Yearly Archives: 2012

A Typical View of Wal-Mart’s Advantages. Again!

Posted on January 19, 2012 | 5 comments

If you have an important point to make, don’t try to be subtle or clever. Use a pile driver. Hit the point once. Then come back and hit it again. Then hit it a third time – a tremendous whack. –Winston Churchill
We will discuss Wal-Mart in the next few posts before moving on to the Coors case study.  Think of reviewing these cases as you develop more experience with analyzing competitive advantages. In fact, do not be afraid to read the cases again! Think of these guys: http://www.youtube.com/watch?v=T9AajQn7b18

Now give me fifty push ups! Does power corrupt?

A Typical View of Wal-Mart’s Advantages

http://www.thefreemanonline.org/headline/the-limits-of-the-local/

The Limits of the Local by Steven Horwitz

Critics of the market often point to the increased globalization of production and consumption as one of the problems that economic freedom can generate. This criticism has a number of elements. One is that multinational firms like Wal-Mart or McDonald’s turn the United States, as well as the rest of the world, into one commercial culture, destroying the local stores that provided a distinct identity to small towns and cities across the globe.

Large chain stores and franchises do affect local businesses, especially in small towns, but note that it’s mostly a shift rather than destruction: Some businesses find ways to compete effectively by filling niches that the larger stores can’t fill, particularly with respect to distinctly local products, such as restaurant food.

However, larger chains have at least two big advantages worth discussing.

First and perhaps most obviously, their size normally gives them the ability to buy in larger quantities, keeping their costs and prices down. Wal-mart grew to the size it did through highly effective inventory management; it pressured suppliers to keep their input prices low and passed those low prices on to consumers.* Low prices are a big part of what lures people to shop there rather than at the smaller boutique stores. Chains like McDonald’s work in similar ways; a burger, fries, and drink there is usually no more expensive (especially if you count the lack of a tip) than the diner up the road.

Known Commodity

The second advantage is less commented on. The very similarity of chain stores and franchises nationwide, and even worldwide, is a big attraction to many customers because they are a known commodity. If you’re hungry in a strange town, you know that you can always go to a national fast-food chain and get a meal of nearly identical quality to what you’re used to at the chain’s restaurant at home — and for a good price. If you are sufficiently risk-averse, the consistency of a national brand is very valuable. In an economy where national chains were more difficult to operate, we would be far more at the mercy of the unknown.

And it’s not just about food. On a recent trip I forgot to pack dress socks. Thankfully, in a strange town 2,500 miles from home there was a Wal-Mart five minutes up the road. I happen to like Walmart’s in-house Faded Glory cotton dress socks, so I was able to buy several pairs of exactly the socks I like and usually wear (for less than $2 per pair). In a “local only” economy, not only would I have had to spend more time searching for a store that carried dress socks (and was open at 8:30 a.m.!), I would also have faced uncertainty over whether those socks would be the kind I like. And I probably would have paid considerably more. A highly local economy constantly puts strangers in a similar position to the traveler with car trouble who knows he is at the mercy of a mechanic he’ll never see again. Chain stores and franchises bring reputation and repeated dealing into the equation, removing uncertainty and reducing the seller’s power over the buyer.

Freedom of Choice

One final advantage of a global economy is that it still permits people to “buy local” if that’s what they prefer. I love living in a small town with a Wal-Mart ten minutes away and a farmer’s market during the summer and a top-notch restaurant that serves lots of local beef and produce. In a world where everything is local, those of us who want to “buy global” presumably would be prohibited from doing so — in the name of preserving the local character. Just as markets allow pockets of voluntary socialism, but socialism cannot abide capitalist acts between consenting adults, so a global economy has room for the local, while mandatory localism cannot meet the needs of those who prefer to buy global.

Whether it’s food or socks or pretty much anything else, the freedom of the marketplace allows for firms of varying size and composition to meet the equally varied wants of consumers.

*Has the writer accurately assessed the competitive advantages of Wal-Mart—the source of Wal-Mart’s cost advantage? Will going global help or hurt Wal-Mart’s profitability? How? (See 2003 Wal-Mart Case Study for help).  And if the writer is correct, then why do Sears, Kmart and other large retailers struggle? What does this article illustrate about most business writers or analysts? Lessons?

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WMT 2003 and Coors Case Studies; Items of Interest

Posted on January 18, 2012 | Leave a comment

I got my driver’s license photo taken out of focus on purpose. Now when I get pulled over the cop looks at it (moving it nearer and farther, trying to see it clearly)…and says,” Here, you can go.” — Steven Wright

The Wal-Mart Stores in 2003 and the Adolph Coors in the Brewing Industry Case Studies are in the Value Vault.  If you just want me to email you the cases just write to aldridge56@aol.com with CASES in the Subject line–you will have them by tomorrow.

Other Items of Interest

Should we re-write the constitution every 20 years as Thomas Jefferson suggested? Check out: http://www.constitutioncafe.org/

How to strengthen willpower. http://artofmanliness.com/2012/01/15/how-to-strengthen-willpower/

Nassim Taleb’s New Book

Talk about Nassim Taleb’s new book, Antifragility, go here www.cafehayek.com and click on podcasts on left of blog.  Other interesting podcasts available.

Keynesian Economics is a Failure

Interesting lecture on classical economic theory: http://mises.org/resources/5278/Why-Your-Grandfathers-Economics-Was-Better-Than-Yours

  • A participant: “I really enjoyed this talk. Most of it is about Say’s Law and how Keynes was wrong. Keynes, in fact, got his idea from Thomas Malthus who was a contemporary of JB Say.”Here are some notes:Recessions are never due to demand deficiency.
    An economy can never produce more than its members are willing or able to buy.
    High levels of savings do not cause recessions.What causes recessions?
    – Structure of supply doesn’t fit the structure of demandGeneral Glut
    – Could you produce too much of everything? No.
    – Overproduction of particular goods can lead to a general downturnMen err in their production there is no deficiency in demand – David Ricardo

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A Different Analysis of Wal-Mart Part 1

Posted on January 18, 2012 | 3 comments

I bought a self-learning record to learn Spanish. I turned it on and went to sleep; the record got stuck. The next day I could only stutter in Spanish.                 — Steven Wright

A Different Professor’s Analysis of the Wal-Mart Case Study  (Part 1)

Try to jot down answers to the professor’s discussion. Part two of his lecture will be posted tomorrow.

A Professor Discusses Wal-Mart with his MBA class. The purpose of this analysis is to give you another approach of analyzing a case. Do you find Greenwald’s approach “better” or more thorough, precise and analytical or this professor’s approach? Can you answer his question at the end of this post?

The Professor: Much of my work with MBA students and companies involves helping them uncover the hidden power in situations. As part of this process often teach a case about Wal-Mart’s founding and rise, ending in 1986 with Sam Walton as the richest person in the US. In a subsequent session I will follow-upby discussing the modern Wal-Mart, pushing into urban areas, stretching out to Europe, and becoming the largest corporation on the planet in terms of revenue. But the older case portrays a simpler, leaner Wal-Mart—a youthful challenger rather than the behemoth it has become. Hard as it is to believe today, Wal-Mart was once David, not Goliath.

I write this on the Black-Board: CONVENTIONAL WISDOM: A Full-line discount store needs a population base of at least 100,000. The question for the group is simple: Why has Wal-Mart been so successful? To start, I call on Bill, who had some experience in sales during the earlier part of his career. He begins with the ritual invocation of founder Sam Walton’s leadership. Neither agreeing nor disagreeing, I write “Sam Walton” on the board and press him further. “What did Walton do that made a difference?”

Bill looks at my labeled box on the board and says, “Walton broke the conventional wisdom. He put big stores in small towns. Wal-Mart had everyday low prices. Wal-Mart ran a computerized warehousing and trucking system to manage the movement of stock into stores. It was non-union. It had low administrative expenses.” It takes about thirty minutes for six other participants to flesh out this list. They are willing to throw anything into the bin, and I don’t stop them. I prod for detail and context, asking, “How big were the stores?” “How small were the towns?” “How did the computerized logistics system work?” And “What did Wal-Mart do to keep its administrative expenses so low?”

As the responses flood in, three diagrams take shape on the white-board. A circle appears, representing a small town of ten thousand persons. A large box drawn in the circle represents a forty-five thousand square foot store. A second diagram of the logistical system emerges. A square box represents a regional distribution center. From the box, a line marks the path of a truck, swooping out to pass by some of the 150 stores served by the distribution center. On the return path, the line passes vendors, picking up pallets of goods. The line plunges back to the square, where an “X” denotes cross-docking to an outgoing truck. Lines of a different color depict the data flows, from the store to a central computer, and then out to vendors and the distribution center.

Finally, as we discuss the management system, I draw the path of the regional managers as they follow a weekly circuit: Fly out from Bentonville, Ark., on Monday, visit stores, pick up and distribute information, and return to Bentonville on Thursday for group meeting on Friday and Saturday. The last two diagrams are eerily similar—both revealing the hub structure of efficient distribution.

The discussion slows. We have gotten most of the facts out; I look around the room, trying to include them all, and say, “If the policies you have listed are the reasons for Wal-Mart’s success, and if this case was published—let’s see—in 1986, then why was the company able to run rampant over Kmart for the next decade? Wasn’t the formula obvious? Where was the competition?”

Silence….This question breaks the pleasant five-and take of reciting case facts. The case actually says almost nothing about competition, referring broadly to the discounting industry. But surely executives and MBA students would have thought about this in preparing for this discussion. Yet it is totally predictable that they will not. Because the case does not focus on competition, neither do they. I know it will turn out this way—it always does.

Half of what alert participants learn in a strategy exercise is to consider the competition even when no one tells you to do it in advance. Looking just at the actions of a winning firm, you see only part of the picture. Whenever an organization succeeds greatly, there is also at the same time, either blocked or failed competition. Sometimes competition is blocked because an innovator holds a patent or some other legal claim to a temporary monopoly. But there may also be a natural reason imitation is difficult or very costly. Wal-Mart’s advantage must stem from something that competitors cannot easily copy, or do not comply because of inertia and incompetence.

In the case of Wal-Mart, the principal competitive failure was Kmart. Originally named the S.S. Kresge Corporation, Kmart was once the leader in low-cost variety retailing It spent much of the 1970s and 1980s expanding internationally ignoring Wal-Mart’s innovations in logistics and its growing dominance of small—tow2n discount. It filed for bankruptcy in 2002. After some moments I ask a more pointed question: Both Wal-Mart and Kmart began to install bar-code scanners at cash registers in the early 1980s. Why did Wal-Mart seem to benefit from this more than Kmart?

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Media Bias and Cuba

Posted on January 17, 2012 | Leave a comment

This blog is not about politics per se, but about rational thinking. If you read the news, be aware of bias, especially your own.

All lies and jests, still a man hears what he wants to hear and disregards the rest. –Paul Simon

I wrote an article in 2005 after traveling down to Cuba: http://www.babalublog.com/archives/001341.html

After seeing several Cuban children being beaten by police, I asked a Cuban woman why there is so much repression in her country? She replied, “Nadie está escuchando.”  (Nobody is listening). Perhaps this article may shed more light on why.

Carlos M. N. Eire*   Jan. 17, 2012

http://ctp.iccas.miami.edu/FOCUS_Web/Issue156.htm
Thugs take over your country. Much more quickly than you ever thought possible, one megalomaniac takes control, discards the constitution, abolishes free speech, takes over all of the news media, bans all sorts of books and films, closes down all private schools, expels most of the clergy, and abolishes all private enterprise and personal property. In the wink of an eye, he also seizes all the banks, wipes out all accounts and changes the currency so no one can have more than a week’s pay in their pocket.

In the meantime, as these changes are taking place, all who oppose the new regime are imprisoned, tortured, or executed. Some simply disappear. Spy houses are set up on each city block, to watch your every move, and these very same government agents are placed in charge of herding you to public demonstrations and telling you what to shout out. In addition to assigning you all sorts of “volunteer” tasks that amount to slave labor, these meddlers are also given control of your access to medical care, of your children’s placement in school, and of the ration cards that you need in order to survive.

Eventually, anyone suspected of being gay or too religious is rounded up and sent to concentration camps, where “experts” try to “cure” them of their “illness” through torture.

Should you murmur the slightest complaint or curb your enthusiasm, you will not only risk prison, but also imperil your family’s well-being.

Should you opt for exile, your neighbors suddenly “volunteer” to harass you constantly. You may also be forced to spend three or more years at a labor camp, working without pay, hundreds of miles from your home and family, before you are allowed to emigrate. When you finally do manage to leave, all of your remaining possessions are taken from you, including your family photos, your wedding ring, and the rosary or mezuzah your grandmother once gave you. After being strip-searched, you leave the country without a penny to your name, and only two changes of clothing in a very small bag. Suitcases are forbidden.

Or you may risk your life and flee in a flimsy raft under cover of darkness, knowing that there are many sentries patrolling the coast, with shoot-to-kill orders, and many sharks waiting to chew you up if your vessel sinks.

Then, imagine that once you get out, nearly everyone in your place of exile tells you that the totalitarian nightmare you have fled is a wonderful and praiseworthy experiment in social engineering, or even an egalitarian utopia. Imagine being scolded for disagreeing with such assessments. Imagine being told by many affluent and well-educated people that you are a selfish oaf who doesn’t give a damn about justice and can’t appreciate “visionary” leaders.

Welcome to Cuba, and also to the life of a Cuban exile.

Want to get a little deeper under this skin? Imagine this, if you can.

The megalomaniac and so-called visionary leader who has hijacked your country for five decades falls ill and appears to be near death. One of the finest newspapers in your adopted land goes out of its way to ask for your opinion, presumably because you have managed to become a well-respected scholar. But this journal, The New York Times, doesn’t really want you to speak your mind. No. Instead it wants you to pass judgment on your fellow exiles who are openly rejoicing in Miami. And they suggest the topic in the most offensive way you could ever imagine, with a remark as flippantly ignorant and insensitive as Marie Antoinette’s infamous “let them eat cake.”

“I can’t help but wonder if this rejoicing is appropriate,” says the Times editor about the street revelers in Little Havana, “since many of them were likely allowed to leave Cuba in the early 60’s with Castro’s blessing.” Then, as if this were not vexing enough, she asks you to lay all your cards on the table and state your position on this question explicitly, to see whether or not your opinion is worth considering. And when you comply and offer to sum up the ailing tyrant as the consummate Machiavellian prince, you are curtly dismissed…

“We’re afraid that this approach is not quite right,” said the editor.

Imagine that.

God knows what they were searching for at the New York Times, or what they expected of me. All I know is that the Times made me feel as if I were back in Cuba, dealing with its state-run propaganda rag, Granma. Or like a “negro” in the old South, dealing with segregationists who couldn’t understand why colored folk were so ungrateful about being rescued from Africa.

But that’s not all.

If it were only the New York Times, maybe all of us Cubans would be in better shape, in exile as well as on the island. But, unfortunately, it’s not just the Times that loves to idolize the Castroite Revolution. It’s most of the North American and West European media, and their glitterati. Or so it seems, most of the time.

When Fidel Castro visited New York in 1995 to give a speech at the United Nations, he was the toast of the town’s news oligarchs: Mort Zuckerman, then editor of U.S. News and World Report, hosted a lunch for the tyrant at his plush Manhattan apartment, where he and others such as Barbara Walters, queen of tear-jerking interviews, and Diane Sawyer, first prime-time anchorwoman of ABC News swooned in his presence, as if he were a rock star. (1) Barbara and Diane are in good company. Dan Rather, former anchorman of CBS news, called Fidel Castro “Cuba’s own Elvis.” (2) Imagine Hitler or Mussolini being compared to Elvis.

Imagine all of this happening to Idi Amin, Sadam Hussein, or Augusto Pinochet.

Imagine even worse.

If it were only the news media, then maybe we Cubans would stand a chance of redemption. But the American entertainment industry seems to love the tyrant and his henchmen too. Robert Redford glorifies Fidel’s sidekick Che Guevara on film in “The Motorcycle Diaries,” and since that is apparently insufficient, Steven Soderbergh follows suit with a six-hour epic hagiography that might as well have been entitled “Saint Che.” Director Oliver Stone praises Fidel as “one of the world’s wisest men.” (3) Actor Jack Nicholson calls him “a genius.” (4)

Supermodels Kate Moss and Naomi Campbell gush after meeting Fidel that this was “a dream come true.” (5) Not to be outdone, novelist Norman Mailer pronounces Fidel “the first and greatest hero to appear in the world since the Second World War.” (6) But in the end, no one could trump the French, those supreme arbiters of good taste. After all, long before Hollywood stars made pilgrimages to Havana existential philosopher Jean-Paul Sartre had already crowned Che, rather than Fidel, as “the most complete human being of the twentieth century.” (7)

No wonder we Cuban exiles are seen as the fiends and villains of our own story, and of American politics. No wonder we’re loathed by intellectuals and commoners alike. No wonder the Washington Post and scores of American newspapers can get away with publishing this cartoon with impunity.

Imagine any other immigrants or any ethnic group in that boat. Imagine the firestorm of protest that would ensue.

Imagine the charges of bigotry and racism leveled against the cartoonist and the newspapers who would print such an offensive cartoon.

One final meditation. Imagine this, if you can.

Imagine a New York Times or Washington Post that would dare to print this essay, or apologize for their abysmal ignorance and bigotry.

_________________________________________________

 Notes

(1) Servando González, The secret Fidel Castro: deconstructing the symbol (InteliNet/InteliBooks, 2001), p. 35.

(2) “The Last Revolutionary”: interview of Fidel Castro by Dan Rather, CBS News, 18 July 1996.

(3) Myles Kantor, “Oliver Stone’s Cuban Lovefest,” www.frontpagemag.com, 5 May 2004.

(4) Army Archerd, “Nicholson, Castrow powwow in Cuba,” Variety, 15 July 1998. http://www.variety.com/article/VR1117478496?refCatId=2

(5) BBC News. News. http://news.bbc.co.uk/2/hi/americas/59225.stm

(6) Arnold Beichman, “Mona Charen Exposes Menace of Senseless Liberals,” Human Events, 17 February 2003.

(7) Frank Rosengarten, Urbane revolutionary: C.L.R. James and the struggle for a new society (University Press of Mississippi, 2008), p. 108.

_________________________________________________

*Carlos M. N. Eire is Professor of History and Religious Studies at Yale University and author of Waiting for Snow in Havana and Learning to Die in Miami. This article is based on a lecture he delivered at the Institute for Cuban & Cuban-American Studies, University of Miami, on November 21, 2011.

_________________________________________________

The CTP can be contacted at P.O. Box 248174, Coral Gables, Florida 33124-3010, Tel: 305-284-CUBA (2822), Fax: 305-284-4875, and by email at ctp.iccas@miami.edu. The CTP Website is accessible at http://ctp.iccas.miami.edu.

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Wal-Mart Discount Stores’ Operations 1985 Case Study Analysis

Posted on January 17, 2012 | 6 comments

 Capital isn’t scarce; vision is.

Each Wal-Mart store should reflect the values of its customers and support the vision they hold for their community.
High expectations are the key to everything.
I had to pick myself up and get on with it, do it all over again, only even better this time.
I have always been driven to buck the system, to innovate, to take things beyond where they’ve been.
Outstanding leaders go out of their way to boost the self-esteem of their personnel. If people believe in themselves, it’s amazing what they can accomplish.
There is only one boss. The customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else.
We let folks know we’re interested in them and that they’re vital to us. cause they are.
We’re all working together; that’s the secret.
               — All quotes are from Sam Walton

Wal-Mart Case Study 1986

Analysis of Wal-Mart http://www.scribd.com/doc/78543427/WMT-Case-Study-1-Analysis

See: http://www.scribd.com/doc/78527294/Wmt-50-Year-Chart

Who wants to move deeper into analyzing WMT and see the HBS Case on WMT for 2003? …………or

Ready to move onto to the Coors Beer Case Study which is a lesson on what happens if a company loses its regional economies of scale advantage?

Lessons learned so far?

If you had read this case study when it was published in 1986 would you have bought WMT and held on for five or seven years?  What analysis would you need to do?

Tomorrow I will post another strategic view of Wal-Mart so you can see other perspectives.

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VALUE VAULT Additions, Unintended Consequences, Studying the Theory of Money and Credit

Posted on January 16, 2012 | 9 comments

Before I speak, I have something important to say. —Groucho Marx

VALUE VAULT Additions*

  • You will find Money Management Interviews from 2005 to 2011, 1938 page PDF.
  • Howard Marks on the Human Side of Investing, 42 page PDF
  • Investors and Austrian Economics, 7 page PDF

All from generous, anonymous contributors. Thank you!

*Access to VALUE VAULT is given by emailing:  aldridge56@aol.com with VALUE VAULT in subject line. For your personal use only

Unintended Consequences of Goernment Action

Matt Damon in Good Will Hunting giving a 3-minute lecture on unintended consequences or Why I Won’t Work for the National Security Agency (NSA): http://www.youtube.com/watch?v=l8rQNdBmPek

Studying Von Mises’ Theory of Money and Credit at The Mises Academy

Readers should know that if ever I benefit from a reveral/advertisement, I will alert you upfront about any conflict of interest or incentive-based bias.

Mises Academy (http://academy.mises.org/) has an eight week course on Mises’ Theory of Money and Credit taught by Robert Murphy.  I have taken a few courses from Prof. Murphy, and he is an engaging lecturer. Go here: ( http://consultingbyrpm.com/blog).

This would be a great course–though advanced–to sink your teeth into Austrian monetary theory with an excellent teacher.  I will take this course and if enough people here are interested, I could try for a group discount. Your only risk is $25.00. But, I warn you, the course is demanding. See the texts below:

http://files.libertyfund.org/files/1061/Mises_0070_EBk_v6.0.pdf

http://mises.org/books/theory_money_credit_studyguide_murphy.pdf

The course:   Econ 400 — with Robert P. Murphy

Cost: $145 Length: 8 weeks       Dates: February 1, 2012 – March 27, 2012
Click here to register for this course

This course will tour Ludwig von Mises’ classic work, Theory of Money & Credit. Space constraints prevent us from covering the entire book. Instead we will focus on Mises’ two crucial achievements in the book: (1) His unification of “micro” and “macro” by successfully applying the modern subjective theory of value to money, and (2) his development of (what we now call) Austrian business cycle theory. The course will showcase not only Mises’ brilliance as a novel thinker, but also his excellent command of the literature and his selection of the best ideas from other schools.

Lectures

The video lectures are online. Lectures will be Wednesday evenings, 6:30 – 8:00 pm Eastern Time. They will be recorded and made available for enrolled students to download.

Reading

All readings for the course will be free and available online.

Grades and Certificates

The final grade will depend on quizzes. Taking the course for a grade is optional. The Mises Academy is currently not accredited, but this course is worth 3 credits in our own internal system. Feel free to ask your school to accept Mises Academy credits. You will receive a digital Certificate of Completion for this course if you take it for a grade, and a Certificate of Participation if you take it on a paid-audit basis.

Refund Policy

If you drop the course during its first week (7 calendar days), you will receive a full refund, minus a $25 processing fee. If you drop the course during its second week, you will receive a half refund. No refunds will be granted following the second week.

Academy Courses

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Posted in Housekeeping

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Hannibal Lecter’s Lecture on Strategy, Lesson on Margin of Safety

Posted on January 15, 2012 | 1 comment

The sooner you fall behind, the more time you’ll have to catch up. –Steven Wright

Hannibal Lecter’s One-Minute Lecture on Strategy

“For any particular thing, ask, “What is it in itself? What is its nature?” — Marcus Aurelius, Meditations (c. 175); — Hannibal Lecter, The Silence of the Lambs (1991).

http://www.youtube.com/watch?v=f33ieCWRWlI&feature=related

Lesson on Margin of Safety

While studying strategy don’t forget to always invest with a margin of safety. Don’t do this: http://www.youtube.com/watch?v=7s5KFbyBmrQ

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Klarman, Einhorn, Tudor Jones Readings, Hedge Funds and a Reader’s Questions

Posted on January 14, 2012 | 5 comments

Note the chart below. Thoughts? Hedge Funds are a better deal for the fund managers than the clients.  Buyer beware.

READINGS

The Loser’s Game by Charles Ellis: http://www.scribd.com/doc/78279980/CWCM-the-Loser-s-Game

(Source: www.santangelsreview.com) Failure Speech by Paul Tudor Jones (2009) http://www.scribd.com/doc/16588637/Paul-Tudor-Jones-Failure-Speech-June-2009

Einhorn on Why He Shorted Lehman Brothers’ Stock: http://foolingsomepeople.com/main/TCF%202008%20Speech.pdf

Seth Klarman Interview by TIFF: http://www.tiffeducationfoundation.org/commentaryPDFs/2009_Ed2_COM.pdf

Questions from a reader

I owe several of you replies to your questions. Bear with me as I finish reading the Wal-Mart and Global Crossing Case Studies.

 A new readers asks,

I spent about 3 hours yesterday catching up on posts from your site that I had saved in my Google Reader over the past month. I am not sure how to describe my feeling right now besides to say I was enthralled and inspired. Your website is like finding a value investor pirate’s secret treasure trove on a deserted island. There is such a wealth of material and information and it’s all such high quality thoughts that I kept thinking, “Who the hell is this guy?” Attempts to dig into posts related to answering that question yielded several tantalizing details but the mystery remains.

Are you currently or were you an MBA student? I am trying to figure out where these lecture notes are being pulled from. It says “auditing classes from 2001-2007″… that’s an awful long time and the institution and role of the note-taker are left unsaid. I get you’re trying to focus on quality, not reputation, a worthy goal, but I am fascinated simply from the stand point of why I am suddenly able to access all of this information, for free. It doesn’t really matter, I am just curious, that’s all.

My replay: Thanks for the kind words. I have never been an MBA student. I worked on Wall Street as a broker and investment banker before starting a few companies here in the US and Brazil. Upon selling those businesses, I sought to dig into value investing. I saw that the author of a value investing book was teaching at Columbia Business School so living in Greenwich, CT–only 45 minutes from the campus–I hopped the metro train and sat in on his class.  The first class was around 1999, when his students would regularly laugh at the idea of valuing companies when all you had to  was buy Price-Line or Yahoo and see the price rise five percent in an hour. All I had to do was sit in the back and keep my mouth shut. Now, I think Columbia is touchy about outsiders sitting in on classes.

But you really don’t have to do what I did. You just need to read, read and apply your independent thinking to investing. Look how Michael Burry learned (See the Big Short by Michael Lewis or search this blog). But, I do believe that becoming an “expert” or skilled investor probably takes 5 to 20 years of intensive commitment.  Of course, you never “master” investing which is why the journey is fascinating. Also, several great investors have confirmed my belief that the best way to learn about value investing is through your own efforts and application of principles that you will learn through Buffett, Fisher, Klarman, Graham and your accounting textbooks.  There are a lot of dead ends and wasted time if you do not know the proper principles and methods for investing.

SUCCESSFUL INVESTORS

Investing really is constant applied learning which is cumulative. Let me share what I have noticed with ALL successful investors:

NOT TEAM PLAYERS:

The investors work alone. Any group decisions for Buffett or Walter Schloss? They make their own deicsions, and they are little influcned by any form of group affiliation.  Buffett said of Walter Schloss: “I don’t seem to have much influence on Walter. That is one of his strengths: nobody seems to have much influence on him.” Ditto for Michael Burry.

FOXES, NOT HEDGEHOGS

These terms originate from a remark attributed to the Greek poet Archiloschu: “the fox knows many things, but the hedgehod knows on bigf thing.”  Foxes are eclectic, viewing the world through a variety of perspectives, with no allegiance to any single approach.  READ WIDELY and not just on finance and economics.

Understanding how markets work is more important to an investor than understanding technology (trading systems).

  • Few great investors are overnight successes. Many have to overcome failure.
  • Money is about freedom, not consumption.
  • They enjoy the process, not the proceeds.

Note that Michael Burry accumulated his investment knowledge gradually, from his own experience and from reading others’ experience via bulletin boards, rather than from finance textbooks. (Hint: study the www.valueinvestorsclub.com or www.yahoo.com finance boards of intelligent contributors).

Successful investing is a practical craft, not an academic discipline, and certainly not a science. The craft of investing is comprised of heuristics: a toolkit of approximate, experience-based rules for making sense of the world. (See the book: FREE CAPITAL by Guy Thomas).

GOALS FOR THIS BLOG

My goal is placing all this material here is multi-fold:

I have the material so I might as well post for the 20 or so hard-core students who will wish to use it. Many talented investors helped me, so giving back is my responsibility, though sharing this material helps me as much as anyone. I do not expect many readers because few people are suited for long-term, intensive self-directed learning.

There are those who are already in the business who think they already know everything; others seek a conventional route of the MBA; while some want investment ideas/tips–not theory, case studies and practice.   I wanted the material on the web for easy searching and access.

Secondly, many people have made excellent contributions to the value vault. Like the quarterback who hands the ball off to the running back who then runs 98 yards down field while breaking 7 tackles and leaping into the end zone, I receive too much credit.

Thirdly, interactions with curious readers help keep my thinking sharp.

Other questions:

I have a friend who has been working on developing a grass-based, intensive rotational grazing miniature farm on an acre of land about an hour north of Los Angeles, California. He looks at all the reading, time, energy and money he has spent on this project so far (and in the future) as the cost of acquiring a “personal MBA in agriculture” (yes, he gets that agriculturalists don’t get MBAs, but he’s approaching this project from the mindset of a businessman).

When I read through your site, I realize I could do the same thing using some of your material, as well as other blogs I follow and various recommended readings, as a launching point to pursue my own “personal MBA in investing” over the next 12 mos or so. The focus on case studies, and the ability to directly apply my learnings to my own small portfolio in real-time provide the perfect means to make real-world application to the theory being taught in the “classroom.” I think this is a big idea and I am very excited as I consider it more and more seriously. I plan to blog my entire journey and produce various supporting course materials along the way (such as reading list, top blog posts, favorite video lectures links, etc.) as well as keep a running tab on costs, so at the end of it all I can show other people what I learned and how much it cost to get the knowledge.

Yes, use the material how you wish. Start a study group and work on several of the cases. Eventually, there will be sections on special situation investing, competitive analysis, valuation, Austrian Economics.  Or you can take a case study and develop it further.  Seek higher; you can also sign up for courses at the Mises academy (www.mises.org) or go to www.thomasewoods.com to learn about Austrian economics.

I want to thank you again for the resources you place on your site. I’ve only just begun to dig into them and it may be some time before I begin actively participating in your site’s discussion but I do think it’s wonderful already.

And I absolutely LOVE that you’re into Austrian economics, as well. Finally, I’ve found someone else who is interested in synthesizing these two great (and in my view, complimentary) philosophies/disciplines, just as I am:   http://valueprax.wordpress.com/about/ (going to need to re-write that soon, though, to reflect my slightly new direction for the site, ie, cataloging my progress in acquiring a “personal MBA”)

My reply: I became interested in Austrian Economics because Rothbard and von Mises had the only coherent theory and explanation for booms and busts. But as I studied fruther, I learned more about the structure of production  and time preference which helps you understand the risks in different businesses. Every wonder why a steel company fluctuates more in earnings and price than a beverage company? The distance from the consumers in terms of time and production structure. Look at your watch. How long did it take to make? Two hours? Well, who mined the sand to make the glass? Who mined the metal to make the case? Who killed the cow to make the leather wrist-band? And who planned all the production? Perhaps your watch took two years from the moment of assembly to the first production of the materials.  You need to understand this if you EVER invest in a highly cyclical company–what company isn’t at some level cyclical?

Okay, that’s all for now. Thanks for sending the link to the Value Vault. Where are you located geographically, generally speaking? East Coast, West Coast? Big city, small town?

I live in Greenwich, CT home of many hedge funds, but I have never been to one.

Good luck on your journey.

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Posted in Housekeeping, Investing Gurus, Investor Psychology

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Buffett’s Investments in Franchises

Posted on January 13, 2012 | 3 comments

A long-term durable competitive advantage in a stable industry is what we seek in a business.

I look for businesses in which I think I can predict what they are going to be like in ten to fifteen years’ time. Take Wrigley’s chewing gum. I don’t think the Internet is going to change how people chew gum.

—Warren E. Buffett

Old, established and Predictable

Predictable products equal predictable profits. It seems Buffett loves OLD, ESTABLISHED companies. Note the proclivity in his private life to repeat what he likes—burgers and Cherry Coke with Sees’ Candies frenzy as desert.

(Read/listen to Buffett discuss Coke and P&G during his lecture at the University of Florida: http://wp.me/p1PgpH-1N and the videos start: http://www.youtube.com/watch?v=ogAxzPaU5H4

Note the difference between Buffett’s style and Venture Capital investing:
Two VC’s explain their company: http://www.youtube.com/watch?v=3iQTvJIGArc&feature=related

We are studying competitive analysis in case studies to help us determine the strength and durability of a company’s future cash flows (depth and width of moat). Eventually we will circle back to tie franchise analysis in with valuation.

Warren Buffett selectively buys stocks when others are rushing to sell. And he has cash when others don’t as in 1973/74 thanks to his closing up his investment partnership in 1969. When Berkshire had $37 billion in cash, he pounced during the crash of 2008/2009.

Note the franchise and non-franchise companies

EPS       EPS          EPS              EPS
Year              Coke       JNJ          Ford     Adv. Micro Dev.
2011              $3.85     $4.85       $2.00           $0.55
2010              $3.49     $4.76       $1.66           $0.64
2009              $2.93    $4.63       $0.86            $0.45
2008              $3.02     $4.57     -$6.50          -$4.05
2007               $2.57     $4.15      -$1.43          -$5.09
2006              $2.37    $3.76       -$6.72          -$0.28
2005               $2.17    $3.50       $0.86            $0.37
2004              $2.06     $3.10       $1.59           $0.25
2003               $1.95     $2.70      $0.35          -$0.79
2002               $1.65     $2.23       $0.19           -$3.81
2001               $1.60      $1.91     -$2.95            -$0.18
TOTALS  $27.66  $40.16  -$10.09      -$11.94

Johnson & Johnson http://www.scribd.com/doc/78158910/JNJ-35-Year-Chart

Advanced Micro Devices http://www.scribd.com/doc/78159095/AMD-35-Year-Chart

Ford: http://www.scribd.com/doc/78159068/Ford-35-Year-Chart

Coca-Cola: http://www.scribd.com/doc/78158885/Ko-35-Year-Chart

Now, the charts do not imply that purchasing a franchise company at any price is wise, but look how profitable growth puts time on your side vs. the non-franchse companies.

When the market crashes, Buffett isn’t buying the Grahamian bargain he cut his investing teeth on. Instead, he is focusing on the exceptional businesses–the ones with a durable competitive advantage (DCA).

Arguments/Discussion/Disagreements

A few readers preface their remarks with an apology for disagreeing with my comments. Don’t. The purpose is to learn not be right.  If you reason with logic and facts you will convince like this: http://www.youtube.com/watch?feature=fvwp&NR=1&v=1jQP0Y2T2OQ

There is no point in discussing an opposing view with a person who acts on blind faith or belief rather than reason: Frailty: http://www.youtube.com/watch?v=Y_rVU40BTw4&feature=relmfu

Please feel free to disagree, but I warn you the last person to do so met this fate: http://www.youtube.com/watch?v=QHH9EYZHoVU  And I want….. http://www.youtube.com/watch?v=WcxiEOqk_w4

Remember today is Friday the 13th; be careful.

3 Comments

Posted in Competitive Analysis, Housekeeping

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Chanos Testimony on Enron, Slide into Tyranny? Federal Reserve Theft?

Posted on January 12, 2012 | 2 comments

“First They Came for the Jews” By Pastor Niemoller

First they came for the Jews and I did not speak out because I was not a Jew.

Then they came for the Communists and I did not speak out because I was not a Communist.

Then they came for the trade unionists and I did not speak out because I was not a trade unionist.

Then they came for me and there was no one left to speak out for me.

America’s Slide into Tyranny

Or the “Patriot” Act’s stomping on the 4th, 5th and 6th Amendments to the US Constitution. Who has ever heard of the Bill of Rights? http://www.archives.gov/exhibits/charters/bill_of_rights_transcript.html

When I read this, I puked on new suede shoes. http://lewrockwell.com/goyette/goyette22.1.htmlay

Pay close attention. This is how it happens…

President Obama found a moment of reduced visibility, in an unwatched hour on New Year’s Eve, to sign the latest assault on the Fifth Amendment. In signing the National Defense Authorization Act of 2012 on New Year’s Eve, Obama knew the nation’s attention would be elsewhere, diverted by revelry, football, New Year’s Day, and a Monday national holiday.

In case you haven’t heard, the National Defense Authorization Act allows the government to detain people indefinitely – yes, it includes American citizens who can be taken even on our native soil and imprisoned – merely on the basis of accusations.

The measure is “so radical,” says Human Rights Watch, “that it would have been considered crazy had it been pushed by the Bush administration.” And although Obama appended a signing statement as he put his name to the act, solemnly assuring the nation that the power he insisted on having won’t be used recklessly, it is a political gesture that has no more force of a law than attaching a little yellow sticky note to the bill. If the clear language of the Constitution itself cannot bind the governing classes, it is hard to imagine a post-it note having much effect on the current or future presidents now that the indefinite detention of Americans without trial has been legislatively countenanced.

There you have it in a nutshell, the new American way: Guilty until proven innocent. This is how once-free people slip into state tyranny and slide into martial law.

I ask if any here feel safer?

So Where Does the Federal Reserve Earn the Money?

http://www.economicpolicyjournal.com/2012/01/nutty-77-billion-dollar-profit.html

The Federal Reserve turned $76.9 billion over to the U.S. Treasury last year, close to the record amount transferred to the government’s coffers in 2010, amid a strong profit generated from its expanding portfolio of securities.

Preliminary unaudited results released by the central bank Tuesday showed the Fed had net income of $78.9 billion in 2011 mainly thanks to higher earnings on securities it bought to counter the recession and promote recovery….the Fed’s crisis-lending programs have produced profits. The increase in 2011 income was primarily a result of $83.6 billion in interest earnings from holdings of U.S. Treasurys, federal agency debt and securities held by government-run mortgage finance firms Fannie Mae and Freddie Mac, the Fed said.

Got that? The Fed printed billions of new dollars and earned a profit after all this nonsense. For the record the money supply (M2) grew in 2011 by nearly $ 850 billion. The total monetary base came in at aprox. $8.5 trillion.

Note: Don’t try this at home. You would get arrested for counterfitting. But do you think you could “earn” a profit of $77 billion, if you printed, over-time, some $8.5 trillion to buy Treasury securities and the like, which means, as part of the circus, you could give the Treasury the money to pay you the interest that you then give back to them and release a press release about your financial acumen?

Quiz: Any guess as to where this money actually comes from? Who loses? 

Enron Case Study Addition

We have discussed Enron in prior posts here:

http://wp.me/p1PgpH-1R Enron so What is it Worth?

http://wp.me/p1PgpH-2U  Analysis of Enron Case Study

http://wp.me/p1PgpH-34 Video of Enron Collapse

An alert reader gave me a heads up to add this to the Enron Case Study:

Full Hearing Testimonies on the Enron Scandal:  http://republicans.energycommerce.house.gov/107/action/107-83.pdf

Chanos Testimony: http://energycommerce.house.gov/107/hearings/02062002Hearing483/Chanos782print.htm

Please stop me before I post again…..but I had to alert you to the above. Most will enjoy reading the Chanos testimony. Note how he FOUND the idea. From our prior study of this case we know that great businesses do not need to layer on complicated debt to grow. Complexity in financial statments is a RED FLAG.

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Posted in Competitive Analysis, Economics & Politics

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