Selling Out to Warren Buffett: Clayton Homes

Buffett’s Qualitative Aspects of a Business

Up close and personal interview with Kevin Clayton, CEO of Clayton Homes, the largest factory built homebuilder in the United States and a wholly owned subsidiary of Warren Buffett’s Berkshire Hathaway. For nearly one hour, author Robert Miles interviews Kevin Clayton and covers all aspects of the business from getting started, to taking over from his father, and to selling to Warren Buffett.

This video may help the viewer understand the qualitative aspects that Warren Buffett may consider when making an investment. This interview may also showcase one of the eventual successors to Warren Buffett.

Better yet, view Ken Langone’s interview below: All his investment successes came from investing in good people

there-they-go-again-again

100 to 1; Sales; Hedge Fund Pop Quiz

From Best to Worst.  There are typically two ways to make 100 to 1 on your money.   1. The preferred way–in my view because the company has more control of its destiny–would be to invest early in a high ROIC company that can redeploy capital at high rates for MANY years.

Note how the chart has gone sideways for 18 years as the ability to redeploy at high rates has declined. WMT can’t grow with regional economies of scale in Germany as it could in Arkansas back in 1965. You have to hold on through the inevitable 50% price plunges which you are able to do because of your understanding of the company’s competitive edge in the market.

2. Or, you find an extremely cheap, beaten-up cyclical company (TECK) in an industry that has had low capital investment, then hold on for the boom which you then sell out at the top–harder and more nerve-wracking than the example above.

The worst performing sectors are where you want to look, but realize that some industries like phone companies may be under structural change.

The Anthesis of Out-of-Favor

The Psychology of Sales

Hedge Fund Pop Quiz (Accounting)

Why is EBITDA so different than operating cash flow?  Is that a problem or an opportunity.  See: WTTR Mar 31 2018

A good research report on WTTR: Permian WDDC

<

Bitcoin, Blockchain, and Money

Another interview with Caitlin Long

https://caitlin-long.com/

  1. Blockchain for Dummies
  2. Repo_Markets_Handbook
  3. Repo3

Free Course: https://mises.org/library/economics-bitcoin-primer

But THE book to get, read, and study is

AMAZON REVIEW

This book is the missing treatise on “Why Bitcoin?”. It is not technical from a coder’s point of view; however, it is technical on its treatment of economics.  If you never heard of Bitcoin. If you are a long-time holder of Bitcoin. This book is for you.

The book fills a gap on three fronts. First it helps those of us who became enamored with Bitcoin through individual and economic freedom explain our viewpoint in a succinct manner. Second, it serves as a philosophical on-ramp to the multitudes of speculators who flooded into Bitcoin in the past 6 months or so. It provides them a concrete reason to transform their time-preference (a key economic theme in the book) from trader to HODLer. Lastly, it is for people who have never heard of Bitcoin or have heard of it but don’t know or understand much about it. It provides these folks with the very best reason for converting at least some of their government-backed fiat money into the sound/hard money of Bitcoin.

Another overriding theme in the book is security. Without it there is no such thing as financial freedom. Near the beginning of the book Ammous explains:

“Should you come out of reading this book thinking that the bitcoin currency is something worth owning, your first investment should not be in buying bitcoins, but in time spent understanding how to buy, store, and own bitcoins securely.”
This is without a doubt the best advice one could possibly give regarding Bitcoin.

In reading the book you may find yourself wondering when he’s going to start getting to the Bitcoin part. The first seven chapters barely mention Bitcoin. Instead there is a gradual discussion of money and economics, including the various popular schools of economics. Ultimately, the conclusion is that Austrian Economics provides the fundamental basis of “Why Bitcoin?” In fact, those of us already schooled in Austrian Economics should celebrate the existence of this book. It can potentially spread the common-sense Austrian view to multitudes of people who otherwise would never learn of it.

If you know someone who bought bitcoins for speculation or to make some quick money buy this book for them and force them to read it. You may even have to go all “Clockwork Orange” on them, strapping them to a chair and pinning their eyes open. They may scoff at first, but they’ll thank you later (yet another benefit of having a low time-preference).

“The Bitcoin Bible”… er.. I mean “The Bitcoin Standard” is essential to read and understand for anyone even remotely interested in Bitcoin. Read it. Then read it again. Then pass it around to everyone you know and if they are reluctant, figure out non-violent ways to get them to read it. So, you probably shouldn’t resort to the “Clockwork Orange” method mentioned above. Just find a way.

If Roger Ver can be “Bitcoin Jesus” (or more accurately “Bitcoin Judas” at this point) then Saifedean Ammous is a “Bitcoin God”. Read his bible with the highest time preference so you can learn to have a low time preference when it comes to Bitcoin itself. BTFD and HODL!

Deja Vu for “Value” Investors https://www.dollarcollapse.com/value-investors-endangered/

Bitcoin is a speculation:https://www.ineteconomics.org/perspectives/blog/jim-chanos-cryptocurrency-is-a-security-speculation-game-masquerading-as-a-technological-breakthrough

GABELLI ON INVESTING TODAY

https://www.youtube.com/watch?v=Cxj2TqRvTT8

Valuation Tutorials

Introducing HOLT Economic Profit

Valuation of Classic Companies

I haven’t had a chance to read the above, but a reader shared them.  Let me know if useful.

 

Project Recovery: Finding Lost Airmen

https://projectrecover.org/media/

Value Investing Seminar; Hating Finance; Doing Research

Value Investing Seminar in Cyprus

I know nothing about this but to let you know: https://cyprusvalueinvestor.com/

Hating Finance

Why Everyone Hates Finance and What to Do about It
By Paul McCaffrey

Finance can be a noble profession, yet too many people don’t see it that way.
Mihir A. Desai, the Mizuho Financial Group Professor of Finance at Harvard Business School and professor of law at Harvard Law School, explained why finance has a trust problem and offered a simple strategy to address it at the 71st CFA Institute Annual Conference.

“Finance is being demonized, and it’s being demonized because people don’t understand it,” he said. “If we want to stop demonization, we have to make it accessible . . . And it turns out stories and the humanities are a really powerful way to do that.”

Though he says much of the criticism of finance is unfair, Desai, the author of The Wisdom of Finance: Discovering Humanity in the World of Risk and Return, acknowledged that some of the industry’s reputational wounds are self inflicted.
“Why do we have more than our share of Martin Shkrelis?” he asked. Largely because of attribution error. What sets finance apart from most other disciplines is that performance feedback is clear and constant. And that can breed arrogance.

“If you’re an investor,” Desai explained, “you get feedback all the time about how you’re doing every day. And it’s super precise and inflated by leverage. What happens in those settings? Human beings do what human beings do everywhere. Every good outcome is because of me. Every bad outcome is because of the world.”

As that process continues through the years and the outcomes are mostly good, people come to believe in their skill, that they earned and deserve their returns.
But in finance and investing, skill is difficult to assess and practically impossible to prove.

“The greatest lesson in finance, of course, is it’s very hard to tell the difference between luck and skill,” Desai said. “It’s better to operate as if it’s luck.” He also pointed to the emphasis on value extraction over value creation in recent decades as another culprit behind finance’s lackluster standing among the public.

These criticisms aside, Desai believes that finance does much more good than harm and that finance professionals need to highlight the benefits that it creates.

Rehabilitating Finance

“If we re-aim the practice of finance and the underlying ideas that are incredibly noble, we can make finance into something aspirational, which is what it should be,” he explained. That requires thinking about the big ideas, the first principles of finance, and explaining them to people in ways that resonate.

“And frankly equations and graphs don’t work for many people,” he said. “It turns out there’s a whole section of the population that just doesn’t get that.”
That’s where literature and the humanities come into play.

Inspired by the structure of The Wisdom of Finance, Desai broke finance down into seven concepts during his presentation, what he calls “the biggest ideas in finance,” which are

  1. risk and insurance;
  2. risk management —
  3. options/diversification;
  4. value creation and valuation;
  5. corporate governance;
  6. mergers;
  7. leverage/bankruptcy.

As Desai explains it, when reduced to its essence, finance comes down to insurance. “Insurance is underneath all of finance in a remarkable way,” he said. “Once we think about risk and insurance, we have to think about risk management. That’s going to be about options and diversification. Instead of doing it with fancy calculus, we’re going to do it with stories.”

Risk and The Maltese Falcon
To explain risk, Desai recommends the Dashiell Hammett novel, The Maltese Falcon, which was made into a motion picture starring Humphrey Bogart as the hard-bitten San Francisco private detective Sam Spade. In the novel, Spade recounts a story about a man named Flitcraft, who disappears one day, leaving a wife, family, and career behind. Some years later, the wife receives word from an acquaintance that Flitcraft has been spotted in Spokane, Washington. She calls Spade to investigate.

Spade learns after traveling to Spokane, that the man is Flitcraft, as it turns out, only he’s changed his name to Charles Pierce. Spade confronts him and Flitcraft admits his ruse and explains why he abandoned his family.

“‘I was walking along, and a huge iron beam fell right next to me, and a piece of sidewalk jumped up and hit me in the face,’” Desai said, quoting Flitcraft’s words. “‘And at that moment, I realized that life was totally random. And I’d been living my life as if the universe was well ordered so my life had to be well ordered. But, in fact, the universe is random. So I’m going to change my life at random.”

So Flitcraft left to build an entirely new identity. “But then,” Desai continued, “Sam says, ‘The best part of the story is, when I found him in Spokane, he had recreated the same life he had . . . He had the same kind of wife and house and job and kids and everything was exactly the same.’” The names Flitcraft and Charles Pierce were not chosen by chance. Allen J. Flitcraft was a leading actuary and author of a life insurance manual. Charles Sanders Peirce was a philosopher dubbed the “father of pragmatism.”

What Hammett and Spade were getting at was that what looked chaotic and haphazard was not entirely unpredictable. There was an underlying order to it.
“The fundamental thing in life is randomness,” Desai explained. “And what do finance and insurance understand? They understand that we can navigate it by looking for patterns. Things that look totally random are not. . . That’s what the foundation of finance is: Seemingly random outcomes actually behave along patterns.”

Pride, Prejudice, and Risk Management

So how does Desai explain the concept of risk management?
“We could talk about options and diversification with modern portfolio theory and stochastic calculus,” he said. “Or we could use Jane Austen.”
It turns out her 19th-century English romantic novel Pride and Prejudice, describing the courtship rituals of the day and how the heroine, Elizabeth Bennet, and other young women respond to their various suitors, has a lot to teach on the subject.

“So what’s the risk management problem?” Desai said. “Potential suitors come by and you don’t know which one to take. And there’s always a problem. Some of them are rich, some are drunk, some of them are nice, some of them are ugly.”
Indeed, the novel features one of the worst marriage proposals ever. A Mr. Collins asks Bennet for her hand rather bluntly: “You’re not that pretty. You’re not that rich. Here’s an offer. I suggest you take it,” Desai recalled. “And of course, what’s he doing? He’s playing off her risk aversion.”

Bennet rejects the offer, but soon after, Collins shifts his attention to her friend Charlotte, to whom he makes a similarly mercenary proposal, one that that she excitedly accepts.

“The neat part about that story is the risk management problem is solved with options and diversification,” Desai said. “These characters give voice to what we think of as modern financial institutions.” “Finance needs some humanization.”

Desai’s message was simple: The best way to reclaim finance’s reputation is to demystify it and to do it through literature and the humanities, through storytelling.

“If it becomes all about spreadsheets and screens, then we detach ourselves from humanity,” he said. “We should think about the human consequences of what we do. And these stories are a wonderful way to get reattached to what the moral content of our ideas are.”

https://blogs.cfainstitute.org/investor/2018/05/22/why-everyone-hates-finance-and-what-to-do-about-it/

Doing Research

https://youtu.be/c34vmUxXZ1A

Condemned to Repeat the Mistakes of the Past

Here We Go Again……..

Financial bubbles are not accidents but rather inevitable outcomes of our asset-backed banking system. To illustrate: imagine a homeowner who owns a $1 million house free and clear. He goes to a bank and borrows $800,000 against the house. This credit money springs into existence as an accounting entry of a private bank—it is the creation of credit out of nothing. The borrower goes out into the market with these newly created funds and starts purchasing other assets: stocks, perhaps, or a weekend house. The new money drives prices higher, including those of the assets that form the collateral of the banking system. Since its collateral value has increased, the banking system is happy to increase its loans to borrowers, which pushes prices yet higher, and so on in a positive feedback loop. Price signals then prompt over-development, which
eventually lowers rents, which causes borrowers to default, the fractional reserve
process goes into reverse, and the banking system collapses.

Irving Fisher, whom Milton Freidman anointed “the greatest economist the
United States has ever produced,” described it thus:

In boom times, the expansion of circulating medium accelerates the
pace by raising prices, and creating speculative profits. Thus, with new
money raising prices and rising prices conjuring up new money, the
inflation proceeds in an upward spiral till a collapse occurs, after which
the contraction of our supply of money and credit, with falling prices
and losses in place of profits, produces a downward spiral generating
bankruptcy, unemployment, and all the other evils of depression.

CREDIT INSANITY

Performance_Update_2018_04 (1)

The Art of Contrary Thinking

The above video is a decent book review of the book, The Art of Contrary Thinking found in this link: http://csinvesting.org/2017/12/01/the-art-of-contrary-thinking/

and http://csinvesting.org/2015/12/16/contrarian-investing-part-ii/

You are neither right nor wrong because people agree or disagree with you but because you have your facts and reasoning correct.

Emotionally, going against the crowd will subject you to ridicule.

Focus on Management Excellence; My Interview Did NOT Go Well!

Identifying-Managers-with-Talent-and-Integrity-May-2017

Perhaps you should differentiate yourself by focusing on management’s character and skill.  However, you will need to focus and work hard to make a difference in understanding who is unique.

Find founder-led companies who are mission driven–one place to start your search.

Imagine putting the numbers of Berkshire Hathaway during the early days of Buffett’s takeover into a spreadsheet–would ANYONE have bought Berkshire.   Who would have focused on Buffett’s integrity and skills?

Also: https://microcapclub.com/2018/05/invest-in-owner-management/

My Interview at Goldman Sachs

 

Interviewer: Are you unbiased?
John Chew: What a dumb question! Next.

Interviewer: No matter how you answered that question, how could you have an edge in researching companies?
John Chew: Well, I ……………..

and

Any suggestions? Is it possible to be unbiased? And based on your answer, how can you have an edge researching companies? Prize.

A BUFFETT Buffet

A Complete Video Archive of Warren Buffett

https://buffett.cnbc.com/warren-buffett-search-results/?query=inflation

A Reader kindly shared this: Warren Buffett Letters from 1957 to 2017! Now you can do a search through 60 + years of his writings on any subject.  Use as a learning tool.

Also: https://buffett.cnbc.com/warren-buffett-archive/

Warren Buffett 1957 to 2017 letters

Don’t forget Munger! http://latticeworkinvesting.com/

Here is Charlie Munger’s ‘first rule of value investing’

Ethan Wolff-Mann  Senior Writer       Yahoo FinanceMay 7, 2018

Value investing has changed over the years, but the fundamental way its disciples think about it hasn’t, according to Berkshire Hathaway (BRK.A, BRK.B) vice chair Charlie Munger.

“It’s gotten hard in the United States to find easy value investments because the world is so competitive,” Munger told Yahoo Finance editor-in-chief Andy Serwer after the Berkshire Hathaway 2018 Annual Shareholders Meeting.
“That accounts for a lot of what you see in Berkshire, where we buy securities like Apple that we wouldn’t have bought in the old days when we had more mundane things that were serving us very well,” said Munger.

For a company that operated for decades in the insurance business and other “mundane” areas, Munger and Warren Buffett’s moves at Berkshire Hathaway into tech appear to be a jarring change from the original value investing approach. Tech companies have historically been known to be the paths of “growth-oriented” investors. Value investors focus on a company’s price versus its value.

But Berkshire’s moves of late aren’t a deviation of value investing, Munger says, because rule number one is still the same.

“Now there are various ways to look for value investments, just as there are various places to fish. And the first rule of fishing is to fish where the fish are,” said Munger. “The first rule of value investing is to find some place to fish for value investments where there are a lot of them.“
Now, in a tougher environment, Berkshire has to fish in places it didn’t fish before. “So we’re just looking in different places, but we’re value investors,” said Munger.

In the end, Munger noted, value investing as a philosophy is tough to define precisely because, “All good investing is value investing by definition.”
“Some people, when they say ‘value investor,’ they mean somebody that emphasizes working capital or something,” said Munger. “Meaning, you should fish in that particular place, but I think that’s all a bad use of the language to think that the difference between value investing and other good investing.”
No formulas in value investing

During the Berkshire Hathaway Annual Shareholders Meeting, Munger and Buffett were asked about whether they use a formulaic approach to valuing companies and investing. Munger’s answer shed some light on why Berkshire’s business model is often-attempted-but-rarely-duplicated.

“I can’t give you a formulaic approach because I don’t use one,” Munger told a curious shareholder. “I just mix all the factors, and if the gap between value and price is not attractive, then I go on to something else. And sometimes, it’s just quantitative.”

Munger gave an example about Costco, (COST) noting that the stock was selling for 12 to 13 times earnings. (Berkshire Hathaway owns about a percent of the company.)

“I thought that was a ridiculously low value, just because the competitive strength of the business was so great, and it was so likely to keep doing better and better,” said Munger. “But I can’t reduce that to a formula for you.”
Some things Munger does like when he’s considering a company’s value, like Costco?

“I liked the cheap real estate. I liked the competitive position. I liked the way the personnel system worked. I liked everything about it,” said Munger. “And I thought, even though it’s three times book, or whatever it was then, that it’s worth more. But that’s not a formula.”

In fact, Munger has contempt for formulas.
“If you want a formula, you should go back to graduate school,” said Munger. “They’ll give you lots of formulas that won’t work.”

https://finance.yahoo.com/news/charlie-mungers-first-rule-value-investing-204323719.html