One of the Best Trump Political Cartoon

The New Yorker probably has the best political cartoon of Trump I’ve seen in a while. The only reason Trump hasn’t bashed the New Yorker it’s because the articles are too long for him to read.

tom-toro-daily-cartoon-for-wed-feb-22
“It lets you hold the President’s attention for a few extra seconds before he wants to change channels.”

Trump is reputed for watching a lot of TV and a very short attention span. Just think of the people he has attacked on Tweeter seconds after they said something he didn’t like on TV.

Refreshing Climate Talk from Exxxon’s New CEO

The first blog post by ExxonMobil’s new CEO and Chairman Darren Woods is refreshing. Mr. Woods advocates a nationwide carbon tax to discourage use of polluting fuels. Exxon also endorsed the Paris Agreement. Actually, former CEO and now Secretary of State Rex Tillerson wasn’t a climate denier unlike his predecessors. Rex Tillerson said that climate change is real, but downplayed humanity’s responsibility for raising the global thermostat. Tillerson was also favor of a carbon tax. The fact that Mr. Woods is repeating these commitments  is encouraging. He doesn’t want to start his term labelled a climate denier. 

Exxon and other energy companies are facing huge challenges. The Company needs to meet growing demand for energy while managing the risk of climate change. The neutral carbon tax would promote greater energy efficiency and the use of today’s lower-carbon options, avoid further burdening the economy, and also provide incentives for markets to develop additional low-carbon energy solutions for the future. Woods’ view continues the corporate policy implemented during Tillerson’s reign at Exxon.

I occasionally visit the East Coast, the Gaspé peninsula on the Atlantic ocean, where I’m from.  That region is a front row seat to climate change. Scientists’ warnings that the rise of the sea would eventually imperil the coastline is no longer theoretical. In Gaspé they are seeing increasing severity of extreme weather, floods and heavy rain in the summer. Because the Gulf doesn’t freeze as often it used too in the winter,  tidal floods increasingly inundate the roads that are too deep to drive through. Certain roads are disappearing beneath the sea several times a year. These things didn’t happen when I was a kid. Now its a few times a year.

It is a good sign that we are starting to move away from discussions about whether climate change is real, and talking about solutions. Let’s see if these nice words can translate into action.

 

2016 Baupost Group Annual Letter Part 2

My publication of the 2016 Baupost Group Annual Letter was taken down. I wasn’t supposed to published it, as clearly stated at the bottom of every page in the letter. I felt a little guilty publishing it. At the same time I felt like I was doing the right thing. Let me explain.

In the letter, Seth Klarman, the legendary value investor running Baupost, stated that the letter is addressed to the limited partners only (his investors). However, after reading the letter, which is available all over the Internet, it’s clear that he wrote it for a larger audience. It’s obvious by the content of the letter that he expected non-investors and the media to study and analyze every line. He wanted people to read it. A good portion of the letter is on Trump.  Klarman warn us about a Trump presidency. He knew his thoughts would end up in the New-York Times and Wall-Street Journal. You don’t write that kind of stuff without expecting it to go public. His shareholder letters are not like reading a personal email he sent to somebody. Publishing something like that would clearly be in violation of privacy and other rights.

I also think he didn’t make his letter public on purpose. Seth Klarman obviously understands basic psychology; as soon you can’t have something you create a desire for it. If he didn’t understand that he wouldn’t be the legend he is at investing. Since “you are not supposed” to read his letter, now you want to read it. Just like his book, Margin of Safety, one of the most sought after value investing book, was never reprinted and now sells for over $1,500 a copy (Imagine the price crash if a reprint is ordered). He knew that his letter was going to be leaked.  His letter are up there with Warren Buffett’s annual letters. Imagine if Buffett didn’t make his shareholder letters public, it would become of the most pirated document ever.

Why did I think I was doing the right thing? In his letter he share his thoughts on the current state of the market and investment philosophy. You can learn a lot and will make you a better investor. Again, that’s something Klarman intended to accomplished since he is one of the most successful and influential investor.

As mentioned his letter got taken down on this blog. But somehow, the New-York Times among others, published large section of the letter in numerous posts and it’s legal. I guess they know the legal tricks to get around the “ban”. From what I understand, if I copy and paste sections of the letter, it’s fine, but if I publish the document (the source), it’s wrong. Not sure how that makes it legal. So don’t take my legal advice. Anyway, people who want to read his letter will find it and read it.

Baupost Group has a reputation for being extremely private. I like that and I respect that. But it’s also strategic. Klarman has long kept a low public profile. But when he comes out in the media, it creates an impact. People listen because it’s a rare event.

What Investors Really Want

We want high returns from our investments, but we want much more. We want to nurture hope for riches and banish fear of poverty. We want to be number 1 and beat the market. We want to feel pride when our investments bring gains and avoid regret that comes with losses. We want the status and esteem of hedge funds, the warm glow and virtue of socially responsible funds, and the patriotism of investing in our own country. We want good advice from financial advisors, magazines, and the Internet. We want financial markets to be fair but search for an edge that would let us win, sometimes fair and at other times not. We want to leave a legacy for our children when we are gone. And we want to leave nothing for the tax man. The sum of our wants and behaviors make financial markets go up or down as we herd together or go our separate ways, sometimes inflating bubbles and other times popping them.

Source: What Investors Really Want by Meir Statman and Ben Carlson from awealthofcommonsense.com

Baupost Group 2016 Annual Letter

**February 24, 2017 Update Here.


Here’s a copy of Seth Klarman’s 2016 annual letter. As always, very insightful, a must read if you want to become a better investor. The letter also provides his take on Trump.

Baupost 2016 Annual Letter

Bonus:

Seth Klarman Baupost Group Letters 1995-2001

 

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Warren Buffett & Bill Gates: Looking Forward

While on the topic of Warren Buffett (see previous post), Buffett and his pal Bill Gates were interviewed by Charlie Rose back in January. They discuss current affairs, the recent US Elections and issues facing the world and what they’re doing to tackle them. One key takeaway from the interview was that Buffett said, “We’ve bought $12 billion net of common stocks since the election. (Ted and Todd) have probably bought some too.”  This is coming from a guy that campaigned for Hillary Clinton. He really believes that the economy will do better even with Trump in power.

Below is the video of Charlie Rose’s interview with Warren Buffett:

Becoming Warren Buffett

This is the HBO documentary on Warren Buffett’s life. You don’t need to be a fan of Buffett or investmenting in general to enjoy this. There’s a lot you can learn from this documentary. Below are copies of the documentary on Youtube. I don’t know how long it will be there since it’s most likely an illegal feed. Below the video I have attached some notes from the doc provided by Market Folly.

Link #1:

Link #2:

Market Folly notes:

– He was always fascinated by numbers and it talks about how at an early age he discovered the power of compound interest. He concluded, “It’s a pretty simple concept, but over time it accomplishes extraordinary things.”

– He goes to McDonald’s everyday for breakfast on the way to work and has three options based on how much change his wife has given him for the day. Yup, one of the biggest owners of American Express (AXP) pays for breakfast in cash.

– He framed newspapers from various financial crises and hung them on the wall as a reminder that “anything can happen in this world.”

– As a young student, all his teachers owned AT&T at the time and he shorted the stock and showed the teachers proof to kind of spite them.

– Buffett learned two rules of investing from Benjamin Graham: Rule 1: Never lose money. Rule 2: Never forget rule number one.

– Doesn’t hang his diploma from undergrad or graduate school, but instead the certificate from the Dale Carnegie course of public speaking, which he says changed his life since he was so scared of it.

– Charlie Munger said Buffett made a lot of money early on buying thinly traded securities that were incredibly cheap statistically (“cigar butt” investing).

– Started his first partnership with $105,100 – $100 from himself and the rest from investors.

– Buffett says, “The trick in investing is to just sit there and watch pitch after pitch go by and wait for the one in your sweet spot. There’s a temptation for people to act far too frequently in stocks simply because they’re so liquid. Over the years, you develop a lot of filters. I do know what I call my circle of competence. I stay within that circle. Defining what your game is, where you’re going to have an edge is enormously important.”

– He later adds, “If you’re emotional about investment you’re not going to do well.”

– Charlie Munger had a big impact on him by shifting him to look at wonderful companies at fair prices rather than fair companies at wonderful companies.

– Buffett said he spends 5-6 hours a day reading. He likes to just sit and think. When asked to describe what one word describes his success, he said ‘focus.’

– “The biggest thing in making money is time. You don’t have to be critically smart, you just have to be patient.”

– “Look for the job you’d take if you didn’t need a job.”

Uber Part Deux

Here’s the first part on Uber’s sale pitch.

I just can’t get over this quote from Morgan Stanley’s pitch of Uber shares to their clients when addressing the lack of financial info from Uber (There’s a 290 page prospectus of just verbiages and no financial data):“the development of insights and big ideas is valuable to the investment process, whereas obsession over incremental ‘information’ flow is not.” Nice quote right. Well Uber is still raising billion despite the lack of info. A chart like the one below is probably all some investors need to make an “informed” decision.

number-of-uber-rides
Source: Bloomberg

The bankers that refused to push the Uber stocks on their clients will probably not be doing the IPO. But at the same time, this is great risk management from their part. Let’s say Uber investors starts to lose a lot of money, they might have a legal case for suing the banks for pushing the stock on them. This is the kind of stuff that got bank in troubles over and over. Just look at the financial crisis mess with the subprime mortgage bonds.

I can’t believe they can sell that stuff. How much money can Uber be losing for not disclosing their financials? This is like Trump’s taxes. There’s stuff in there he doesn’t want us to see otherwise he would have disclosed it a long time ago. If Uber is making money, they would proudly show it. Now everybody know they are in the red. Losing money is not bad thing when you are starting up since people are investing on the potential of making money in the future. The real question is will Uber will ever be profitable? Can they show a path to investors that will see a positive return in the future? Uber has been around 6-7 years and it’s still classified as a $65 billion start-up. When do you lose the tag start-up?  This is what Uber is offering: the potential of making money in the future. But maybe they can’t show that therefore we will talk about our big dream. People love investing in these new concepts. Sometime it works, like Facebook, and sometimes its a flop like Twitter. Twitter has been around longer than Uber and still hasn’t figured out how to make money.

“the development of insights and big ideas is valuable to the investment process, whereas obsession over incremental ‘information’ flow is not.”

Let’s assume you need money for a house or a project. So you go to your bank asking for the money. The banker ask you for pay slip, your budget, assets and liabilities, you know the usual stuff that would ask somebody if they were asking you for money. But instead of providing the info, you tell him about that your insights and big ideas are valuable to getting money, whereas the banker’s obsession over incremental ‘information’ flow is not.” No way in hell you are getting a dollar. They might think you have been smoking too much. But somehow you can pull that stunt with the sale of Uber shares…

Good for Uber really. If they can raise that money without putting up any financial data, good for them. Heck there are a lot of suckers out there, might not be a great shareholder base to have but they are willing to throw money at you, why not take it.

Regarding Uber’s financials and future, there’s a great piece online by the nakedcapitalism you can read here.

Uber’s Pitch to Investors

Update: After publication I received a Tweet  suggesting an excellent article on Uber: Can Uber Ever Deliver? Part One – Understanding Uber’s Bleak Operating Economics posted Yves Smith. Hubert Horan did a thorough 6 part series on the company. The article includes financials from Uber.

A lot of people are asking how can I invest in Uber. They say things like “Uber is the next big thing, I can’t miss out on its IPO”…Every year we have a company that makes people dream. People want the next Microsoft. The fantasy of easy money makes people dream and they kind of lose their mind when it comes to rational investing.

Uber is what we call a “disruptor” business. Companies like Uber, Netflix, Spotify, Airbnb and Amazon among others are “disrupting” the world we know with the aim of making it better. Along the way it creates winners (usually the consumers) and losers (taxi drivers, cable companies, hotels etc…) Uber is simply an taxi app on your phone that let’s book a ride. Uber didn’t reinvent the wheel here. They simply made an under-served service, cabing, much better.

Uber is a company that I admire. I like taking it and I believe they are not going anywhere no matter how many angry cabs drivers block the streets. Technology is not something bad or good, just like steel is not bad or good. It’s just that our laws are not up to date for these new an upcoming companies. Companies like Uber take on the establishment and left the old guard gritting their teeth. Fast growing companies like Uber constantly need money. Uber is still a private company and we don’t have access to financials. Various media have reported that Uber is burning over $500 million a quarter. It could be an exaggeration but it’s reasonable to think they are burning through a lot of cash since they are constantly looking for money. Uber is not profitable and probably won’t be for a long time. A company like Uber is still allowed to exist because the capital market let it exist. If the tide turned, like it did with the dotcom boom in 2000, it could become a bust.

Companies that you admire and love doesn’t necessarily make it a great investment. I like Twitter, it doesn’t mean it’s a great investment. You still need to focus on the fundamentals. You still need to ask how you are going to make a return on that investment. Especially if the company is burning through cash. Interesting fun companies doesn’t necessary = I will be rich. A company like Uber can’t pay a dividend or buyback shares. So you are entirely hoping that the next valuation round will be higher (and you are diluting your ownership too). It’s the greater fool theory. Now I’m not saying Uber is a bad investment. We barely know anything about its finances. It might turn out to a great investment. I don’t know.

I suggest you read the article, Banks Passed Up Uber Share Sale on Lack of Data from Bloomberg. Credits to François Denault,  an excellent value investor in Montreal for the find.

The articles says that at least two investment banks passed on selling shares of Uber to their high-net worth clients — shares eventually sold by other banks in January — because the ride-share company wasn’t willing to provide financial details about its business. The 290-page Uber prospectus Morgan Stanley sent to prospective investors before the January stock sale didn’t include Uber’s net income or annual revenue. The New York-based bank addressed the lack of data in its prospectus, and love that part, by saying “the development of insights and big ideas is valuable to the investment process, whereas obsession over incremental ‘information’ flow is not.” I just love how you can spin so much b.s. and still get the money you need. Good for them. But there’s a lot of suckers out there. We live in a weird era. Reminds me of Trump with his “alternative facts” and “we disagree about the facts”.

Who is buying shares of a company without having any clues about the financials? A lot of folks apparently.  It’s a dream for Uber and a potential disastor for investors. Reminds me of the dot-com mania. Now that we have the Dow at 20,000 points, there’s seems to be a mini euphoria going on.

The Trustees’ Dilemma

John Train, one of the most respected financial author, his book, The Money Masters, published in 1980. Mr. Train shares a story of one woman, her family, and the difficulty of applying proper fiduciary management to her trust account. He ends the piece with a call for help from other professionals, as “it’s a problem that requires airing.

Retired baby boomers, more than ever, need financial advice. They retire at 65 and most of them have a life expectancy of 20 years plus. But the key is to make their money last as long as 30 years or more. I never bought into the theory as you get older you need more bonds. Bonds looks riskier than ever.  A portfolio full of “safe” bonds barely provide any income and the “safe” capital could be in for a shock in inflation and interest rates starts creeping up. Anyway that’s another story. The point is it’s hard to find a solid reliable financial advisor. They operate in a conflict of interest. Financial planners earn their living from selling products (commission) and from a % of managed assets. The majority of these “advisors” have lived in an isolated world of product distribution whose portfolio management skills revolved around a suitability standard. There are some good advisors out there and they are hard to find. You need to ask around, check their experience, qualifications, and find out how they work.  Talk to a few of them and you will see the difference. See if anybody can referred you somebody good. Is the person product centric or portfolio management focus?  Advisors have a fiduciary duty to the client. That means that the client’s interest comes first and should provide the highest standard of care. Make sure it’s respected. As the article suggest, another advice is to surround yourself with professionals. Make sure you get the input of a tax lawyer and an accountant on your situation. A financial advisor is not a tax expert. Here’s the article:


The Trustees’ Dilemma by John Train
Reposted from the July 9th, 1979 edition of Forbes Magazine

A widow was left a substantial amount of money by her husband when he died. The income went to her for life, with the capital to be divided among their three children after her death.

Her late husband had been a successful New York businessman, and the family had two large houses: one in Greenwich, Conn. and one on Cape Cod, where they went in summer. The children liked coming to the Greenwich place on the weekends and spending long periods on Cape Cod in summer, so she kept both. As a result, the widow found herself living at the limit of her resources.

At her annual meetings with her trustees, the problem was aired frankly. How could she maintain the houses and keep up roughly the same standard of living as before, with her husband’s considerable salary no longer available? Each year it was decided to sell some growth stocks with low yields and move into bonds or high-yielding equities to maintain the needed income, and hope that all would end well.

So the trust portfolio eventually became roughly half fixed-income securities and half high-dividend stocks, notably utilities and the like.
Continue reading “The Trustees’ Dilemma”