jay21

Double Your Profits

So you expect to beat the market by 1-3% for a total of 8% - 12%. Half of your portfolio will be in the market so the other half must generate excess returns of 2% - 6%. If you can generate those types of excess returns, that half my return low double digits. (e.g. 7% for the market + 6% excess returns = 13%).

I agree. I see a lot of people thinking their reinvestment RoE is sub 10%. I disagree.

Worked for a company who was buying back shares at $30-40/sh. Then the financial crisis hit and shares dropped to $9, at an all company meeting someone asked why they weren't buying back shares. The CEO stated they thought shares were a good value but wanted to preserve cash. Shares recover to $40-70 and suddenly the buybacks begin again. They loved to buy at all time highs and do nothing at lows...many companies are like this. Yep. This is why I have a lot of contention with that article. I thought it was a bit non-sensical. I've never seen buy backs done at valuations that make sense. They just re-affirm my view that the guys driving these things are morons. Sometimes, I see buy backs when the company shares are drastically under performing the markets. Dell comes to mind. And, going private is just a affirmation that they really believe they are being undervalued by the market. I've seen that happen a few times before in companies I believed were truly undervalued (a small REIT I owned back in 2000 comes to mind). But, for the most part, I've seen buy backs done that just didn't make sense. And, I believe if we looked at short term and longer term performance, the markets will probably agree. At least that is from my own experiences seeing these things. BUT, I would still love to see a rigorous study done on buy backs and share performance. I think I've read an article on it once a long time ago, and I remember not being impressed by it. I mean, if I was, I would be looking for good companies announcing large buy backs and using that as a strategy. For some reason, I am not. So, that tells me I haven't read anything so convincing to lead me to believe these are ultimately great things to the shareholder. Personally, I would rather take a dividend versus a buy back. But, better than either, a buy out at a set target price that is at a premium. Never? Malone, Singleton, Erbey is in the early innings, etc. I think there are plenty of examples.

I am not concerned. I think that Malone is very comfortable with the people he picked as managers (e.g Rutledge). The concern I would think is if the discount to NAV widens (but this just makes buybacks more effective) and if there are less ideas/financial engineering going forward (but I don't think that is baked into the price of his entities anyway).

Anyone use google sheets for tracking sports stats? If so, I'd love to know how. Thanks

I also think of reinsurance as being levered itself as well. For example, an insurer does not want to take losses above $9.5m on one contract and cedes the rest of the exposure to the re-insurer on an expected loss of $10m. The re-insurer books a $.5m liability and then the actual loss is $12m. The losses were 20% higher than the expected loss, but the re-insurer's liability explodes to $2m or 4x the initial estimate. The above is just an example and not entirely indicative of all reinsurance contracts, which obviously can be much more complicated and less levered than I showed. I just wanted to demonstrate what happens when you start structuring out risk and adding attachment points, etc. If pricing is soft and you experience losses, will you get hurt pretty bad and it has happened plenty with re-insurers.

Can't you just convert to word and use the compare function?

I'm glad someone figured it out. The whole premise of an economy is centered around the owners of production "renting" the labor from "freed" folks. Turns out it's cheaper to pay someone a wage then actually owning them since wages can deflate in real terms, but having to feed, clothe, and put a roof over their heads actually keeps up with inflation. Karl Marx alluded to the final steps of capitalism is to completely displace human labor with machines in his Communist Manifesto. Of course the workers will feel disenfranchised and rise up beginning the age of communism. Pretty amazing foresight from someone writing in the 1800's. I think this was a well established fear before Marx's time. The Luddites spring to mind as an easy example. Also, I wouldn't necessarily say that owning income producing capital is the definitive answer. It probably matters what asset we are talking about but let's say a manufacturer as the first poster alluded to money moving from workers to shareholders. If automation makes the company that more profitable, I think you may see an increase in competition, which will offset some of the profitability gains.

I wanted to get a sense of BRK's op cos FCF generation so far this year. I started with OCF backed out CapEx and Interest/Dividends to get a $4.6 annualized number. Using D&A instead of CapEx to get a proxy of maintenance cap ex I got a ~$9.6b annualized number. There may be other adjustments to make that I am not thinking of that should be made. Please let me know. If you trust Buffett's method of giving full value to his investments, the sum of cash+investments is ~$219b and subtract that from market cap of ~$326b, I got an implied FCF multiple of 11 on the higher ~$9.6b FCF estimate. I think that multiple is pretty good and somewhat cheap. I don't think this method give any value to their financial arm. However, it appears the important assumption is giving full value to investments because it looks like that makes up a very large percent of the market cap if it holds.

Does anyone have a good idea on what he plans with PSH? Is it just capital for his hedge fund or is he going to acquire companies? Thanks

Credit Suisse on capital allocation: https://doc.research-and-analytics.csfb.com/docView?language=ENG&format=PDF&source_id=em&document_id=1036635381&serialid=dS5DGgP0K8DZZDJ4Obe7o2c3tj9TdQfSLapezyCWcwg%3d

I do not fully agree with what you are saying and I do not think your example fully captures the point the author is making. You wouldn't use intuition when the factors are known because you can mathematically calculate the odds. The author is trying to encourage the use of intuition for unknown, non-calculable risks. One example that I think clearly delineates the two is the Monty Hall problem (car hidden behind 1 of 3 doors, host opens a door without car after you pick and then asks if you want to switch). The scientific community has proven that you should switch. However, the author noted that the host doesn't always offer the option to switch. Is he trying to induce a switch (or stay) by asking you to switch? This is an unknown variable, where the calculated odds do not match the actual odds. Another example is deciding who to marry. How many people attempt to list out potential mates and perform an expected value analysis on them? They generally rely on heuristics: love, social norms (e.g. are my peers getting married?), satisficing (date until you find someone that suffices and then marry them), etc. In general, I agree. It would be nice to know the exact odds of each system so we could act accordingly. However, what in life works that way? I like this quote from Double Your Profits because I think it's how most systems work: "Everything it takes to win in business and everything this book talks about requires the trading off of a number of subtle variables: knowing when to apply which rule and which tactic to which situation, and when to offer which carrot or which stick to which employee, customer, or supplier. This isn’t math, accounting, or science, where the intellectually-correct, “deterministic” answer is being sought. Rather it’s an infinitely variable game of intuition based somewhat loosely on a large set of rules."

[amazonsearch]Risk Savvy: How to Make Good Decisions[/amazonsearch] It seems that Thinking Fast and Slow has become a seminal text in the value investing world, heuristics have become viewed as detrimental to decision makers. Obviously, it is easy see that they can be helpful for blinking and walking at the same time, but how can they be useful in decision making? This is a question central to Risk Savvy. Here is one quote that I believe summarizes the author's view on intuition: "A gut feeling is neither caprice nor a sixth sense, nor is it clairvoyance or God’s voice. It is a form of unconscious intelligence. To assume that intelligence is necessarily conscious and deliberate is a big error. Most parts of our brain are unconscious, and we would be doomed without the vast experience stored there. Calculated intelligence may do the job for known risks, but in the face of uncertainty, intuition is indispensable. Our society, however, often resists acknowledging intuition as a form of intelligence, while taking logical calculations at face value as intelligent. Similarly, some social scientists view intuition with suspicion and consider it the main source of human error. Some even postulate the existence of two cognitive systems, one conscious, logical, calculative, and rational and the other unconscious, intuitive, heuristic, and error-prone, each working by different principles ... A heuristic can be safer and more accurate than a calculation, and the same heuristic can underlie both conscious and unconscious decisions." Two other important topics include the difference between risk (something you can measure with certainty) and uncertainty. And how people have trouble interpreting statistics. On the second point, consider the example of a medical test. 1% of the population will have the disease and 5% will have a false positive. What is the probability that a person testing positive will have the disease: high, medium, or low? Overall, I am not sure how well the book was constructed as it dealt a little too much with healthcare and I wasn't convinced on what the author said about relationships, but it does raise some interesting points.

I'm not Jay, but I thought it was surprisingly very good. Despite the descriptions, Schwarzman actually had relatively little role in the book. It was more a depiction of Blackstone generally with lots of discussion of individual deals in a manner I found quite interesting. I thought it was one of the better books in that genre. Thanks Kraven. I'll bump it up the list. I agree with Kraven. It's definitely not a technical book where you are going to learn the ins and outs of PE, but it's a very good narrative of the history of Blackstone, where they do give some interesting background on some deals, some other executives, Blackrock, etc.

Here's what I read since this post, bolded ones are highly recommended and a few random thoughts: How Will You Measure Your Life? Iron Curtain: The Crushing of Eastern Europe The Spy Who Came in from the Cold Playing to Win: How Strategy Really Works In the Plex The Thief Engineers of Victory Reamde King of Capital Poor Charlie's Almanac The Power of Habit - I am interested the psychological underpinnings of consumer choices/goods so the beginning of the book was very interesting When Genius Failed - I see more parallels in the fixed income world between now and the 90s than equities (despite everyone's contention that we are in tech bubble 2.0). A lot of spreads (all kinds not just high yield) seem to be very tight and vol is low. Blood Meridian All the devils are here Thomas Jefferson: The Art of Power Confessions of a sociopath The Outsiders Creativity Inc The Extra 2% Mistakes Were Made (But Not by Me) A Splendid Exchange - Made me much more interested in economics role in history The Second Machine Age - Very good book on the role of automation in the economy and how it affects inequality The Most Powerful Idea in the World Double Your Profits - Must read for managers The Box Influence The Wrong Enemy: America in Afghanistan, 2001-2014 How to win friends - Easy to see why this book has been recommended for years Hooked Risk Savvy - How heuristics can be helpful. Potentially more to say on this one. This title made me laugh.

Smart Money Buys Brand X http://www.bloombergview.com/articles/2014-07-21/smart-money-buys-brand-x

Distress broker/dealers, maybe JPM, Lazard, etc. You can search recent WSJ and Bloomberg articles to see if they have quoted any color, but obviously that's not firm pricing. You can try to email Hunter from distress debt investing as he might be able to be more helpful.

Welcome to the Everything Boom, or Maybe the Everything Bubble http://www.nytimes.com/2014/07/08/upshot/welcome-to-the-everything-boom-or-maybe-the-everything-bubble.html?rref=upshot How the Everything Boom Might End: The Good, the Bad and the Ugly http://www.nytimes.com/2014/07/09/upshot/ways-the-everything-boom-might-end-the-good-the-bad-and-the-ugly.html

What's the people/worker intensity of Walmart vs Costco (i.e. does Walmart's business model require more people than Costco's)? Also, I would think that Walmart's competition may become increasingly automated and less reliant on minimum wage jobs (e.g. Amazon?), therefore they should still want low minimum wages. Found a few good articles: "Costco has a tiny number of SKUs in a huge store -- and consequently, has half as many employees per square foot of store. Their model is less labor intensive, which is to say, it has higher labor productivity. Which makes it unsurprising that they pay their employees more." "In other words, Trader Joe’s and Costco are the specialty grocer and warehouse club for an affluent, educated college demographic. They woo this crowd with a stripped-down array of high quality stock-keeping units, and high-quality customer service. The high wages produce the high levels of customer service, and the small number of products are what allow them to pay the high wages. Fewer products to handle (and restock) lowers the labor intensity of your operation. In the case of Trader Joe’s, it also dramatically decreases the amount of space you need for your supermarket ... which in turn is why their revenue per square foot is so high. (Costco solves this problem by leaving the stuff on pallets, so that you can be your own stockboy)." http://www.bloombergview.com/articles/2013-08-27/why-walmart-will-never-pay-like-costco "One final thing that's worth pointing out is that Costco doesn't even make money selling the groceries and the six person hot-tubs. Their annual membership fee revenue exceeds their net profit--which is to say that the actual business of selling stuff is operating at a loss. They're charging you an annual fee to buy stuff at or near cost. That's a model that works really well with their basically affluent customer base, and not incidentally, a model that allows you to worry a bit less about your cost of sales. Sam's Club tries to do the same thing, but caters to a lower-income clientele and makes a lot less money despite having more stores." "The point of all of this is to say that while it might be true that Walmart could make more money by adopting Costco's labor model, there's no particular reason to think that this would be so. The differences in their labor models are not just some sort of personal preference, or ideological choice*; they're responses to the way that labor needs to be deployed to do the quite different things that these stores do. We say that "they're competitors" because they do compete with eachother in some markets, for a handful of SKUs. But very few people could replace their trips to Costco with visits to Walmart, or vice versa. Despite the superficial similarities (cheap stuff in large store) they're really very different, and you can no more graft one's labor model onto the other than you can buy a single pack of gum in the Costco checkout." And a bonus anecdote: "So actually, Costco's labor model is partly an ideological choice; its founder and longtime CEO, James Sinegal, was a fairly committed progressive who paid himself a very modest salary. (He did, of course, own a good bit of stock). There is some question about whether this is going to continue long term; Sinegal overrode his executives on a bunch of stuff related to compensation. One signal to pay attention to: the incoming CEO makes more than twice what Sinegal did, though his mid-high six-figure salary still pales in comparison to the CEO of Walmart. But whether or not Sinegal's ideology mattered, he would have had a hard time paying those kinds of salaries in a Walmart style operation, which is much more labor intensive, so that each extra dollar of wages cuts more deeply into the bottom line." http://www.thedailybeast.com/articles/2012/11/26/why-can-t-walmart-be-more-like-costco.html

What's the people/worker intensity of Walmart vs Costco (i.e. does Walmart's business model require more people than Costco's)? Also, I would think that Walmart's competition may become increasingly automated and less reliant on minimum wage jobs (e.g. Amazon?), therefore they should still want low minimum wages.

The anecdotal high student debt loads distort the true picture of student debt. The median is pretty low as the majority of loans are <10k. The bigger problem might be drop outs with student debt as people with high debt loads should have professional degrees (medical, business, etc) and be a little more well off in terms of job prospects. DTEJD1997 - I am not sure about the law job market, but I think it's much worse than other professions. Here's a good article: http://www.nytimes.com/2014/06/24/upshot/the-reality-of-student-debt-is-different-from-the-cliches.html?_r=0

see attached for moodys methodology PBS_SF330637.pdf

I read someone's quick blurb on this book. Basically he is arguing that the GSEs were better than private capital in terms: Tim’s Turn Last week, I asked Tim to describe the final draft sent to McGraw Hill. One of the most bizarre aspects of the current debate on mortgage finance reform is that the consensus objective for reform-- getting rid of the GSEs and providing a greater role for the private sector-- was the goal of the anti-Fannie Mae cabal in the late 1990s and early 2000s, and pursuing it is what led to the 2008 mortgage crisis! Why would anyone want to do the same thing again? We shouldn't, but the major proponents of today’s ideas for mortgage reform are the large banks and their supporters, and they're the ones who control the narrative about what happened during the crisis. The story they tell about the crisis is completely wrong, but before my book there has been no fact-based alternative view for anyone to consider instead. That's what "The Mortgage Wars" will offer. It makes clear how and why the crisis evolved-- using actual events and developments in the correct sequence in which they occurred-- and it's told from the perspective of an insider who lived through the events he's relating. As I've noted before, the mortgage crisis was the result of a fight between the supporters and the opponents of the GSEs over who would control the largest credit market in the world. Fannie and Freddie always had been controversial, but the controversy got serious in the late 1990s, when two decades of banking deregulation produced giant financial services companies (mostly banks) with national ambitions who viewed Fannie and Freddie's dominant position in the mortgage market as a threat to those ambitions. They came to Washington to try to convince policymakers and regulators to replace a mortgage finance system based on the GSE with one based on private-market mechanisms and incentives, with very little government involvement or regulation. Fannie Mae fought back, and what I call "the mortgage wars" began. The banks and their supporters succeeded in getting control of the mortgage standard-setting process in 2004-- when private label mortgage-backed securities accounted for over half of all new MBS issues for the first time ever-- and that got the bubble going. Fannie Mae was pulled into it after OFHEO used allegations of accounting fraud-- subsequently shown by Federal District court judge Leon to have been completely invented-- to oust Fannie Mae's top leadership and force the company to change its risk management organization and practices. But even with that, five years after crisis ended it is clear that Fannie Mae's mortgages performed twice as well as the banks' and four times better than those put into private-label securities. The GSE-based system was the best and safest in the country's history. The bank-based private-market system that replaced it in the mid-2000s-- with the support and assistance of the Treasury, the Fed and the Bush administration-- led to a catastrophic failure that ended up killing everybody, including the GSEs. Anyone with an accurate understanding of what happened during the mortgage crisis, and why it happened, would be highly unlikely to ever again fall for the siren song of basing an $11 trillion market essential to the country's economic health on free-market principles with no government oversight or regulation. http://www.restorefanniemae.us/mortgagewars I find quite a bit of what he is saying to be troubling. He compares GSE performance to private performance, except the credit quality is widely different. If the private capital system held on to all the super prime products that the GSEs hold, the performance would not look so unequal. If the performance of the PL RMBS products were so poor, why did the GSEs hold on to so many? The expansion of their retained portfolio caused a huge increase in the demand for these products. I would suggest All the Devils Are Here as a counterweight to this book, which will probably be very pro-GSE. All the Devils are Here came off as somewhat objective to me as I believe it praised the turnaround efforts of the GSEs in the 80s and 90s and cast them negatively in the late 90s and early 2000s.