ItsAValueTrap

Let's say the bid is $5 and the ask is $7. If you buy right away at $7, you are taking liquidity. If you sell right away at $5, you are taking liquidity. The other side of your trade is providing liquidity. Usually if you use a limit order and your order doesn't fill immediately, you will likely be providing liquidity (if and when your order fills later on) and you will receive a rebate.

Yeah, you definitely can't have Day, Questrom, or Drexler work for you right now. I've stayed away from WU because the CEO strikes me as bad. Combined with high leverage, he could run the company into the ground. The reason why Buffett liked Coke back in the day was because of the moat AND the really good CEO. Of course! Dollar Tree (DLTR) bought a Canadian chain. Most supermarkets here have a dollar store section. There are a number of dollar store chains in Canada. One of the problems with retail is that you can't grow that fast. Many retailers are unable to plow all of the cash flow back into the business. I think the limiting factor is being able to source good people. Retailers also have a very hard time growing once they saturate their own country. Tech companies scale really well, but they also hit the point where they have too much cash and can't reinvest it into their own business. Most excellent businesses throw off huge amounts of cash that they can't reinvest. One exception is in television and cable, where you just buy up more and more TV stations and cable networks (e.g. Cap Cities, Malone). I think that's one of the reasons why Buffett is brilliant. He buys these wonderful companies and allocates their excess cash to buy more wonderful companies. Look at Lululemon. It is sitting on a huge cash hoard that isn't doing anything. Capital allocation is poor. With Buffett, all of his businesses have excellent capital allocation because Buffett handles the capital allocation.

I use cost plus. I'm not sure why the flat rate commission would really make sense. 2- If you *take* liquidity, then you might get price improvement. If you enable the "seek price improvement" setting, then you might get a better price than otherwise. But there is a delay. If you *provide* liquidity, then you will usually get a rebate. SMART routing means that your order might end up on any number of different exchanges. The major ones are NASDAQ, NYSE, and BATS. The exchanges have different rebate structures. 3- I really wish the US regulators did a better job. But the reason why things are so complex now is because they did something about the abuses of the past. It's also partly because the SEC's rules has led to more competition, which makes order routing more complex as there are many places you can send order flow. The other source of complexity is from people trying to game/play the current system.

Crocs actually didn't make much money when the fad was raging. There was an accounting controversy/revision, the old CEO was pushed out, and then a turnaround guy came in. He passed the reins over to his COO, John McCarvel. In my opinion, his track record with Sears shows that he isn't a retail expert. I'd say that he run a super concentrated portfolio (fueled by some leverage from the underlying companies) and got lucky. If he's so smart, why isn't he making money? Usually in retail you will see results in a few years. I don't know of any superstar retail CEOs who had an incredibly slow start. Amazon took a while to make money, though they grew revenue like crazy and weren't entirely trying to make money back then.

I read Fisher's book but I forgot most of it. I remember that he recommends visiting the actual businesses, but I'm not sure about that. Some of the best performing stocks have ugly stores. Most dollar stores are tacky. Dollarama (DOL.TO) is one of the tackier dollar stores out there (the logo is the ugliest in my opinion), but it has the highest return on capital of all the dollar stores out there. Many of the restaurants owned by MTY Food Group are tacky. Taco Time looks bad in comparison to Taco Bell. MTY stock has gone up 100X in the last decade (!!). Walmart was supposedly really ugly when it started. Some retailers waste money on IT but it's hard to see. You'd have to read the financial statements. 2- What happens if the CEO leaves: Heh. You're in trouble! I think that has been Buffett's experience. When Rose Blumpkin left Nebraska Furniture Mart to fight her family, she beat her own family. There's another Berkshire retailer where the CEO left and things went bad. When superstars like Questrom and Mickey Drexler leave, the company usually goes downhill afterwards. So most of the time, Buffett prefers stocks with moats over management-driven businesses. Television stations used to have very good moats. But the moat companies are sometimes run by really bad CEOs. So Buffett ended up selling out of Kraft and Fannie/Freddie. If he owns the business 100%, I think he'd prefer a moat because he can replace the CEO if things get really bad. 3- How to spot the really great businesses: I'm not sure about that one. Perhaps just stick to the super obvious moats: Visa (and to a lesser degree Mastercard), Ebay + Paypal, etc. Superstar managers: Buffett, John Malone (though Berkshire is more focused on DTV than LMCA, which I think is a mistake), etc. Retail managers: Christine Day, the Dollarama guy, TJX/Carol M. Meyrowitz, ROST/Michael Balmuth, Drexler, Questrom, etc. I have a list on my blog with less obvious ones: http://glennchan.wordpress.com/2013/10/11/quality-businesses-on-my-radar/ Ross' signature has some moat stocks in there too.

Regarding ARO: I don't think that it's a very good company because the new CEO isn't that great. You can see that same store sales has been declining after he came on. In my opinion, you need to stay away from retailers with bad/average CEOs. Companies like JCP, SHLD, and ARO. I'm sure that's going to be a minority viewpoint on this board haha. Go long retailers like TSCO, TJX, DLTR, CROX, DOL.TO, etc. Those are the companies that are growing and have high returns on invested capital. There's a reason why the first set of retailers is heavily shorted and the second isn't. *I'm long CROX, TJX. http://www.berkshirehathaway.com/letters/1989.html

Outside of business, universities would be a perfect example of a self-fulfilling brand. Harvard University is generally considered to be one of the top universities in the world. It attracts many of the best students, teaching staff, and researchers. It has a very large endowment and even attracts some of the best endowment management talent. It seems to me that Harvard's brand is largely self-fulfilling. Employers rate Harvard students higher than students from other school. Even if the student's grades aren't that good, getting into Harvard is an achievement onto itself. And students want to get into Harvard because it's hard to get into (human beings have a heuristic where they assume that something is better if it's hard to get), because employers value the brand, and because the school has many top professors. I assume that top professors prefer to teach at Harvard because usually professors want to teach the best and the brightest. For non-profit universities, the skill of the president/"CEO" doesn't seem to matter that much. It's mostly the brand that matters. In the business world, it seems that there are some industries that are dominated by self-fulfilling brands. I don't understand advertising agencies that well but it seems like the reason why market shares rarely change in that field is because the brands are self-fulfilling to some degree. I assume that top employees prefer to work for the most prestigious agencies. The best clients tend to gravitate to the biggest name ad agencies because those agencies attract the top employees. Buffett owned a few different ad agency stocks and did very well with them. Investment banks also seem to have self-fulfilling brands. I would never buy an IPO, but if I did... I would rather buy something from Goldman Sachs than say Citigroup or Morgan Stanley, and Citi/MS over Rodman and Renshaw. And I think that the people who want to work for investment banks would rather work for Goldman over Citi/MS, and the large investment banks over the smaller ones. The companies doing IPOs prefer the prestige of big name investment banks and listing onto "credible" exchanges (e.g. all the Canadian juniors want to be on the TSX, not the TSX Venture; they want to be listed on the NYSE rather than pink sheets or OTC). On the other hand, the investment banking business is more complicated that simply saying that brand is the only thing that matters. Management matters... bad management killed off some of the major banks and the others had to be bailed out. In the brokerage and clearing and market making business, scale may matter. When you get to look at most of the order flow out there, it's an informational advantage. (Technically the investment banks aren't supposed to do that but...)

There are companies out there trading for less than the value of their cash and/or stocks: NFD.A* Phoscan Selwyn* SCP.TO CMP.UN Pinetree Capital (the debt is more attractive though IMO) Aberdeen International ?Jemtec? The companies I listed first tend to have better management. If you're into super easy, those are places to look. I would avoid companies with very bad management though... Pinetree/Aberdeen/Jemtec may be traps. I am wary about cigar butts and 50-cent dollars. I believe that Pinetree is currently a 50-cent dollar... if you're into that kind of thing. *I own these.

Very interesting!

But Buffett even states in one of his shareholders letters that Berkshire Hathaway was a mistake...

Nice article! I think that a lot of value investors are still focused on cigar butts and turnarounds.

Or... management is lying to you. Historically, that has been the case with most companies on the TSX Venture exchange and most independent E&P companies. These areas of the stock market are usually awful and you should probably stay away from them. If you need a refresher on the dangers of investing in E&P companies, see this thread on CoBaF: http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/atpg-atp-oil-and-gas/ There are also multiple writeups of ATPG on valueinvestorsclub.com.

Ack... somebody started a thread in the investment ideas section. Please go there! http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/prxi-premier-exhibitions/

Looks like the consortium fell through. http://finance.yahoo.com/news/premier-exhibitions-reports-second-quarter-204310725.html Some analysis on quarterly earnings at Seeking Alpha: http://seekingalpha.com/currents/post/1321722 *20/20 hindsight says I covered too early.

You can use an "all or none" order? I believe they're banned in Canada (presumably due to market makers abusing them and clients getting poor executions).

I found it interesting that some of the ideas presented in his first book are reversed in his second book. He used to be a champion of authenticity and not making wimpy coffee... and then Starbucks made Pike Place roast. http://glennchan.wordpress.com/2012/11/16/books-from-starbucks-ceo/

The most famous (not biggest) Ponzi scheme in Eve online is by "Curin Trading". The person running the scheme actually posted a full confession and explanation how he did it afterwards which is an amazing read: http://web.archive.org/web/20091026234156/http://geocities.com/currintrading/ epilogue: http://web.archive.org/web/20091021193732/http://geocities.com/currintrading/bank.html Very interesting, thanks for this! I see some similarities between the investors in the Eve Online Ponzi schemes and investors in TSX Venture stocks... :o

Maybe I am a little biased because I dislike conflict in general. Usually it's a lose-lose situation. If you look at Buffett... he used to invest in cigar butts and then amass a sizable position in the company. Then he would approach the board or CEO about making changes to the company. At Berkshire Hathaway, he made a deal with the CEO to tender for shares for below intrinsic value. That seemed like a win-win situation. Buffett gets a high rate of return on his investment (he didn't get intrinsic value for his shares but who cares). The CEO gets to keep his job. There wasn't some ugly public battle where the activists pretty much push the CEO into acting like a complete douchebag (there are posts on my blog about Selwyn Resources). Unfortunately, the CEO decided to try to screw Buffett by doing the tender offer at an eighth lower (or a sixteenth; can't remember). So Buffett didn't tender and bought majority control of the company and then fired the CEO. ;D The rest is history. He also realized that investing in cigar butts is not as good as finding the See's Candies, GEICOs, etc.

Tractor Supply (TSCO) is succeeding in ex-Walmart locations. Tractor Supply stores have a smaller footprint than Walmart stores though. Historically, size doesn't seem to be a moat in retail. Size is both a blessing and a curse. There are retailers with thousands of stores that have slowly gone out of business.

Buffett John Malone Resource investors: Brian Dalton ?Rick Rule? ?Resource Capital Fund?

I'd read both of them. It's interesting to see how things he says in the earlier book turn out to be untrue in the second book. I think that the restaurant business is largely management-driven. Starbucks tended to have better CEOs than its competitors. I don't think that branding is that important in the restaurant business. With soft drinks, a brand can make one product taste better even though it tastes worse in blind tests. Pepsi tastes better than Coke. New Coke tastes better than Coke. I'm pretty sure these megacorporations have done blind taste tests. Yet people think that Coke tastes better because of the brand. I don't think that restaurants exhibit the same effect. Certainly the presentation of the food and the decor makes a difference... but I don't think that brand matters. Maybe reputation matters, but big chains rarely keep a high reputation (unlike an independent restaurant with a Michelin star or something like that).

I feel like some activist investors would make more money if they exercised more tact. There's no need to be scathing when criticizing management. By being openly hostile to the CEO, suddenly the CEO will focus on protecting his/her job and/or getting as much severance as possible. He/she may rack up huge expenses on investor relations (and legal fees, etc. etc.) to fight any proxy battles.

QXM/XING. The company was undervalued until the CEO ran off with everything. Integrity matters. 2- ATPG: I thought that this company was an obvious short and I shorted it (and covered too early when the borrow was 40%; later it shot up to almost 100% as the stock went to 0). I thought that the real lesson from ATPG is to stay away from unethical management teams that overpromise and underdeliver. Wasn't it obvious that reserves were inflated? High debt is also arguably bad but I feel like it wasn't the problem.

If you're only getting paid 50% of the borrow cost (and the borrow cost is very high like SHLD), then it might be better to simply buy only call options. When the borrow cost is high, put/call parity will break down to reflect the cost of borrowing shares to short them. With options, the borrow cost is "locked in" unlike the common stock.

A few days ago I checked on IB and the borrow was around 25%. Which is higher than credit card debt. Some other ideas on this board like ATPG and STP came near 100% at some point in history. (!!!)