Sees Pricing and EOS; Book Rec; Too big NOT to fail; Crony Capitalism; Obama Speech in Context

Money talks. Chocolate sings!

QUESTION from a READER on Pricing and Economies of Scale

I was reading the PDF and I had a question about the early 
discussion related to pricing below competitor's costs
with a brand that demands a premium in the market. 
There was a suggestion that the premium
brand is not able to arbitrarily price higher 
above the shared costs of the industry and 
earn outsize profits because this would invite 
competition, whereas when they lower prices closer to 
competitor costs, they're still able to be profitable due 
to marketplace premium while denying competitors
(potential and actual) the profitability they'd need 
to be incentivized to enter and compete.
How has Warren Buffett been able to raise
prices continuously on See's candy?  His
competitors aren't continually raising prices on
their candy, are they? Why don't these price
increases become self-defeating and
invite competitors?  

You can see all comments on this post here: 
http://csinvesting.org/2012/01/24/study-on-economies-of-scale/#comments

My Reply: Good question. In the example you mentioned, the same logic would apply to Sees Candy. I have extensive notes on Sees but trapped on a dead laptop.  The notes below have an analysis on Sees pricing. Read the PDF on Sees, and we can discuss further.

http://www.scribd.com/doc/79357646/Sees-Candy-Schroeder

BOOK Recommendation

I rarely suggest investment books, but here is a thoroughly revised edition of a book that Joel Greenblatt recommends in his MBA classes: Contrarian Investment Strategies: The Psychological Edge by David Dreman.

I have read about a third of the book, and certainly any Contrarians out there should read the book.  For example, on page 179 there is a table of Analysts’ and Economists’ earnings growth estimates for the S&P 500, 1988-2006 (18 years)

                                Analysts                     Economists                        Actual

Average                         21%                                      18%                                    12%

Percentage Error    81%                                   53%                                     —       

Even a cynical observer of Wall Street like me can’t believe my eyes. How can analysts estimate on average 21% earnings growth? The odds of any company growing in excess of 15% per year for 10 years is almost infinitesimal.  Take common sense so we add an optimistic GDP growth rate of 4 percent a year plus nominal inflation rate of 6% and we have 10% earnings growth, How can analysts even think of 20% EPS growth?

FAILURE

Too big NOT to fail: http://www.youtube.com/watch?v=lAxKAzpGmVA&feature=player_embedded

That leads us to David Stockman’s interview with Bill Moyers on CRONY CAPITALISM or Welcome to the USA today. http://billmoyers.com/segment/david-stockman-on-crony-capitalism/

The Blow-up Artist. Victor Neiderhoffer interview on being wrong. http://www.scribd.com/doc/79358509/Niederhoffer-Discusses-Being-Wrong

http://www.newyorker.com/reporting/2007/10/15/071015fa_fact_cassidy

OBAMA SPEECH in Context

http://www.thefreemanonline.org/in-brief/presidents-speech-targets-china-trade/

http://www.thefreemanonline.org/in-brief/obama-calls-for-fairness-through-higher-taxes

2 responses to “Sees Pricing and EOS; Book Rec; Too big NOT to fail; Crony Capitalism; Obama Speech in Context

  1. John,

    After reading that exchange (I caught on early you need to read from top to bottom for it to really make sense) it seems that, while there may have been some initial price increase Buffett put in place based upon an analysis he and Munger did of the competitive landscape, beyond that the price increases were really just to stay ahead of inflation and, during the 70s price control-era, they didn’t even manage that.

    The answer to my question appears to be, “He didn’t.”

    Does that sound right or did I miss something?

    Fascinating link either way. Thanks for sharing.

  2. Yes, you are correct that the bulk of the price increases was just to stay at or ahead of inflation–the definition of an inflation pass through. Note the time period of high inflation in the US 1970s and on.

    But note that if you are NOT in a business that can easily pass along price increases your REAL returns will be dismal. Thus, we are madly studying how to buy franchises–profitable growth and able to raise prices. Also, franchises are RARE and beautiful things, so cherish them when you find them.

    If it were easy then price would adjust and not leave a margin of error occasionally.

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