ItsAValueTrap

Some people think that Russian stocks have very high levels of corruption.

That was pretty much the conclusion of this thread: http://www.cornerofberkshireandfairfax.ca/forum/strategies/searching-for-special-situations/msg135429/#msg135429 You can also go to the SEC website and look at the latest form 10 filings. (Some spinoffs are done in an IPO fashion so that's a different form. Can't remember which one it is.)

Or maybe Berkshire Hathaway front run his trades...

There may be a lot of hedge funds going long distressed debt and shorting the common with the coal companies.

I think Maffei's strengths is in understanding what Malone wants in a deal and he is good at making them. Liberty is trying to constantly: A- Defer its taxes. B- Swap its assets for better ones, in tax-free transactions. Malone is constantly trying to wheel and deal. Maffei has the charisma that Malone lacks.

I figure he's not that good because his company went bankrupt. (To be fair, Malone's Internet tracker back in the day did very poorly too.) Maybe he could have issued equity to have avoided that fate. As Microsoft's CFO, he could have pushed the company to: A- Issue dividends B- Use its overpriced stock to buy more companies. I know that Gates was thinking about doing a hostile takeover of Liberty's cable assets, since Gates (and many other people including Malone) thought that the smart TV would be a thing. C- Buy Liberty stock instead of its debt. Corporate debt is arguably not a great investment. The insiders of a company typically own the stock, not the debt.

I think Maffei doesn't have very good operating or capital allocation skills. After being Microsoft's CFO (and buying Liberty's debt instead of equity... which is kind of dubious), he ran a Internet company which went bankrupt. I believe Malone values Maffei highly because Maffei is a very good negotiator and dealmaker.

If you look at the history of the restaurant industry, the top #10 list changes rapidly over the decades. The wonderful business don't always stay wonderful. I think that the restaurant business is highly management-driven. With consumer foods, the top #10 list doesn't change nearly as much.

Buffett owned McDonald's in the past and sold out when blue chips were fetching really high valuations a little over a decade ago.

I think i'd rather own exxon mobil over 95% of the independent oil and gas companies out there. (But that's mostly because independent oil and gas is awful.) Management is very good, they don't use debt as a crutch, and they are buying back shares. Their free cash flow is probably poor because they are plowing cash back into more production capacity.

Weird. I thought about shorting Micron and it has high-ish short interest so I'm not the only one thinking that. The history of semiconductor manufacturing is ugly and highly cyclical. Their end products are mostly commodities. There are some advantages from economies of scale, but the industry dynamics are awful as the industry is very cutthroat. Flash memory is a commodity business that is close to the top of its cycle. The profits will attract overcapacity.

The technology seems *far* from proven. If the technology works, it will first be rolled out into easy situations such as roads with very little traffic (e.g. shuttle buses). 2- If you look at Buffett's portfolio, technology devastated the newspaper and encyclopedia (World Book) industries. Overall, he still made a lot of money from those investments.

If you turn away the most difficult patients then your mortality figures may improve. DaVita is doing some things well: they are encouraging their patients to get fistulas and made an investment in NxStage. I think most doctors would choose NxStage as the treatment option for themselves as they can hold a job and more frequent dialysis makes them healthier. Unfortunately, the current system doesn't encourage nocturnal home dialysis because it's not as profitable for the dialysis clinics (and there may be liability and legal malpractice issues that I don't understand). They may have significant cost efficiencies in getting their staff to be more efficient and using metrics to measure their performance. There are things that DaVita can do better: - Not overdose their patients on EPO - Not scam Medicare - Switch to single-use filters, instead of re-using them. Re-using filters is error prone. The Lufkin clinic (where a patient died or was murdered) had a huge number of problems, some of which were made worse by needing to clean filters. - Not inflate their numbers by having techs repeat tests. Their techs are gaming the measurements / inflating them. - Get rid of the conflicts of interests in having kidney doctors owning equity in DaVita clinics. They should not profit from their patients' dialysis treatments.

Here's an old blog post of mine on Davita that explains why I think that most of the industry and Davita are unethical: http://glennchan.wordpress.com/2013/06/17/for-profit-dialysis-an-unethical-industry-davita-dva/

Having done my research on this stock, I'm not sure why Weschler is so enamored with it. Management strikes me as extremely unethical. There's a reason why its settlements are so large.

I don't think that's the case. There are: 1- Advertisers who track their clicks down to a sale. 2- Advertisers who are trying to build their brand and can't track their advertising that well. For group #1, you increase your advertising spend until your profits stop going up. It's not that complicated. When determining your Facebook budget, you don't care about how much you are spending on Google. Facebook and Google only compete for the marketer's time. Because Google tends to drive more traffic, marketers tend to put more time into optimizing their Google campaigns (especially over Bing/Yahoo). Because Google is the most competitive ad marketplace, its rates are a little higher. The largest ad platform will enjoy higher rates than everybody else. Group #2 might be different. I don't really understand that type of advertising. It's not very empirical/scientific. Facebook has exposure to that type of advertising. -------------- Google and Facebook and Bing do not set pricing. Rates are based on a bidding process. The more complicated answer: On Google, the highest bidder doesn't always win. - If the bid is extremely low, Google won't show any ads at all. Google doesn't want its search results cluttered with low-revenue ads. - Google has a quality score (which is sometimes frustrating to marketers). Google doesn't want all of its ads to be the same. It also wants the ads to be relevant to the search result. A high quality score will improve ad position. - The click-through rate on the ad will improve ad position. That sometimes means that the marketer with the #1 spot gets an advantage, as the #1 spot will naturally have a higher click-through rate. So sometimes there is a game where you will overspend in the beginning to secure the top spot. On Facebook, certain types of ads are disallowed. This largely prevents abuse. ------ *Disclosure: I'm long GOOG, short CRM TRLA WDAY KUTV

SAAS is just another way of delivering software. I don't think that it's some seismic shift in the software industry. Outlook is application-based. Hotmail is SAAS. Both are legitimate ways of delivering software. And if you look at Hotmail, SAAS has been around for a long time (even before Hotmail). 2- I think that online advertising does create value. The targeting on search ads is pretty amazing. It has opened up niche markets that would not otherwise bother with advertising on radio or TV. Lawyers for abestos-related lawsuits pay very high CPCs (e.g. several dollars for a click) for online search advertising. I don't believe they would advertise in mass media because their audience is so narrow. The other aspect of online advertising that does create value is advertisers' ability to track their campaigns. We already had that with direct response television (infomercials, home shopping channels, etc.) and most forms of traditional advertising. But companies advertising toothpaste in branding campaigns couldn't track their ads. With search advertising, most advertisers do track their ads / aren't running branding campaigns. Being able to track ads allows them to bid aggressively on clicks, which means that Google makes more money. That being said, there are a lot of online services that haven't yet been profitable. Major companies have shut down popular services such as: DivX: Stage6 Google: Reader, Checkout I'm sure you can find more examples yourself. I think a lot of the Web 2.0 IPOs will flop (with the exception of Facebook, which is highly profitable). Like the original Dot-Com bubble, a lot of these companies have monetization problems. 3- Online advertising facilitates online shopping. The ads help you find obscure items that would be difficult or impossible to buy locally. I definitely think that there is real value creation going on. I clicked on Google ads to buy a Halloween costume online. The ads were actually helpful. I believe installing Salesforce can be ridiculously complicated, like all of the CRM software on the market. Companies will hire consultants to help them implement a CRM system.

Cyclists are a pain in the ass: Walks into a camera: Drunk on the street: Admits to smoking crack cocaine: http://youtu.be/VsjlNNsChZ4

Then it starts to become a circular argument- these CEOs are good because they are good. I think that you have to be careful with well-written books because some of the ideas may be false. You should try to look at the opposite side of their arguments. Strong ideas are ones where it's hard to argue for the opposite side. I'll leave it at that.

There's way to test his theories about good capital allocation. There are probably net nets out there that are buying back shares. Or closed end funds that are buying back shares. You can look at their performance and see how well they do. Obviously I think that this is a good idea. But maybe it doesn't do a very good job at explaining the unusual returns of these CEOs. For example, Buffett doesn't aggressively buy back his stock (even though he "should" have). *In a few cases, Buffett issued Berkshire stock. You can try to prove something by trying to find evidence to support the opposite argument. I don't think that the author has done this. His arguments are rather one-sided. 2- I think that being a good operator is better than good capital allocation. Maybe that should have been the lesson. 3- I don't think that Malone's business can handle it. TCI came close to going bankrupt when Malone ran it. Malone got margin called in 08/09. Malone bought a stake in Charter... a cable operator that emerged from bankruptcy.

The book is very clearly biased in favour of good capital allocation. But the author never inverts and looks at CEOs where "good" capital allocation didn't work out. He also doesn't consider the dangers of debt. According to the data presented in the book, it looks like the competitor to Bill Anders/General Dynamics was just as good if not better. His competitor used less debt for similar performance.

Jschembs, you're short Salesforce right? I think you just have to look back at the Dot-Com Bubble to see how dopey their strategy is (e.g. Webvan). But it will probably be very hard to make money from shorting Salesforce. The underlying business has the potential to be highly profitable and it will take a very long time for the stock to collapse (so your rate of return won't be good even if the trade works out).

If you look around, there are some examples of industries where it might make sense to lose a lot of money in the beginning. 1a- You are developing technology so there is an upfront R&D cost. 1b- You are developing technology that might become economic in the future. Stuff that creates value but you have no idea how to monetize it. This describes most of the things that Google is involved in: search, gmail, google reader (closed down), google checkout (closed down), youtube, etc. Reader and checkout are good examples of things that reached high market share but were closed down because they were unprofitable. If your criteria is over $500M in revenue, then I think Intel's Itanium product might fit the bill. 2- The product is believed to benefit from network effects. Satellite radio Video formats: VHS/beta, bluray/HDDVD Content networks for video Payment processing networks Semiconductor manufacturing (this industry has historically been awful) search engines etc. etc. Now that I think about it, Sirius XM is probably the best example of a company that lost money for years before becoming profitable. (It was actually two companies that lost so much money that US regulators allowed them to merge and become more profitable.)

starbucks was losing money when it was still owned by private equity. (According to howard schultz's book.)

Paypal (you can look up their SEC filings before they were taken over by eBay) Intel - originally they were a memory company. Lost money on microprocessors for years before they became profitable. Itanium lost money for years too. Starbucks lost money in the very beginning. Google and Amazon also lost money in the beginning I think.