Category Archives: Competitive Analysis

A Reason to be Bullish; Industry Maps

There is hope for America. We have the lowest energy costs in the world (electricity).  See both sides of boom and gloom.

Industry Maps

Gold Industry Map A reader submitted this–giving him a $2,000 prize (Actually, on Amazon New, the book is offered at $3,500).

Measuring_the_Moat_July2013  See page 12 for an example of an Industry Map of the Airline Industry.

Value Investing Program at Columbia University   If you still want to learn how to do an industry map, go here and pay $80,000 per year for the value investing program.

I will wait and see if any other readers wish to submit a gold industry map, then next week we move onto valuing a company.

A great interview of a resource investor, Rick Rule.


Have a Great Weekend!

Part 2: Analyzing a Gold Mining Company–Initial Steps

Mark Twain: “A mine is a hole in the ground with a liar standing next to it.” 
2-BGMI-Gold both-W2 (1)

Initial Steps

We first have to understand the product/market of our gold company. Gold companies produce gold and silver which is money. What is money?  Precious metals have exchange value which makes up a large part of their value.  You first have to understand the gold market. Note: why did gold go down LESS than other commodities such as oil in the 2008/2009 credit crisis?

You need to draw up an industry map. How? Find out who the participants are.

Start with history:


QUIZ: What is the best environment to invest in Gold mining equities. Why?

We will circle back to an industry map after you have read about the industry.

What determines the price of gold: Also, do a search for gold and/or mining stocks and then read his posts.

The Case For Gold by R Paul

Gold Dollar by Rothbard

Roubini Why Gold Won’t work


Gold as collateral:   Also, do a search for gold.

Read free research on gold as money:

View all five videos on money:

Two excellent books: Gold, the Once and Future Money by Nathan Lewis. Also, Gold: The Monetary Polaris by Nathan Lewis.

Gold and inflation:

The case for gold:

Understand royalty companies:   (read all five parts)

Then read presentations of Royal Gold, Silver Wheaton, Franco-Nevada, Sandstrom from their websites for a good overview of the gold mining market(s).

These sites can get you started. Don’t believe the hype! Also, go to to view video on valuing gold and silver stocks.

Go to and search for Jim Grant AND gold,   John Doody and mining stocks.  Ditto for Brent Cook, Rick Rule. Search for their comments.

That will get you started and then next week, I will post an industry map. Ask questions.   In two weeks we will crack a company.

Update March 17, 2014: Discussion of Junior Resource Sector



Part 1: Analyzing a Gold Mining Company–Where to Start?

Idaho_Gold_Minegold mine 2

Gold mine 3gold mine




Assignment: Analyze and value a gold mining company

Mario Gabelli once suggested to a group of Columbia MBA students to become an expert in an industry. The process will take at least six months of intensive reading and research to get to a level of what you need to know and what you can ignore. Then in a year or so move on to another industry. After five or six years you will have competency in five to six different industries.   Since investing is all about context, we first need to learn about the gold (precious-metals) mining industry.

Whether you will analyze a gold mining company, a shipping firm, a title insurance business or a media company, you will need to develop an understanding of the industry within which your firm operates.

Since we do not have six months to study, we will move at an accelerated pace.

OK, so what do you need to start with and how would you begin?  Pretend that you wanted to build a mining company from scratch, how would you do it? If you were airdropped into Northern Pakistan, what would you first need after hitting the ground?

Friday, I will post my suggestions and information sources. Meanwhile, you can think and search for yourself. Eventually, we will move on to the particular company.   Don’t hesitate to post questions if you are unclear or my instructions are incomprehensible.

Good luck!

Pop Quiz on Competitive Advantages–What Would You Advise?


QUIZ: Discuss in a few words the mistakes made in these recent acquisitions in the newspaper business. If you wanted to develop an advantage in newspapers how would you do it.  (Hint: What is the most profitable news magazine in the world–or close to it?)

How would you advise Bezos to enhance his purchase of the Washington Post?

Good luck.

Case Studies on Newsweek and Boston Globe

For those struggling, I suggest reading, The Curse of the Mogul: What’s Wrong with the World’s Leading Media Companies by Jon Knee and Bruce Greenwald

I will weigh in at the end of the week.




The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors. –Warren Buffett (1999)

The most important thing to me is figuring out how big a moat there is around the business. What I love, of course, is a big castle and a big moat with piranhas and crocodiles.” Warren E. Buffett (1994)

Measuring the Moat

Note on page 12 the industry map. Please print this out and read carefully:


What is Austrian Economics?

Punch card Investing: Case Studies on Franchise Investing

Punchcard Dedicated to the Exploration of Moats and High Quality Businesses

Please check out the new blog. Your time is better spent learning about franchises and case studies than debating gold or any macro picture/forecast.


Strategic Logic (Book)


 This is an excellent book for understanding how companies have a STRUCTURAL competitive advantage. I am now re-reading it.


Financialization of the US Economy    Why Wall Street will have to shrink over time.

My Take on Dell Case Study

Dell Big

We first spoke here of Dell

Dell Case Study

So begins my analysis of Dell. Please be aware that I have been a recent shareholder of Dell, but no longer own shares. These comments should be taken in context of potential self-serving, hindsight bias.  My methods may or may not be applicable to your investing, but I will lay out my assumptions.

First, I look at Dell_VL_2013. I love Value-Line for all the historical information that it packs into one page. However, I use it for a first screen and as a tickler to focus my reading when I go to the proxy and annual reports. Next, I go to the history of Return on total capital (“ROTC”) and ROE. In 2002 Dell had almost a 40% return on total capital averaging close to 50% until the plunge down to 17% in 2009—not unexpected given that computers could be considered a capital good. Use of debt was minimal.

My eye notices that ROTC has not really recovered to the pre-2009 glory days and now averages about 14%, a normal return on assets for an average business. Having read about Dell over the years, I know Dell had a business process advantage. Dell had a lower cost structure in computer assembly and distribution over its competitors. If you go to you can download dozens of case studies on Dell’s manufacturing advantage. The market and competitors changed. Dell lost its cost advantage RELATIVE to its competitors. Now Dell is a commodity business. The proof lies in the history of its ROTC.

Next, I see sales growth per share about quadrupled from 1996 to 2000 during the Internet boom/bubble before flattening out at a ten-year 5.2% compounded annual growth rate from $35 billion in revenues in 2002 to about say $57 billion estimated in 2012. Wow, a big sales deceleration.

Dell has been buying back shares continually since 2001 both to sop up option issuance and shrink share count. My eyeball says management started shrinking the share count by 900 million shares from 2001 at an average price of $25—almost 90% above Dell’s current $13.65 offer. Dell’s management spent roughly $22.5 billion on share buybacks. The shareholders who remain sit with a current market cap at $24 billion (1.73 billion outstanding shares times $13.7 current share price). The shareholders who sold are the ones who benefited while the long-term and long-suffering shareholders saw the firms capital squandered.

If Dell’s management destroyed capital buying their OWN company, what does that say about their ability to make acquisitions outside their area of expertise going forward? I wonder….?

I jump to Dell’s proxies:2012 Dell Proxy and 2010 Dell Proxy. Michael Dell already owns about 13% of Dell which I don’t begrudge him since he did create the company and develop a better way to assemble and distribute than his competitors, for a time.

But why does he receive a dollop of 500,000 options every year? How does receiving more options incentive him more than his 13% stake and on top of his generous salary?  My prejudice is that Mr. Dell looks out for number one first and shareholders second.  I think Dell comparing itself to Intel in its peer group is absurd. Intel has to spend much more on R&D, for example, than Dell. They are different businesses. Dell’s compensation plan has the makings of fancy consultants. Read more on M. Dell’s compensation:

For a brief history but biased slant

Dell Michael

Now from Dell’s 2012 Letter to Shareholders Dell Sh Letter 2012:

I’m proud to report we delivered on that promise in fiscal year 2012. We made big investments to expand our portfolio of solutions and capabilities and to build an expert global workforce to deliver them to our millions of customers. By the end of the year, enterprise solutions and services accounted for roughly 50 percent of gross margins—a record result, and great validation that we’re on the right road and delivering the technology solutions our customers need.

I am excited about our future. Information technology is a $3 trillion industry, and we currently have roughly a two-percent share. The opportunity to grow and, more importantly, to help our customers achieve their goals is tremendous. That is—and will always be—our ultimate goal.

That ladies and gentlemen is called the “Chinese Glove Theory.” If I can garner 1% of the Chinese Glove market by getting 1% to 2% of the 2 billion Chinese to wear one glove (like Michael Jackson), we will be rich.  Of course, what edge do I have and/or profits will be made doing that relative to competitors?

Ok, Dell has made big investments to grow but how does Dell have a competitive advantage in any of its businesses? If I can’t answer that question—and I can’t—then Dell’s GROWTH has NO value, zilch, nada, none.   Returning money via dividends and share purchases is good provided the company shrinks itself faster than the decline in its business or does not squander its cash with overpriced acquisitions or share buybacks.

Note the average annual P/E ratio has moved down from the hyper growth 62 P/E in 1999 all the way down to the current 6 or 7 P/E net of cash. High expectations have collapsed to low expectations. Good, I seek low expectations.

Also, note the wisdom of crowds (the market). See the dotted line showing Dell’s share price relative to the market that declines from the end of 2002 to today. Note the decline accelerating while Dell made a high of $42.60 during 2005. The market (like it is doing with Apple today) was and is handicapping Dell’s future prospects. The “market” sensed the change in competitive dynamics occurring in Dell’s business. Respect the market because the onus is on you to be right or contrary to the consensus.

So what is the business worth? 

Post tax “cash flow” is about $1.90 per share.  Capex is estimated at 30 cents per share, but it was 38 cents per share in 2011 and back in 2006 and 2007 almost 40 cents.  I want to err on the side of conservative so I put 40 cents for capex.   $1.90 per share in “cash flow” minus 40 cents leaves me about $1.50 in free cash flow (“FCF”).  For a discount rate with NO GROWTH I use about 11% to 12% because that rate is the average equity return for an average business. Yes the 30 year bond (“risk-free”) rate is 4% but normalized the rate is closer to 6% or 7% and I think historically the equity premium has ranged much higher (go read The Triumph of the Optimists for a history of equity premiums by country).

$1.50 divided by my discount rate of 11.5% leaves $13 per share for the operating business. The excess cash is $11.3 billion in cash minus $5.3 billion in long-term debt or $6 billion in net cash or about $3.50 per share.  But I can’t get my hands on that cash, and taxes would have to be paid to repatriate that cash—I will knock off 25% and use $2.50 to add back to my operating value. I see that total debt is $9 billion so I need to check out the terms of the debt, but I will use $2.5 per share to add to $12. 50 to $13 per share operating business value with no growth of $1.50 per share FCF using a 11% to 12% discount rate.

My back of the envelope value is $15 to $16.5 per share. Now, that value range assumes no growth but also no decline. I am receiving about 4% per year of the $1.50 in free cash flow in dividends and share buybacks. On the other hand, I have Mr. Dell’s high compensation, poor capital allocation record on share buybacks, and “me-first” attitude towards shareholders.

Since growth has no value, I am buying a non-franchise type company. Profitable growth will not bail me out, so I need a 30% to 40% discount for my margin of safety AND I can’t make it more than 2% to 3% of my portfolio. A major position for me is 5% to up to 15%. 30% to 40% discount from $15 to $16 leaves me a buying range of about $9 to $11. I will be conservative and look at $15 as my level of value so $9 to $10.50 will be my range. I bought in Sept. 2012 at about $10.60 and again in November at about $9.15 for an average price of $9.80.

Dell small

Yes, I could be making all this up with hindsight bias, but this is from a simple man.

Upon the announcement of Dell going private, I waited a day and sold at $13.55. Why sell when the minimum value I placed on it was $15 and up to $16 per share?  I am not an arbitrageur. I will leave it to them to make the last nickel or dollars.  The business seems cheap, but I ride with a poor capital operator in a commodity business. I don’t see much future value and perhaps I was TOO AGGRESSIVE in my valuation. My return for investing in Dell is 39% for six months. Good, but it doesn’t factor in my losses for when I buy a “Dell” and all hell breaks loose and I may have to sell at $5 or $7. But I had excess cash, free cash flow, shareholder angst (Pzena and Southeastern) and LOW EXPECTATIONS at my back. My expectations of management and the business were low as well, but perhaps not low enough. Time will tell.

If you read Southeastern’s letter Dell-Board-Letter_by_Longleaf, they place a value of $24 on Dell (Southeastern paid about an average of $25 for Dell’s stock over the past five years (see 13-FH filings).  They mention Dell paying about $12.94 per share at cost for their acquisitions buttressed by Dell’s CFO saying to that point had delivered a 15% internal rate of return.  Perhaps, but I am skeptical that Dell’s acquisitions will generate more than an average rate of return.  What does Dell bring to the party in its acquisitions? Scale? Technology, Patents? Customer captivity? Ironically, if Dell isn’t worth at least $13 per share for those acquisitions, then Dell’s current bid is another nail in the coffin for its reputation in building shareholder value.

I do agree with Southeastern’s letter that Dell should allow shareholders the option to remain invested in the company if they so choose while breaking up the company.  If shareholders have traveled this far, let them decide.  Basically, Michael Dell wants to use more cheap debt (available today) as a tax shield to juice his after-tax returns.  I don’t blame him, but let the shareholders decide.

Beware of sum of the parts valuations. If you do use them, analyze the competitive advantages of each business segment.

I could spend a year on Dell reading about their divisions but I would have no edge over industry analysts. My edge (I hope) is sniffing out despair with a cynical eye.

Dell is not an obscure, forgotten company/stock, but it was laden with disappointment, despair and low expectations. I just had to wait for my price or walk away.

Hope this helps you to find our own way.


UPDATE: FEB. 12, 2013:

Mason Hawkins Buys More Dell While Opposing the Deal

The future of the Dell (DELL) deal is looking dimmer as its largest outside investor Southeastern Asset Management buys more shares while openly opposing the deal. Southeastern Asset Management bought almost 17 million shares in the past weeks. It now owns 146.8 million shares, which is about 8.5% of the company. Southeastern Asset Management has openly opposed the Dell deal, which is led by Michael Dell and plans to buyout other shareholders at $13.5 a share. Southeastern Asset Management said that the deal “grossly undervalued the company,” and believes that Dell is worth $24 a share, according to Barron’s.
Southeastern Asset Management has been a long-term holder of Dell, and started buying the stock when it was trading at above $30. Its average cost is estimated to be above $25. If the deal went through at $13.5, Southeastern would have lost almost 50% of its original investment, excluding dividends.

I will be out until Friday………until then.



Apple (AAPL) 100 to 1 in the Stock Market


After buying Apple during the depths of the Tech Bubble Bust in 2003 around $6.94, I recently had to sell about ten years later around $700 for a compound annual return over 10 years of 58.5%. Eat your heart out Munger, Buffett, Soros, Graham, Tudor Jones, etc., etc.

And now what? 

Ok, Ok, I live in fantasy.  A friend recently said that he wished he had sold his Apple after buying it last year. Coulda, shoulda, woulda doesn’t advance your skills as an investor. What can we learn A Priori (before the fact) to help us as investors in finding and or managing our investments?  What lessons can be gleaned from Apple’s history? In Part 2: We will begin to prepare our case study file on Apple.

Mental Models, The Franchise of Legos (plastic blocks)


But why should we learn about the world and its history, why bother trying to live in harmony with others? What is the point of all this effort? And does it have to make sense? These questions, and some others of a similar nature, bring us to the third dimension of philosophy, which touches upon the ultimate question of salvation or wisdom. If philosophy is the ‘love’ (philo) of ‘wisdom’ (sophia), it is at this point that it must make way for wisdom, which surpasses all philosophical understanding. To be a sage, by definition, is neither to aspire to wisdom or seek the condition of being a sage, but simply to live wisely, contentedly and as freely as possible, having finally overcome the fears sparked in use by our own finiteness. –Luc Ferry in A Brief History of Thought

Mental Models:

Why Legos Are So Expensive — And So Popular? Hint—it is a FRANCHISE!   (I hope readers who have children that play with Legos can add their input–Why did you shell out those big bucks for plastic blocks?)


January 16, 2013

A lot of people wonder how Lego, selling a now un-patented product, can command both massive market share and sell at twice the price of the nearest competitor: Megablocks.

pm-gr-legomega-616Mega blocks are much cheaper than Legos yet Legos dominates in sales.

Rhett Allain, in his WIRED article addressing why lego sets are so expensive, unsatisfyingly concludes “Honestly, I don’t know much about plastic manufacturing – but the LEGO blocks appear to be created from harder plastic. Maybe this would lead them to maintain their size over a long period of time.”

While lego offers a superior product, that doesn’t wholly account for why they sell so well.

Chana Joffe-Walt offers a much better explanation in her NPR Planet Money article: (click on link to hear the radio show on Legos)

Lego did find a successful way to do something Mega Bloks could not copy: It bought the exclusive rights to Star Wars. If you want to build a Death Star out of plastic blocks, Lego is now your only option.

The Star Wars blocks were wildly successful. So Lego kept going — it licensed Indiana Jones, Winnie the Pooh, Toy Story and Harry Potter.

Sales of these products have been huge for Lego. More important, the experience has taught the company that what kids wanted to do with the blocks was tell stories. Lego makes or licenses the stories they want to tell.

Lego isn’t just selling a product, they are selling a story. Still, I doubt that alone fully explains the difference.

I think Warren Buffett offers the best explanation. Talking about the brand power of See’s Candies, he comments:

What we did know was that they had share of mind in California. There was something special. Every person in Ca. has something in mind about See’s Candy and overwhelmingly it was favorable. They had taken a box on Valentine’s Day to some girl and she had kissed him. If she slapped him, we would have no business. As long as she kisses him, that is what we want in their minds. See’s Candy means getting kissed. If we can get that in the minds of people, we can raise prices. I bought it in 1972, and every year I have raised prices on Dec. 26th, the day after Christmas, because we sell a lot on Christmas. In fact, we will make $60 million this year. We will make $2 per pound on 30 million pounds. Same business, same formulas, same everything–$60 million bucks and it still doesn’t take any capital.

… It is a good business. Think about it a little. Most people do not buy boxed chocolate to consume themselves, they buy them as gifts—somebody’s birthday or more likely it is a holiday. Valentine’s Day is the single biggest day of the year. Christmas is the biggest season by far. Women buy for Christmas and they plan ahead and buy over a two or three-week period. Men buy on Valentine’s Day. They are driving home; we run ads on the Radio. Guilt, guilt, guilt—guys are veering off the highway right and left. They won’t dare go home without a box of Chocolates by the time we get through with them on our radio ads. So that Valentine’s Day is the biggest day.

Can you imagine going home on Valentine’s Day—our See’s Candy is now $11 a pound thanks to my brilliance. And let’s say there is candy available at $6 a pound. Do you really want to walk in on Valentine’s Day and hand—she has all these positive images of See’s Candy over the years—and say, “Honey, this year I took the low bid.” And hand her a box of candy. It just isn’t going to work. So in a sense, there is untapped pricing power—it is not price dependent.

The reason Lego is awesome and Megablocks is not has as much to do with what’s in the consumers’ mind as the product on the shelf. It’s the experience you have with Lego that makes it so amazing.

Remember the first time you played with Lego? You want to pass that experience off to someone else. No one wants to show up to a kid’s birthday party and announce to everyone they took the ‘low bid’ on a relatively cheap children’s toy.

Lego is a safe bet and we want to reduce uncertainty.

Read more posts on Farnam Street on:
Association biasLegoWarren Buffett

I went to Toys R Us recently to buy my son a Lego set for Hanukkah. Did you know a small box of Legos costs $60? Sixty bucks for 102 plastic blocks!

In fact, I learned, Lego sets can sell for thousands of dollars. And despite these prices, Lego has about 70 percent of the construction-toy market. Why? Why doesn’t some competitor sell plastic blocks for less? Lego’s patents expired a while ago. How hard could it be to make a cheap knockoff?

Luke, a 9-year-old Lego expert, set me straight.

“They pay attention to so much detail,” he said. “I never saw a Lego piece … that couldn’t go together with another one.”

Lego goes to great lengths to make its pieces really, really well, says David Robertson, who is working on a book about Lego.

Inside every Lego brick, there are three numbers, which identify exactly which mold the brick came from and what position it was in in that mold. That way, if there’s a bad brick somewhere, the company can go back and fix the mold.

For decades this is what kept Lego ahead. It’s actually pretty hard to make millions of plastic blocks that all fit together.

But over the past several years, a competitor has emerged: Mega Bloks. Plastic blocks that look just like Legos, snap onto Legos and are often half the price.

So Lego has tried other ways to stay ahead.

The company tried to argue in court that no other company had the legal right to make stacking blocks that look like Legos.

“That didn’t fly,” Robertson says. “Every single country that Lego tried to make that argument in decided against Lego.”

But Lego did find a successful way to do something Mega Bloks could not copy: It bought the exclusive rights to Star Wars. If you want to build a Death Star out of plastic blocks, Lego is now your only option.

The Star Wars blocks were wildly successful. So Lego kept going — it licensed Indiana Jones, Winnie the Pooh, Toy Story and Harry Potter.

Sales of these products have been huge for Lego. More important, the experience has taught the company that what kids wanted to do with the blocks was tell stories. Lego makes or licenses the stories they want to tell.

And kids know the difference.

“If you were talking to a friend you wouldn’t say, ‘Oh my God, I just got a big set of Mega Bloks,’ ” Luke says. “When you say Legos they would probably be like, ‘Awesome can we go to your house and play?’ ”

Lego made almost $3.5 billion in revenue last year. Mega made a tenth of that.

But Mega Bloks may yet gain on Lego.

Mega now owns the rights to Thomas the Tank Engine, Hello Kitty, and the video game Halo. And, on shelves for the first time ever this week: Mega Bloks Barbies.

PS: I will post shortly on a Reader’s Question: What besides an Index would you recommend for a person who seeks safety and return on his/her capital?