ratiman

But why couldn't Dexter move operations to China? I assume Fruit of the Loom is not made in the US. Here is Greenwald on moats: Greenwald: So it is really about, and Buffett’s word for this is moats, moats and franchises are identical, and it turns out moats are not that hard to calculate. I think one of the things Buffett has been coy about is not letting people know how easy it is to calculate. So if you think about the global automobile industry, it is so big that people can be viable with two percent market share, that people buy cars every seven to ten years so they don’t tend to be captive. So a lot of market share changes hands, typically about one percent will change hands a year. Well to get to two percent, which is a viable level of entry, at one percent a year is a two-year moat, and that’s not going to stop anybody. At the other extreme you’ve got Coca-Cola. In order to have the economies of scale necessary to distribute heavy product like soft drinks you typically have to have something like 25% local market share. That’s a situation where there’s tremendous consumer loyalty. If you look at it in contested environments, two tenths of a share changes hands every year, so to get to 25% it’s going to take you at a fifth of a percent every year. It’s going to take you 125 years. That’s an enormous moat. So the first element in this is what’s the minimum viable share somebody has to get to. For very big markets that’s going to be low. For small niche markets in geography or in product space that’s going to be large, and secondly what does customer captivity look like? And because the current technologies tend to be user oriented you have to learn how to use it so you have a lot of customer captivity. And in services it’s face to face with high purchase frequency so again you’ve got a lot of customer connectivity but really what you’re looking for is minimum viable scale divided by annual market share change in a contested environment.

I should mention that the market share criteria was proposed by Bruce Greenwald. Some failed Buffett investments are Kraft Heinz, Dexter Shoe, and IBM. Kraft Heinz he underestimated the pricing power of brands relative to retailers, although he probably also underestimated the shift away from processed food. Did Kraft or Heinz have increasing unit profitability and stable market share before Buffett bought it? I am going to guess no on that. I think Buffett said that he bought IBM after talking to IT directors in his businesses who relied on IBM. Again I suppose it depends on how market share is defined. IBM probably has pricing power but has probably been losing market share for a long time. I don't know what happened with Dexter Shoe. Like newspapers, Dexter was probably on the wrong end of a secular trend. In fact the same could probably be said of IBM and Kraft Heinz as well.

Buffett mentions moat, pricing power, and "circle of competence" or understandability of a business. Can we put numbers on these characeteristics of a good value investment? First, moat. A moat is a business in an industry where the market share changes very slowly. A number can be put on this, such as how much market share changes hands per year, for instance. There is a way to measure this such as the Herfindahl-Hirschman Index, which is easy to calculate. Of course a stagnant industry is not enough. Next is pricing power. Pricing power can be measured by consistently increasing unit profitability. Sees has increased unit profits consistently while losing market share, so pricing power doesn’t necessarily rely upon a moat. Next is the simplicity or understandability of the business. This could be measured by the Lindyness of the business: the longer the business has been around, the more it has demonstrated staying power, the more “understandable” the business is. 25 years ago, when Ebay was new, network effects were a relatively novel moat, but today it is understood that Ebay is a Lindy business. A good Buffett investment would have low market share percentage changes, increasing unit profitability, and be a long-established business. All of these things can be measured.

This was a good presentation by Bill Gurley about VC investments staying private forever (I just want an AI to strip out every time the host says "I'm curious.") It's going to be hilarious when somebody just really needs their money back, issue a massive market order into these quasi-public markets for private companies, and then sues their manager for fraudulent marks.

"You cannot be serious" is a Valley girl expression that McEnroe probably picked up when he went to Stanford. McEnroe's outburst is funnier when you realize that he's imitating a teenage girl. Or he might have gotten it from Airplane and the famous "Surely you cannot be serious" scene.

Here is what I would do in Abel's position. First, sell off some of the smaller businesses that don't contribute to BRK, like BusinessWire and Pampered Chef. It's not worth management time to deal with companies that small. Then I would consolidate the jewelry business under one brand and the furniture under one brand. I would pick a handful of businesses that had been underinvested during the WB years, such as Sees and DQ, and increase investment. Then I would take all the money away from Ted and Todd walk them out of the building like they were being arrested by the FBI. Finally I would change the name of Berkshire Hathaway RE to Hathaway Homes because it's not as much of a mouthful and you don't want to name a subsidiary after the holding company.

This will be my first and possibly only politics post here at COBF but I think the way to understand Trump is that he's a real estate developer who sees allies & trading partners as suppliers & contractors who are constantly trying to overcharge him and rip him off. And his job is to play them off against one another and get the cheapest price. This might work in building an office building but it's the wrong approach to US trade relations. With luck congress will take back tariff man's authority before it gets out of hand.

It's hard to find good macro commentary that isn't bears repeating the same brain-dead bear arguments for the millionth time but Russell Clark is a bear and also a good macro commentator. This 7 minute commentary on food inflation is good. He also has some other short macro commentary on his site. https://www.russell-clark.com/p/food-inflation-revisited-e82

Somebody should quiz Kuppy on what the "current account" is and see whether he can explain it.

I'm not usually a fan of Meb Faber because he just reads off a list of questions (easy target for being replaced by AI) but this with Chuck Clough is very good. Clough makes the case for more deflation and is persuasive although it would have been good if Faber asked one follow-up question to make him back up his arguments. For instance how can demographics lead to deflation when retired people spend but don't produce anything. https://www.listennotes.com/podcasts/the-meb-faber-show/former-merrill-strategist-Y9RUmy2bTQx/

Will BRK after Buffett try to run the conglomerate like a business? For instance BRK has a number of furniture subs, including NFM, Jordan's, Star, CORT, and maybe some others. Why not merge those and try to get scale? I know that is against the BRK religion but it is what any other conglomerate would do. Same goes double for jewelry.

What I meant was that he doesn't consider a poor track record of acquisitions or lack of reinvestment opportunities to be a disqualifier. The Berkshire portfolio is full of brands that have withered while in the BRK portfolio without any reinvestment or acquisitions, like Dairy Queen and Jordan's Furniture. And why would past capital allocation decisions be included in a measure of capital efficiency? It's completely extraneous so it's curious that ROIC is so much more popular than RONTA. What you want to understand is the efficiency of the current business, not the blended measure that includes the effectiveness of past management decisions.

Buffett doesn't really care about the company's past investment decisions because he doesn't plan on growing by acquisition. Typically if the business doesn't have reinvestment opportunities Buffett isn't going to do any acquisitions.

Munger & Buffett have mentioned that they did not initially realize how important RONTA was. Does Graham's Security Analysis even mention RONTA? DNA was discovered before investors discovered the important of tangible capital.

Some businesses even have negative tangible assets. These are the truly great businesses, like Chewy.

I haven't seen a company ever use it in an investor presentation. Banks do use ROTA and Buffett is talking about banks in the clip above, whereas in a normal business I think Buffett would focus on *net* tangible assets. But I don't remember a CEO ever talking about RONTA. I could be completely wrong though.

Buffett has consistently said that the best way to measure a business is return on tangible assets (see video). Likewise Greenblatt's magic formula uses ROTA. Tangible assets (PP&E, inventory, receivables, accrued expenses and some other stuff) minus payables is the amount of capital needed to run the business. And despite Buffett touting this measure for the last fifty years it rarely gets mentioned. For instance the last mention of "return on tangible assets" on X was over a month ago whereas the last mention of "return on invested capital" was an hour ago. The difference between ROTA and ROIC is that ROTA ignores capital structure and intangibles. So why has Buffett's preferred measure been largely ignored? This is especially puzzling when it is much easier to understand than the alternatives.

This seems like the difference between chess and poker extended to politics. Is he saying that conservatives are Villagers?

It's a good point that a capital lite business can grow to the sky but a capital heavy business is constrained by real resources. If a cap heavy business compounded indefinitely it would eventually consume all of the real resources but that constraint does not apply to software. If the high capex business did succeed in producing real resources at near zero it would put itself out of business, like nat gas producers.

Here is a list of highest return stocks over the last 100 years roughly. As you can see there are plenty of capital heavy stocks. The low capital stocks on this list are Altria, S&P, Coke, Pepsi, Hershey, J&J, UST, Tootsie Roll. I didn't include tech or pharma companies because R&D really should be considered capex. So historically capital lite has mainly meant popular brands. There is a reason why CPG companies still trade at 20x multiples. I think what connects all of these companies is that there is no substitute for a tootsie roll when you want a tootsie roll.

I agree with your analysis but that's why it's FCF and not earnings. The capital heavy business will have higher cash flow and more capex requirements.

Everyone knows that capital light lite outperform but why? Let's say there are two business. Same exact growth rate and same FCF. One is capital lite and the other is not. Why does the capital lite typically outperform? The capital lite will have much higher return on capital but it doesn't matter because growth in FCF is the same. My guess is that high capex businesses develop hidden liabilities over time that aren't immediately apparent ie real depreciation is understated.

I thought banks lend money? In none of these cases do the companies lend money. Instead they are lent money by customers. Borrowing money is very different from lending it. Negative working capital is great but it has nothing to do with being a bank.

It's not the case that the recession crowd has stopped predicting a recession. The consensus has not shifted to "inflation is here to stay". A few people predicting higher inflation does not change the consensus. The consensus is vastly and overwhelmingly on the side of disinflation, a slowing economy (variable lags), and lower rates and lower inflation over the long term. If that is your position, you are with the crowd. The crowd is usually right but you are not bravely fighting the consensus. For instance consider the consensus (from Nick Timiraios of WSJ):

So Powell comes out and says what everybody is realizing, that current rates aren't very restrictive, and now Fedwatch has Fed staying flat through December at . . . ZERO. Not .1% but actually 0%. I'm clearly missing something. Isn't the first rate cut the hardest, because it commits the Fed in one direction? If the Fed stays flat it leaves open the option of hikes without flip flopping. There must be something else going on because cutting with everything at highs and oil perking up and so on strikes me as insane.