Circle of Competence Issue #59
- Benton Moss
- Apr 27, 2019
- 4 min read
QUOTE OF THE WEEK
"The stock market is filled with individuals who know the price of everything but the value of nothing." - Phillip Fisher
FOOD FOR THOUGHT
John Hempton, a hedge fund manager at Bronte Capital, wrote a tough opinion piece on Mattel and their product deficiencies that have been the lead cause of many baby deaths. His opinion as to the ultimate cause of the product deficiency? Leverage used for buybacks and increased shareholder returns. In a dying business like the toy industry, what was the rationale behind levering up the company to buy back shares? This seems to me to be a very bad blunder on management's part and shows a complete lack of second order thinking. I completely understand a company like Apple doing this, but in a business declining year over year for 5 years? The situations change but the lesson remains the same: when companies employ leverage imprudently, you find out that 'decent' people can get put into tough situations and turn out not to be so decent after all, as seen in both the Valeant and Mattel examples above.
This is an oldie but a goodie. I've written about free trade here on the blog and will admit that I'm an ardent free trade supporter. Though I've never thought much about needing a solution to the trade deficit problem, Buffett proposes a novel market-based solution to the massive trade deficits we've been running for decades. I may have missed it, but has a market-based solution been floated in either liberal or conservative circles since this article was written? Seems like today's focus on trade is mired in protectionist tariffs vs. absolute free trade rhetoric, but I could be missing something. Regardless, this piece is worth reading and thinking about... it may just hold the key to bipartisanship on trade in the future.
WRITTEN WORD
I wrote about China's social engineering on the blog
and warned about the exporting of China's advanced surveillance technology. I find it odd that Huawei is one of the companies behind this push into other governmental markets given that they are in the news lately for technology trade secret theft.
See my earlier thoughts on BTC here. In my opinion, the internet bubble at least produced companies that produced services that people depend on daily. Bitcoin has yet to become a productive asset or a product that people depend on daily... unless you are speculating or are a criminal.
Fundless (independent) sponsors are becoming more of a force in the private equity space and represent a small but growing opportunity for investors and entrepreneurs. Watch this space.
I have no problem with the statement that once you control for all of Buffett's factors, he produced only a small amount of alpha over a longer period of time. Why? Because it takes skill (and a hell of a lot of patience and emotional fortitude) to select quality, low volatility companies at the right multiples and hold them over a long period of time. If these happen to be factors that outperform the S&P, all the better.
In a world of low interest rates and few viable investment alternatives, capital flows to the next best alternative. In a pure theoretical world, it is logical that a hot, albeit money losing, technology platform that has the *potential* to capture a huge percentage of future daily transportation would command a massive $100B+ market capitalization. But is the risk worth it? It is hard for me to envision a scenario in which both Lyft and Uber exist simultaneously and earn large and growing profit streams while they compete on the margin for consumers with aggressive pricing, but I'd love to hear from someone with a completely opposite view.
Great overview of the four forms of competitive advantage: economies of scale, barrier to entry, customer captivity (switching costs), and network effects.
Worth reviewing what Munger & Buffett have said about owning businesses in rising interest rate and inflation environments. Even thoughf we have neither at the moment, this can change swiftly.
Think about this question as you read this: are markets truly efficient?
SPOKEN WORD
I must admit, I'm not a huge fan of Facebook or social media (and the amount of time people waste on them) for that matter. But they are here to stay, for better or for worse. What is more disturbing is the possibility that these platforms are actually being used to create more division in our societies. I'm on the fence about this, but then again, I don't spend much time on the platforms. Worth the watch. Public backlash and the threat of harsh regulations represent a large existential risk to social media companies.
This was a close second in terms of best listen for the week. From a return to learning on time investment standpoint, Josh Wolfe is probably one of the highest return listens out there. Every time I listen to him speak, I come away with another mental model to think deeply about.
Gabelli's focus on niche industries early in his career is a great model for young aspiring investors: start small, conquer a niche, scale from there.
Specialty agriculture for the retail investor is becoming a reality. Big operators are able to aggregate large tracts and sell small slices to investors in a turnkey style (retaining management of the parcels for a fee). Interesting listen for a twist on global real estate investing.
Great listen for those who are considering a private placement investment. K-1's are tax forms sent to passive investors in private investments.
コメント