KCLarkin

If interested, read the book. "In July 1998, Lemann sold Banco Garantia to Credit Suisse First Boston for $675 million" -- wikipedia

Some e-commerce companies generate float. Amazon is the obvious one but Cimpress does too.

Whether they make good returns or not isn't the point. My point is that the Net Income and cash flow dynamics of growing SaaS companies are actually not that attractive. There is no natural float. I remember reading about the early history of Salesforce. They were growing themselves into oblivion because the cash flow dynamics for new customers were so bad. They fixed this by charging annually in advance rather than monthly. They also lowered their cost of acquisition by moving to an inside sales force. So the "float" that the big SaaS players generate is due to the multi-year contracts that they need to cover the high initial cost of customer acquisition. -- The economics of SaaS are generally less attractive than on-premise. Churn, for example, is significantly higher. Margins are lower. However, SaaS is much more attractive to customers. Update: I don't remember where I read about the early history of Salesforce, but it might have been this book: https://www.amazon.com/Behind-Cloud-Salesforce-com-Billion-Dollar-Company-ebook/dp/B002PJ4SU2/ref=sr_1_1?s=books&ie=UTF8&qid=1484321419&sr=1-1&keywords=marc+benioff

E-brokers. They generate interest on client cash balances. Stock lending is also float-like.

They charge all 2-3 years in advance? Or annually? The drawback of the SAAS companies is that they are investing heavily in Customer Acquisition Costs. So the float dynamics are burdened by the customer acquisition costs. Assume you spend $1500 to acquire a 3 year contract at $500 per, billed annually in advance. Technically, the float would be $500. But in reality, net cash is -$1000. Could this be gauged similar to an underwriting profit? Probably. The dynamics are very similar to when Buffett bought Geico. The cost to acquire an auto insurance customer is much higher than the income generated in the first year. But the Lifetime Value of each new customer is much higher than the acquisition cost. So Buffett ramped up advertising, even though it hurt short-term net income and FCF. He could do this, because it was now a private company. Interestingly, Mr. Market let's a few tech companies act as if they were private (try to maximize long-term value at the expense of short-term profits).

They charge all 2-3 years in advance? Or annually? The drawback of the SAAS companies is that they are investing heavily in Customer Acquisition Costs. So the float dynamics are burdened by the customer acquisition costs. Assume you spend $1500 to acquire a 3 year contract at $500 per, billed annually in advance. Technically, the float would be $500. But in reality, net cash is -$1000.

Airlines, enterprise software, some E&C and consulting firms bill in advance. But, the airlines are a good warning that not all float is equal. A floaty company, like an airline, is vulnerable during downturns. Not only do earnings and revenue drop, but cash is sucked out of the business as the float unwinds. That's why you want a stable source of float. A software company with 98% renewal rates can use the float to invest in new businesses. On the other side, companies with negative float can be wonderful businesses too. Think of industrial distributors. One of their jobs is to provide working capital to customers. The negative float makes them very resilient businesses. During recessions, they release capital that can be used for buybacks, M&A, or paydown debt.

Thanks Liberty. Never heard of it before but added to my list. -- Edit: His ancestors come from the same county in Northern Ireland as my grandmother.

Yes, that is a better analogy. The issue is that Coors is unable to build factories to meet the demand. Local politicians have zoning regulations, it is difficult to get permits, land is scarce, whatever. Eventually, enough people will switch to wine (condos or apartments) to balance the market. Now, it is perfectly reasonable to say that demand is inflated. But it must also be true that supply is constrained. Otherwise, new houses would be built to accommodate the speculative demand. That is what happened in the worst cities in the U.S.. Excessive supply was built to meet excessive demand. Look at the price chart in Las Vegas. Prices spiked briefly. Then new supply was brought on line. And prices plunged. Compare that to the price chart in Toronto. This time really is different. That doesn't mean Toronto won't crash. Just that the forces are very different than the ones in U.S. housing bubble.

Both Newmarket and Hamilton seem to be inside the Greenbelt. But that doesn't really matter. If there is insufficient supply in Toronto, there will be spillover to Hamilton and Newmarket. If the Bud factory goes on strike, Coors will be in short supply too.

This long blog post does a good job summarizing the PBM business from a payers perspective: http://pharmacybenefitconsultants.cmail20.com/t/r-l-ykjjjhyk-uydukihrl-t/

I don't think that is precisely true. You can claim interest if there is a "reasonable expectation of profit". So there is debate: http://business.financialpost.com/personal-finance/taxes/watch-for-the-dividend-wrinkle-when-writing-off-interest-on-investment-loan But still, probably best to stay away from this grey area.

Are our memories that short? ETFs were tested and failed miserably: http://www.marketwatch.com/story/heres-what-may-have-caused-the-flash-crash-in-some-big-etfs-2015-08-25 That was August 2015! Just over 1 year ago. Off the top of my head, there are at least three potential issues: - liquidity of underlying doesn't match liquidity of ETF - prevents arbitrage from working properly - panic or flash crash uncertainty cause market makers and HFT to back away - prevents arbitrage from working properly* - 1987 style crash - where programatic ETF trading causes the underlying to crash. Setting off a vicious circle of selling. These issues are easily solved by: - avoiding stop loss orders - only buying most liquid ETFs with liquid underlying assets - buying and holding ETFs for multiple years to ride out flash crashes - structuring portfolio to survive flash crashes (avoid leverage, barbel approach, cash optionality) The market structure, including ETFs, is very fragile. Plan accordingly. * Interactive Brokers, for example, was unwilling to act aggressively during the flash crash because there is high uncertainty whether the exchanges will cancel orders. The arbitrage could blow up spectacularly if the exchange cancels half of the arbitrage arbitrarily and after the fact. * HFTs have crowded out Market Makers. Unlike Market Makers, HFTs have no obligation to operate in chaotic markets.

Yes, Berkshires airlines look precarious at current prices. Unless these are short term positions, I am baffled.

R-O-I-C. So far, I haven't found any mention of ROIC in Norwegian's presentations. I haven't run the numbers myself, but it looks like they are buying growth and losing money after including Cost of Capital. Because they are willing to buy uneconomic growth, they can buy the newest, most fuel-efficient airplanes. -- Labor doesn't seem to be the answer (at least not directly). They try to circumvent unionization by outsourcing to 3rd parties. They hire pilots in Singapore. They setup their subsidiary in Ireland to avoid Norwegian labour regulations and taxation. So it seems like they are aggressive. And the regulatory regime is rightfully skeptical at Norwegian's aggressive use of loopholes. But beyond their labor arbitrage games, their labor cost advantages seem to come down to buying high-density 787s. If a 787 has two pilots, the airline flying with 344 seats is going to have a huge labor cost advantage over the one with 252 passengers. As I mentioned previously, that's not a sustainable advantage. Why aren't other airlines copying this strategy? The ROIC doesn't seem to be attractive. And they are leveraged beyond belief.

Yes, they are flying 787s on long flights. Great planes. But they have 12 787s, according to their website. United has 25. If you look at the whole fleet, yes, United will be more expensive because they have an older fleet. But airlines compete route by route. So if they wanted to, United could reconfigure their 787s to a higher density and compete directly on Norwegians routes. Would Norwegian still have a cost advantage? Probably but maybe not by much.

The obvious question is why does Norwegian have such a low cost structure? They buy the same planes. They use the same fuel. Apparently, they even hire Americans. So either Norwegian has a tax advantage, illegal subsidy, or some other structural advantage that I am missing. Or the cost advantage is an illusion. For example, flying to cheaper but less desirable airports. Or packing more seats on a plane. I think the cost advantage of many of these ULCC's comes simply from cramming more seats on the plane. But this isn't really a sustainable competitive advantage. United can easily re-configure its planes. We saw this with Air Canada Rouge, for example. But presumably United uses lower density configurations because they can charge more to business flyers. So the network carriers let the LCCs and ULCC's pick off the leisure travellers.

https://www.amazon.com/When-Sell-Strategies-Stock-Market-Publishing/dp/0870341340 Although I disagree with his philosophy, I think many of his ideas are very helpful. It is very difficult for value investors to think this way, but when a stock is going up it means that there is strong demand for the stock. Which means the stock is likely to go up further. We saw this recently with BAC. All the value investor on that thread were eager to sell when it hit $18. After those shares were absorbed, buyers needed to raise their bids. I have had some success buying more AFTER my value instincts tell me to sell.

Cyclicals are hard, no doubt. But the basic rule is pretty simple: Strong returns attract capital. More capital lowers returns. Lower returns cause capital to exit. And it takes a long time for capital to enter and exit. So the cycles last longer than you expect. The Air Canada chart probably looks pretty familiar to someone who owns Penn West. -- The other dynamic is low-cost versus high cost producers. WJA, LUV, RyanAir had a relatively stable decade. But the marginal guys had a wild ride. Every investor should understand cyclicals. At least so you know what to avoid. I highly recommend "Capital Returns".

Oliver Wyman Airline Economic Analysis: http://www.oliverwyman.com/content/dam/oliver-wyman/global/en/2016/jan/oliver-wyman-airline-economic-analysis-2015-2016.pdf Interesting report for anyone who wants to waste brain cells thinking about airlines.

Air Canada, for example, is up 1000% in the past 5 years. So, it can be attractive if you time the cycle correct. The question is why NOW. Most people would agree that airlines are at or near a cyclical top. To me, the airlines look very expensive today. They must see something we don't. Right?

http://business.financialpost.com/personal-finance/mortgages-real-estate/worry-about-supply-not-demand-in-canadas-overheated-property-market-says-former-boc-governor-david-dodge

I think the past 40 years of bankruptcy can clearly be linked back to deregulation. Have the past 40 years of bankruptcies allowed the legacy airlines to cut costs and consolidate enough so they can compete? Certainly the gap between the legacy carriers and LCC has narrowed dramatically. And it's true that ULCC are lower CASM. But they also offer lower levels of service, resulting in lower RASM. An obvious example is business class. A business class seat has much higher CASM. But a business class flyer would never choose Spirit Airlines. Is it possible that both point-to-point, leisure ULCCs and higher cost hub-and-spoke business airlines can co-exist profitably? Probably not. But the odds are much higher today than they were 10 or 40 years ago.

It's not just a matter of capacity, consolidation also creates some narrow moats. For example, in SFO United has 44% of seats. In Atlanta, Delta has 73% of seats. In Miami, AAL has 67% of seats. If you live in SFO, you probably join United's frequent flyer club since it has the most flights. You are more likely to book United because it has more frequent flights. United presumably has better economies of scale at SFO. You are still a price taker (especially for leisure travel), but at least you have some advantages. -- There are many positives for existing airlines: Consolidation, capacity discipline, oil prices, de-bundling, bankruptcy re-orgs, stronger balance sheets, capital returns, higher yields and utilization. But I still don't think current returns are sustainable.

I think the environment will have much less impact than building good habits. As Oddball said, if you are not being productive, there is usually a reason. If you want to read, one option is to print everything. Then just keep a big stack beside your favourite reading chair. If you read on your phone, tablet, or computer, there are too many distractions. The other thing, it is impossible to read everything. Filter aggressively.