Broeb22
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Posts posted by Broeb22
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ESI, CPG and MEG
SD
What's your thesis on ESI?
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https://www.broyhillasset.com/wp-content/uploads/2020/08/The-Broyhill-Letter-2020.08-FINAL.pdf
Am I the only one who finds it ironic that a manager who earned roughly 0% returns (roughly b/c he doesn't explicitly disclose them) despite significantly increasing his exposure while the crisis was happening is talking about the Dunning-Kruger effect in reference to OTHER people?
There is a lot of cognitive dissonance in here, since we're all trying to impress each other with all the obscure cognitive biases and big words we can conjure.
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https://www.gwinvestors.com/wp-content/uploads/2020.08.18-Q2-2020-Letter.pdf
Great work yet again from Steven. Who knew this field that is so focused on quantitative results cares so much about how people sound?
I've seen his work on Rolls-Royce first-hand and he undoubtedly digs very deep, but does it matter if you end up with poor returns?
His published returns are wildly inflated by 155% returns during 2009 when he wasn't running very much money and probably had a different strategy.
5.5% CAGR if you start in 2010 vs. 8.5% for the MSCI ACWI, and well over 10% for the S&P500.
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Trimmed CELH
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You can pick any LatAm "moaty" company today and they will be cheaper than comps elsewhere.
Coca-Cola Femsa (KO Bottler), Arcos Dorados (MCD Master Franchise), Grupo Televisa (cable and broadcast TV conglomerate) are just a few off the top of my head which would fit this description.
Why is that? Currency devaluations , inflation , or something else?
It’s probably a number of factors but some include currency devaluations (which hurt quite a bit if the entity has USD denominated debt), perceptions of lower political and economic stability (due to dependence on oil or other more commodity-type exposures), lower quality mgmt./governance on average in EM companies.
There is some truth to these, but I do think they are a little overblown. Looking at the stock charts of most EM public companies traded on US exchanges, this is a great example of investors paying peak multiples of peak earnings in the 2011-ish period for the same businesses operating in the same historical political and economic environment that they are now, except now we’re seeing very low multiples of low (currency-depressed) earnings.
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You can pick any LatAm "moaty" company today and they will be cheaper than comps elsewhere.
Coca-Cola Femsa (KO Bottler), Arcos Dorados (MCD Master Franchise), Grupo Televisa (cable and broadcast TV conglomerate) are just a few off the top of my head which would fit this description.
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Inflation is just incremental $ chasing the same TOTAL quantity of goods.
$100 spent over 10 items is an average 10/item, $105 (5% inflation on $100), over the same 10 TOTAL items, and the average price/item is $10.50 (105/10). Pretty straight forward.
So where's the inflation?
Covid-19 and the global trade war, have reduced the TOTAL quantity of goods. Current spending (Covid-19 related) is clearly higher than it was months ago. If total spend is up 15% ($115) and total quantity is down 10% (9), the average price/item should be $12.78 (115/9) - and inflation should be 27.8%/yr (((12.78-10)/10)x100). ie: very high.
There are only 3 possibilities ....
1. Current spend is not that much higher than it was under successive rounds of QE. Sure, there IS large incremental spend - but divided over the very large (QE spend inflated) base spend? % wise, it's just not that much.
2. The current total quantity of goods available is HIGHER than it was. Very unlikely, as there are shortages of goods all across the US and Canada. The US/Canada border has been closed for some time, and anything non-essential can only be met from existing inventory.
3. The inflation has been absorbed in global foreign exchange devaluations. If the US, and the Euro debase at the SAME rate, the RELATIVE US/Euro FX rate doesn't change much (what we see), if the compared country is debasing faster - we see a worsening in their FX rate (3rd world currencies)
Gold is often viewed as a hedge against fiat currency debasement.
Pick a date, as to when you think the adverse Covid-19 lock-down effects started. March-31-2020?
The closing price of gold, 3/31/2020 was USD 1583/oz. The closing price yesterday was USD 2069/oz. If the total supply/demand of gold available for trading over the 4 months (Apr, May, June, July) did not change significantly - the price change must be due to inflation About 31% PTD ((2069/1583)-1)x100 - guess where the inflation went!
If PTD debasement is this large - shouldn't you have heard about it elsewhere, as well?
You have - all the discussion on US loss of reserve currency status, and any cursory scan of 3rd world FX rates over the last 6 months. The real question is why is it that 'retail' can see this - when apparently institutions cannot?
SD
I would push back on bullet point 2. In industries where there have been capacity constraints, like toilet paper, companies such as KMB and PG have intentionally reduced SKUs to enable their factories to produce more, and one representative from KMB said they saw 10-15% production increases from limiting SKUs. In POST's earnings release this AM they noted a reduction in SKUs to limit capacity constraints on machines.
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Trimmed TRRSF and CARR
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Started some MRTN, and bought a few more BRK as I had cash freed up from other sales.
Curious what interests you about MRTN? TL trucking is a pretty rough and tumble industry.
MRTN just posted outstanding results, and after following(like with a lot of names) for some time decided to use some cash to put it in the portfolio. They are incredibly well managed, have an impenetrable balance sheet, have refined the business to be primarily temperature controlled transport rather than competing for everything under the sun. As such they've been able to hold reasonable leverage on pricing and grow revenues much more consistently than the "peers". Theyre basically a trucking company that doesnt really have the problems most trucking companies have, and this has historically been the case.
Someone recently blogged on ODFL and how despite being in what is typically a "commoditized" business have earned very good returns on capital. Marten doesn't seem to earn returns on capital or achieve operating ratios similar to ODFL. Do you think their business is improving so that returns on capital and operating ratio continue to improve?
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Jurgis’ points are good ones. I guess trying to generalize the examples he used, if an industry’s growth is more open-ended, a few key decisions early on can make all the difference in a company’s trajectory whereas in well-establishes industries, great managers can add a lot of value but that might pale in comparison to a Zuckerberg or Nadella.
I’m thinking of Fabrikant at Seacor ably trading oil and shipping assets. Has created value in a tough industry but the value created relative to a Zuckerberg (or name your own fave CEO) is in two different worlds.
So I guess the short answer in my mind is it depends, which is never satisfying.
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No one publicly discusses the good ideas (As I have found out, it's not that the ideas are ignored or go undiscussed as the threads may lead you to believe - just no one publicly discusses them). The best discussions are often the battleground stocks that don't actually present a great return profile. They are just good for discussion but might actually enhance attrition rates. Outside those, COBF often feels like an echo chamber with few dissenting opinions.
At least one other issue is that the best performing stocks do not meet the standards of traditional value investing and traditional value stocks have performed relatively poorly. When I first signed up, 'quality investing' are paying slight premiums for higher quality companies was being debated. If you look at today's best performers, clearly the quality investing side won the debate the conversation has transitioned to how much to pay for what type and duration of quality/growth. I don't think this forum has ever been the best place to discuss business models so I think those conversations naturally moved elsewhere.
I think it's fair to say the quality of discussion in general has declined.
Where do you think conversations about business models migrated to, because I would like to read/think more about that...
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Sold 75% of Cloudflare and reallocated this into Akamai.
How do you think about the threat from competitors like Fastly?
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I think the main similarity is the "New Economy" narrative. Technology companies are seen as unstoppable and immune to the economic cycle and deserving of very high valuations and make up a significant proportion of the indexes. In both cases an accommodating monetary policy helped to support high valuations and allowed the stock market to inflate to very high levels.
But the main difference now is that part of the New Economy narrative is belief in the Fed's omnipotence. That is the biggest wild card here.
+1
That is probably the best way I've read of describing this phenomenon. Tech in 1999 was not as widespread as it is now, so the good SaaS businesses grew through the economic ycle (even though stock prices fell a great deal). Now, people may be mistakenly believing that tech is immune to the economic cycle, but because software has eaten the world, as Andreeseen famously said, software businesses now have to fluctuate with the economy to a greater degree.
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The topic is funny because it's true - these presentations have a lot of buzzwords as if they read a lot of Buffett letters - which tracks a lot of high-quality shareholders.
Consequently, I get more skeptical when these buzzwords are flying around in annual reports, as I don't really look at presentations.
I totally agree with this comment. I often find this type of language is almost inversely correlated with good capital allocation. A lot of companies I perceive to have good capital allocation don't really trumpet what they're doing in those terms.
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Basically anything that portrays capital allocation as the end all be all thought process instead of anything to do with growing the business/making stuff happen/customer focus is a good way to sucker in a value investor. Capital allocation is overrated imo in that it doesn't take much thought to say "hey lets only do high return investments!". In my experience it only takes 5% of your time to answer the question "is this project worth doing?" and 95% of your time is spent figuring out "how do we make this project come to life?". Capital allocation is also worthless if the underlying business is deteriorating.
While I would agree that having a framework for making good capital allocation decisions is somewhat intuitive or even obvious, getting organizations to consistently operate in this way is much harder than it looks in my experience. At a decent size manufacturing company, I was involved in the capital planning process for 2020 and the projects people proposed were often not very imaginative or did not move the ball. A project like investing in automation that would allow multiple smaller lines to remove at least a few people from the lines who were doing very manual labor was viewed with some disdain. This is in a relatively commoditized industry where cost determines 80% of success and technology/marketing/relationships is the remainder.
Getting everyone to understand the importance of reducing inventories and not yelling at the buyer if, during the transition, things don't go smoothly, is hard. Getting people to understand the trade-offs of such decisions and having thoughtful conversations about why trying to optimize inventories opens up capital for us to grow faster is challenging.
Talking with people on the floor about scrap and the cost of the raw material they're throwing away is another example. You would be shocked how many people don't have a basic understanding of the trade offs involved in their jobs. Most people in lower level jobs operate in some state of fear about some past event that scarred everyone. "Oh, well we could keep less inventory of that raw material but we keep 3x as much because we don't want to run out because one time that happened and I got my head ripped off."
Even at the Board of Directors level, I doubt how many people really get it. They constantly pay each other more every year, they reprice options lower for executives who have failed miserably, they sign off on acquisitions at prices that would be hard to justify and often don't create value, and the list could go on and on.
Just curious - how was the CEO and his tone from the top?
I have heard from an activist that companies now have training in how to do PR to value investors to sell their stock.
The company I mentioned is private, which perhaps is worse since there are no short-term quarterly pressures to deal with, but getting people thinking about long-term value creation is still tough.
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I took a flyer on SLQT.
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when bergdrof's on 5th ave gets ransacked, what again is the reason a ceo wants office space in NYC? "fire next time" has become this time.
I would have bet that this same argument would have been had in October 2001 after 9/11, and many people would have thought NYC office space is a dying breed because what executive wants to risk his or her life to just have a nice view of the Hudson River?. Turns out they were really wrong, and those who doubt urban office real estate will again be really wrong. But as Liberty likes to say, that's what makes a market.
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Basically anything that portrays capital allocation as the end all be all thought process instead of anything to do with growing the business/making stuff happen/customer focus is a good way to sucker in a value investor. Capital allocation is overrated imo in that it doesn't take much thought to say "hey lets only do high return investments!". In my experience it only takes 5% of your time to answer the question "is this project worth doing?" and 95% of your time is spent figuring out "how do we make this project come to life?". Capital allocation is also worthless if the underlying business is deteriorating.
While I would agree that having a framework for making good capital allocation decisions is somewhat intuitive or even obvious, getting organizations to consistently operate in this way is much harder than it looks in my experience. At a decent size manufacturing company, I was involved in the capital planning process for 2020 and the projects people proposed were often not very imaginative or did not move the ball. A project like investing in automation that would allow multiple smaller lines to remove at least a few people from the lines who were doing very manual labor was viewed with some disdain. This is in a relatively commoditized industry where cost determines 80% of success and technology/marketing/relationships is the remainder.
Getting everyone to understand the importance of reducing inventories and not yelling at the buyer if, during the transition, things don't go smoothly, is hard. Getting people to understand the trade-offs of such decisions and having thoughtful conversations about why trying to optimize inventories opens up capital for us to grow faster is challenging.
Talking with people on the floor about scrap and the cost of the raw material they're throwing away is another example. You would be shocked how many people don't have a basic understanding of the trade offs involved in their jobs. Most people in lower level jobs operate in some state of fear about some past event that scarred everyone. "Oh, well we could keep less inventory of that raw material but we keep 3x as much because we don't want to run out because one time that happened and I got my head ripped off."
Even at the Board of Directors level, I doubt how many people really get it. They constantly pay each other more every year, they reprice options lower for executives who have failed miserably, they sign off on acquisitions at prices that would be hard to justify and often don't create value, and the list could go on and on.
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Here's a more mundane example...that I guess is related to JIT inventories
Let's say you perceive that you have 50 days worth of raw materials on hand in an industry that should turn inventory 10-12x per year and when your lead time on that raw material is about 4 days.
You could say, hey, if the lead time is 4 days, then if I can plan production a week out, if I order the raw material the same time I schedule production, I will get my raw material a couple days before production starts and it will be turned into a finished good within 3 days.
In theory this could reduce my inventories from 50 days of production to approximately 6, a huge savings.
But what happens the first time this delicate balance breaks? You get screamed at by sales, operations, supply chain, management, for missing
What happens when you simply hold too much inventory? Half-hearted pleas from finance to manage things better.
If you're a person who isn't thinking like an owner in your role and are more concerned with not rocking the boat until you retire, the choice here is really easy.
Which is where constant support from management to pursue practices like these even when they occasionally cause problems is very important.
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appreciate the comments.
I think face to face business meetings will remain important. but cubicle to cubicle daily work arrangements will be proven unnecessary by covid.
as to sensationalism, keep in mind that as to mortality rates, Minnesota has had more covid mortalities for people over 100 years old than for people less than 50 years old. the fourth leading cause of death in US is nosocomial (medical/hospital malpractice). the human species is imperfect, and sending covid infected people from hospitals to nursing homes is an example, should you need one. so if we cant have an intelligent conversation about the long term effects of covid, then so be it...
Sorry you thought the responses were so unintelligent to your click-bait thread title.
If I’m going to bet on one thing, I’m going to bet on human beings being social creatures and no pandemic is going to reverse millions of years of evolution in a couple years just because technology enables it.
There are so many reasons people will work in the same offices together again. Want to get a promotion? Good luck trying to do that and being a leader of people remotely. What percentage of your friends that you speak to regularly live within the same metro area as you?
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Agreed with LC that the thread itself is sensational.
Would retail space or hotels or AirBnB-dependent properties not be harder hit?
The counterpoint to your belief in the death of office space is how much space will exist between workers in the office of the future?
Will cubicles or open office spaces that saved space be a thing of the past? If that is that case, then won't companies need more office space to hold the same number of workers? Wouldn't that actually cause demand for office space to actually grow?
Like LC, I also agree that people are social and many would like to be in an office.
I also think that the sample size of the last 2-3 months when people are scared for their jobs and have few alternatives for their time is perhaps not a good data point to extrapolate from. Almost every industry is facing some degree of challenges, so if you're one of the lucky ones to have a job, you're probably pretty engaged with work right now. 2 years from now when things get back to "normal", maybe those same hard workers will not be working so hard, and maybe when more options are open outside the home some will decide to attach a fan to their mouse at 4 and head out for an early happy hour.
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Except it seems that most places drivers drive for both Uber and Lyft. So if Uber builds a network of drivers with density it doesnt seem like they have a way of keeping their competitors from using the same driver network to take share.
How many other rideshare competitors are there in the US? Or in some of the more competitive markets like NYC/SF? Not that many, and when you look at the third link below, the market shares follow exactly the power law distribution you would expect to see from a winner-take-most market structure that is the hallmark of an industry/business with network effects.
These competitors exist, but if you're thinking long-term about this, those other companies likely can't compete with Uber, UNLESS Uber's costs are way too high and they are overcharging people to compensate for their bloated cost structure. Recent announcements from Uber that will cut over 20% of the workforce suggest that Dara is on top of this and won't allow Uber to get undercut by a more cost-conscious competitor. Disclosure: No Position.
https://ride.guru/cities/new-york-new-york-united-states-of-america
https://ride.guru/cities/san-francisco-california-united-states-of-america
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To echo and perhaps expand on winjitsu's point:
To have a seriously durable competitive advantage in such a large market - a business model that is essentially a toll road for restaurant food delivery... think about how incredibly valuable that could be once the market has matured and cost of customer acquisition falls.This is the key point, isn't it? A couple of questions:
1) For most moat-y businesses, do they have to pay their customers to choose their business?
2) For the ones which do, in fact, pay their customers (perhaps just initially) - what do those businesses look like?
In my opinion, for (1) most moat-y businesses do not need to be acquired. You are offering something so special that competition is limited. Either you have some special process to offer sustainably lower costs (i.e. best commodity producer) or you are so differentiated that you are offering a special product (brands, etc.)
Now, yes there are some businesses where you pay to acquire. The question then becomes, which are successful, and why? I would argue therefore the response to (2) is that you are building yourself into long-term customer processes, with high switching costs/specialized service, and a high natural relationship length. It becomes uneconomical to pay for customers if they can just hop to a competitor (low switching costs) in a month (low relationship length).
My problem with the VC world (and perhaps I am wrong) is that they over-estimate their competitive advantages. I am sorry, but food delivery is not a competitive advantage. And access to capital is almost never a competitive advantage. Real competitive advantages come from high skilled activities at least in most cases.
I think there is potential for significant competitive advantage in creating a network that makes delivery better, if it makes delivery better. Despite what some might argue, I am probably never going back to ordering a taxi because Uber/Lyft are so much more convenient that I would probably pay a premium to a taxi. Uber/Lyft made transportation a better experience IMO. They also made the driver experience better by making it a more flexible job, eliminating expensive medallions, etc.
The open question for me perhaps is how are the food delivery services making the experience better than the status quo? Is calling up my favorite restaurant and going to pick it up that much different than having someone deliver it? I see the two-sided network effects very clearly with something like Uber, but food delivery not so much, especially if restaurants are eating the delivery cost. It is at best another form of advertising for them in that world.
What makes Uber better than a taxi? Uber is a taxi service with an app. There is nothing more to it. Uber is just the app-ification of a service that's been around forever. The Uber business model wasn't related to network effects (even if they claimed that), it was about just subsidizing rides relentlessly to get to a scale that local laws didn't apply to them anymore. In fact, if you read about Uber, everyone can see the network effects never existed. Even small price increases (or smaller subsidies) causes Uber to lose market share.
I would argue Uber just took advantage of another Silicon Valley business model - ignoring regulations. Like how if you throw a Coke can on the ground, you are littering. If you have a scooter company where 10,000 scooters are thrown on the ground, you're a mobile transportation company.
I think appification grossly oversimplifies it. Facetime/iMessage is just a technological version of a letter (a form of communication), but would you ever want to return to a world where you could not see/communicate with your loved one anywhere in the world at a moment's notice? Certain Expense Reporting Apps are just apps, but they make it much easier to submit expenses, so usage of them becomes much better. Sometimes "just an app" makes things much, much better than their prior state. If the taxi world had figured out that an app that gave riders certainty of who was showing up and when, they would have retained a significant portion of their business.
Saying that network effects don't exist in a business like Uber is a preposterous claim. The network effects may be more local in nature than a Facebook or Google, but they exist nonetheless. The same economics work for Uber that work for any route-based business like UPS, Stericycle (medical waste), uniform rental, trash services, or even cable TV/internet. If you're going to "pass" by many locations, it's vastly better to be picking up from or delivering to as many of those locations as possible.
If an Uber driver has to drive 15 minutes every time they have to go get a new ride that takes 5 minutes to drop off, they will very quickly realize driving 75% of the time and getting paid 25% of the time is not a good model. While I would bet Uber drivers don't make an economic profit on their time and vehicle-related costs, they still can earn a decent living simply because of the density of demand that exists in an area.
And in regards to the regulations, there are different opinions on this, but Uber is not an "unregulated" system. Uber regularly boots drivers for poor ratings, so while they allow people who are not licenses taxi drivers to be on the platform, it is not a free-for-all without consequences. In the age of everyone reviewing everything, there can be consequences for drivers and riders in a much more efficient way than whatever process exists to deal with a poorly-behaved cabbie.
https://www.insidesources.com/how-uber-exposed-decades-of-flawed-taxi-regulations/
Company wages and what it means
in General Discussion
Posted
This doesn't help answer the problems of the day, but it helps me at least understand where we may be going.
If you accept the premise that we should all be paid based on the "value" we provide, then globally a manual laborer should be paid the same amount. Right now, we are (were?) in a period of globalization where I can outsource a task to somewhere else cheaper than I would have to pay here in the US. Eventually, and eventually may mean decades, those workers overseas will demand wages on par with, home country (let's say US) workers, adjusted for whatever frictional costs there are of dealing with people half-way around the world.
Once one country/region has seen its living standards rise, then the work will progressively migrate to increasingly lower-wage places until all those places are at parity with US labor. At parity, it no longer makes sense to outsource work that can be outsourced (some work, like getting a haircut, cannot be).
The challenge for an unskilled/semi-skilled US worker is this process can take decades more to happen. But ultimately, I think that is inevitably what happens. Deciding to pay working people more is not really a sustainable solution because it increases the value proposition of automation.
The only real sustainable answer to this is to aggressively upskill and re-skill workers so they provide more value than someone overseas does. This pandemic may be a perfect time to do that given the number of people out of work, and I would not be mad at all if the government devised a sensible scheme to do exactly that. Wistfully looking back on the post-war period when a good job and a pension were a given for anyone willing to work hard with a high school degree was a function of the lack of available labor after the war ended. Those pensions and perks were created to attract workers, and were created out of competitive necessity. Companies are no longer feeling those constraints (although the pandemic could change that for a while). I think we have to do our best to find a market-based solution to the problem before coming up with more artificial wage requirements which only accelerate the challenges facing most workers without giving them the tools/skills to combat them.
I do also believe CEO's get paid way too much. Some of the suggestions which tie up mgmt. compensation for a long time (and creates more of a partnership mentality) is a good idea. I am all for managements eating their own cooking over the long-term (and being forced to do so). Mgmt. is taking a lot of risk, but its mostly asymmetric (heads I win, tails I don't really lose much) and any thing we can do to increase their downside risk from engaging in myopic behavior to benefit their short-term comp is a plus.