Packer16

The Berkshire performance collapse is my concern. Over the past 10-years it has approached the performance of the S&P 500 as its P/BV has declined and BV growth has slowed. You have the best capital allocator in the world whose performance is approaching the S&P 500. I like the Markel team and approach my only concern is if size has reduced the best capital allocator in the worlds returns, why would it not do more so for others? Packer

I agree BV growth is great historically but as these firms grow there BV growth declines (look at BH as an example). So I am looking at Markel and given there size saying that low teens is good starting point. With BNL is get low teens growth but a cheaper price. The question in my mind is the premium above BV worth paying for in the case of MKL vs. BNL or even KMI. Packer

The CAGR for 2013 is 17% but over the past 5-years the 5-yr GAGR it has ranged for 8 to 12% so I look at 17% as a high point. As going to BV I am not sure that is going to happen but relative so BNL who has grown @ 12% per year since YE 2007 and is expecting that going forward and can be purchased at book it does not look as favorable. Packer

How do you estimate compounder growth prospects and incorporate valuation into when to buy? For example if you take a look at MKL. The appear to be growing in high single digit/low double digit growth rates. Does paying 1.26 times book value make sense when the S&P 500 returns will be 5 to 6% at there current price. This implies a 5.8 year breakeven point (.26/(10% - 5.5%)). Also in cases like BNL there is no advantage as you can get 10.5% return buying at BV or for KMP 10% return (7.3% yield plus 7% growth in BV/(P/BV)) buying at 2.46x BV. Packer

Try this: https://secure.globeadvisor.com/servlet/ArticleNews/story/gam/20140517/RBIBINDIAFUND0516ATL Packer

This assumes that price is the key competitive dimension. I would argue that for many customers who are spending $100/year on printing, pricing is mostly irrelevant. They will go with the company they have heard of. Vistaprint's scale let's them outspend their competitors on advertising and marketing. I suspect that this realization is what caused VPRT to shift their strategy. Shipping out crappy, free business cards gets you scale but doesn't build your brand. The key metric I'm watching is Net Promoter Score. Customer satisfaction is going up, which should be a leading indicator. I think to the small business guy price is important and even more so if switching costs are low (which they are). The printing customer who has money to spend is already being serviced by one of the big printers and is sub-contracting out the work his company does not do. I don't think advertising makes that much a difference as price and relationship to the larger business folks VPRT is targeting. So for them to be successful they will need to steal customers away. I think the 42% annual repeat customer rate tells the story of how loyal the VPRT customers are and how much repeat revenue they can get for their S&M spend (not very much). Packer

Looking at Ycharts, RRD has had ROE pretty close to zero over the last five years. RRD also has a lot of debt, which would also artificially inflate ROE. RRD is facing major headwinds. A big portion of their revenue is for catalogs, etc. I used to run a digital catalog business and I can tell you the big catalogs (Crate and Barrel, Restoration Hardware,etc) are cutting back on their mailings. RRD has 21% gross profit margin versus 65% for VPRT. VPRT is forecasted to grow EPS at 20%. I think it is pretty obvious that VPRT deserves a significant valuation premium to RRD. But for a value guy, the bet is that current earnings aren't normal and that they will revert to historical trend. I am very comfortable with this bet and I like the widespread scepticism. If I am wrong, I won't lose much. As a long-term investor, I am very concerned about the capital intensity of the business though. Accounting RoE can be very misleading in a business with a lot of acquisitions and intangibles on the books. I like to look at FCF/(WC + FA) as my RoE equivalent. If you look at this metric you will see VPRT is not all that different than RRD. VPRT has had growth but that had actually got them little to nothing in terms of FCF. If they had such a great low cost model why would they be changing there model to go after larger companies? The reason is there is little profit with the small guys and competition can match your prices with many desperate printers out there will take any job just to keep the capacity up. VPRT has no lock-in and desperate competitors not a very good mix. Packer

Based on his portfolio, I think Mecham is more focused on earning power than book value. He might be willing to pay a significant premium for a company with high ROE and promising reinvestment opportunities (AKA "compounder"). I agree with his logistics pick as the model has worked before, however, Vistaprint is closer to SHLD and JCP in that what they are trying to do has never been done but has been tried in the past and found not to work out. Packer

:D Glad to hear! (assuming you are referring to VPRT). This is why I like the stock so much. Superficially, it is terrible and I want all the bad news to be priced into the stock. The bear case is pretty obvious (at least superficially): Broken growth story: Negative 76.60% Q/Q eps Expensive: PE = 30 (ttm), EV/EBIT = 11 Terrible quarter: Huge earnings miss, revenue miss, big write-off, bad guidance No momentum: Stock has went sideways since 2007 Horrible industry: Print is dying. Marketing is going online. Low margin. Capital intensive Bad execution No dividend Small cap, tech stock in the midst of a small cap, tech correction Poor sentiment: Most analysts rate it hold or underperform, huge short positions No moat: printing is a commodity business Who would buy this dog? And if nobody is buying and everyone is shorting, wouldn't all of the above be priced into the stock? With the huge short position, it wouldn't take much for the stock to pop. So let's use some Howard Marks / Charlie Munger second level thinking to see if there is something we are missing: Terrible business? Actually seems like a terrific business (if it weren't so capital intensive): - ROE of 20% for most of the last five years. - Operating EPS growth at 20% since going public - 65% gross margins - Have bought back 25% of stock since 2010 Expensive? Need to normalize earnings (this is where the J-curve comes in): - Earnings temporarily depressed due to investments in product, service, pricing - Earnings temporarily depressed due to investments in asian markets - Revenue temporarily depressed due to shifts in pricing / marketing - Net Income Margin fell from 10% to 2.5% due to these investments - If NIM rebounded to historical 10%, 2014 normalized GAAP EPS would be $3.78, PE = 10.5 Broken growth story? - Hard to tell, but results from Canada (where they tested the new strategy) are very promising - Anecdotally, my wife works for one of Canada's largest hospitals. Their charitable foundation ($120M revenue) used Vistaprint for a recent small project (even though Vistaprint is targeted at much smaller companies). Seems like there is some combination of convenience / cost that current large printers aren't providing. No Moat? - Vistaprint specializes in low cost, small batch printing - Traditional printers can't produce small batches cost effectively - No other small batch printer has Vistaprint's scale (5.5 billion business cards per year, 90,000 orders per day) - Vistaprint is the cost leader in small batch printing (each business card pack only takes 10 sec) - Economies of scale allow VPRT to make investments that no other printer can make (e.g. national TV ads) Gannon took a pretty good first stab at describing their moat: http://www.gurufocus.com/news/161898/vistaprint-vprt-the-makings-of-a-moat How was Nucor anything but a steel company? How was Southwest anything but an airline? How was Amazon anything but a low margin book retailer? Not saying that VPRT is in the same league but if you can find a misunderstood company in a terrible industry, the payoff can be huge. At 12x forward earnings, I'm willing to make the bet. P.s. If Allan can lend his stock out at 10%, then the risk/reward becomes more compelling. The issue here is these guys are not exceptional printers. I'll address the major points to why you think it is good investment: All printers have high ROE look at RR Donnelly and the other printers. Why is this the case? From what I see the technology becomes obsolete and there a huge amounts of overcapacity in the industry. This overcapacity leads to price competition (just look at Vistaprint's margins going from 25% to 11% - more in line with the industry average). The only way Vistaprint was able to grow was to accept lower margin jobs. Why do think these jobs will all of sudden become higher margin jobs? The printing business does not have many long term contracts so you are competing job to job. They say reduced margins say it is due to temporary higher costs (I think this is bogus because I see the increased costs as a cost of doing more business. If you stop spending then business will go elsewhere where others are will to spend.) The moat you mention has no profitability associated with it. The reason Vistaprint can make a profit is you can't change anything as a customer for your job or you get charged to print it again. This is a terrible way to build customer loyalty. The customers are so small with no lock-in, I doubt they make much money on them. If you look at the turnover stats, the retention is terrible, there repeat customer count is only 42%. The incremental revenue they have acquired since 2009 has resulted in negative OCF growth so I am not sure low cost matters if you are incrementally losing free cash flow. VPRT sells at a premium multiple to other mainline printers like RR Donnelly (6x EBITDA) when they are smaller and less profitable. I just think the price includes a rosy outlook (11x EBITDA is not a bargain price to me) and if the only way you get to a lower multiple is to assume some costs away (which I questions they can remove and keep the same level of revenues) then that adds additional risk. I could never figure out why some value guys liked this company. BTW my dad owns a short run digital printing company so he is very familiar with the printing business so we have some insight some outside the industry may not. Packer

But this idea is just baloney in my mind. The business is a terrible business and you can't change a terrible business into something good. They tried to go after the low-end of the market and got smoked. There is no profit at the low-end because customers make decisions based upon price. They have the same FCF as 2009 and CF margins that are down by over 50%. So growth took away value. Now they are trying to go up market. The only problem is profitable upmarket niches are already occupied by digital printers who have technology and customer requirement expertise and the larger profitable jobs are already dominated by salesfolks from the large printers. What is Vistaprint going to provide that everybody else doesn't already have? How is this anything but a printer valued at 11x EBITDA? Packer

I just attended the annual meeting for BNL and does look like cheaper than than the publics with the ability to make more accretive acquisitions. Now it is yielding 7% and has has and additional 5% increase in NAV over the past 6 years. It also includes depreciation deductions for individuals of about 40 to 60% of the distribution and pays no tax and the LLC level. They actually had a shareholder poll on going public vs. staying private and staying private won. They offer quarterly liquidity which they have always been able to honor. I dug into costs and there expense ratio (G&A, Op Exp/MVIC) is close to 0.9% on par with O (at 0.8%) and below LXP and ARCP at 1.4% and 1.8% respectively despite being much smaller at about $800m MVIC. TIAA/CREFs direct real estate fund also has an expense ratio of 0.9%. In talking with the CIO, he has seems to feel the pipeline of opportunities is still very large. They appear to have developed a niche below the large pubic players. Packer

How old are you? If your child will be in college after your 59.5 birthday then you can take money out of a Roth tax-free including any earnings. I never did any of these programs and my kids are approaching college age and I plan on funding from Roth contributions and current earnings. I think the flexability was worth it for me as my son delayed college entrance for a year and is now doing a 2 & 2 with a local community college. Packer

I was reading the 1949 edition of the Intelligent Investor and Graham points to a Lazarus-type rising from the dead situation in the Cotton Belt railroad. The railroad was in bankruptcy and the common shareholder protested the fact that they were not a part of the plan all the way to the Supreme Court. This took 12 years after declaring bankruptcy and by then the railroad had accumulated enough cash to pay off all creditors and resume operations by exiting bankruptcy with the common shareholders in tact. I know FRE/FNM have more politics surrounding them but this has happened before. Packer

I was thinking about FFH and the bind they have gotten into with the hedges and if there may not be a better structure where the hedges would not have to be used. One idea is to IPO the insurance companies, sell say 30 to 40% and use the proceeds to allow Fairfax at the holdco level invest the proceeds in there normal distressed/value investments. The insurance companies would use HW as there asset manager and use a more traditional mix of bonds at the insurance company level and dividend up excess capital to HW for investment. This would allow HW to pursue its value/distressed investing which it is good at independent of the constraints of the hedges. I think one of the issues with FFH is I am not sure investing insurance float in a distressed/value approach is appropriate. The two other invest the float companies (MKL and BRK) invest in high quality companies and stay away from distress. Packer

Markel Breakfast thread: http://www.cornerofberkshireandfairfax.ca/forum/events/markel-annual-breakfast-2014/ Packer

I have been listening to these directly from the Milken Institute. You can go to their website and choose which one you want: http://www.milkeninstitute.org/events/gcprogram.taf?function=program&EventID=GC14&day=Wednesday Packer

What was the date of the Schloss interview (so what crash are we talking about)? Thanks. Packer

I am not sure the general market is valued very high. The number of cheap stocks is down but not non-existent. There are a number of threads on potential undervaluations. I don't think stocks are all that popular based upon 5 year flow of funds into mutual funds bonds are much more popular. Packer

Maybe we need a sarcasm emodicon Packer

I thought I would check out this site we have alot of viewers from Romania??? Interesting. http://www.alexa.com/siteinfo/cornerofberkshireandfairfax.ca Packer

Will there be translation? I am interested in opportunities in this part of the world and have some I would like to discuss with some folks but I would be lost understanding Chinese. Packer

I am not sure the market is ever totally rationale. If so, we would not be able to earn returns higher than the market. If folks are focusing on dividend investing maybe the other areas of value investing are being ignored. Have you been able to find smaller Nordic value stocks? As an American, the one cheap Nordic stock I own is Awilco Drilling. Packer

Although, I see some of this I see a bigger love of bonds. We have had negative real rates in the US for a few years now and people have been just buying more bonds. I also hang out at another passive investor sight called "Bogleheads". They also have a net worth demographic similar if not higher than here and the conventional wisdom is to have your age or your age less 10 years in bonds. So if your 50, you allocation is 40 to 50% in bonds. Some of these folks have a pretty strong conviction that portfolios with large portions of bonds are the way to go, some even recommend a 50/50 stock/bond mix to younger investors. If this is the what the typical investor is investing in I understand why there are negative real yields. My take is to run away from these popular assets and buy asset that have slightly more risk but much higher returns like triple-net lease properties. Packer

A corollary of this is while you don't need the money yourself, there are causes worth supporting that take lots of money. You may not know how charitable work is done but if you know how to invest and make lots of money, turn over what you don't need. We've started this in our own life and our giving in the last 7 years has exceeded all prior Giving. I also have a portion of my retirement designated for future giving. The magic of compounding working for the larger good. Directly learned from the master. This is spot on and there is more than one master who espouses this point of view. A view of life and resources as stewardship and not ownership allows you realize that investment gains should be directed to help others and not to purchase things that moth and rust will destroy. I find Warren's recent most important question interesting: although current agnostic, it is is there a God? He is on the right track. Packer

Can you expand on the liquidity and tax advantages? I don't follow how private REITs can be better than public REITs. Assuming Broadstone can mark property values pretty accurately, it seems that there are probably public REITs trading at greater discounts. I looked at the publics (NNN players like LXP and O) but they all trade at lower yields with no depreciation tax sheltering associated with the distributions at the personal level. If you can find a public NNN with a yield higher than 6.8 percent I would like to know about it. Thx. Packer