Tag Archives: Bill Miller

Cyprus; Soviet Union Failure; Investing in Cyclical Industries

Russell

It goes without saying that during the Russell 2000 crash the fast money traders did not lose 55 percent—not by a long shot. It was the Main Street “investors” and their proxies–mutual fund managers like Bill Miller—who got fleeced, owing to the naïve belief that they were investing in stocks for the long run and that picking good companies mattered. So the true evil of the Fed’s financial bubble making sits right here: Main Street  Investors had no clue that their cherished “stock picks” could drop 55 percent in a matter of months because in an honest free market share prices wouldn’t inflate to absurd heights in the first place, nor plunge irrationally during a monetary panic afterward. –David Stockman

Central Banks and Cyprus

A classic to read: How to Profit from the Coming Devaluation by Harry Browne

An EU bureaucrat offers insightful advice, “Get your money out of the EU!” http://www.economicpolicyjournal.com/2013/03/nigel-farage-get-your-money-out-of.html  (Video)

A history and economic lesson on the failure of the Soviet Union (must see): http://www.economicpolicyjournal.com/2013/03/the-truth-about-collapse-of-soviet-union.html

Why the Greenbackers Are Wrong (AERC 2013)

One of Ron Paul’s great accomplishments is that the Federal Reserve faces more opposition today than ever before. Readers of this site will be familiar with the arguments: the Fed enjoys special government privileges; its interference with market interest rates gives rise to the boom-bust business cycle; it has undermined the value of the dollar; it creates moral hazard, since market participants know the money producer can bail them out; and it is unnecessary to and at odds with a free-market economy.

…In short, there is no need to replace the Fed with another government creation. There is no good reason to replace the Fed’s monopoly with a more directly exercised government monopoly. All we need for a sound money system are the ordinary laws of commerce and contract.

Let’s oppose the Fed for the right reasons, and let’s oppose it root and branch: not because it doesn’t create enough money out of thin air (is this really a fundamental critique of the Fed, after all?) but because the causes of freedom, social peace, and economic prosperity are at odds with any coercively imposed monopoly, and because the naive confidence in the American political class that the Greenbacker alternative demands is beneath the dignity of a free people. Read more on http://www.tomwoods.com/paper/

Cyclical Industries

A lecture on investing in cyclical businesses (Junior Mining Companies) http://youtu.be/BOzJaaih8Bc Listen to the first 8 minutes. You can substitute steel, cars, home-building for mining companies.

“Own stuff the central banks can’t print.” — John Mauldin

 

Bill Miller on Central Banks and the Financial Crisis

Video of Bill Miller discussing central banking April 2012

http://www.interdependence.org/resources/re-examining-central-bank-orthodoxy-for-un-orthodox-times-keynote-speech/   26 minutes

Even after seeing his Legg Mason portfolios devastated, Mr. Miller doesn’t consider the question, “Why do we need central banks?” After failure upon failure of central bank policies of ceaseless boom and bust, devaluation, ballooning debt, punititve interest rates–both too low and too high–what will cause the public to understand the futility of central financial planning?

Imagine if Miller had read Ludwig von Mises (www.mises.org) instead of quoting the Austrian Philosopher, Ludwig Wittgenstein, he would have an inkling of what caused the boom and bust that eviscerated his portfolios:cbm 2003 Version of Trade Cycle

 

 

 

 

I would rather invest with him: http://www.youtube.com/watch?v=tZnkql_Xkhc

Why is 49 the lucky number in France?

http://prudent-speculation.blogspot.com/2012/05/in-france-49-is-lucky-number.html?

 

Discussion of Strategic Logic (Kodak) Part 1

Part 1

Remember the cardinal rule of market analysis and investing: Those that know don’t say and those that don’t know have the floor to themselves.

You won’t find any great market or investment tips here.  What we can do is learn investment principles, strategic logic, and tools and techniques to become better investors. 99.999% percent of your success will be in applying your own thinking to the opportunities in front of you.

Strategic Logic

Studying strategic logic will be an important part of building a mental model for investment success.

I will discuss the Kodak case from here: http://csinvesting.org/2011/11/22/industry-analysis-kodak-strategic-logic-quiz/

I chose Kodak’s demise and Bill Miller’s loss to highlight several points.  Don’t follow market mavens off a cliff, make your own mistakes. You can’t lose when investing—either you make money or you learn. But to learn you must think systematically about your process, record your investments and think about your successes and mistakes.  Secondly, unless you have mental models (thanks Mr. Munger) to understand reality, you will become lost.  Mr. Miller and his team of 10 analysts including Michael Mauboussin might have been caught up in a turnaround story, the personality of a new CEO, the iconic brand name of Kodak or a plunging stock price—I don’t know—but they never asked a simple question—what competitive advantage would Kodak have in its new endeavor?

Let’s take a break to assess what is “Strategic Logic” or analysis of competitive advantages.

Strategic analysis should begin with two key questions: in the market in which the firm currently competes or plans to enter, do any competitive advantages actually exist? And if they do, what kind of advantages are they?

There are only three kinds of genuine competitive advantage:

Supply. These are strictly cost advantages that allow a company to produce and deliver its products or services more cheaply than its competitors. Sometimes the lower costs stem from privileged access to crucial inputs, like aluminum or early recoverable oil deposits (Saudi Arabia). More frequently, cost advantages are due to proprietary technology that is protected by patents (Pharmaceuticals) or by experience—know how—or some combination of both.

Demand. Some companies have access to market demand that their competitors cannot march (Ebay’s network effects). This access is not simply a matter of product differentiation or branding, since competitors may be equally able to differentiate or brand their products. These demand advantages arise because of customer captivity that is based on habit on the costs of switching, or on the difficulties and expenses of searching for a substitute provider.

Economies of scale. If costs per unit decline as volume increases, because fixed costs make up a large share of total costs, then even with the same basic technology, an incumbent firm operating at large-scale will enjoy lower costs than its competitors.

Beyond these three basic sources of competitive advantage, government protection or, in financial markets, superior access to information may also be competitive advantages, but these tend to apply to relatively few and specific situations. The economic forces behind all three primary sources of competitive advantage are most likely to be present in markets that are local either geographically or in product space. Pepsi loyalists have no particular attachment to Frito-Lay salty snacks, any more than Coke drinkers prefer movies from Columbia Studios when that was owned by Coca-Cola. Nebraska Furniture Mart, the store Warren Buffett bought for Berkshire Hathaway one afternoon, is a dominant player in Omaha and its hinterland, more powerful there than Ethan Allen or other large national furniture retailers.

Most companies that manage to grow and still achieve a high level of profitability do it in one of three ways. They replicate their local advantages in multiple markets, like Coca-Cola. They continue to focus within their product space as that space itself becomes larger, like Intel. Or, like Wal-Mart and Microsoft, they gradually expand their activities outward from the edges of their dominant market positions. (Source: Competition Demystified by Bruce Greenwald)

Think simply about competitive advantages. Morningstar categorizes economic moats in five ways.

Efficient Scale: when a company is effectively serving a limited market, rivals may have no incentive to enter. Some businesses are simply natural monopolies. This classification also applies to rational oligopolies. Think International Speedway for NASCAR races (geographic) or WD-40 in product space.

Network Effect: The value of a network is correlated to the number of connections. Large networks are most attractive for users, and it may be nearly impossible for upstarts to attain critical mass (Chicago Mercantile Exchange or CME).

Cost Advantage: Companies that thrive on being the low-cost provider in a commodity industry can offer lower prices to customers and still make a profit (Compass Minerals or Vulcan Materials). These companies create difficulty for higher-cost competitors.

Intangible Assets: Some companies have an advantage over competitors because of unique nonphysical assets such as intellectual property rights (patents, trademarks, and copyrights), government approvals, or brand names.

Switching Costs: If a company sells products that customers can’t get elsewhere—at least not easily—it has high customer switching costs. This creates a situation in which customers are willing to pay higher prices for products because of convenience.

Industry Analysis & Kodak Strategic Logic Quiz

Industry Analysis on Housing

This a report on the US housing market. Whether you agree with the author’s assumptions or not, he carefully lays out his thesis. Also, his research shows the difficulty in investing in cyclical industries. The future is unknown, but if you can find a skewed risk reward opportunity then pursue it.

http://www.scribd.com/doc/64974231/Anon-Housing-Thesis-09-12-2011

Kodak Case Study in Strategic Logic

Value-Line on Kodak: http://www.scribd.com/doc/73498449/EK-VL. Note the high returns on capital pre-2000.

50-Yr. Chart: http://www.scribd.com/doc/73498399/50-Yr-Kodak-SRC Note how the stock price of Kodak (EK) begins to underperform the stock market back in 1973/74. Back then (1972) the digital camera was invented. Coincidence or every picture tells a story doesn’t it? (Rod Stewart).

The history of the digital camera: http://inventors.about.com/library/inventors/bldigitalcamera.htm

Digital imaging also had another government use at the time that being spy satellites. Government use of digital technology helped advance the science of digital imaging, however, the private sector also made significant contributions. Texas Instruments patented a film-less electronic camera in 1972, the first to do so. In August, 1981, Sony released the Sony Mavica electronic still camera, the camera which was the first commercial electronic camera. Images were recorded onto a mini disc and then put into a video reader that was connected to a television monitor or color printer. However, the early Mavica cannot be considered a true digital camera even though it started the digital camera revolution. It was a video camera that took video freeze-frames.

Bill Miller Loses on Kodak

Bill Miller bought Kodak near $60 and then many years later sold at $1.  He said to a reporter that Kodak was his biggest mistake. He underestimated the need for a cultural change to turn the company around.  Do YOU agree with his assessment of his mistake?  Not to pick on Mr. Miller, but using strategic logic what questions would you ask if Kodak was transitioning from film photography to Digital?  What might you do if you were the CEO?

http://blogs.wsj.com/deals/2011/11/10/bill-miller-is-done-losing-money-on-kodak/

In 2002, Fortune described the quandry Kodak faced in this article:  http://money.cnn.com/magazines/fortune/fortune_archive/2002/02/04/317510/index.htm

Kodak: In The Noose

Andy Serwer                                                                                                             February 4, 2002

(FORTUNE Magazine) – When I was a boy, my grandfather gave me a few shares of Eastman Kodak. I never got a chance to talk to him about it, but I’m sure his thinking was, “Taking pictures is a great business. People will always take pictures, and Kodak is the big fish in that pond.” Well, for years my grandfather was right, and Kodak was a fair, though by no means stellar, stock. Now, however, it seems that only the first part of Grandpa’s axiom holds true. Everyone still takes pictures, but increasingly Kodak isn’t the big fish in the photography business.

Despite all of Kodak’s best efforts, this grand old American brand could very well go the way of Wang and Xerox. Which is to say the company may be hanging around for years, but for all intents and purposes, it’ll just be twisting slowly in the wind.

EK is under siege. On one side, Fuji and others are chipping away at Kodak’s very profitable consumer film business. On the other, the digital image revolution (i.e. digital photography) is hitting critical mass. Yes, Kodak is a big player in that arena, but even if it succeeds there–which is far from clear–that’s a much less profitable business than those little yellow boxes.

Take a look at the numbers. In 1991, Kodak had $19.4 billion in sales. Last year, it’s expected to have done just a bit over $13 billion. And while net income hit close to $1.4 billion in 2000, that’s about what it earned in 1988. The company has recorded “nonrecurring” losses in ten of the past 12 years. Kodak’s dividend is now $1.80 per share, but some analysts don’t think the company will earn that this year. The stock, which hit $94 in 1997, now trades for $27. (How long, you might ask, before the good people at Dow Jones do what they did to Woolworth, Bethlehem Steel, and Union Carbide, and throw EK off the DJIA?)

But there is an even more disturbing figure for EK shareholders: Sales of digital cameras climbed an estimated 30% last year, to 5.5 million units. Now, Kodak makes digital cameras–in fact, it recently became the market share leader. But (1) Kodak’s digital camera business isn’t profitable, (2) every time someone buys a digital camera he is no longer a customer of the company’s high-margin film business, and (3) to succeed, Kodak must compete with the likes of Sony and Canon.

Kodak says it’s hurting because of the recession and the slump in travel since Sept. 11. (“Why then,” asks one short-seller, “is its medical imaging business also slumping?”) As for digital photography, the company says that it’s not only selling cameras but also high-quality paper and other digital photo-finishing services. Again, though, margins there are nothing like those in film. The other problem with digital photography is that consumers seem to print far fewer images. Why bother? You just store ’em on a disk or PC and print out the few you want when you want ’em.

Management at Kodak has long been considered–to quote one knowledgeable Wall Street source–“entrenched, inbred, and unresponsive.” (And one key outsider, COO Patricia Russo, just left to head up Lucent.) I doubt, however, that any manager could “turn around” Kodak. What’s happening doesn’t lend itself to a restructuring. To exaggerate only slightly, we are talking buggy whips here. Film for Kodak is somewhat like long distance for AT&T: a mature, still profitable business that’s very much in decline. One thing to do would be to take Kodak’s film operation and turn it into some sort of master trust that pays out cash to shareholders. But that would probably require a level of fortitude that only an outside-raider type like Carl Icahn possesses.

Sure, film will be around for years, but let’s be real: Digital cameras are totally changing how we take pictures. Here’s a story: Friend of mine told me about a woman who mostly uses a digital camera. One day she had her old SLR instead. Her daughter looked in the back of the camera after a shot and asked Mommy where the picture was. “This camera doesn’t let you see the picture,” Mom said. “Then why are we using it?” the kid asked. Get the picture?

You answer should be no more than a few sentences.  Bill Miller is an intelligent, well-read investor but he failed to think strategically (yes, easy to point fingers with hindsight bias).  But you can take the same analysis of entering the digital photography market and apply it to investing in Salesforce, Inc. (CRM) today. If you were to invest in CRM, what questions must you ask?

If you have trouble with this case, I have started a training camp to teach strategic logic. Watch a clip of a recent training day: http://www.youtube.com/watch?v=6eXFxttxeaA

Bill Miller, Uber Genius or Empty Suit?

Here is another blog, Prudent Speculation, you should bookmark. The writer is a savage critic of conventional wisdom, politics, and Wall Street.

In the link below, he rips Bill Miller.  This is another lesson on how the financial press operates and the marketing of institutional money managers. Oh how nothing ever changes on Wall Street–just the players.

http://prudent-speculation.blogspot.com/2011/10/wall-st-uber-genius-bill-miller.html

What do YOU think?