LongHaul

Every so often I find a company where it seems like management has jacked up prices to customers. When I say increase prices, I really mean above and beyond any raw material inflation so that the Gross profit per unit goes up faster than inflation. A current example is Ametek where Gross Profit Margins have increased and organic growth has stalled. What seems to happen is organic growth slows because competitors come in and take market share. I think it shows that management is short term oriented and ruining the business. I have previously made the mistake of thinking this was sustainable when often it is not. Anyone else have experience with this and any general thoughts? It is great competing with a competitor who keeps prices high.

Newegg is an interesting data point, thanks for pointing it out. Did about 2% operating margin in 2009. Blue Nile did about 7% operating margin in 2007 and now it is down to 3.1%. My guess is that the internet is more competitive than it was 5-10 yrs ago. If one assumes Amazon does 1.5% EBIT margins long term then NI for 2014 might be about $1b. It is currently trading at a market cap of ~$167b, or 167x earnings. WOW! 1.5% EBIT margin is the big assumption. I really don't know where it will end up.

I was just curious what people thought a decent long run operating margin would be for internet retailers? Retail itself is tough and generally pretty low margin. On the internet people are just a few clicks away from a competitor. In addition, internet retailers can require much less capital (no stores, less inventory, etc.) Amazon last year did a ~1% Operating margin.

Alice Schroeder talked about how Buffett thinks of cash as a call option with no expiration, and no strike on any asset class. The cost is the opportunity cost of holding cash. I am still trying to fully understand it. http://www.portfoliomanagement.ca/warren-buffett-article.html A couple of times when Buffett went largely to cash: 1. 1969 - he closed his partnership because he could not find anything. I think the Dow was down about 30% after that. 2. 1987 - He sold a lot of stocks into the bull market before the crash. I think Bernard Baruch and Joseph Kennedy had a lot of cash going into the Great Depression. Howard Marks had a fund ready with cash for the 2008 crash. I don't think I can time the market, but if almost everything is overvalued I will just wait it out in cash. I have usually been able to find new ideas on average within 2 years so base my calculations off that time frame. I would rather sit in cash earning 0% for 1 year, then deploy it in an idea with an expected IRR of 20%+ for a few years rather than buying something with an expected return of 10%.

I have never been an M&A banker and have trouble understanding the psychology or mindset of CEO's that go out and pay a huge price for deals. I think I read about 80% of deals destroy shareholder value (for the acquiring shareholders). Any war stories or experiences that could explain the behavior would be most appreciated. One quick one a friend told me is of investment bankers auctioning off a company. The funny thing was there was only 1 bidder and the bidder kept upping the price vs his fake opponent!

From the little I know of Exxon here are some observations of Exxon's Focus: 1. IRR with a high hurdle rate. 2. Being the low cost producer. (technology, efficiency) 3. Under Lee Raymond they were contrarian - bot Mobil in 99, invest thru the cycle. 4. Don't waste money on Green initiatives, advertising as much as others. 5. Grade employees - end up with really good employees. 6. True Long term focus.

How has Exxon outperformed competitors for so long? Exxon fascinates me. It is a low cost producer in Upstream, downstream and chemicals. I think it has generally maintained this position for over a century starting with Rockefeller's Standard Oil. Munger even mentioned it at the Berkshire meeting in May of this year as an example of a large company that was able to stay on top - which is the exception. Anyone have any insights into how Exxon has been run vs. competitors?

Munger mentioned how he saw so many idiots get rich in easy businesses. See video link below. Anyone have any stories of idiots getting rich in easy businesses or easy businesses that come to mind? The local monopoly newspapers were an "easy" business. Economies of scale were almost impossible to break especially if the dominant paper reacted. Bill Paley also seemed like an idiot at CBS in his later years but the growth of TV and barriers to entry helped CBS do fine. (Capital Cities did far better though) Quick 3 minute video of Buffett and Munger

I thought the writer seemed very biased (perhaps I am the biased one though!). In the picture of Valtakia Jones notice that she is very overweight and her child has a can of Dr. Pepper in her hand. I worked at a food bank and had to interview a lot of people in very difficult financial situations. I went through their income and expenses to determine eligibility. First - I would say about 1/3 had very difficult circumstances - medical, etc and they were deserving. The other 2/3 had a serious spending problem. Gas guzzling cars with loans, cell phones, and tons of other items. Their food money was in their spending if they made the effort to cut it. Who wants to eat rice and beans and live in a small apt and drive a tiny old car though. About 80% were obese. How can you get obese if you are that poor? I came in with an open mind and really as more of a Democrat and left pretty hardened. They say Charity hardens those who dispense it. Sure all of life has randomness which can have good and bad effects. I think there is plenty of opportunity for someone who is willing to be honest, work hard and do a quality job. You could go into any number of trades and win against the yo yo contractors who are your competitors and make a very nice living. I really am not sure why more poor people don't do that. A lot of immigrants and their children come to the U.S. with nothing and don't even speak English and do very well because they work hard and save. Some other cultures in the US seem to be the opposite so it is no wonder the end up broke. Another thing that people don't like to hear is that a lot of lower income parents seem to be not really care about their children's schooling and education. In a low income are perhaps 10-20% of parents might show up for parents night while in a high income it is much higher - perhaps 70-80% (at least for elementary). That tells you a lot. Too much TV and not enough emphasis on education. My personal belief is that you make your own life as best as you can. You live with the choices you make and deal with the consequences.

Anyone have a good place to invest cash right now? I currently have my cash at IB earning 0 and would like to find a better alternative.

A story that I found interesting. Ben Graham was running money in the 1920's and I think in 1930 he met with a 93 year old man in Florida. The man asked Graham a bunch of penetrating questions and then told Graham he should do himself a favor and liquidate his positions and go to cash. Graham ignored the old man and lost a bundle in the depression that ensued. Imagine how difficult it would have been to go to cash in early 1929. Everyone was making easy money. It was a total contrarian move in a wildly overvalued market. The 93 year old had been through a bunch of booms and busts and knew the signs.

Great posts - very helpful. So basically consumers love Starbucks because they have clean bathrooms. JK. Howard Schultz is a very rare CEO who is really great and really cares. SBUX is his baby. It makes it hard to compete with them because they are doing so much so well. I am really not sure if anyone will challenge SBUX long term though. I just don't know. Speed, service, ambiance and even the quality can be replicated. The management and brand might be tough though. They may or may not be surmountable. With hundreds and hundreds of competitors trying to take their share someone might crack the code in a big way.

Why haven't Starbuck's competitors done more damage? I am curious why Starbucks has done so well when they are really just a fancy coffee shop. I would have thought that competitors would have moved in and taken more market share and hurt them. For comparison, the restaurant industry is extremely difficult. I don't drink coffee, so am disadvantaged in trying to figure this one out.

Retail has been some of the worst for me. I had avoided retail until I had ~10 yrs of experience under my belt I thought my hard work and research would help me understand the retailers. Totally wrong and overconfident! What I didn't understand fully about small retailers was the following: 1. They can almost evaporate overnight. Competition can come in, mgmt can misexecute or the economy can tank and their earnings go to losses very quickly. Their track record of great results is almost meaningless. 2. The leases are really off balance sheet capital which they are "renting" from the landlord. Retail really is a capital intensive industry but many retailers just lease and operating leases are not on the balance sheet. And those lease payments are fixed costs and the retailer is liable for the remaining leases. Essentially retail can be highly levered. 3. Undifferentiated products which means competitive environment is extremely brutal. 4. History of retailing is of many, many failures. Tough business. I just completely avoid them now.

I was curious what 1996 and 1997 investing climate was like for value investors? This was prior to the Asian Financial crisis and when a bunch of value investors under performed in 98 and 99. Was there broad based overvaluation where it was hard to find great ideas and value investors reached? Curious because so many US stocks are fairly or overvalued today.

I love IB. Switched ~2 yrs ago. My impression is that the company is generally very well run and transparent as opposed to much of the competition that rips their customers off by shaving off a small percentage off of lots of money. I think the biggest risk is some type of horrible event (nuclear bomb in NYC) that takes stocks down immediately and wipes out their shareholders equity from margin loan losses. Probably would have to be greater than 50% immediate crash. Perhaps the market maker could fail too, but I have heard that is in a separate corporate entity. For stock lending my understanding is that IB is the counterparty for the managed portion. I generally will not lend stock when it is paying a dividend because of the higher tax rate on payments in lieu. Overall I find IB transparent and honest. Super low FX and commissions, borrowing rates and other fees. I have found very good service. I really like the algo's where you can sit on the bid/ask which can save a lot. Con's are there is definitely a learning curve on the system. I have made some mistakes so be careful and try trades in small lots first. "Do you know any specific risks with IB? They seem to be pretty aggressive in terms of technological improvement. If their systems get a mistake, something like what happened with Knight Capital, then will we get affected? Or will they get bailed out by the SIPC, and clients will be fine? For lending securities, they will give cash collateral. But if a VW or FFH type of squeeze happens, will the cash collateral be sufficient? Last question, how do you file tax if you trade with IB? Also I saw this: https://www.interactivebrokers.com/en/index.php?f=shortableStocks&p=stockyield&ib_entity=llc When you lend stocks, you receive the full equivalent of all dividends. However, because you have loaned the stock, the cash you receive "in lieu of" dividends may be taxed as ordinary income instead of at the qualified dividend rate of 15%.2 IB will try to return shares to you prior to a dividend to reduce or avoid any potential negative tax consequences. Does this always work, or will there be any problem in getting back the shares on time? Another question: Do you use its yield enhancement program, or use the Self-Directed Fully-Paid Securities Lending Program?

I think the annual probability might be about 50bps or less - hard to say really. I think the world is a much safer place now vs. prior to WW2 for the following reasons: 1. More trade 2. Better communication 3. More free democracies 4. The US is a free democracy and is now the most powerful country 5. Nuclear weapons - the ultimate deterrent 6. Economic competition vs. competition for land historically If there is a war it could be nuclear so even though the probability is probably much less, the death toll could be far higher.

Article on Adapting Old-Style Phone Wires for Superfast Internet http://www.technologyreview.com/news/517381/adadapting-old-style-phone-wires-for-superfast-internet/ If ISP invest then it seems they could hurt the cable companies long term.

Question for members: Of all the businesses you've looked at - what's the best one and why? My answer is the Panama Canal. It has a very entrenched position!

I just switched to Amica Home Insurance. This is like the Geico of home insurance because they are a direct writer and can pass the savings on. Plus it is a mutual so you get a dividend check every year. And added benefit is that they are excellent at paying claims as rated by JD Power.

I found this talk very helpful. It is a talk given by a Buddhist Monk on patience.

Wonderful responses! Thanks everyone. What I am comfortable investing in is quite small at this point as the last time I reached I fell off the cliff? I am trying hard to avoid reaching and buying risky investments. To summarize the responses, it seems like the answers fall into a few categories: 1. Distract yourself with something other than investing. Perhaps this is why Buffett plays Bridge. 2. Start a business. 3. Research businesses and invest in yourself. 4. Meditate. I definitely need to look into this as I have heard that meditation increases self control. I am an impatient person by nature and at times the waiting gets to me. Any strategies for increasing patience that have worked for others I would be curious about. Thanks.

I was curious what strategies people used to be patient when they can't find anything that is undervalued (and low risk). In my opinion, lots of companies are fairly valued or overvalued right now. The last time it was like this was 06/07 when there were a ton of overvalued companies.

I don't fully understand what Munger meant by Locker Room mentality with the investment banks. If someone could please explain this I would really appreciate it.

http://www.multpl.com/interest-rate/ Is this a bond bubble? Thoughts? It might be a good short.