cpan
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This thread had a nice start so let me jump back to the original topic. Here are my mistakes:
Amex - Brought it because: 1. Valueact bought it. 2. Thought the third payment network should be valued higher than a regional bank but not realizing the market was richly priced over all. 3. Didn't appreciate how hard the banks were competing in this space. Maybe this is still not a mistake but definitely could have bought it cheaper.
Italy/Spain index - I think I just heard Mab Faber talk about applying low P/E across different countries. Thought these countries should start to recover after 3/4 years. Yet, not realizing I know nothing about these countries. To ignorant to know about catalonia or NOL on Italian banks. This one was well deserved spanking.
POSCO - Thought I understood that it was a commodity producer but couldn't get Charlie Munger's words out of my head about POSCO is so advanced that its not a commodity producer. Bought it early and it went up. Thought I was smart but I was just lucky. Then see it go down. I hear Charlie Munger changing his mind about the brutal reality of competition. Chulk it up as learning experience.
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I am definitely not an informed opinion but the thesis feels quiet logical to me. There are a couple of other youtube videos with Bruce Greenwald going over the same idea if you search for his name. I think Bruce is pointing out that the minsky cycle is but one of the cycles in economics. There is also another cycle when the supply is increasing faster than the increase in demand. The productivity increase in farming or manufacturing driven by competition causes 2 problems. One is more and more excess labor becoming not productive enough to join the system of production. Two is that prices drop because the demand is fixed or is growing less than the supply productivity growth. This eventually results in a economy contraction that can not recover on its own. There is no way to get out of this unless the excess labor can be deployed elsewhere in the economy that can produce value. Or we have some way to grow demand for the existing system of production but not through debt financing which is unsustainable. I like how his thesis ties competition into the macro economic cycle. His example for Japan shows that the issue is not Japan suddenly produced less goods or goods with less utility in the 90s but its because the prices dropped or the goods produce by Japan couldn't compete because of China.
The link between FED monetary policy and bank not having to pay interest on deposit is also interesting. I just wish he had mentioned that it was not because the law got repealed that bank started to pay interest. My reading seem to indicate that the money market (shadow banking of its day) pretty much was going to drive banks out of business if the law didn't get repealed.
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I am a software engineer for over 15 years and just started learning about value investing 5 years. I think the piece that value investing really fits with engineer is the need to understand what going. As an engineer, I think you have an innate need to figure out how things work. Same thing with value investing in term of trying to figure out if there is value in a security and why the value is there. The big difference is that in engineering you can pretty much figure everything out if you put your head to it but in investing there is the too hard bucket, so you have to get use to the nondeterministic nature of the problem.
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Just finished:
The Origin of wealth - Eric D. Beinhocker
Good summary of the issues with classical economics with some fascinating example of complexity in economics.
The Billionaire's Apprentice - Anita Raghavan
Some good insights on how some of the hedge fund gains a edge as well as how ambition can help and hurt us.
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"Cardboard,
let me ask you a question: have you ever managed a business of your own?
If you have, you know at least as well as me that most technical aspects are beyond the man at the helm (furthermore, Mr. Watsa hasn’t ever been at the helm of BBRY!). I manage my businesses finding good and reliable technicians, whose work I can barely evaluate and judge... It has always been this way, it has worked pretty well, and it will always be so.
Believe me: Mr. Watsa doesn’t know anything about new phones… And has never pretended otherwise… "
FYI, I have had two small businesses and I have worked for quite a few years for a Fortune 100 company. I know very well how is managed the appropriation process at big companies having written many myself.
Any time the amount requested for a project exceeded a certain threshold, the appropriation had to be signed off by the CEO and the board. So to say that the CEO in this case and Prem knew little about the phones or a project of that magnitude then I must say that you are very wrong.
This was a bet the farm type project. Everyone had to sign off on it all the way to the top. It is actually very important for someone or a group up there to make the final decision about go or no go since there are many functions involved including: sales, marketing, engineering/manufacturing, finances all coming up with their own forecast about cost, sales, etc.
This "project" was not an engineering failure. To my knowledge, the phones work fine and manufacturing costs have been in line. It failed because it did not address a "demand" in the marketplace and was likely pushed because of sales and marketing typical rosy forecasts. It is up to top management to figure out if things are realistic and to ask the right questions to their team. It was also top management's job to stop the project or steer it in a different direction if they found flaws during the execution.
Blackberry was about a keypad and secure e-mail in the mind of most. What did management expect coming up with a phone that looked very similar to the IPhone but, released 2 or 3 years later? So if there was no device that they could come up with using their strengths or differentiation points, then what was the point of sinking billions of dollars into this adventure?
So for those who hate the micro-managing part, I do believe that for companies such as Blackberry and Apple who rely on just a few devices to ensure their survival that for the CEO to understand its product inside and out is crucial. He does not have to know the software code, but at least be able to question his team about the benefit of such and such for their consumers.
Cardboard
In my opinion your whole answer just proves how difficult it is to invest in technology and, I would add, in fashion too.
You write:
Any time the amount requested for a project exceeded a certain threshold, the appropriation had to be signed off by the CEO and the board.
Sure! But the problem remains the same, if even the CEO or the board cannot predict the outcome accurately enough! And that is just the nature of the beast with technology and fashion.
You also write:
What did management expect coming up with a phone that looked very similar to the IPhone but, released 2 or 3 years later? So if there was no device that they could come up with using their strengths or differentiation points, then what was the point of sinking billions of dollars into this adventure?
Those are good questions… in hindsight! What was BBRY to do instead? The only thing I can think of is to become a BRK: to buy new and completely different businesses, using the free cash generated by operations that were going to die… Come on! Let’s face it: BBRY is (or was…) in the business of selling mobile phones, either you succeed or you don’t. If you want to run the risk, you do whatever it takes to come up with the best product you can. Vice versa, if you don’t want to run the risk, you use all the cash you generate, until you can generate some, to change business. Could have Mr. Watsa taken the decisions required to follow the second course? I don’t think so.
And despite the existence of a wonderful device like the i-phone, it seems that Samsung is doing pretty well, isn’t it? Therefore, to compete with Apple might not be easy, but neither it is utterly impossible. Or so it seems.
giofranchi
One thing BBY could have done was become an to other phones by offering a keyboard attachments that also have hardware encryption to provide secure messaging access to enterprise BB servers. This would have solidified their enterprise hold.
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Another thing she said in the article is that Buffett won't get impacted if the company goes bankrupt, I am not sure that makes sense. I would think that the preferred and common equity would get wiped out in that case. Of course, Buffett could pay off the bond holders but thats additional capital which would hurt the return. Does anyone else know what Alice is talking about?
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In my simple mind, I am counting on Fairfax to hedge me against apocalypse (since I am not a goldbugs so I only plan against apocalypse lite). But just out of curiosity for the experts in the forum, is there a better way (i.e. cheaper way) to hedge this. As far as I can tell, fairfax looks to be a pretty cheap hedge (given you still have one of the best investor working for you on the long side). So the way I think of it as a couple of percent goes to the hedge as a form of cheap insurance. Is there another way I should be thinking about this?
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Thank you for the pointers to the interesting docs. I would say that risk appetite for low-grade bond and stock is related. From Howard Marks memo I gather that he is seeing that low-grade bonds are getting bid up to a level where its getting him worried. I don't have any data to shows how this translates into stocks but currently we do see S&P hitting 5 year highs, but with macro stuff its hard to know anything that is actionable. Certainly, there are always value stock around that you can find so it doesn't affect specific company analysis. However, I just think maybe its time to check how much dry powder is available if something pops up. What is your point of view? Do you see a lot of stock with good value? I don't really see much but maybe we got spoiled by the last few years.
My view is that this is a good time to double check the valuation on your holdings and pear down a little on the high-end ones. Even if stock is not high, we have seen that stock and bond can be very correlated so if stock will be effected if the bond market ever tumble. I guess this is where the fun is.
I'm not aware of any correlation. I'm curious by nature, so I Googled a bit and found this study:
http://www.cbsnews.com/8301-505123_162-57464128/the-correlation-of-bond-and-stock-returns/
Bonds co-moved more strongly with "bond-like" stocks. Large stocks, long-listed stocks, low-volatility stocks, stocks of profitable and dividend-paying firms, and stocks of firms with mediocre growth opportunities were more positively correlated with government bonds. In other words, portfolios of bond-like stocks -- stocks with the characteristics of safety as opposed to risk and opportunity -- showed higher correlations with long-term bond returns."bond-like" stocks sounds like another word for "high quality or "flight to quality". Anway, the word correlation makes me think of this:
The "flight to quality" gave us some good opportunities in 2012. If the trend continues and there's causality between "good deals" and "flight to quality" then 2013 should be a good year. Isn't "flight to quality" the opposite of what a contrarian investor would do? If so, then I'm quite sure there's some causality there. But what do I know, I'm no statistician, just a guy trying to find undervalued stocks. Macro investing is certainly not my game.
Here's a link to the study behind the CBS News article:
The correlation between bond and stock index returns is unstable, as documented bymany authors. We find that government bonds and stocks are closely connected from a crosssectional perspective, however. The relationships are intuitive. Government bonds covary more
closely with “bond-like” stocks: stocks of large, long-listed, low return volatility, profitable,
dividend-paying firms which are neither high growth nor distressed. Importantly, this
relationship remains stable even when the index-level correlation between bonds and stocks
breaks down. Furthermore, excess returns on government bonds, and relative returns on bondlike stocks over speculative stocks, are predictable by some of the same time series variables.
These findings suggest that empirical finance researchers might more profitably merge two
playing fields, bonds and the cross-section of stocks, that they often study in isolation.
http://www.people.hbs.edu/mbaker/cv/papers/Comovement_RAPS.pdf
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My view is that this is a good time to double check the valuation on your holdings and pear down a little on the high-end ones. Even if stock is not high, we have seen that stock and bond can be very correlated so if stock will be effected if the bond market ever tumble. I guess this is where the fun is.
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For some reason TE connectivity looks really interesting to me. It looks like its the leader in a fragmented industry with maybe 2 other big competitors (molex, Amphenol). The valuation looks pretty cheap with strong free cash flow. The CEO sounded very humble in the conference call when explaining their effort in expanding to mobile. I am still trying to understand the industry segment better. Does anyone have any pointers to what to read to get a better handle on the industry?
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I don't think Bruce was talking about decline of manufacturing. Instead, I think he was saying that productivity gain in manufacturing has outran demand and as a result there is unemployment. Manufacturing is doing what farming did where instead of 1 person farming 1 family plot, you have a few person farming hundreds of acres. The equivalent would be 1 person installing a windshield of a car vs. a few person would assemble the whole line of cars. It will be interesting if Bruce's theory is correct. If it is correct, then we are in a world of hurt since I am not sure service economy can scale as well as manufacturing.
Where are people in this forum from?
in General Discussion
Posted
Ottawa, Ontario.
Is anyone interested in a meetup in Ottawa?