Account Report November 12 2013 (Brutal!)
The first secret to success is discipline; the second is being able to buy or sell when almost everyone else is telling you to do the opposite.
Why the idea that miners can’t earn money at $1,200 gold is absurd.
Agnico Eagle reports third quarter 2013 results – Strong operational performance leads to record quarterly gold production and positive revision to 2013 guidance.
Miners are bottoming.
Tonight when I have 30 minutes, I will post links to all the folders that contain videos so folks will have fresh links and one place to find them. Check back tomorrow.
Only 3% of All Money Managers See Gold Prices Higher in the Next Twelve Months! A contrarian’s wet dream.
Chetan Parikh, of India’s Capital Ideas Online, regularly publishes extracts from investment classics, to educate his readers and clients. In the early 2000s, he selected a 1971 speech by iconic investor David L. Babson. It is eerie how timely this speech, delivered 42 years ago, remains today. The italicized quotes below are from that speech.
I arrived in Wall Street in the spring of 1969, too late to be allowed to join in the late 1960’s fads and bubbles, but early enough to observe how complacency reined. Several well-known economists had proclaimed that the United States had “conquered the economic cycle”, and “Buy on weakness” was a widespread credo as it was believed that any market weakness would never last long. Yet, Parikh reminds us, the market’s postwar Bull Run, which had seen a 400 percent rise in the Dow Jones Industrial Average, came to an abrupt end in 1970. Between January 1 and May 26 of that year, the DJIA lost a third of its value, falling to its lowest level since the beginning of the 1960s. So, in 1971, Babson commented:
Asking the performance investors of the late 1960s what went wrong is like someone in 1720 asking John Law what went wrong with the Mississippi Bubble. Or in 1635 asking Mynheer Vanderveer what went wrong with the Dutch Tulip Craze. Nevertheless, this panel interests me because if we can identify what really did go wrong it may help to avoid a future speculative frenzy. And if we are serious about getting to the bottom of what went wrong then we ought to say what really did go wrong. So let me list a dozen things that people in our field did to set the stage for the greatest bloodbath in 40 years.
First, there was the conglomerate movement and all its fancy rhetoric about synergism and leverage. Its abuses were to the late 1960s what the public utility holding companies were to the late 1920s.
Already then, financial analysts and portfolio managers who had never themselves run a company were urging actual corporate managers to engage into mergers and acquisitions in order to boost reported results through growth synergies and cost savings from the merged entities. Very few of these conglomerations were lastingly successful. Yet, today, a new wave of “activist” investors is arguing for more share buy-backs, increased balance-sheet leverage and other gimmicks intended to give a short-term boost to reported earnings per share.<
Second, too many accountants played footsie with stock-promoting managements by certifying earnings that weren’t earnings at all.
At the time, for example, the then-legal “pooling-of-interest” method of accounting for business combinations allowed companies to acquire a business that had been growing very fast and to restate its own past record as if the two companies had always been merged. This would not boost the combined entity’s current earnings, but it would show the past record (and thus the implied quality of management) in a much better light. Few analysts would order and study five or six years of printed annual reports (no computers, then) to check if originally reported earnings were as good-looking as the “pooled” earnings as restated on the most recent document. I am ashamed to admit that I, too, got fooled once. But I don’t think I made the same mistake again.
Today, if a glamour company seems to show a lot of promise but does not have the level of reported earnings necessary to justify its stock valuation under Generally Accepted Accounting Principles, it simply convinces analysts to use other measures of “operating” earnings, where many expenditures or write-offs are simply not counted.
Third, the “modern” corporate treasurers who looked upon their company pension funds as new-found “profit centers” and pressured their investment advisors into speculating with them.
I am not sure if today’s treasurers are speculating or not with their pension fund assets, but many of them still use actuarial figures assuming that the pension fund portfolio will have an annual investment return of 7%-8%. Obviously, it will be difficult for a balanced portfolio to achieve these targets with interest rates as low as they are and stock market valuations (price/earnings ratios, for example) at levels that historically have not engendered high future returns. The result is that required contributions to the pension funds are understated and reported earnings are thus overstated.
Fourth, the investment advisors who massacred clients’ portfolios because they were trying to make good on the over-promises that they had made to attract the business in the first place.
Promises that will fool naïve, greedy of even fearful investors still proliferate in the advertising sections of the media, with claimed “guarantees” often of a dubious or unattainable nature. The imagination of promoters (including some presumably reputable ones) is inexhaustible, but the younger the investment market, the more alluring and more preposterous the promises generally are. Currently, the new class of Chinese investors may be among the most vulnerable prey to such schemes.
Fifth, the new breed of portfolio managers who churned their customers’ holdings on the specious theory that high “turnover” was a new “secret” leading to outstanding investment performance.
Envy and gambling are two of the biggest investment dangers. Many (maybe most) investors believe that there exist a few people out there, who “know” things and use methods that the general public is not privy to. These people eagerly bought asset-backed securities on the way to the subprime-mortgage crisis, for example, even as many of promoters of these products were privately making fun of the naïve buyers, as subsequently discovered e-mails have documented.
Recently, high-frequency trading, where computer-heavy organizations use algorithms to enter orders fractions of a second before more traditional traders, is again raising the allure of short-term profit seeking. Investors who may be tempted to engage in trading themselves often confuse highly successful investors, who are rare, and successful salespeople, who can make a lot of money fast but usually not for long. It is good to keep in mind the old Wall Street question:
“Where are the customers’ yachts?”
Sixth, the new issue underwriters who brought out the greatest collection of low-grade junky offerings in history – some of which were created solely for the purpose of generating something to sell.
Interestingly, I don’t believe the term “junk bond” had yet been invented when Babson spoke, nor had asset-backed securities been assimilated to higher-grade securities. But we know how all these more recent inventions turned out.
Seventh, the elements of the financial press who promoted into new investment geniuses a group of neophytes who didn’t even have the first requisite for managing other people’s money, namely, a sense of responsibility.
CNBC, which invented the style of presenting business news as if they were football or hockey competitions, was only launched in the 1980s and Bloomberg television followed as recently as 1994. Both all-day channels are voracious consumers of “expert” interviewees, but entertainment comes before information.
Eighth, the security salesmen who peddled the items with the best “stories” or the biggest markups even though such issues were totally unsuited to their customers’ needs.
I find it ironical that this disdain for what is appropriate for customers has further developed in earnest since regulatory agencies have imposed questionnaires defining investment styles (“conservative”; “growth and income”; “aggressive”, etc.). Questionnaires do not make people responsible – or responsive.
Ninth, the sanctimonious partners of major investment houses who wrung their hands over all these shameful happenings while they deployed an army of untrained salesmen to forage among a group of even less informed investors.
My recollection of old-style brokers, among whom I started my career, is that they were true professionals and decent analysts, who really knew a lot about the shares they recommended. Later, the proliferation of products, both pooled like mutual funds and synthetic concoctions full of derivatives, made it almost impossible for brokers to know each product from the inside, so to speak. As a result, it befell to marketing departments to create new products and organize their sale. Research became an assist of marketing and investment banking departments, with a shrinking freedom for sales people to exercise judgment.
Tenth, the mutual fund managers who tried to become millionaires overnight by using every gimmick imaginable to manufacture their own paper performance.
Actually, I believe this manufacturing of performance has become more difficult in recent years – one of the few areas where regulation may have visibly improved transparency. But consultants and asset allocators invented many other measures, often with enough Greek letters and complicated mathematical formulae, to confuse matters for neophytes.
Eleventh, the portfolio managers who collected bonanza “incentive” fees – the “heads I win, tail you lose” kind – which made them fortunes in the bull market but turned the portfolios they managed into disasters in the bear market.
The fashion in recent years of participating fees, where managers share in the realized portfolio gains, was made popular by hedge-fund and private-equity partnerships. It can be extremely profitable for managers that experience a winning streak of five or ten years, since they receive a share of the gains they have realized without putting much of their own capital at risk. On the other hand, it carries some dangerous features for shareholders. If a manager has had a bad investment period, for example, the incentive to accept disproportionate risks to make up for poor prior results must be high. This kind of “double or nothing” temptation is obviously not in the best interest of clients.
Early hedge or private equity funds offered access to special skills, either in research or in types of investments. More recently, many investment funds have adopted the fee structure without offering either special skills or unusual investment opportunities.
Twelfth, the security analysts who forgot about their professional ethics to become “story peddlers” and who let their institutions get taken in by a whole parade of confidence men.
I believe that most analysts are honest people. But the top management of Enron may have said it best when, before being convicted for fraud, they reportedly described financial analysts as glorified stenographers.
These are some of the things that “went wrong”. But for those who stuck to their guns, who tried to follow a progressive but realistic approach, who didn’t prostitute their professional responsibilities, who didn’t get seduced by conflicts of interest, who didn’t get suckered into glib “concepts,” nothing much really did go wrong.
As in earlier periods of delusion most investors tried so hard to be “smart” that they lost the “common sense” that pays off in the long run.
October 12, 2013
*With considerable help from David L. Babson and Chetan Parikh
Author: Francois Sicart
Buy, Sell, or Hold? Why? Is this a good business? Can costs be passed through to customers? Is growth profitable?
Wrong answers will result in: http://youtu.be/6eXFxttxeaA
Free On-Line Finance Course from a Nobel Prize Winner: http://oyc.yale.edu/economics/econ-252-11#sessions
Excellent blog, www.oftwominds.com, on current issues. Read the article on why China’s Yuan can’t easily become the world’s reserve currency. Yes, the dollar is under pressure, but no viable alternatives exist–for now.
October 17, 2013
Are We Approaching Peak Retirement?
October 15, 2013
The Impossibility of China Issuing a Reserve Currency **** must read!
October 14, 2013
Have We Reached Peak Entitlements?
October 11, 2013
Obama Administration Proposes 2,300-Page “New Constitution”
October 10, 2013
It’s Definitive: We’ve Reached Peak Jobs
(October 8, 2013)
The (Needed) Revolution Emerging in Higher Education
(October 7, 2013)
Five Goals for the Era Ahead
(October 5, 2013)
Have We Reached Peak Federal Reserve?
(October 4, 2013)
The Shutdown Political Game: Inflict Maximum Pain to Score Cheap Points
(October 3, 2013)
Have We Reached Peak Government?
(October 2, 2013)
One More “The Status Quo Is Saved” Rally and Then…?
(October 1, 2013)
Trapped in Net/Nets
The danger of even net/net, “cheap” stocks or camouflaged value traps.
Barron’s Sept. 19, 2011.
James Grant: I invested in Japanese value stocks, and had occasions to regret over and over on the reluctance of the Japanese to admit error and re-price. Companies that deserved bankruptcy would often not be allowed to meet their just deserts, but were carried on the back of banks that themselves had no true claim to solvency but were supported by the government. Capitalism is not just about success–that is the easy part. It is also about failure, recognizing it, dealing with it, liquidating it, properly pricing it. The Japanese have been unable to do that, and this characteristic was on display in the 1920s as well, so I take this to be a salient Japanese trait.
You were a great believer in Japanese equities. What happened?
With my friend Alex Porter, I was a general partner in Nippon Partners from 1998 through the end of 2010. We invested in Japanese value stocks. We closed it in December of 2010, because we weren’t making money, and it was immensely frustrating. Japanese corporate managers, by and large, don’t own equity. They have a platonic interest in the stock price. In the absence of a lively market for corporate control, there is no check on management doing nothing. In 1998 we began investing in companies whose shares are trading well below their pro-rata share of net cash on the balance sheets. In this country, in 1974, 1975, there were a lot of companies like that they did rather well in the 1970s and the 1980s. But in Japan, many (companies like these) remained at these compelling valuations for year upon year upon year. You get tired. The last straw was when one of our companies was selling at a huge discount to everything, and announced that it would undertake a capital investment larger than its stock-market capitalization.
Borrowers want capital, but they get money–newly created credit money. More credit money has been issued by the banking system than savers have deposited (“fiduciary media”). Those participants in the economy who suffer losses due to price changes were not parties to the original credit transactions. They are participants in the economy who receive the new money late in the process, after prices have been bid up by the credit money. –Mises (so much for the harmless actions of the Fed)
What Happens When You Buy Quality: October_Quest_2013
CAPITULATION IN THE MINERS
When I use the word capitulation it implies an ending to the bear market in precious metal equities, however NOTHING is certain in markets. I know not all public gold stocks will go to zero. Eventually, the laws of supply and demand assert themselves and you can only buy assets super cheap if sentiment is SUPER bearish. I think in late June when gold hit $1,180, gold stocks made a FEAR bottom while today they are going through despair/throw in the towel selling.
People see no hope so why own. Volume is relatively low and the selling persistent–day after day.
The above chart shows the sell-off from new highs over the past 90 years in the BGMI, the Barron’s Gold Mining Index). Currently, 2013 shows about a 63% loss or in the range of the past 10 bear markets.
The low relative volume, the historical depth of the sell-off and the demarcation of price movement between high quality (RGLD, FNV, SLW) and low quality gold stocks (NEM, GLDX) as the chart above shows, leads me to believe that we are closer to the end of the decline.
We continue to get one ‘do or die’ moment after another in the charts of gold and gold-related instruments. So far, the outcomes have obviously been bearish every time since the 2011 peak, but at some point that is bound to change, as the fundamental backdrop continues to be gold-friendly (note that not every aspect of the fundamental backdrop is – for instance, the declining federal deficit is probably viewed as a negative by market participants). Often it is precisely at those times when nothing seems capable of turning a market around that surprise changes in trend can and do occur.
Note that gold sentiment remains absolutely dismal. Recently Mark Hulbert’s HGNSI (gold newsletter writer sentiment index) stood at minus 20 (meaning gold timers recommended a 20% net short position on average), while the daily sentiment index among gold futures traders (DSI) stood at 9 (all time low: 5). Bearish sentiment in the sector rarely becomes as extreme as it is at the moment. Of course it has been quite negative for some time now, but the current readings are rather extreme even so.
A major reason why we continue to maintain that the fundamental backdrop remains gold-friendly even though the price action suggests a bear market is still in progress, is that we believe that mainstream analysts are quite mistaken when they assert that it is back to ‘business as usual’ in the economy. It clearly isn’t.
History is being made today!
Of course, if you believe QE will lead to sustainable growth without monetary mayhem then stay away from anything to do with gold.
The company exists as a social transfer mechanism between Western investors and Brazilian government officials and Petrobras workers. No hope.
Back to School!
The key is not to predict the future but to be prepared for it.–Pericles
Wal-Mart vs. Costco
|Stock Keeping Units (SKUs)||70,000||3,600||19.4||times|
|Return on Tot. Cap (VL)||15%||13%||2%|
|Ret. On Equity (VL)||22%||14.50%||7.50%|
|Gross Profit Margin||24%||10%||140%|
|Sales per square foot||437||976||110%|
|Price Aug. 2||$78.55||$119.10|
|Debt to Equity||45%||35%|
I think when you compare numbers, what strikes you is the difference in # of SKUs between retailers. WMT’s business model is much more labor intensive coupled with a lower-income customer. The squeeze on the middle class has crimped WMT. You would think with WMT’s higher ROC and ROE compared to COST’s that WMT would not be lagging CostCo’s in share price performance but remember that COST is growing faster above its cost of capital and has more room to grow than behemoth, Wal-Mart. In other words, CostCo can redeploy more of its capital at higher rates than WMT can (grow its profits faster).
That said, the market knows this and has handicapped Costco with a higher price to book and P/E ratio than WMT’s. As an individual investor, your time might be better spent looking at smaller, more unknown companies to find mis-valuation. Also, when a company gets as big as WMT (1/2 TRILLION $ in sales), the law of large numbers sets in and the company becomes a magnet for social engineering and protest. But if you had to have me choose what company to own over the next ten years, I would choose COST because its moat is stronger (greater customer captivity) shown by its huge inventory turns/high sales per square foot plus greater PROFITABLE growth opportunities. However, I do see WMT becoming more focused rather than expanding overseas where their local economies of scale are lessened.
My analysis is cursory, but for those that picked out the main differences, you have a better grasp of whether WMT can raise its employees’ wages to the level of Costco’s. It can not unless it reduces its SKUs and employees.
More analysis from others:
|Why Wal-Mart Will Never Pay Like CostcoBloomberg writer Megan McArdle hits the nail on the head with her analysis of the situation in Why Wal-Mart Will Never Pay Like Costco.Wal-Mart is trying to move into Washington, a move that said local housing blog has not enthusiastically supported. Hence, we’ve been treated to a lot of impassioned reheatings of that old standby: “Costco shows it’s possible” for Wal-Mart to pay much higher wages. The addition of Trader Joe’s and QuikTrip is moderately novel, but basically it’s the same argument: Costco/Trader Joe’s/QuikTrip pays higher wages than Wal-Mart; C/TJ/QT have not gone out of business; ergo, Wal-Mart could pay the same wages that they do, and still prosper.Obviously at some level, this is a true but trivial insight: Wal-Mart could pay a cent more an hour without going out of business. But is it true in the way that it’s meant — that Wal-Mart could increase its wages by 50 percent and still prosper?Upper-middle-class people who live in urban areas — which is to say, the sort of people who tend to write about the wage differential between the two stores — tend to think of them as close substitutes, because they’re both giant stores where you occasionally go to buy something more cheaply than you can in a neighborhood grocery or hardware store. However, for most of Wal-Mart’s customer base, that’s where the resemblance ends. Costco really is a store where affluent, high-socioeconomic status households occasionally buy huge quantities of goods on the cheap: That’s Costco’s business strategy (which is why its stores are pretty much found in affluent near-in suburbs). Wal-Mart, however, is mostly a store where low-income people do their everyday shopping.
As it happens, that matters a lot. Costco has a tiny number of SKUs in a huge store — and consequently, has half as many employees per square foot of store. Their model is less labor intensive, which is to say, it has higher labor productivity. Which makes it unsurprising that they pay their employees more.
But what about QuikTrip and Trader Joe’s? I’m going to leave QuikTrip out of it, for two reasons: first, because they’re a private company without that much data, and second, because I’m not so sure about that statistic. QuikTrip’s website indicates a starting salary for a part-time clerk in Atlanta of $8.50 an hour, which is not all that different from what Wal-Mart pays its workforce.
Trader Joe’s is also private, but we do know some stuff about it, like its revenue per-square foot (about $1,750, or 75 percent higher than Wal-Mart’s), the number of SKUs it carries (about 4,000, or the same as Costco, with 80 percent of its products being private label Trader Joe’s brand), and its demographics (college-educated, affluent, and older). “Within a 15–minute driving radius of a potential site,” one expert told a forlorn Savannah journalist, “there must be at least 36,000 people with four–year college degrees who have a median age of 44 and earn a combined household income of $64K a year.” Costco is similar, but with an even higher household income — the average Costco household makes more than $80,000 a year.
In other words, Trader Joe’s and Costco are the specialty grocer and warehouse club for an affluent, educated college demographic. They woo this crowd with a stripped-down array of high quality stock-keeping units, and high-quality customer service. The high wages produce the high levels of customer service, and the small number of products are what allow them to pay the high wages. Fewer products to handle (and restock) lowers the labor intensity of your operation. In the case of Trader Joe’s, it also dramatically decreases the amount of space you need for your supermarket … which in turn is why their revenue per square foot is so high. (Costco solves this problem by leaving the stuff on pallets, so that you can be your own stockboy).
Wal-Mart’s customers expect a very broad array of goods, because they’re a department store, not a specialty retailer; lots of people rely on Wal-Mart for their regular weekly shopping. The retailer has tried to cut the number of SKUs it carries, but ended up having to put them back, because it cost them in complaints, and sales. That means more labor, and lower profits per square foot. It also means that when you ask a clerk where something is, he’s likely to have no idea, because no person could master 108,000 SKUs. Even if Wal-Mart did pay a higher wage, you wouldn’t get the kind of easy, effortless service that you do at Trader Joe’s because the business models are just too different. If your business model inherently requires a lot of low-skill labor, efficiency wages don’t necessarily make financial sense.
If you want Wal-Mart to have a labor force like Trader Joe’s and Costco, you probably want them to have a business model like Trader Joe’s and Costco — which is to say that you want them to have a customer demographic like Trader Joe’s and Costco. Obviously if you belong to that demographic — which is to say, if you’re a policy analyst, or a magazine writer — then this sounds like a splendid idea. To Wal-Mart’s actual customer base, however, it might sound like “take your business somewhere else.”
Concentrating on fewer stock-keeping units generates buying power for Costco on par with, or perhaps even greater than, larger mass merchants. At first glance, excluding gasoline, at about $60 billion in U.S. sales Costco seems at a scale disadvantage against Wal-Mart’s WMT $265 billion domestic purchasing power. However, Costco concentrates its merchandise purchases on 3,300-3,800 active SKUs per warehouse, compared with the average 50,000-75,000 SKUs at a Wal-Mart superstore. As an illustration, if we assume a straight average, that calculates to more than $16 million in sales per SKU at Costco compared with just over $3.5 million-$5 million per SKU at Wal-Mart. Moreover, the company limits its buys to only specific, faster-selling items. Costco turns its inventories in less than 30 days. This variable cost parity with larger mass merchants, along with the little or zero mark-up requirement of its membership business model, produces price leadership for Costco on the products it chooses to sell.
Note sales per square foot: http://www.wikinvest.com/stock/Costco_Wholesale_(COST)/Data/Sales_per_sq._ft
Unlike its big-box peers, Costco’s international operations generate returns above its cost of capital. The company owns about 80% of its properties, operates its business at an EBIT margin below 3%, and is at the earlier stages of international expansion but still generates on average 12% returns on invested capital because of its low fixed asset base. In its fiscal 2012 year, just 439 domestic warehouses generated roughly $60 billion in revenue (excluding fuel). That calculates to $135 million in sales per unit, or $960 per square feet, which we estimate is about 2.3 times higher than Wal-Mart supercenters. That powerful unit model also works in international markets, where sales productivity levels remain high at $900 per square feet. As result, despite likely lacking logistical scale, returns on net assets for operations outside of North America are roughly 12%, above the company’s cost of capital. This is in contrast to the 6%-7% RONA range for Wal-Mart’s international operations over the past decade.
Economic Moat 05/09/13
We assign Costco a narrow economic moat. We base this on its business model’s loss-leader capabilities and ever-increasing buying power. Membership fees are the main driver of operating profits, so Costco has the ability to sell virtually any consumer product at wholesale rather than retail prices. This makes it very difficult for other retail concepts to compete with Costco on price. Moreover, its price leadership position is reinforced because the company concentrates its merchandise buys on much fewer and faster-turning SKUs, which generates disproportionate purchasing power for its size. Additionally, the company does not advertise and its austere warehouse format requires much lower maintenance capital expenditures. Therefore, the membership wholesale business model has a sustained cost advantage versus other retail operators that sell the same product categories.
Costco WalMart Case The document to read
For those who feel they DESERVE a prize simply email me at email@example.com with PRIZE in the subject heading.
Gold, Debt and History
Note page 10, the Stock to flow ratio for gold is 65 years compared to about a year for both oil and copper. Gold is money.
Pages 60 to 61, how Austrian Economics is applied.
Notes: I hope to post my rough draft of the CSInvesting Analysis Handbook by the end of the week. I have a book recommendation coming…….
Just as I seek panic and capitulation as a place to find value among the carnage, the Colonel loves the smell of napalm.
I’m writing to get some input from you about where to start regarding a fortunate situation I’ve found myself in. Long story short, I have two very intelligent friends, one working as a newly minted credit analyst at a large regional bank and the other as an XXXX.
After reading “the Big Short” my credit analyst friend wanted to know more about investing – value investing specifically. Given that his job is analyzing balance sheets, I figured there would be some relevant over lap. We have gotten together for the last three weeks to discuss the practice of investing, primarily in the Buffett/Munger framework with an emphasis on Moats more so than the Graham/Dodd cigar butts.
My lawyer friend and I always have interesting conversations about a wide range of world events. He is very sharp, asks excellent questions, and has become more and more interested in the art and science of investing. He asked me today if he could join our weekly investing discussions. Of course I said yes.
My dilemma is that i would like to bring some structure to this, but not suck out the fun. I am having trouble as to where to start with them. I have been accumulating value investing knowledge for nearly a decade now and i don’t want to overwhelm them right out of the gate and potentially end the group before it gets started.
What are some good intro pieces or books or cases studies that you would start with. I’ve got two very sharp and inquisitive minds that genuinely want to learn more about Value Investing, and I’d really love to seize this opportunity as I think it would benefit all of us.
So far, I’ve shared your blog, Punchcard Investing’s blog, the MCO write up there and Hagstrom’s “Making of an American Capitalist”, and few other articles I think are relevant.
Where would you start?
It is fine to discuss theory but investing requires actually investing. Your focus on moats is a good start. You need to combine your study of moats into finding, valuing and perhaps investing in attractive franchises.
I divide the world into asset Investments with special situations as a subset, franchise investing or buying growth at a low price, and investing with asset allocators without paying a premium for their skills.
Why not start a club to become experts in competitive advantages. So you could focus on regional economies of scale and search for companies that might fit like trash haulers. Or you could focus on specialty product economies of scale with customer captivity like Balchem (BCPC), etc. The fun is in applying what you have learned. Part of where you go is based on the specific interests of your group. How could a bank develop a competitive advantage? Then go find those banks with a competitive advantage, then what price to pay? Or take a case study of a competitive advantage of low cost structure like Geico or Compass Minerals and try to find other companies to put into your franchise list.
Between the three of you you could after a few weeks put together a list of 40 to 80 companies with moat divided into type of competitive advantage. Are there any attractively priced or at what price should you pounce?
You must understand barriers to entry. No matter what, study will be time well-spent.
Why not start with a simple book on strategy:Little Book That Builds Wealth_Dorsey then progress to Strategic_Logic. You could then search for specific company case studies like COORS HBS Case Study on Losing EOS.
Go to Value-Line and/or Morningstar and put together a list of companies that have competitive advantages.
Be sure you can distinguish between a company that is efficient vs. one with a sustainable/structural advantage. Either go from broad down to specific or the reverse.
Let me know how your group develops. Good luck.
As David Ricardo, a successful speculator who, in his early retirement, became one of the finest economists of the early nineteenth century, explained in 1817:
It has been my endeavor carefully to distinguish between a low value of money and a high value of corn, or any other commodity with which money may be compared. These have been generally considered as meaning the same thing; but it is evident that when corn rises from five to ten shillings a bushel, it may be owing either to a fall in the value of money or to a rise in the value of corn…..
The effects resulting from a high price of corn when produced by the rise in the value of corn, and when cause by a fall in the value of money, are totally different.
GEICO CASE STUDY
You can never read enough about a great business and the importance of HOLDING ON to reap the benefits of growth. If you can combine patience with the knowledge of understanding the moat of a great business, then you will have an outstanding investment career.
Klarman’s Speech (Thanks to a reader)
His latest speech also includes a distinct tone of regret over where the current state of affairs is taking the U.S. He sounds positively saddened by how things are run in his country. In Klarman’s words:
“Like all of you, I am worried about our future, I am concerned about the prospect for upcoming generations to have the same opportunities that ours did, and I’m saddened that our generation was handed something unique, the stewardship of the greatest country in the history of the world– and we are far down the path of making it less great.”
Klarman said that the idea that financial markets are efficient is foolish, and he goes on to describe how that will always remain the case. Markets are governed by human emotions and they do not follow laws of physics—prices will unpredictably overshoot, therefore the academic concept of market efficiency is highly incorrect.
“Academics are deliberately blind to the fifty plus year track record of Warren Buffett as well as those of other accomplished investors, for if markets are efficient, how can Warren Buffett’s astonishing success possibly explained?”
In his speech Klarman mentioned value-investor Ben Graham’s explanation of markets, where he says that Mr. Market is to be perceived as an eccentric counter-party which should be taken advantage of, but one should not follow its emotional advice. He also agrees with Ben Graham’s idea that assets should be bought at a significant discount to keep your margin of safety.
“As when you build a bridge that can hold 30 trucks but only drive 10 trucks across it, you would never want your investment fortunes to be dependent upon everything going perfectly, every assumption proving accurate, every break going your way.”
Klarman said that the current economy is being built like a house of cards that will implode. Huge deficits, empty government promises, pretty pictures painted to ease voters and reliance on external markets to keep your currency afloat, have all disrupted the margin of safety in U.S. economy.
He says that investors have become increasingly speculative and subject themselves to frenetic trading, even the holding period of 30-yr treasuries has fallen down to a mere couple of months. Investors increasingly rely on technology to judge their performance not merely on a monthly or quarterly basis—it has now become an hourly practice.
“The performance pressure drives investors to into an absurdly short-term orientation…. If your track record is going to be considered by investment committees every quarter, if you are going to lose clients and possibly your job because of poor short term performance, then the long term becomes almost completely irrelevant.”