Category Archives: Competitive Analysis

Niche Franchise Breached? Value Trap


Taxi Medallions have been one of the best performing assets over the past twenty years:

However, you as an investor, must require a very high discount rate when you depend upon government licenses.  If Uber makes inroads?


taxi ten


“Value” investors may flock to the seductive yield:

But readers know their history when technological change or a catalyst for regulatory change Airline_deregulation upends an incumbent, then the plunging price becomes a value trap versus an opportunity.  Reflexively reaching for this 8% yield by not turn out well.

Of course, the future is uncertain, but after a five year bull run, failure to advance after last quarter’s earnings beat and pricing pressure from UBER, then TAXI’s high valued medallions may become less so.  The government is placing an artificial restriction to keep supply low while boosting prices that hurt consumers’ choices and pocketbook. I wonder how this fight will turn-out?  I will be watching this unfold.

What do YOU think?

Question on ROE vs. ROCE; Comprehensive Look at EBITDA

EBITDA and an interesting look at margins here:

Respecting the Reality of Change

The following chart shows CPATAX divided by GDP from 1947 to present.  The black line represents the average from 1947 to 2002, and the green line represents the average from 2003 to 2013.


As you can see in the chart, CPATAX/GDP is wildly elevated at present.  It currently sits 63.3% above its average from 1947 to 2013, and a whopping 75.0% above its average from 1947 to 2002.

As readers of this blog have probably inferred by now, I’m not very patient when it comes to waiting for “mean-reversion” to occur.  In my view, when a variable deviates for long periods of time from a reversion pattern that it has exhibited in the past, the right response is to expect something important to have changed–possibly for the long haul, such that a predictable reversion to prior averages will no longer be readily in the cards.  The task would then be to find out what that something is, and try to understand it. Go here:   (Interesting blog)

Reader Question:

Can you help me understand one aspect of ROE? In Indian companies, some of the companies have ROE < ROCE.

Isn’t that a violation of the observation that ROE ~ ROCE times Leverage.

I define ROCE as Return on Capital Employed.

ROCE = EBITDA (1-Tax Rate)/Total Capital Employed (=Debt+Equity)

I use ROCE as a measure of the attractiveness of the industry and the company. High ROCE is good, implying a moat, low ROCE is not.

Some of the reasons I could think of are:

  1.  Exceptional losses, which lead to Net Income << EBIT(1-Tax) *Leverage
  2.  Extremely high interest charges. ( higher than return on the        debt portion) which leads Net Income << EBIT(1-Tax)* Leverage
  3.  There is a slump sale of a division, and thus suddenly huge            amount of profit has come in increasing inordinately the            average shareholder equity. So suddenly the effective leverage        has dropped.

Update May 1: 

I made a mistake in describing ROCE.  In my defense, I dont exactly calculate ROCE and merely use the numbers from screens.
ROCE = EBIT(1-Tax Rate)/ Total Assets and not EBITDA as mentioned before.

Does someone want to have a crack at this? I see issues whenever you use EBITDA without understanding maintenance capex. Please read this: Placing EBITDA into Perspective

More on WMT: A reader posted this in the comment section:    Does that article even touch upon the ture nature of WMT’s competitive advantage?  No wonder the obvious is overlooked.

Hannibal Lecter Analyzes Wal-Mart (Part 2)

Social Networking

The prior post asked you to guess the name and price that you would pay for this case study: (Part 1)

It is WALMART  Annual:1974-annual-report-for-walmart-stores-inc. If you had paid the HIGHEST possible market price in 1974 or the first quarter of 1975 (after reading this annual report),  you would have about 1, 300 times your money over 40 years not including annual dividends which today stand at about 31 times what you paid in the market (WMT 2014) through and despite wars, high inflation, double-digit interest rates, civil unrest, political changes and a mundane, extremely competitive industry, AND WMT’s stock price “UNDER-performing” the general stock market one-third of the time. See Wal-Mart 50 Year Chart_SRC.

Eat your heart out Buffett, Munger, Peter Lynch, and all other investing pantheons. The point is you would have made a lifetime fortune sitting on your hands for more than a third of a century. WMT is the pinnacle of an investment–a relentless compounding machine.  Buffett said the goal of an investor is to put together a portfolio of compounding machines.

Well, Wal-Mart was the king of compounders; a company that could generate high returns on capital AND reinvest those high returns into similar high returns.  As many of you know, it is easy to spot a company with high ROIC or ROE but how do you know if the company can grow and reinvest those high returns at the same high rates? If not, then that company should return the excess capital which it can’t reinvest to you through dividends or appropriate (below intrinsic value) stock buy-backs.

You could have paid any price in 1974, 1975, 1976, 1977, 1978, 1979 and generated over-15% annual returns.  How would you know that WMT would keep growing with such high returns? What could you have KNOWN? What can we use for tomorrow’s investments?

AT Hindsight Capital (my firm) we always pick the Wal-Marts.

Joking aside, what is the point of this case study and what are the lessons we can use?  Let’s be realistic, we may never find another “Wal-Mart” but at least we can study “perfection” or the best to grasp what principles to look for in a company and an investment. You could do worse than spend weeks or months studying the history of Wal-Mart. Start here and go to here: WalMart_AR. And read: Sam-Walton-Made-America.

What’s the point of viewing one of THE best?

Hockey Player

NY Giants Lawrence Taylor on the loose:

Playing the Piano:

You gotta at least see and hear excellence to know it.

Let’s get back to Wal-Mart. What is the essence–the key–to its ability to grow profitably for so long? What can you spot in the 1974 annual report that would have alerted you to its competitive advantage? In other words, follow Hannibal Lecter’s tutelage when analzing any investment: What is its nature?

Here are two hints:

Sam Walton‘s passions included flying his own plane over the American countryside, hunting with his dogs, and sharing his good fortune with his family. But Walton will always be best remembered for his lifelong passion for providing low prices and good service to customers at Wal-Mart, his chain of discount stores that revolutionized the retail industry.

Walton did not invent the discount store when he opened his first store in 1962. But he did do something new. Wal-Mart introduced the concept of selling a large number of items at cheap prices to residents of rural towns—customers other discount retailers ignored. From that base, Walton expanded Wal-Mart across the United States and eventually reached into foreign markets, using the latest technology to keep costs low.

“I think I overcame every single one of my shortcomings by the sheer passion I brought to my work.… If you love your work, you’ll be out there every day trying to do it the best you possibly can.” Read more: Walton

The second hint is that you will not see the financial results of WMT’s competitive advantage in its GROSS margins but in its NET margins. WHY?

The answer to my questions can be found in Competition Demystified (Chapter 5) but don’t cheat yourself. Think it through. In fact, if YOU wanted to get a job at hedge fund, investment firm or even work for a major service firm, you could do a comprehensive study of Wal-Mart’s rise and semi-fall of its competitive advantage and then find a new company or industry (Auto-parts?) where the same factors are at work.  Show what you can do while providing a study of value.  You will stand out from all the Harvard and Columbia MBAs.

I will post in Part 3: Analysis on WMT next week. Meanwhile focus on what is important.

How Markets Work (Trading Places)


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.