Tesla, SpaceX and Musk

Tesla’s marketing budget: $0.

We all have seen the picture. The picture. The one that features Starman clad in a SpaceX astronaut suit. It is nothing short of epic. Musk’s SpaceX launched the Falcon Heavy rocket to much fanfare. The 27-engine behemoth is the most powerful rocket in use today. Because Musk though the launch wasn’t exiting enough, he put his own cherry red Tesla Roadster in the rocket to be released into space. There’s a live video feed of the Tesla floating through space.

If you work in marketing, I wouldn’t be surprised if your clients ask you to have a “stunt” marketing campaign with a $5,000 budget.

Its successful launch was a significant step forward for SpaceX and Musk’s eventual goal of sending people to live on Mars. President Kennedy was fixated on the moon. Musk is fixated on Mars.

I had the opportunity to visit the Tesla factory in Fremont but it didn’t work out. There are plenty of documentaries on the factory such as this one (Youtube).

I have written a post on Elon Musk after reading his biography. Musk and his accomplishments are an incredible story. We need more Elon Musk in this world. Musk has his share of critics. But he is also an easy target. I have no investment in Tesla and I don’t plan too. I would like a Tesla roadster but there’s no way I’m touching the shares. I can’t justify its valuation (TSLA). Tesla is currently trading at a $60 billion market cap and an enterprise value of $70 billion. And it makes no money. I know this is a bet on the future, but let’s say that once it is profitable, what will be its margins? 5-8%? I haven’t got into its financials. Tesla has a lot debt, losses, and burns a lot of cash. If you think its financials are bad, the critics are trashing the new Model 3 that just came out. The quality of the car has been compared to the 1990s Kia. In a normal rational world, none of this is good for the price of a stock.

So why, knowing what we know, is Tesla trading at astronomical levels? Tesla’s shareholders are like members of a religious cult. They don’t invest based on fundamentals (things like profits, cash flow, and assets), but instead the investment is based on faith. They believe that Tesla will revolutionize the world and they want a piece of the action (or wealthy). In my mind, they have no idea what’s about the hit them. But as long as the capital markets are there to support Musk’s vision he might succeed in accomplishing it.

But am I ready to bet against Musk? Hell no.

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Two Days In Los Angeles

I was in town on business and I only stayed two days. I need to come back to spend more time. I liked LA. I enjoyed my short stay. Here are some observations.

Population-Sanctuary City

Ask locals what is the population of LA and you will get different answers. There’s the official count which is 4 million people, according to the Census Bureau. And then there are the off the book numbers that range from 12 to 17 million. The answer varies on who you ask and what you consider to be Los Angeles.  If you include the greater LA area, the number jumps to 10-12 million. If you add illegal aliens, we could be taking about 17 million. Nobody really knows because how do you know how many illegals are there? It happens to be thaT Los Angeles is a sanctuary city. While there’s no clear definition of what a sanctuary city is, it understood that it limits local law enforcements cooperation with federal authorities. In other words, city employees are not assisting Immigration and Customs Enforcement (ICE) in enforcing federal immigration laws. Sanctuary cities are controversial and Trump has promised to crack down on them. It’s estimated that there are between 5 to 7 million illegal immigrants in LA. It’s near Mexico, the weather is nice, and it seems like everybody speaks Spanish, so why not immigrate there. LA is a majority-minority city. Latinos and Asians make a large percentage of the population. LA also has a huge homeless population problem. The official count underestimates L.A.’s homeless population according to a study. So who knows how many people are in the city of Angels.

What is Los Angeles?

If you tell somebody that you are going to New York, you are probably referring to Manhattan. Or else you would say I’m going to Brooklyn or Long Island. If you are going to LA, it’s not exactly clear where you are going. Los Angeles is a collection of neighborhoods. There’s Hollywood, Malibu, Beverly Hills, Inglewood, Anaheim, Compton, Santa Monica, Pasadena, Long Beach and many others.  Logistically speaking, these neighborhoods don’t connect well.  People in Pasadena don’t hang out in Inglewood and so forth.

There’s a downtown. Sort of. LA has been investing a lot in the last couple years to create regenerate downtown. The reason why LA is structured the way it is today is due to the way it was grown. LA’s growth exploded in the post-World War II suburbanization, thanks in part to defense spending. So its growth was sprawled out resulting in all these different neighborhoods. As the move to more suburban neighborhoods continued, the city’s population surged. Signs of decline in the central city, however, were becoming apparent. Downtown LA has declined in metropolitan importance for decades.

But in the last couple year gentrification began to take hold in downtown. I was only in LA for two days and I spent 90% of my time downtown. It was nice and clean but unfortunately it has a major homeless problem. I found that even though it was nice, it lacked “life”. I don’t have the exact words I’m looking for. They have this new art district. It’s beautiful. But it doesn’t feel organic. An art district has to look like it has grown on its own. You can’t put a painting up and call it the art district. Just like when there’s a Chinese restaurant that opens on your block, you can’t just call it Chinatown.  A local told me that you only go downtown if you need to, which is like never.

Sports

When I visit a major city, I like to get a vibe of the sports scene. In LA, the Lakers are #1 by far. It’s a Lakers’ city. The Dodgers come in 2nd. After that it’s college sports and the Clippers. When I asked somebody about the LA Kings (NHL), he thought I was talking about the Sacramento Kings (NBA). Nothing on soccer and zero mention of two NFL teams they have. After twenty years without a team, they now have two. You probably heard about the indifference toward the Rams and the Chargers in LA. The moves looks like a failure at the moment, but let’s give it some time. They will have a new stadium in 2020. My guess for the failure is that LA is a neighborhood city, so they probably don’t have the sentiment that its “their” team.

2020

I consider both current mayor Eric Garcetti and former mayor Antonio Villaraigosa great presidential candidates, in 2020 or later. They have done a good job with LA. Their diverse background could provide them with a broad appeal. Also California Lt. Gov. Gavin Newsom could be an interesting candidate. You can’t count out California Senator Kamela Harris which is increasingly positing herself for a White House run. It could be a crowded race.

Charlie Munger At The 2018 Daily Journal Corporation AGM

It’s been a while since I posted anything on Seeking Alpha. I was due. The post is part of my California trip. More posts on the subject will come later. Here’s the part of my trip at that concerns Charlie Munger.

The article is available on Seeking Alpha. They have exclusive rights. Here’s a preview:

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Reposted from Seeking Alpha
From Brian Langis

Summary

• Charlie Munger did a two-hour Q&A. He answered questions on a variety of topics.
• DJCO is a cult stock. It’s not in an attractive business, but the company has gained a following with Munger as its Chairman.
• In 2009, DJCO invested its excess cash in a portfolio of securities that has gained in value. This portfolio of securities and dividend provides a cushion to DJCO.
• DJCO is not a mini Berkshire Hathaway.

*I was in LA for the DJCO AGM. If you are reading this article for an advance analysis on DJCO, you won’t really find it. This article is about the AGM and Charlie Munger.

I recently attended the annual shareholder meeting of Daily Journal Corp. (DJCO) in Los Angeles. I am not a shareholder in DJCO, and I don’t plan to be one anytime soon. But I wouldn’t overlook the company either. I will explain later. So, why attend? The main reason for attending a DJCO AGM is not for its results or the company itself, but for the opportunity to hear Charlie Munger’s wisdom in his Q&A segment, who is the chairman of DJCO. Also, part of the reason for attending is the DJCO meeting reveals itself as a community gathering of fun, fellowship, and learning. There are dinners, lunches, and social gatherings related to investing. It’s great to see familiar faces and to meet new people. Ideas are generated and exchanged. You learn a lot. Attending these investment events is a way for me to regenerate myself. It’s like adding wood to a fire. It fuels the core of why I do this for a living. I can’t wait to get back to my desk. Value investing is a lone wolf business. You spend a lot of time in your bubble. Sometimes, you can drift, so it’s good to re-center yourself. Like the Berkshire Hathaway (BRK.A) AGM, the DJCO one offers a great experience for any serious investors on a much smaller scale.

The 5 Aces of an Investment Advisor

At the DJCO AGM two weeks ago, Peter Kaufman, one of the directors and author of Poor Charlie’s Almanack, had his very interesting comment on the list of qualities an investment advisor should demonstrate. He calls them the five “Aces” to find in a money manager. I’m posting it because I will find very important.

Here’s Kaufman’s list verbatim:

1. Total integrity 
2. Actual deep, deep fluency in whatever you say you are going to do on behalf of the client
3. A fee structure that’s actually fair in both directions
4. An uncrowded investment space
5. A long runway (meaning that the manager is reasonably young in age)

Kaufman also added:

“I further add that if you ever find a money manager who possesses all five of these characteristics, there are two things you should do. One, you should put money with them immediately. And number two, put as much money as you are allowed to put [with them],”

This is how it all came up:

“I came up with this list in giving reference to a very exceptional money manager,” Kaufman explained. “And I not only wanted to give what I thought was a correct reference, I wanted the person I was giving the reference to in turn be able to relate this to the real shot caller so that a compelling narrative would be transferred from me directly to the ultimate shot caller. So, I came up with what I call the five aces, five aces being the highest-hand of cards in a game of wildcard poker.”

The list is not only useful for evaluating where to allocate money, but it’s a great list for money managers to use as part of their own aspiration.

Investment Collection Additions

I added a few links to the Investment Collection segment. Here are some new links:

• David Einhorn’s Speech at Value Investing Congress 2006 (PDF)

• “Trying too hard”by Dean Williams SVP at Batterymarch Financial. Keynote speech at Financial Analysts Federation Seminar, August 9, 1981 (PDF)

 

• Transcript of Google Talk by Francois Rochon (PDF)

• Primer on ROIC Valuation Framework (PDF)

• More Moats, More Profits by Morningstar

Berkshire Beyond Buffett

I finished Berkshire Beyond Buffett by Lawrence Cunningham (@CunninghamProf). Prof Cunningham is well known for his work on Berkshire Hathaway (BRK) and Warren Buffett. Prof Cunningham’s books on BRK and Buffett are among the best. He’s been a follower for decades and has direct access to Buffett and its managers.  If you want to read this book, I would assume it’s not your first book about Buffett and BRK. There’s ton of material you can read before this one. If you don’t know where to start, here’s a good start: The Essays of Warren Buffett: Lessons for Corporate America.

This book on Buffett/BRK book is different. This is not a Warren Buffett centric book. It’s more like the bio of BRK. And not just a book full of happy stories about BRK.

BRK is structually complex and highly decentralized. Lawrence had access to many people in BRK organization to realized this book with Buffett’s blessing. Despite its popularity, few people understand Berkshire and many assume it cannot survive without Buffett. They are wrong and this book proves them wrong. This is a comprehensive portrait of the corporate culture that unites BRK’s subsidiaries and the traits that ensure the conglomerate’s continued prosperity.

“The special Berkshire culture is deeply ingrained throughout our subsidiaries, and these operations won’t miss a beat when I die” – Warren Buffett

The book also goes on to explain why many companies picked BRK as their home, even when a more lucrative offer was on the table. It goes beyond the dollar amount. For many entrepreneurs, their business is their baby. It’s their life’s work. And it’s very important for them to preserve it.

I’m glad I read this book. I was looking forward for a book like that for a while. One that goes inside and throughout the subsidiaries. Even the smallest ones. Cunningham talked to many family businesses belonging to the Blumkins, Bridges, and Child and several entrepreneurs like at FlightSafety and Justin Boots.

An interesting question why aren’t there many more companies like BRK? Markel is the closest clone that I can think off. BRK has been cloned before, but you don’t seem to hear about their success. The reason is because it goes beyond the corporate structure. It’s about the attitude. Berkshire takes a partnership attitude toward its shareholders whereas most corporations are hierarchies, with shareholders seen to own a residual claim on firm assets, an equity stake after liabilities are covered by assets. BRK is simple, but hard to replicate.

Here are some characteristics among many others:

• Decentralized. The managers of the subsidiaries have massive power.
• It rarely uses intermediaries — brokers, lenders, advisers, consultants and other staples of today’s corporate bureaucracies.
• No strategic plans administrated by an acquisitions department.
• Berkshire defined itself as a partnership from the outset: “While our form is corporate, our attitude is partnership.”
• While American companies borrow heavily, Berkshire shuns debt as costly and constraining, preferring to rely on itself and to use its own money.
• BRK generates abundant earnings and retains 100 percent, having not paid a dividend in more than 50 years.
• Berkshire earns some $30 billion annually — all available for reinvestment.
• In addition, thanks to its longtime horizon, Berkshire holds many assets acquired decades ago, resulting in deferred taxes now nearing $100 billion.
• The principal leverage at Berkshire is insurance float. This refers to funds that arise because Berkshire receives premiums up front but need not pay claims until later, if it all.

 

Walt Disney’s 1957 Vision

Walter Elias Disney’s corporate vision since it was codified back in 1957. Only two years after the company’s first theme park opened, Walt detailed an expansive vision for Disney – one where every segment of the business worked in concert.

The Investment Collection

I want to introduce a new section to the blog: The Investment Collection. It’s simply a collection of links and resources that I found interesting. I will try to update it when I have time. Why am I doing this? First, I wanted to gather some of the most important investment material under one roof. Second, somehow stuff gets lost on the Internet. The resources are not simply about investing. It is about becoming a better human being. Learning from the success and failure of others is the fastest way to get smarter and wiser without a lot of pain.

The best thing a human being can do is help another human being know more. – Charlie Munger, Berkshire Hathaway Annual Meeting, 2010

Charlie Munger DJCO Meeting

I will be attending the Charlie Munger DJCO Meeting in LA on February 14, 2018. I booked the day.  I will probably bounce around the meetups and lunch afterward.  I will then go to San Francisco for a couple days.  I also posted on Reddit here. One of the best part of these meetings are the great people that you meet. If anyone wants to meetup reach out. This approach worked when I went to Omaha.

 

Warren Buffett’s 1950s Articles

Last Monday I published a post on Warren Buffett’s letter in Barron’s in 1962. I was wondering if it was Buffett’s earliest public appearance. David Shahrestani from the blog Wiser Daily,  found earlier. He posted a link in the comments that led 4 articles published in The Commercial and Financial Chronicle by Warren Buffett during the 1950s.

The articles are in the PDF below.

Here’s the original link on Dropbox provided by David: Dropbox (PDF)

Warren Buffett 1950s Articles (PDF)

Here are the four stocks that Warren recommended back in the 50s.

1951: GEICO, which is now a big holding in Berkshire Hathaway. 100%+ gained following the publication of the article. Even though it was up 100%, he still though it was cheap.

1953: Western Insurance Securities. Was trading at less than 2x earnings and at 55% book value. He liked it because it was cheap.

1957: Home Protective Co. I couldn’t find anything on what happened to it.

1957: Oil and Gas Property Management. I couldn’t find anything on it either but I didn’t search very hard.