Cigarbutt

An interesting aspect is that all attempts aiming for cost containment that have been tried have not been successful so far. A strategy would be to try more of the same with an expected different result, another strategy would be to reframe the foundations which is basically not possible. Still, using the heart stent example below, it appears that the system may be ready for some significant (and constructive) changes. If you play with the link provided by Spekulatius, you can find that the cost to insert heart stents (cost of procedure and estimated cost of stent) is a large multiple compared to other countries. Because of innovation, it is understandable that the cost may be superior but clearly not enough to be a multiple. Also, it is becoming increasingly clear (evidence-based, multiple references available upon request including a large international study just published last November) that stents mostly do not result in significant benefits in chronic and stable heart disease. Despite this, in all countries but especially in the US (by a large margin), stents continue to be inserted without any restraint. Finally, some groups, who are aligning incentives, are designing ingenious protocols to replace invasive procedures and expensive drugs. We are only at the forefront of this wave but it is coming. If I'm right, you may want to adjust sales and profitability for those involved in the stent market: Medtronic (MDT), Cardinal Health (CAH), Abbott (ABT), Boston Scientific (BSX), Becton Dickinson (BDX), Terumo and MicroPort Scientific on the OTC market. https://www.eurekalert.org/pub_releases/2019-08/kp-kpr082719.php

^The following table could be helpful: https://www.marketwatch.com/story/buybacks-are-the-dominant-source-of-stock-market-demand-and-they-are-fading-fast-goldman-sachs-2019-11-06

There is another thread specific for Reitmans but there is the smell of blood and will take it from here. https://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/ret-reitmans/msg273985/#msg273985 Long story short: Long story and very competent managers but retail is tough and all good things must come to an end. Short-term problems are turning into intractable issues and I think that, given the present momentum, the turnaround will be very difficult. This is a first shared shot at it and expect to potentially meet interesting entry points in the next few months. 3 scenarios: 1-They sell or turnaround the maternity segment and somehow save the brand; then market price should converge to book value. 2-They try and try and this becomes a value-trapped melting ice cube with accelerating negative cashflows (the transition from slow to fast may be short) 3-They decide to enter BIA, define a SISP pathway and rapidly liquidate through a receiver (the Danier Leather story) For scenario 3, comparing Reitmans now to what Danier Leather looked like at the end of 2014 is instructive. There are balance sheet differences but IMO differences tend to cancel out in terms of the liquidation value. I assume Reitmans could terminate or assign leases in a similar way. I come to a liquidation value of +/- 1.40 per share if things go south in the next 6 months. I assume the liquidation and distributions would happen over a two-year period. That's it for now and will reconsider with further developments or if/when share price goes below 0.70.

The latest 'agreement' dealing with individual wildfire claims was felt by some (some Seeking Alpha contributors and some others) to lessen the pressure on the equity backstop reported last September. http://s1.q4cdn.com/880135780/files/doc_downloads/wildfire_updates/2019/09/2019.09.17_Plan-Financing-Summary_FINAL.pdf The agreement, simplified, implied 6.75B to victims in installments ending in early 2022 and 6.75B in company stock that would result in a significant stake in the 'reorganized' PG&E. Gov. Newsom, after a solicited debtor request from the party looking for a nod of approval, gave the following answer: https://htv-prod-media.s3.amazonaws.com/files/letter-from-governor-newsom-12-13-19-1576295434.pdf This remains complex++ and anything can happen but the Governor is, in a simplified form, asking for a more significant commitment (governance and new equity). There may be another interesting entry point if PG&E does not respond fast enough or in an unconvincing way. It seems to me that PG&E is positioned to deliver a reasonably sufficient message (more essential governance change, more 'new' equity commitment in order to have a less leveraged phoenix entity and perhaps a specific equity commitment for the wildfire fund to come that will deal with future costs). I keep my baseline requirement for +/- 17B in new equity. IMO, there continues to be a window of opportunity for a white knight such as BRK energy who could supply sufficient equity capital, management capacity, governance reassurance and long-term stability for cost of capital not even considering the reinsurance expertise that will play an increasing role going forward, given the wildfire context and the inverse condemnation rule. I understand the Governor's tone, given the noise at the constituency level but the public authorities have to get their act together and it is difficult to explain how the insurance department does not seem to understand that they are more a part of the problem than a part of the solution: https://ktla.com/2019/12/13/insurance-plan-fights-california-commissioners-push-to-offer-homeowners-state-wildfire-coverage/ Unrecognized costs remain so qualified until the forces of nature start to send invoices. It looks like old PG&E will 'pay' perhaps more than its 'fair' share of 'natural' costs due to its bad-boy and rogue behavior and attitude and it may recapture some of these costs over time but the state needs to remember that they can't have their cake and eat it too. I would say the bankruptcy is likely to discover the best outcome but an adult in the room would help.

A nice obituary with a personal touch: https://www.nysun.com/editorials/paul-volcker/90935/ He enjoyed also fly-fishing. He was a member at the Restigouche Salmon Club which is located in an absolutely beautiful area. https://www.forbes.com/sites/monteburke/2011/01/31/gone-fishing-paul-volcker-retires-from-public-life-heads-for-the-river/#2add45b96ced A principled man, he was one of those who are greater than life: https://www.amazon.com/Keeping-At-Quest-Sound-Government/dp/1541788311/ref=sr_1_1?keywords=keeping+at+it&qid=1575981673&sr=8-1 "If you keep at it, eventually you’ll catch a big one"

This remains very complex but the BK pretty much evolved in a typical way, at least so far. Risks: -nationalization risk -bankruptcy risk -more wildfire risk Late last week, there was an agreement reached for wildfire claims (13.5B). Together with the previous resolution of state and insurance claims (1B + 11B), I would say a significant layer of uncertainty has been removed and the likelihood that oldco (old equity) comes out favorably, given the remaining risks, may now get recognized. Old PCG needs to come out with a reorg plan with a deadline fixed in Q2 2020. Assumptions: -old equity 'pays' for the after-tax total claims of the past -post BK equity valuation at 22-24B, similar to end 2017 -need to raise 17B in new equity -debt raised for future wildfire costs as part of a future effort, rate-backed and state-backstopped So "value' about 10 to 13 per share. It looks like the price may rise to this reasonably conservative range in the short term. NB This is, in large part, an exercise in liability discounting. One liability was easier to discount: https://www.marketwatch.com/story/was-a-280-million-emerald-destroyed-in-california-wildfire-pge-is-dubious-2019-11-19?siteid=rss&rss=1

Thanks! That was an interesting take. Never underestimate people who have drooping eyelids and the value of self-derision, as long as your ability to do so is bigger than your ego. If short on time, the Eton rugby photo says it all.

FWIW, I think this divestiture should not be regretted. In addition to the regulatory challenges associated with their aggressive style, there was another aspect which was questionable and for which recent work suggests that a large part of their clients would be better served by another option. In my jurisdiction, the workers comp insurance market is 100% funded (premiums and payouts) by the government. However, private parties can get 'involved' in the claims handling part and a way to do this is to 'mutualize' the costs and benefits that result from this activity. I have been peripherally 'involved' in this market. California (the main market for Applied) has a large self-insured workers comp market. The advantage of the products sold (aggressively) by Applied implied 1-savings on the administrative costs due to scale, 2-lower premiums by sharing the savings coming from the built-in incentive to self-improve practices and 3-the bright and effective use of reinsurance to deal with the excess of loss component. An essential ingredient was the trust necessary to outsource this aspect of the insurance transaction. It seems that self-insured groups can do a better job at cost savings and how to share the NPV effort. The report has been sponsored by a self-insured group but results correlate with what I've seen in my neck of the woods. For those interested: https://www.dir.ca.gov/osip/AppRequirements.htm https://www.securityfund.org/assets/docs/Bickmore%20Comparision%20Self-Insurance%20v%20Insurance%20-%20FINAL.pdf Note: This is not to say that self-insured groups will take over the traditional private insurance market, it is only to say that many clients presently under the Applied umbrella could get a better (and more transparent) deal elsewhere. I doubt Mr. Buffett wastes his time on such technical details but would not be surprised if he showed an unusual lack of concern (after a discussion with Mr. Jain) when the black sheep offered to fly on his own.

This is potentially relevant but there are multiple variables and aggregate results may need to be decomposed for application versus a specific sector or specific entity. Also, comparing different sources can be a challenge since different definitions may be used for the critical variables. You may find the following interesting (especially the "Debt to EBITDA is Retreating From Post-crisis Highs" graph). https://libertystreeteconomics.newyorkfed.org/2019/05/is-there-too-much-business-debt.html Interestingly, note that the graph uses debt and not net debt. The recent "improvement", in fact, has not materialized at the net debt level because the lowering of the ratio can be explained by the massive cash repatriation that us firms completed after the last tax reform with funds mostly going to share buybacks and some net debt reduction but the aggregate cash balance has come down a lot and the net debt ratio has not improved. Another factor that is tainting results in the aggregate is the very unusual manifestation, historically speaking, of concentration of cash in the hands of a few. These days, 5 companies hold about a third of the aggregate cash, the top 1% hold more than 50% of and 45% of the cash pile is held by the tech industry. If you look at specific industries, the leverage picture has become somewhat unusual. This creates also a relative game where a player like CVS (pharmacy), despite carrying a high debt load, looks like Fort Knox when compared to one of its competitors, Rite-Aid. Recently, I looked at RH, a luxury furniture retailer. Below are relevant (significance of the relationship between the numerator and denominator) numbers of the analysis: 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 net debt/"adj." EBITDA 2.8 2.5 1.5 0.8 0.5 0.8 0.8 2.7 3.4 2.4 The conclusion that I came away with is that it does not matter that much if leverage increases, as long as the cash flow follows but the company bet that it can capture the excess cash in the top 5% of customers and may have overlooked that debt is stickier on the way down. Because of the cash concentration at the top, an interesting area to look at is the larger pool (larger than the S&P 500). The best way to share an interesting graph coming from La Société Générale is the following link (page 3 of the document showing Russell 2000 {the initial reference mentions R2000 not R200) net debt to EBITDA): https://fpa.com/docs/default-source/funds/fpa-capital-fund/literature/quarterly-commentaries/fpa-capital-fund-commentary-2019-06_final.pdf?sfvrsn=4 In some sectors and for certain specific entities, we are living in interesting times.

^What Rule#1 is saying basically (if I get it right) is to consider jumping off the plane while leaving many questions unanswered. The easy thing is just to ignore as jumping off the plane is the wrong thing to do most of the times but the inputs perhaps incentivize to ask some relevant questions: 1-How much risk can you afford to take? 2-How much risk do you need to take? 3-How much risk are you willing to take? 4-How much do you care about keeping up with the market? 5-Is there a way to make money here? If the inputs make you go through the first three or four questions then the next logical step is to hope for a complete financial striptease which may be too much to ask. The above was inspired by a link read this AM: https://humbledollar.com/2019/12/imagining-worst/ Speaking of humility, one has to wonder about the environment when there seems to be an unusually high number of pilots expressing that flying an airplane is simple AND easy. ----- Who knows what this all means but this thread went from an environment where fund rates were supposedly and decisively going higher to neutral and, against all odds, to easing although the Fed has difficulty finding the right vocabulary. In reply #101, Spekulatius noted: "Maybe they are too deep in? If rates increase, the value of those low/no/ negative interest rates bonds would drop and the bagholders owning them wouldn’t broke. Maybe all that can be done at this point is dig deeper." While not being relayed really by the press (even the financial press), there continues to be a very unusual confluence of circumstances where the Repo market has participants refusing to enter "risk-free" arbitrage opportunities and where massive support is now simply integrated into a new normal. https://ig.ft.com/repo-rate/ And the Fed now put in place 42-day facilities to make it through year-end. This is extremely complex but there is something REALLY weird going on and I wonder if there is a link between the tiny rise in interest rate that occurred since last August and the stress seen at the core of the financial plumbing because, as Rule#1 reports, this tiny change likely had a huge impact on the portfolios' mark-to-market value and these are the typical portfolios that foreign financial institutions use as collateral to enter the US Repo market. Obviously this may be some kind of temporary technical noise but it's eerily similar to the noise heard from the wholesale funding market in 2007, when it was felt that the brutal forces of the market would be contained. ----- Today, I plan to analyze Tech Data in order to do some inversion work. It will likely be a learning experience. However, I doubt that it will be possible, even in retrospect, to find an attractive entry point along the way because there appears to be too much competition as the graph showing competition to outcome is bell-shaped

Yes, most M&A happens in the public market but the other assumption mentioned (which I thought was correct until I looked at the facts, national accounts and all) needs to factor in that higher buyback activity has been associated with higher issuance of stocks through options and other equity grants. For example, in the last 10 years, on a net basis, net share count reduction occurred only at about 1% per year. Even if absolute amount of dollars were allocated to buybacks, the fact that shares were bought at relatively high levels (opinion) helped to mitigate the share reduction.(!) If you look at what happened since the mid 90s (by choosing that initial reference point, there is an embedded starting point bias to some degree because this happened to be a high water mark of sorts), the defining features include declining "death" (all causes included) and "birth" rates but the birth rate has declined more, especially during the decade preceding the GFC. Since then, we've pretty much flat-lined, whatever that means. https://fred.stlouisfed.org/series/DDOM01USA644NWDB Capital does not die and the stock market has not shrunk ($ value) and it seems like the optimal scenario would involve recycling the enormous amount of capital returned to shareholders into new and more numerous ventures that would (eventually) displace incumbents. Isn't that the secret sauce?

^To the question, what's wrong, Warren? I don't know the answer and wonder if he has lost it or if the market has lost it. I guess it all comes down to an individual decision with personal investment implications but here's an historical input that is potential food for thought. The link is an indirect reference to a WSJ article and was supplied by, I think, a COBF member: https://brianlangis.wordpress.com/2018/09/26/whats-wrong-warren/ The question here is not to compare both periods but simply to mention that, for some, in 1999, the obvious choice was to bet on Yahoo. The verdict 20 years later: 1999 2019 MKT CAP Yahoo (B) 120 48* MKT CAP BRK (B) 83 540 *I'm no Yahoo or related specialist and the number represents what I come to as an estimate of liquidation value resulting from relatively recent transactions. A potential message: The environment keeps on changing but some principles endure and the retained earnings aspect may only play out over time.

Will try to go from micro to macro and back and this thread reminds me of one you started recently which dealt with the issue from a regulatory angle. I just arrived at a conference where the title includes "dynamic" and "staying ahead" but even if the title is elegant, it's really about maintaining regulatory capture. There are many reasons/causes but I think this has to do with the fact that we live in a golden era for incumbents (section 4, starts page 23). https://eig.org/wp-content/uploads/2017/02/Dynamism-in-Retreat.pdf An interesting area is that we seem to take for granted that financing is easy (financing is important for entrants) but it appears that financing for smaller players is nothing but easy. One way to gain market share is to be at the leading edge; stifling entrants may help. And I wonder if the Great Recession was not a wasted opportunity. At lunch, I'm sure somebody will take a photo of their meal and send it to "friends" but somehow it seems that the real issues will not have been discussed.

Absolutely.

I am not as familiar with the Ontario-specifics but the regulations are pretty uniform on this side of the border for that aspect and I tend to agree with longlake in the sense that your efforts are unlikely to succeed if your goal is to go through a formal arrangement. You have two hurdles: 1-Obtain an exemption, when you accept money from somebody else to "manage" it, in order to avoid the prospectus rules. This would essentially involve producing an offering memorandum showing that your 'investors' are rich, sophisticated, 'accredited' and are ready to (consent to) lose all their money because they think you are great. 2-Obtain an exemption in order to avoid the need to register yourself as some kind of an adviser. This requires time, potential frustration, fees and your job is then to somehow convince somebody that you have the capacity and ability to do this outside of official bounds. https://www.getsmarteraboutmoney.ca/protect-your-money/investor-protection/regulation-in-canada/types-of-prospectus-exemptions/ https://www.osc.gov.on.ca/en/Dealers_asking-relief_index.htm I hear what longlake is saying about investment managers being stifled but this area has always attracted individuals with poor credentials (and poor incentives) and it may be a price to pay for the collective blanket of security.

Here's a quote that's really a summary of documented facts: "Floyd Odlum: Making the Best of Bad Times Floyd Odlum is sometimes described as the only guy to make a fortune in the Great Depression. (He wasn’t.) James Grant, editor of Grant’s Interest Rate Observer, called Odlum a “salvage artist par excellence.” “None of us can know the future,” Grant wrote. “But, like Odlum, we can make the best of a sometimes unappetizing present.” Grant also managed to scrounge up a pretty good anecdote on Odlum. In the summer of 1933, when all the world seemed to be in pieces, Odlum strolled into his office, looked at his glum partners and said, “I believe there’s a better chance to make money now than ever before.” Odlum liked poking around in the smoking wreckage of the 1930s. Bad times create wonderful pricing. The story of a man with the odd name of Odlum is one of how he got rich in the Great Depression. Floyd Bostwick Odlum was a lawyer and industrialist, born in 1892. He started his investing career in 1923 with $39,000. In a couple of years, he turned that into $700,000 through some savvy investing in deeply undervalued stocks and other securities. Odlum was on his way. All told, in about 15 years he parlayed that $39,000 into over $100 million. His big score came after the crash of 1929. Odlum bought busted-up investment trusts. As Diana Henriques writes in The White Sharks of Wall Street, “Odlum [became] a multimillionaire almost overnight by investing in the undervalued shares of twenty-two investment trusts decimated by the 1929 crash.” He found companies trading for less than the value of the cash and securities they owned. So he bought them, liquidated them and then took the cash and did it again . . . and again. Of course, to do this, he had to have a little money at the bottom. And he did. Odlum was either lucky or prescient, because he avoided much of the pain of the 1929 crash by selling some of his investments beforehand— leaving him with some $14 million of fresh cash to take advantage of opportunities. So, don’t be afraid to hold onto cash until you find those special 100-bagger opportunities. As Odlum’s career shows, bad times create those big opportunities." I guess the limits of copyright use without permission are possibly stretched so here is some justification: -the idea is to share potentially helpful info that reflects generally known facts and that does not include unusual insight or analysis -the quoted part contains only a small amount of text vs the whole book -the reference is listed below -the book is an interesting read and is recommended; I would say it is worth at least 100x the price. https://www.amazon.com/100-Baggers-Stocks-100-1/dp/1621291650/ref=sr_1_1?crid=ZANZ09OV5KVI&keywords=100+baggers+chris+mayer&qid=1574881970&sprefix=100+baggers+%2Caps%2C275&sr=8-1 NB If sufficient negative feedback is provided, will delete the post temporarily until permission is granted.

Of course I support Trump in goosing the market. He needs to do whatever it takes to keep the liars and thieves (Elizabeth, Bernie, AOC) away from the White House. 2 questions: 1-Are you a central banker or something? :) 2-Can you elaborate on the link between your comment and the underlying theme of the thread or did you just want to vent a political opinion?

It's interesting that this thread, which is about a redefinition, barely touches on the father of the definition (apart from a brief indirect mention in reply #6). How you define the margin of safety and its relevance may be epoch-specific. Mr. Graham went through a vertiginous rise during the new era period and became a portfolio manager in 1926. His capital grew, mostly from capital appreciation, and went from 450K to 2,5M in three years. The following three years meant a 70% loss. The fact that he survived with grace is, by itself, an accomplishment but he was wise enough to think about the whole thing and come up with some definitions. A fact that is not well known is that, after the dreadful period, he often acted as an expert witness helping cases to argue that market quotations actually undervalued many businesses. His experience was unique and perhaps not repeatable but the atmosphere of the period helps to understand his tone and his anchor points for definitions. It seems that he was able to grasp concept of resilience, optionality and the nature of growth but he chose to focus on past quantifiable measures, put a high price on downside risk and respected the limitations of evaluating the outcomes of the future which, invariably, are tied to the general level of business conditions. An argument could be made that such a confluence of events won't happen again, that he was unable to recover from the permanent bruising and that we was, in the end and perhaps because of this attitude, an average investor (if one forgets Geico which is an investment that didn't fit his margin of safety definition) but it seems that Mr. Graham was at least right in the need to remain humble and the contrarian side of me wonders if his teachings are not the most relevant when it is felt that he no longer is.

^I don't have the 'right' background and continue to wonder if that's a disadvantage when dealing with those types of questions. The opening post contains limited info and possibilities are vast but it is implied that the potential breach may be more technical in nature and relatively easy to remediate, simply indicating that, even if a default could be contractually called, this is an opportunity for the lender to revisit the agreement and 'negotiate' better, (in the sense of more constraining) and more expensive terms. Whatever the context, to assess refinancing-type risk, it would be perhaps relevant to look at the other Cs: credit history, collateral, capacity and especially character. Even if we live in an increasingly intermediated world, this could boil down to a face to face outcome. FWIW, reading many bond agreements and much leveraged loan documentation, I continue to be impressed by the degree of easing in covenants with, for example, many companies being able, in the last 2 years or so, to issue debt with an agreement throwing even the going concern requirement out the window. Maintenance covenants used to have a leading indicator type of quality and it seems that, often, value can no longer be appropriately appraised from documents delivered at period ends. This too shall pass.

^I suggest the book too if you have an inclination to this sort behavior analysis. An interesting aspect is that it can be a source of ideas, from a practical standpoint, for applications in activities of daily living. Productivity and the KISS principle have been central in my activities and, maybe, that's why I'm doing nothing these days. Anyways, a while back, my contribution to an infrastructure project was to suggest painting footsteps of different colors on the floor in order to 'nudge' people in the right direction. Scientific evaluation of the input (asking volunteers who had first-line contact with the "clients"): amazingly positive NPV. I've always been amazed how small things can make a huge difference, at the margin. A problem though is that nudging can easily become manipulation and one has to be careful when Mr. Thaler suggests application to the societal level. It think it may form an acceptable compromise of paternalism with adequate checks in place and first-do-no-harm principles.

^Somehow, reading the prospectus doesn't seem inspiring, at this point. After a few seconds on this, two questions come up: 1-Why didn't they do a bond offering? 2-Does the risk section mention the possibility that leaders may lose their heads?

Excellent point. Maybe this deserves a separate thread but here’s an additional and perhaps final comment. On the above supply chain management and working capital comment, RH has done well since fiscal 2016 with a plan to improve sourcing and inventory management that worked. See numbers below. Characteristically, they’ve called this: the new architected, redesigned and reconceptualized operating platform but it basically means getting it right in terms of alignment between their inventory, what the customers want and the efficiency to deliver the product so that the client does not regret that a deposit has been made. fiscal 2014 2015 2016 2017 2018 Q1Q2 2019 GPM (% of R) 37.0 35.7 31.8 34.8 39.9 40.4 OP (%) 8.9 8.8 2.5 5.4 11.5 13.2 NPM (%) 4.9 4.3 0.3 0,1 6.0 7.6 interest expense (%) 0.9 1.7 2.1 2.6 3.0 3.4 From 2014 to 2018, revenues have grown at a 7.6% rate. Q1Q2 numbers show a similar continuing trend. Shares outstanding have decreased very significantly but once dilution is taken into account, the cannibal is not as vociferous as it first appears. For comparison between periods, using the gross measure of inventory over sales for WC management (careful: direct sales were important in the former period). fiscal 2006 2007 2016 2017 2018 Q1Q2 2019 inv/sales 27% 28% 35% 22% 21% 18% The positives: new market position with a brand formula meeting a relatively unmet need, as mentioned above an improved operating platform since 2016 which was matched by a period of market incredulity that allowed a massive share buyback, a loyalty program that reinforces the brand and a marketing strategy that involves (directly and indirectly) designers (quite brilliant in fact). However, the cash obtained from improved working capital needs and inventory was combined with a massive amount of debt to complete the share buybacks. So, after some review, there are clearly some positives in this ‘story’ but the thesis remains basically a (risky) bet on the jockey. Let’s take a look. The early 2000’s is an interesting period and the CEO was the same person. This was a time of transformation and Restoration Hardware (was selling hardware then) reported 5 years of losses. The turnaround was partially a success with growing sales and, eventually, hope for potential enduring profitability but 2007 caused a significant decrease in customer traffic and in-store sales (then negative cashflows etc etc). The CEO scored positively with improved merchandise selection, effective store remodeling, appropriate store closures and debt decrease. The strategy included an increase in imports, a strategy (which has continued to this day, in fact even higher now, with more than 70% coming from Asia and about 41% sourced in China) which IMO is, in a way, hard to reconcile with the ‘classic’, ‘traditional’ and ‘authentic’ America brand but high spenders may not be really bothered by the apparent discrepancy perhaps the same way that wearers of certain caps may not appreciate that the manufacture of the symbol is, in fact, out-sourced. The strategy also focused on catalog and on-line sales dubbed direct-to-consumer sales which grew ++ up until the company disappeared from the public screen and, obviously, this part of the strategy has radically changed (I think for the better in this specific niche) with the on-line connection being defined not as a direct sales channel but as a “virtual extension of the stores”. Of note, however, is that the gross margin in the early 2000’s improved only temporarily from lowish 30% levels under the helm of the CEO, at least in part due to an inability to improve the supply chain management, an area where the CEO succeeded with changes implemented after things started to turn south in 2015-6. Mr. Friedman is potentially an outstanding owner-operator and one has to include character assessment. Mr. Buffett has been unusually clever in this regard and this may represent an opportunity to judge the flair of the next generation. After much reading and thought, I find that Mr. Friedman stands somewhere between Mr. Steve Jobs, Mr. Bernard Arnault and Mr. Adam Neumann. He has the salesman DNA and it all comes down to instinct (more on that later). I think the fundamental weakness lies in the fact that the experiential gallery stores (style, hospitality part etc) may be a well executed idea that may work for a while and hold some iconic value but the essence of luxury is only partially related to the place where you buy the product. IMHO, it’s THE product that really counts. In their specific market, RH will continue to be exposed to the risk related to the anticipation of customer preferences and I think that they may have a hard time with the high fixed cost business during volatility periods that will come from anticipation variance and from the fact that the top 5% may not be bailed out by the top 1% in times of discretionary lifestyle stress. Here’s a link that helps to size the jockey: https://images.restorationhardware.com/media/press/2019/Winter2019-BusinessofHome_PressPage.pdf When reading the article, the underlying act of selling furniture is barely mentioned, the same way prices are not listed in certain restaurants. Speaking of restaurants, the last time I was in Chicago, we went to Bavette’s for a steak and did not particularly like it or at least thought that it wasn’t worth the price, not even the peer value potentially recognized by people reading my nonsense. That night, I enjoyed myself more at The House of Blues which, perhaps, tells more about the person writing than the investment itself. So, all in all, there are positives and potential for some value that I’m missing but there are negatives. I would also say that the entry point is associated with a high price tag to find out but this is the territory. In the end, I conclude that this is likely to be a poor investment (and perhaps a very poor one given the capital posture and certain risks mentioned above) and what helped with the final assessment, the “this is it” moment, was the following excerpt, when choosing the real estate spot for the Chicago Gallery/Showroom, from the jockey himself: “As a man in a long cashmere coat and an Hermès scarf walked by with a well-coiffed poodle, Friedman turned to RH’s president and chief creative officer Eri Chaya and said, “This is it.” As reported by the reporter who worked as a barista throughout high school and college. Apologies for the long post but it was an exercise that was useful for me as I presently consider an investment in a furniture retailer that, somehow, shares many similarities with RH even if it sells to the mid and lower segments of the market, for instance, in the need to reinvent the brick and mortar model in order to better serve certain segments (through an on-line bridge and through a better on-site shopping experience). The target I'm looking at now though is more conservatively financed, has taken a more conservative take on the 'transformation', would actually benefit from a downturn as it has historically shown better inventory turnover management which will help to opportunistically gain market share and would relatively benefit from a general downturn as decreasing traffic from existing customers would be compensated by higher traffic from downgraded people lying higher in the class structure. The end.

^From a personal business experience point of view, profit margins and return on equity are joined at the hip, both when trying to expand the business prospectively and when assessing the historical record retrospectively. The two charts, on the surface, suggest an absence of a strong correlation which, conceptually, is hard to reconcile. Let's try. For a very long time, the corporate profits per gdp as expressed remained in a 'band' between 5 and 7%. During that long period, ROE, as measured in the second chart hovered around 12% (that was one of the premises that Mr. Buffett used in his The Inflation Swindles the Investor article). More recently, profit margins have increased significantly and now deviate from that historical band. See below for a more recent update. I just looked at S&P 500 numbers as a proxy for market ROE and compared earnings to book value in the aggregate and note that, in the last few years, ROE has also settled to around 15 to 16% which, I submit, also appears to be a clear break from the historical band. While the increase in profit margins, as measured, appears to have outpaced the increase ROE, as measured, I suggest that there are confounding variables including the fact that the book value growth of the S&P 500 has outpaced the growth in GDP (both values nominal) by about 15 to 20%, in the last 20 years, which suggests that a higher denominator vs the right chart may contribute in partly "hiding" the paradigm shift that has also occurred at the ROE level. https://fred.stlouisfed.org/graph/?g=1Pik Another consideration is that the aggregate numbers "hide" another factor which is the increasing concentration of highly profitable firms. If you look at the last few years, the number of companies forming the S&P500 responsible for 50% of net income has been decreasing, which adds another level to the concentration problem and the competitive landscape. In 1999, Mr. Buffett said the following: {For an investor to achieve juicy profits}, "Corporate profitability in relation to GDP must rise. You know, someone once told me that New York has more lawyers than people. I think that's the same fellow who thinks profits will become larger than GDP. When you begin to expect the growth of a component factor to forever outpace that of the aggregate, you get into certain mathematical problems. In my opinion, you have to be wildly optimistic to believe that corporate profits as a percent of GDP can, for any sustained period, hold much above 6%. One thing keeping the percentage down will be competition, which is alive and well. In addition, there's a public-policy point: If corporate investors, in aggregate, are going to eat an ever-growing portion of the American economic pie, some other group will have to settle for a smaller portion. That would justifiably raise political problems--and in my view a major reslicing of the pie just isn't going to happen." The above suggests that competition is no longer that alive or that well and some other group has been looking at that growing pie, with envy. Staying away from politics and going back to the personal record, I hope that the highly correlated and high margins and returns were due to talented resistance to competition but I have to admit that some of it (perhaps a lot of it) was due to opportunistic capture of features not related to competition (artificial barriers to entry, excessive regulatory protection etc). I took my market segment as it was and benefitted from the steep inelasticity of demand for my 'products' but somehow wish that people with governance responsibility did better, for the benefit of the aggregate, because I really enjoy tough (even extreme) but fair competition.

Can't say I understand the RH purchase. CEO touting a new business model with magical 50+% ROIC for a furniture retailer, while borrowing heavily to repurchase shares and battling short sellers. I guess that RH is. Weschler or Combs purchase, based on the size. One thing to consider is that the Berkshire folks should know a thing or two about furniture retail, since BRK owns a few furniture retailer (Nebraska furniture Mart, Jordan etc). So I am guessing Weschler/Combs and Buffet know the lay of the land in furniture retailing fairly well. Someboby I’ve learned to respect said the following, last May: “I really don’t care whether Buffet buys are sells WFC stock. He has bought and sold many stocks, some of which performed well or poorly after he bought and sold. Buffets buying a stock just means that there is something special about the company , that it’s cheap and that it’s not a fraud. Other than that it’s my opinion that piggy-packing on other investors never works, not even with Buffet.” and “Buffet buying is a much stronger factor than Buffet selling. For once, it indicates his assessment they it’s is a quality company within its industry. He is usually correct about this, especially about industries he knows a lot about and banking is one of them. Anyways, I typically use buys from other investors as a starting point for research, not as a decision factor.” Given the Restoration Hardware investment now called “RH”, let’s focus on the starting point for a minute. -Investing in an investment that makes investments requires joint approval but also sometimes a level of confidence or even trust. I would say this luxury investment marks a certain departure from classic Buffett. This may eventually have an impact on BRK’s prospects and now is not a bad time to think about it, even if the position is considered ‘small’. -Looking specifically at RH, furniture retailing investments can be profitable although it would seem that one has to start with a high burden of proof against it. Some retailers have done very well by capturing specific customer segments or sensing enduring trends (Costco, TJX, ULTA etc) and it is possible to make money in smaller players with regional advantages or special situations but retail is tough business and the moat can be elusive. Wal Mart has its own 'story' but I can't see how a parallel could be made with RH. The thesis (which obviously may be right) here implies that you believe (or understand?) that the “transformation” of the business by a “visionary” leader will translate in significant profitable growth going forward. The capital structure of RH also lives on this premise. At a basic micro level, the stores are unique and seem to offer a “special” environment (conducive to spending and high spenders) but one can find similar or equivalent products elsewhere for much lower prices. The discounting strategy (which is evolving) is a bet in a way that the high end consumer will continue to see RH items as Veblen goods (items for which demand will increase if the price increases, irrespective of the underlying value), which is a risky bet IMO, especially through a long-term lens. Moving higher in the industry analysis, one has to question the enduring essence of the size of their customer segment. Things have been roaring lately. Luxury items can be real winners but trying to grow in a period of temporary adjustments can have significant effects on liquidity for a retailer and I find RH not particularly well prepared for such a scenario. How they fared during the mortgage crisis is instructive in that regard. The next step would be to assess the funding story behind the customer purchases. I start with the assumption that it’s not all paid cash and some of the customers may be relatively extended as they may well belong to another class. Home Hardware also offers interesting stuff. I don't understand the RH purchase but so far I don't like it as a capital allocation decision. Edit: BTW, I'm told that RH furniture was popular at WeWork and we think that there may be excess inventory there. Perhaps unrelated but perhaps a sign of the times. "It's a sign of the times Welcome to the final show Hope you're wearing your best clothes You can't bribe the door on your way to the sky You look pretty good down here But you ain't really good"

... Read this AM in an unrelated (?) article: "To us, this entire expansion highlights the fact stocks in general don’t need rapid productivity or GDP growth to rise." To me, this eco-system doesn't make any sense and maybe I have some wework to do. :)