Arski

I think that Greentown Management is pretty resilient from the Chinese government. Andrew explains the reason quite clearly:

No problem, hope you liked it!

For the people who are interested. I just shared a post about what make CEOs great and how to recognize great CEOs. Link: The Outsiders (wixsite.com)

Yes, that would be the case. But then, because one dollar is now worth 50 cents, they need to double their earnings to stay even. How do they do that? By doubling their assets, they need a lot of additional capital for that. So, it's economically way more beneficiary to have an asset-light business that needs a lot less capital to double their earnings. Wouldn't operating leverage on rising prices make 2x earnings a low bar when their revenues are also doubling? There might be some flaws in my thinking here. This is what Buffett says in the See's Candies example about doubling revenues: "This would seem to be no great trick: just sell the same number of units at double earlier prices and, assuming profit margins remain unchanged, profits also must double. But, crucially, to bring that about, both businesses probably would have to double their nominal investment in net tangible assets, since that is the kind of economic requirement that inflation usually imposes on businesses, both good and bad. A doubling of dollar sales means correspondingly more dollars must be employed immediately in receivables and inventories. Dollars employed in fixed assets will respond more slowly to inflation, but probably just as surely. And all of this inflation-required investment will produce no improvement in rate of return. The motivation for this investment is the survival of the business, not the prosperity of the owner." I don't know exactly why but he is saying that a business needs to increase their assets in inflationary periods, instead of relying just on increased revenue because of price increases. Maybe someone could help me out and explain why Buffett does not use the concept that when prices increase, revenue will increase and nothing is changed in their inflation-adjusted earnings? Buffett's See's Candy example: “When we purchased See’s in 1972, it will be recalled, it was earning about $2 million on $8 million of net tangible assets. Let us assume that our hypothetical mundane business then had $2 million of earnings also, but needed $18 million in net tangible assets for normal operations. Earning only 11% on required tangible assets, that mundane business would possess little or no economic Goodwill. A business like that, therefore, might well have sold for the value of its net tangible assets, or for $18 million. In contrast, we paid $25 million for See’s, even though it had no more in earnings and less than half as much in "honest-to-God" assets. Could less really have been more, as our purchase price implied? The answer is "yes" – even if both businesses were expected to have flat unit volume – as long as you anticipated, as we did in 1972, a world of continuous inflation. To understand why, imagine the effect that a doubling of the price level would subsequently have on the two businesses. Both would need to double their nominal earnings to $4 million to keep themselves even with inflation. This would seem to be no great trick: just sell the same number of units at double earlier prices and, assuming profit margins remain unchanged, profits also must double. But, crucially, to bring that about, both businesses probably would have to double their nominal investment in net tangible assets, since that is the kind of economic requirement that inflation usually imposes on businesses, both good and bad. A doubling of dollar sales means correspondingly more dollars must be employed immediately in receivables and inventories. Dollars employed in fixed assets will respond more slowly to inflation, but probably just as surely. And all of this inflation-required investment will produce no improvement in rate of return. The motivation for this investment is the survival of the business, not the prosperity of the owner. Remember, however, that See’s had net tangible assets of only $8 million. So it would only have had to commit an additional $8 million to finance the capital needs imposed by inflation. The mundane business, meanwhile, had a burden over twice as large – a need for $18 million of additional capital. After the dust had settled, the mundane business, now earning $4 million annually, might still be worth the value of its tangible assets, or $36 million. That means its owners would have gained only a dollar of nominal value for every new dollar invested. (This is the same dollar-for-dollar result they would have achieved if they had added money to a savings account.) See’s, however, also earning $4 million, might be worth $50 million if valued (as it logically would be) on the same basis as it was at the time of our purchase. So it would have gained $25 million in nominal value while the owners were putting up only $8 million in additional capital – over $3 of nominal value gained for each $1 invested. Remember, even so, that the owners of the See’s kind of business were forced by inflation to ante up $8 million in additional capital just to stay even in real profits. Any unleveraged business that requires some net tangible assets to operate (and almost all do) is hurt by inflation. Businesses needing little in the way of tangible assets simply are hurt the least. And that fact, of course, has been hard for many people to grasp. For years the traditional wisdom – long on tradition, short on wisdom – held that inflation protection was best provided by businesses laden with natural resources, plants and machinery, or other tangible assets ("In Goods We Trust"). It doesn’t work that way. Asset-heavy businesses generally earn low rates of return – rates that often barely provide enough capital to fund the inflationary needs of the existing business, with nothing left over for real growth, for distribution to owners, or for acquisition of new businesses. In contrast, a disproportionate number of the great business fortunes built up during the inflationary years arose from ownership of operations that combined intangibles of lasting value with relatively minor requirements for tangible assets. In such cases earnings have bounded upward in nominal dollars, and these dollars have been largely available for the acquisition of additional businesses. This phenomenon has been particularly evident in the communications business. That business has required little in the way of tangible investment – yet its franchises have endured. During inflation, Goodwill is the gift that keeps giving.”

How do you see a mine expand their operations without making large costs, exactly? I'm just thinking about the difference between an existing mine that might be underproducing, on maintenance and repair, or has adjacent brownfield expansion opportunities vs a mine that has probable reserves that requires building of infrastructure to gain access to the commodity. With commodity price inflation, wouldn't the first mine be better position to capture profit vs the second that requires rapidly inflating capex and thus be less valuable? I think I agree. It would all become clear if calculations are made about the value of mine companies and their mines.

How do you see a mine expand their operations without making large costs, exactly?

Those are great points, which I should have included. It is of course not that easy for a royalty company as TPL to increase their amount of oil fields they posses. So, it will depend on whether they are capable of increasing their percentage on those oil barrels, that are extracted. I don't know how able royalty companies are, in general, in raising prices.

Yes, that would be the case. But then, because one dollar is now worth 50 cents, they need to double their earnings to stay even. How do they do that? By doubling their assets, they need a lot of additional capital for that. So, it's economically way more beneficiary to have an asset-light business that needs a lot less capital to double their earnings.

Just shared some thoughts about this on my blog, with an explanation on why asset-light businesses (so royalty companies as well) have an advantage with high inflationary periods.

Labrador Iron Ore Royalty Corp (LIF) seems also very interesting.

Today, I read a great review of 2020 by Horizon Kinetics. The main topic was about the Fed's expansionary monetary policy and what the consequences could be (inflation). Link: https://horizonkinetics.com/app/uploads/Q4-2020-Review_Final_Approved.pdf or https://horizonkinetics.com/whats-new/#4th-quarter-2020-commentary The best companies against inflation are asset-light companies and royalty companies are on the top of that list. So, the purpose for this thread is for everyone to share their highly promising royalty companies, if you have one. I own TPL, which had a huge run-up lately, but with inflation in mind it could still deliver great excess returns. Another royalty company I'm interested in is Anglo Pacific, but don't own any shares yet.

A section for Book Notes would be great!

Thank you all for the support! I will do my best.

Today I published my blog and first blogposts! One is an introduction about myself, why I started a blog and what you can expect moving forward. The second is a write-up about the A2 Milk Company - the one I posted under investment ideas as well. I would appreciate it if you all could share the things you would like to see in an investing blog and could share some tips with starting a blog. Thank you! https://ajnoordermeer.wixsite.com/luminouscapital

You mean EQD? Has anyone studied how far SPACs dropped during the global financial crisis (2008)? Yes I mean EQD. Here I found something interesting. But not very clear though. https://www.spacresearch.com/newsletter?data-ipsquote-timestamp=2020-03-23 Most important takeaway I think is that SPACs do bottom as well, but definitely have less lower bottoms than stocks.