giofranchi
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Posts posted by giofranchi
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Assume we have no idea why folks chose to use P2P; they just do.
If you assume that, then you are obviously right. No need for any further discussion.
But I am not so sure that consumers will accept credit and payment to be separated… Once people are used to doing just one thing, they won’t go back to the need of doing two separate things… Therefore, I assumed instead that P2P will put pressure on V and MA’s margins, but without disrupting their business altogether.
If this is the case, will their earnings trend lower? As I have said, it is not clear.
Cheers,
Gio
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Separate the loan making process from the payment process.
Now consumers have a service that does both. And it works very well. They have to do just one thing instead of two. I don’t see why consumers will ever accept to separate the loan making process from the payment process… Especially because it is not clear their overall costs will diminish substantially, since the loan making process, if performed by banks, will entail new costs. And the service, taken as a whole: the payment process done by Apple Pay + the loan making process done by banks, will lead to a much worse user experience than the service provided by V/MA.
End result is lower future earnings for V/MC.
Will V/MA have to reduce their fees in the future? Probably yes. Will they penetrate new markets like India and China, where payments are still 90% cash payments? Probably yes. Which factor will prevail? Difficult to say, but it is not at all clear to me V/MA’s future earnings will be lower.
Cheers,
Gio
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Nothing says the platform provider has to give you credit; Uber is not a taxi service, & the platform provider is not a bank. If you want credit, simply borrow from your bank & pay the cash to the provider. They will credit your wallet; then simply pay who you want. No need to pay the annual V/MC fee, and no fee to make the payment. No credit risk to the platform provider either, as there is no payment if there are no credits.
If it were so easy, banks would be doing that already, wouldn’t they? But the job of granting credit is not that easy at all. It would require many costs banks are not sustaining right now, and therefore it would certainly not be free to consumers.
My understanding is that V and MA are able to assume those risks exactly because they are just two players in a very large market: they couldn’t extend credit like banks give loans, they couldn’t be studying in detail the spending habits of hundreds of millions of consumers. Instead, it seems to me they extend credit much like insurance companies underwrite insurance contracts: basing their judgements on statistics. The fact V and MA share between themselves the whole market gives them access to a large enough population, assuring that overall delinquencies will be manageable and, as a consequence, overall results will be satisfactory.
The larger the number of players which grant credit to consumers, the lower the population each player will be able to reach, the higher the required controls will be, the higher the costs.
Am I wrong?
Much of the resistance is because we cannot imagine a plastic world without V/MC. No one wants to hear that their favorite cow could well be delivering less milk over the future.
I am attached to neither V nor MA… I have just started a small position to study and monitor them… If I am wrong, no problem: I’ll sell them and buy GOOG instead!
I just want to understand their market better.
Cheers,
Gio
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However, with each passing year, bank regulations and technology improvements (pseudo-minimal requirements) have dramatically shifted American deposits from community banks and credit unions to national banks (such as the big-4; which have ~45% of US deposits). An example of my concern is Canada's Interac. Canada has such a high deposit density at 8 banks (nearly 100%) that merchants can assume customers will have an account at one of these banks (skipping V/MA network for many txns). Thus, the network node pain-point is gathering merchant as opposed to it being equally difficult gathering deposit institutions like in the US, Europe, or some of Asia. If the US banking industry continues to consolidate then it will eventually reach a critical density that will allow the US big-4 to partially, but materially, circumvent the V/MA network. AXP is much better insulated from this risk because it has a fully closed-network with a subset of in-demand users.
Isn’t this supposed to be a global service? If consumers have to travel abroad, a service that grant them access to credit wherever they go is surely valuable. Isn’t it?
Why would consumers choose a service that provides them with credit in the US, when they already have a service that provides them with credit globally?
Cheers,
Gio
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What I meant is that to grant credit to consumers is not like developing video games. Whenerver you grant credit, you'd better make it your core business, or don't make it at all... The risks are much higher than putting together a bunch of smart app developers and producing video games.
Am I wrong?
Cheers,
Gio
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I am assidous buyer of both Amazon and Apple's products... And to do so I always use my credit card... Cannot say about Google...
Though I think I can see how Apple and Amazon might compete in the payment business, I don't think it will ever become their core business.
Cheers,
Gio
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Gio; a lot has happened - it just isn’t visible yet.
No different to rust on a car; by the time you see it, it has already occurred.
V/MC is just a payment system; one of many, all competing to allow person A to pay person B as cheaply and efficiently as possible. It is the plumbing that allows the payment to occurr. Cash, digital P2P (peer-to-peer), debit, crosses, Hawala, etc. are just different kinds of payment systems – unique plumbings, each with their own pro’s & con’s. The customer uses whatever best suits their purpose.
Business wise this is identical to multiple vendors offering the same commodity product – a process by which to pay. Lowest cost producer wins; scale up to minimize fixed cost per transaction.
Add a new & viable payment system (P2P), and everybody gives up some market share; the more mature the product is in its life-cyle - the more market share the product is likely to give up. V/MC is mature product.
Block chain technology is not a payment system, but it can be used as one (ie: Bitcoin). It is simply a robust digital token ID verification process, with a low cost audited transactional history of all transactions that the chain has been through. The chief cons are its slowness, and CPU processing requirements.
Used as crypto-currency - block chain technology allows anonymous, unlimited sized payments to be made; in zero trust environments, entirely outside of the global banking system. Hence the global AML/ATF interest in the technology.
P2P transactions are dirt cheap, so long as both parties are on the same network; if one of them isn’t – you have to touch the banking system; & pay. To avoid V/MC machine & processing fees, all a restaurant or bar owner need do is open an account on each of the major P2P networks, & advertise it on the door of their establishment.
The mystery is to what extent establishments will do it, & to what extent will their clientele use it. Usage is likely to differ widely across both generation & type of clientele. I advocate a more rapid than expected take-up by the young and disaffected; and by those in Asia.
At present; game theory argues working with versus against P2P rivals. Anyone's guess as to how long that will last.
SD
Thank you SD!
Just let me put it this other way: do you have a name?... I mean of course the name of a company that could disrupt V and MA business.
A technology is never enough imo. There must be the willingness and the ability to take away business from incumbents so much entrenched and mighty as V and MA are.
Which is that company?
Thank you,
Gio
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I have read every post by SD on this thread… And sincerely I have understood very little… Can someone explain in easy to understand terms what is supposed to have so dramatically changed in V and MA’s business during the last 5 years?
Thank you,
Gio
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I'm willing to pay a "fair" price for a good business but this valuation is hard to swallow.
I know, and I agree it’s selling for very high multiples. Unfortunately, it is selling at these levels since at least 2010 (the beginning of this thread)… Therefore, as usual, I have opened a position, leaving room to average down.
Cheers,
Gio
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I have opened a position in both V and MA.
Apple Pay might be a competitor, but I doubt it will impair V and MA’s business: Apple Pay imo is meant to be a valuable service in the Apple’s ecosystem, but it will never be Apple’s core business. And even a company with Apple’s wherewithal might have an hard time competing against V and MA, if it doesn’t make the payment business its core business…
Furthermore, if Apple Pay is truly so much successful as to impair V and MA’s business, my investment in Apple could be viewed as a sort of hedge for the positions I have opened in V and MA.
Cheers,
Gio
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I generally agree with the strategy (and myself am implementing it), but I think if you have a portfolio of them and just a few that don't compound as they have in the past, you may get into trouble. Of course, it depends on whether the other ones outperformed enough...? e.g., if you had BRK, MKL, FFH, and LUK, which all had those characteristics, starting in say 2010, would you have outperformed? FFH and LUK haven't done much. BRK and MKL have done pretty well, but BRK has had trouble in the last five years (book value to S&P comparison, not price). Of course a five year time period probably isn't enough, but the possibility is there.
+1!
No guarantees in business nor investing, of course.
I just wanted to point out that survivorship bias might be a much larger issue when you decide to invest with “outsiders” who have not actually proven to be “outsiders” yet! ;)
Cheers,
Gio
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Did Thorndike ever talk about survivorship bias?
I.e. it seems that it's tough to identify Outsider CEOs during their tenure ( e.g. the company that won't be mentioned - hint it has one of the longest threads on CoBF ;) Oh, hey, there's at least three such companies... ). Is there a tendency for them to blow up - or succeed enormously?
Yeah, I think this is a big issue. I don't think it is as bad as most of the management books (e.g., Good to Great), as capital allocation is clearly important. It may just turn out to really say, "pay attention to capital allocation!", which we pretty much already know.
Not to denigrate the book, I enjoyed it a lot.
What about sticking with those who have at least a 15 years track record of being great at allocating capital? Who are at the helm of great businesses with favorable secular trends as tailwinds, in industries where competition is kept at bay?
How much is survivorship bias going to render the final outcome unpredictable then?
Cheers,
Gio
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so nothing spectacular is going to occur (but it could!)
I agree with all you have said. The fact is I don’t expect anything spectacular to occur holding cash either… But it could! In the case of a crash that comes soon.
Cheers,
Gio
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5) I get worried when rapid P/B expansion in FFH can be followed by a reversal, crash or no crash.
Ok, so do you see too rapid a P/B expansion right now?
Cheers,
Gio
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I am a lot more paranoid than you about the risks to FFH (inflation, catastrophic losses, etc) to consider it as a cash equivalent.
Vinod
Well, generally cash is a very poor choice in an inflationary environment… Will FFH do even worse?! Maybe, but I don’t see why we should assume that.
Catastrophic losses in their insurance / reinsurance businesses? I agree it is a risk. But luckily enough they seem to have become much better underwriters than they were just a few years ago.
Cheers,
Gio
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My point is, if you see FFH as a portfolio diversifier, I can understand but as a cash substitute I am not so sure.
Great opportunities might come even if a general market crash doesn’t happen. Think about the recent rout in the pharma and biotech industry. If you hold a company that is very diversified and very well hedged against the gyrations of the stock market, you can sell it when some great opportunities present themselves.
I agree with Eric that in a general market crash FFH might not prove to be a good cash equivalent, but in almost any other circumstance I think it could serve that purpose quite satisfactorily.
In fact I would say FFH will be a better substitute for cash, if no general market crash comes our way. If, instead, we will continue to witness crashes circumscribed to specific sectors (energy, biotech, whichever will be next), I guess FFH will be a fantastic substitute for cash: because, as Eric has pointed out, the effect of a slow compounding machine will be added to the great optionality cash offers.
Cheers,
Gio
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It's more like if the crash happens several years away, then FFH is better than cash quite likely. But if it happens next quarter (or in 18 months) before any significantly offsetting low-rate compounding, then I think cash is way better.
+1
Then what?
1) You are not worried about a crash at all and you are 100% invested,
2) You are worried about a crash that might come soon and you hold cash,
3) You are worried about a crash that might come some years from now and you hold FFH,
4) You are worried about a crash, but you don’t know when it might come, and you hold both cash and FFH.
Which of the 4 cases? Is there a fifth?
Cheers,
Gio
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People may look to Fairfax in a crash, but they will be selling none-the-less. The reason is fairly simple: the need to raise money for margin calls, and generalized panic. It absolutely will happan again. Your naive to assume otherwise. Going into March 2009 FFH dropped by 100 on the heels on extremely high earnings. I know because I was buying FFH at the time. Its posted somewhere on this board.
If I am not wrong, FFH during the first quarter of 2009 wasn’t hedged anymore. It had taken its hedges away at the end of 2008.
This being said, I think no one is expecting FFH to stay at the level it is trading today in a market crash. But you have two options:
1) To hold cash,
2) To hold a company whose stock might decrease less than your other holdings in a crash, in order to sell it and buy more of those companies you like and which have been more hardly punished in the crash. In other words, to sell a cheap stock in order of buying an even cheaper one.
I don’t know of a third alternative (or maybe yes: simply being 100% invested all the time… but I guess that doesn’t suit everybody well!).
Cheers,
Gio
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One of the opportunity costs of not doing what Adam is contemplating [ i.e. by investing in a low cost index fund, as the alternative to Adams proposal] is that you never learn to invest, thereby not learning a lot, most of all about yourself by taking on some risks, and by the personal process of developing your own investment style over time.
+1
That's similar to what I meant when I said that doing 3) will help you very much in getting better and better at doing 1)! ;)
Cheers,
Gio
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What Malone companies has BRK bought shares of?
I think CHRT, and I am not sure about LMCA... You might want to check it out!
Cheers,
Gio
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Question: to those (Dazel, to some extent me) who are frustrated and wish there was a core of high quality yielding equities...
...would you want them to buy those equities right now?
Given they keep holding their equity hedges, and they keep holding lots of cash, I would surely like them buying more high quality companies at attractive prices. The fact the general market might be a bit stretched at this point doesn’t mean there are no high quality stocks selling at attractive prices.
For instance, the companies controlled by Malone are cheap right now imo. And BRK has bought large investments in them during the last year or so. I surely would like FFH to follow suit.
You know I also think AAPL is cheap right now: think of Mr. Icahn, who has said he is more hedged today than at any time in the past, and who has publicly said he shares many of the concerns FFH has about the general economy, but still holds a very large investment in AAPL.
Cheers,
Gio
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Adam,
I think you’ll do very fine.
1) To generate cash (as much as you can), 2) To save it (as much as you can), and 3) To invest it with great capital allocators:
This is imo the name of the game.
And don’t worry about the comparison to “the index”! To devote time and energy to 3) will yield good results and will enhance greatly your ability to do 1). Therefore, it will be worthwhile. At least, that’s my experience.
If I could add something, I would pay attention also to the quality of the businesses (even a great capital allocator at the helm of a poor business will struggle, and I believe some of the companies in your list are not very high quality businesses), and to the price you are paying (for instance, I own MKL because I think it is very high quality, but I own a small position. Both BRK and FFH are cheaper today, therefore I don’t think you should give equal weight to all of them right now).
My capital allocation strategy is dictated by the best compromise I can find between quality of management, quality of business, and price.
I hope this might be useful.
Cheers,
Gio
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But then they used to like real crap in insurance too, and they learned. I suspect "Fairfax 3.0" will be quality insurance plus a core of quality equity compounders bought cheap, but we're not there yet.
I hope you are right. Until then FFH has a place in my portfolio as "ready cash" or "something that zigs while others zag".
Cheers,
Gio
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The fact that no one on the board or in the public seems to care what Fairfax is doing bodes well. Maybe we will have to get Bill Ackman in to split up the company! Kidding....anyone who knows the Fairfax story knows the sharks...and he is one of them...what goes around comes around and they will eat each other eventually...I certainly would not want to be in the water with him when its his turn. SAC is gone in name only.
Why such a poor opinion of Ackman?
I think it is time for a rethink on their common equity investing because of their size...they have never been here before and their blow ups are in turn around situations which they are adding huge sums of capital to average down in...
if they used the same strategy with brands ala Mr. Buffett they would be buying down on mistakes...that do not have the possibility of a 0 or very little salvageable capital outcome...eurobank, Resolute, Blackberry etc...
American Express for example.....may fall another 50 to 60% in a very extreme situation....they would be able to buy it down..because of their advantage of the float as Berkshire has done in the past. In Value turn around situations they are looking at all or nothing investments that risk large amount of capital...which require large hedges.
Mr. Buffett had to change with size...Fairfax has to as well...I would give Brian Bradstreet more leeway in the common stock portfolio to look at cash yields in large branded companies for dividend yields....of course they will still invest in value ($1 for .50)...but to a smaller degree on a huge portfolio.
In order for Fairfax to move the investing needle they have to be invested....yes I believe the CPI investment will turn out but I am surprised that they did not add to common equityor bond exposure during the pull back when they have massive hedges in place...$7b cash and 100% hedges and you do not take advantage of an equity market ull back of 20% for most stocks? Very surprised....the new Fairfax has be come a cultivate the losers and hedge because the sky is falling...well it fell in August and September and they did nothing.
With this I agree 100%.
Cheers,
Gio
VISA
in General Discussion
Posted
They wouldn’t. And that’s why I have said that to separate credit from payment will entail new costs.
Cheers,
Gio