jschembs

This is a great topic, and gets to the heart of my lack of enthusiasm of all of the Web 2.0 businesses. A separate but related topic relates to SAAS businesses. There isn't a new industry or new customers being created (big data is an exception, although I would bet that addressable market is wildly overstated among DATA, SPLK, etc bulls). I think the first internet bubble was easier to fall victim to, since (like railroads, the early auto industry, early telecom, etc) massive amounts of capital were being spent to build out what would become a new industry called the internet. Here, you've got two new bubbles created among businesses largely stealing share from entrenched advertising media (Web 2.0) or entrenched enterprise software companies (SAAS).

Here are my thoughts in three bullets: 1. In general, HFT is bullshit and shouldn't be allowed. It's legalized front running. 2. Particular to retail investors (investing their own money) and folks like us, HFT isn't really relevant. No HFT firm is sniffing around illiquid micro caps. 3. Just like in the movie Office Space, institutions are getting screwed via HFT penny shaving. More importantly, however, I think is that mom & pop investors in mutual funds end up screwed via the performance shortfall they experience that is attributable to the front running by HFTs in front of institutions*. *Non-mutual fund institutions (bank prop desks, other professional traders) are also getting screwed, but my view is this is more of a zero sum game than what's being done to the mutual fund investors. Still front running IMO, but not as egregious given the other side of the trades in this case are aware of who they're playing against.

Well said Nate!

If folks are interested in something in April, why don't you email me ([email protected]) and I can organize a group poll to figure out the best date/location.

I also missed the first meeting, but would be interested in the next gathering. I live north of downtown Seattle, and work downtown. My suggestion would be something casual and unscripted - perhaps meeting at a pub on a Saturday or Sunday afternoon and getting a chance to learn more about our investment philosophies, current strategies, and anything else of interest?

I'm sure it is the same with cows as it is with companies; not all cows produce to the same extent. Some are healthier. Some are more predisposed to falling sick. Capital allocators choose which cows to milk. I don't know where we disagree then, because I agree with all of that. He wants you to get a job :)

Your welfare system comment unnecessarily complicates the example. In any case: 1. If you "retire," you still have to live off of someone doing work. Think about it; if every member of society started saving half his/her income each year in the hopes of retiring early, you couldn't satisfy them all, or else there would be nobody to produce the goods/services demanded by retirees. In both cases you have 20 people living off of the current productivity of 19. In the first case, you have 20 people living off of the productivity of the 19 most productive members of the village, in the second case, you don't. 2. I already mentioned my statement that profit is indicative of value add to society presupposes a free market. 3. Your comment and erics assume that there are a limited number of jobs and that just because eric retires someone else will be hired. perhaps nobody else is hired. Perhaps the company he worked for goes bankrupt and jobs are destroyed because he was such an integral part to its success. Think about what you think would happen if the top 5% most productive smartest people all decided to retire. Do you think their productivity could just be "replaced" by unemployed people? I don't disagree with your point 3. I'm thinking of the situation at the margins, whereas you're taking it to the logical extreme.

Say you have a town, with 20 people, and 19 are employed. The first 19 are employed because of the 20, those 19 are the best suited for the jobs available. If one of the 19 chooses to withdrawal from the labor market, is the village better off because now the least qualified of the 20 can be employed? So you're implying the 20th prefers to work, but cannot? Let's hypothetically say the employee who chooses to withdraw is able to retire, maintaining their place in the economy as a consumer. The 20th now replaces the retiree as the 19th employee in the economy. I think part of your point is that this 20th person is not the best person for the job, and therefore the economy is "less efficient" because #20 is doing a subpar job in the place of #19. However, what if #20 was destitute, living off a welfare system financed by the 19 employed, and now is a self-sufficient member of society? Perhaps he/she isn't quite as efficient as #19, but I think it's hard to say that economy is better off because #19 removed himself from the work force.

From a societal point of view, I would have to disagree Eric. The economy is not a zero sum game. Your leaving the labor pool did not "open" up a spot for someone else. Your act of leaving the labor pool reduced the percentage of people working. Your statement is very anti-supplyside economics. To the extent you are rich and continue to work, (like buffett) you provide to help society become more efficient and produce productivity gains. Even if your work is limited to investment decisions, you are helping society allocate capital efficiently. To the extent you retire and do not work and put your money in an index fund and just spend down your retirement, you cease to provide society any benefit. However, this is not necessarily a bad thing; it is your reward for providing a large benefit to society in prior years. I haven't fully formed my opinion, but I tend to disagree (and agree with Eric). I don't know Eric's skill set, or what he did in his previous life, but I would wager there were alternative labor options seeking employment who, all else being equal in the economy, now are employed as a result of his decision to remove himself from the labor pool (yet remain a consumer not reliant upon the government). I also disagree with the assertion folks spending down their retirements "cease to provide society any benefit." Do waiters and hotel personnel not benefit from retirees vacationing throughout the year? Do the wide range of service providers to the elderly also not benefit from servicing their needs? Society doesn't benefit when people aren't working but have no means to be a consumer. Spend a week on a Caribbean island and you'll see that in full force.

I would never invest in a publicly-traded PE firm. As Packer mentions, the net returns to shareholders suffer from the massive wedge of fees and other compensation lopped off the top. Further, the PE market is incredibly competitive, and only getting more so, meaning that IRRs almost certainly will be lower in future periods.

If you have access to CapIQ, they have a black line option that enables you to simultaneously compare two versions.

Often the owners are older and looking to monetize what in many cases is nearly their entire net worth.

You're right - there are very attractive returns to be had acquiring solid businesses at those prices. As Stubble mentions, however, if you're going to be absentee you need to make sure you're still generating an attractive return after paying the folks to mind the till. Businesses of this size frequently sell for such low multiples because they (a) are "flying low to the ground," meaning any hiccup in revenue could have disastrous cash flow implications, (b) often have substantial customer concentration, and © often thrived by sheer force of personality of the existing owner. All that being said, the ROICs on some of these businesses, because they fly below the radar of larger competitors, can be phenomenal.

Not personally, but I work in private company M&A, so I've seen a pretty wide range of situations and outcomes - any more specific questions/concerns?

What's scary to me right now is how many are beginning to use relative valuation to justify current transactions/stock prices.

what lawsuits? everybody is happy after this deal. $fb shareholders are not exactly price conscious. In zuck we trust. you're on fire on twitter wellmont

Very interesting - surprised to see the designer lives in a random corner of Seattle!

Probably more often than we think. I'm fairly certain I recall Buffett requesting the same treatment when he built his stake in IBM.

Here's the Bison Dele/Byrne story - http://sportsillustrated.cnn.com/longform/bison-dele/

Patrick Byrne is one fascinating dude. I honestly can't say which side of the fence I fall, as some of his conspiracy theories haven't been that misguided. His war of words against SAC Capital was priceless, and he apparently was one of Bison Dele's (aka Brian Williams) true friends.

Would've thought board members knew what a limit order was!

Excellent topic. I'm fascinated by the hunt for frauds, and the feel of vindication when your suspicions, often cast aside as a vendetta or conspiracy theory by longs or those with vested interest in perpetrating the fraud (think Einhorn's battle with Allied Capital), are confirmed. Undoubtedly there are some frauds out there right now. I think frauds oftentimes begin as "little white lies," for example where management achieves substantial top line growth but fights the inevitable decline in growth rates by playing games with revenue. These obviously aren't as deleterious as Enron, Worldcom, et al, but are likely much more prevalent right now - particularly given the absurd valuations the market places on above-average growth in this low-growth macro environment. Just brainstorming, I could see companies offering significant discounts at quarter-end (not fraudulent, but certainly not in shareholders' best interest) or burying sales discounts and other marketing costs that could conceivably be tied to specific deals in operating expenses. The latter certainly helps explain how companies like CRM can generate billions of dollars in revenue at 75% gross margins and not generate an operating profit.

Scared me, I thought you were buying Lumber Liquidators. I would be scared to be short. one of the smartest stock pickers in the world just bought a big position. I saw that, and everyone's favorite whipping boy Tilson has made a very loud short case. I don't have a position, but if I had to initiate one here it'd be short. Gross margins at all time highs, bulk of the remodeling done by the Blackstone's of the world to build the world's largest rental pool, and the business still only generates $40 MM in FCF (less than 2% FCF yield). I just don't see how you get significantly much more upside in the stock.

Scared me, I thought you were buying Lumber Liquidators.

Perhaps check WM, RSG, WCN annual reports?