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Tim Eriksen

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Everything posted by Tim Eriksen

  1. Operating leverage is vital. To go back to Nate's comments on the lawn mowing business. No matter how good you are there is little scalability. You probably can't charge much of a premium for doing a better job. A barber or beautician is in a similar situation. The person who gains wealth looks for scalable businesses with fat margins. Asset management, software, franchising, royalties, etc. I often hear people say I should start x business and it almost always is a business with little upside beyond a regular job. Most of the time it is much worse - more time consuming, no benefits, and less pay. No matter how hard they work it is marginally profitable.
  2. Remember he had five partnerships by mid 1957 so the generous terms on the first probably did not apply to all. My notes related to 1957 show three options. 6% hurdle with 33% profit interest, 4% hurdle with 25% profit interest, and 0% hurdle with 16.67% profit interest. His 1957 letter also notes that two partnerships started during the year finished minus 12% with no mention of any clawback. I don't know when the law changed but I believe it is illegal now to structure it the way he did.
  3. Each fund is considered an account, so there are more than three investors.
  4. Like Nate said, make sure you're comparing to shares authorized not outstanding. They can't issue more than the shares that were authorized. If they are without going to shareholders to increase the number of shares authorized they most likely are breaking the law or the corporation's charter It is not an issue of authorized shares. Like many companies the number of authorized shares is much higher than the actual shares outstanding. The issue is other than fiduciary duty what prevents substantial stock option dilution? Listed companies are required to get shareholder approval if the number is above a certain level. If a company issues incentive stock options (ISOs) they have to get shareholder approval. In this case they issued non-statutory stock options. What makes it all the more strange is the company approved another stock option plan but it was voided because it did not get shareholder approval because they never presented it to shareholders since they weren't holding annual meetings. But that just confuses why the earlier plan was allowable.
  5. Can the board of a US over the counter company issue "unlimited" stock options? I have spent a lot of research time on this but cannot find a simple answer. I know the exchanges have some restrictions as do states, and that company bylaws and articles of incorporation come into play, although boards can amend those. But I am researching a company that authorized the issuance of 700,000 non-qualified stock options when there was only 2.1 million shares outstanding without presenting it to shareholders. This seems ridiculous and to me should be illegal, but is it illegal? What prevents a board from approving large plans every year? It is also interesting in that the company was not holding annual meetings even though it was required by Delaware law. The directors had been appointed nearly a decade earlier but had never been presented to shareholders for approval, thus their initial three year terms were actually expired.
  6. Classless move. What Winters charges in fees is known up front and voluntarily entered into.
  7. I don't think so. The article is a bit sensationalist with the long term compound projections. I don't think the loss to AVIVA gets higher than 1 Bn USD, an that would take years. Aviva's mkt cap is 16 Bn GBP. Is it sensationalist? The compounding numbers were just for Max. He can't be the only one left with such a contract. While it said his father's was no longer active, it noted that Max was only 1/15 of the family's funds in 2007. There could be five or ten others. So the current hit to earnings could be multiples of what they showed. If you are Aviva how much do you offer to settle? If you are Max how much would you require to settle?
  8. I'm sure you understand this but some may not. You have intentionally oversimplified and I agree with your points. But just to be clear. Rate of book value growth is a bit more than return on equity. It is return on equity less dividends, less share repurchases, plus share issuances, +/- changes in comprehensive income, etc. So it is important to calculate book value on a per share basis. The goal of a firm is not to increase book value. You want to increase intrinsic value per share. You want to generate cash flow. You want to make money for shareholders. You want to have each dollar of retained earnings to generate a similar or higher ROE. The truly great business can grow without retaining earnings (increasing book value), and the incredible one can do it and shrink their equity. That is why great businesses trade at a multiple to book value.
  9. It assumes the business needs or can use invest the retained earnings at a similar rate. Isn't the ideal business a growing royalty. It is ideal because it needs no reinvestment or management. Closely behind it is a business that can grow without additional capex. They both can generate high ROE.
  10. Good thing it is trading at half of book value, because the ROE and ROA are surprisingly weak for the last three years.
  11. 1. Maintaining the vessel falls under maintenance. Improvements and drydock expense are capitalized and depreciated/amortized. It is a bit of a stretch to say it "accounts for the money to retain the earnings power of the business." It accounts for the cost of the vessels over their lifetime. Whether the earnings power of the business is there or not is a separate issue. 2. They are amortizing drydock expense Page 32 says In addition to the operating costs described above, we incur fixed charges related to the depreciation of our fleet and amortization of costs for routine drydock inspections and maintenance and repairs necessary to ensure compliance with applicable regulations and to maintain certifications for our vessels with the U.S. Coast Guard and various classification societies. The aggregate number of drydockings and other repairs undertaken in a given period determines the level of maintenance and repair expenses and marine inspection amortization charges. We capitalize costs incurred for drydock inspection and regulatory compliance and amortize such costs over the period between such drydockings, typically 30 months. Applicable maritime regulations require us to drydock our vessels twice in a five-year period for inspection and routine maintenance and repair. If we undertake a disproportionately large number of drydockings in a particular fiscal period, comparative results may be affected. While we can defer required drydockings of stacked vessels, we will be required to conduct such deferred drydockings prior to such vessels returning to service.
  12. I have a feeling they missed some of his humor, but I must say his dietary habits are worse than I thought. http://fortune.com/2015/02/25/warren-buffett-diet-coke/
  13. LOL. Especially how this went "whooosh" for some people. ;D This article explains a bit was Theismann was possibly saying. http://cohn.blogs.pressdemocrat.com/11126/albert-einstein-vs-norman-einstein/ Theismann couldn't have been a dummy. He changed the pronunciation of his name to rhyme with Heisman to try and win the trophy.
  14. Granted if a fund of funds adds an additional layer of fees they are significantly handicapping investors. To me, the real problem in the bet is that Seides did a horrible job of selecting funds.
  15. The easiest way is to post your analysis on an investment on this message board and let others rip it to shreds. :) Seriously, we have to let others do that in order to see areas that we are blind in. The challenge is that not all criticism is sound. The one giving the critique may have their own blind spots. I would suggest finding someone and doing it privately.
  16. To say 'there is some truth in this" is being quite generous. There is a lot more turds than raisins.
  17. Because the outperformance fee under structure B is typically higher than 20%. It is often 40%. Or even 50% if there is no management fee.
  18. Not to resurrect the prior debate, but I was thinking a bit about this. The US imports more goods than they they export, thus a trade deficit. Oil is a big part of that gap. So a US refiner buys oil and refines it and sells it domestically in order to make a profit. So it has a huge trade deficit. They exchanged dollars for oil and are happy to do so in order to make money. Do they owe anyone? No. Is there areal debt? No. Did US dollars leave the country? Yes. But look at all the business and consumer benefits to having twice the amount of oil products (transportation and thus goods are substantially cheaper) On the other side is a company in a foreign country which produced oil and sold it for dollars to a US refinery. Thus it contributed to a trade surplus (on its side). They presumably earned a profit, but they also reduced reserves. They exchanged oil for dollars. They are happy. They can convert the dollars to local currency or use the dollars to pay for further investment or dividends, etc. Are they now a creditor? No. Yet unrelated third parties believe this is bad in aggregate. I don't see an alternative method that is better. Do we want tariffs? Do we want to limit free trade? Has free trade intertwined other countries reducing the frequency of wars? If ultimately a trade deficit contributes to currency depreciation is that worse than slower growth? note: I do understand that the argument is more favorable regarding oil than say crappy toys from Asia. But even then have we not exported prosperity to countries like China which has resulted in a larger middle class and a softening of their totalitarian communism? How do you measure the benefits of that?
  19. To be clear they are friendly if the manager under performs or barely outperforms. If a fund substantially outperforms (8 percentage points annually or more) they are more expensive. If you are looking at a smaller fund they typically can do a side letter with whatever fee structure is agreeable to both parties.
  20. There is something wrong with Morningstars Total Return Calculation for Coke, or at least it is not the number we are after. I am getting slightly over 14% for Coke. Here is how I did it this time. I took 100 shares, which cost $2100 in 2005. I reinvested the dividend each year which gives a new share total each year. After 10 years, start of 2015 there were 166.5 shares (the split was accounted for). 2015 value = 166.5 shares * 43 = $7160. This is slightly better than 14%. Ignoring taxes of course but fund managers dont pay taxes so its apples to apples. My other method of adding the annual dividend increase plus annual stock appreciation works as well, but is not as accurate because I didn't sum the dividend increases for the ten years. I took 3 and assumed it to be consistent. The dividend increase drops in later years. So I am a couple of percent high there. Unless, I am totally out to lunch the numbers I am calculating are what I would call total return. Morningstars numbers are something else. By definition total return is required to include dividends. I don't want to sound harsh, but Morningstar is less likely to be wrong than you are. I know with Coke you are using a split adjusted price. You should use the original $41.64 to close out 2004, and then the actual dividends up through the stock split in 2012 when you then adjust the number of shares. Roughing it out I get 10.4% through year end 2014, which is much closer to Morningstar than your numbers. The beginning of 2005 was a nice trough for Coke too. It fell nearly 20% in 2004. BTW you might wan to double check that Buffett has shown this. BRK-B 10 yr return was about 9.8% As to your main point yes I agree that a good stock picker should have done better than 12% average over the last decade, but it is not as easy as your comments suggest.
  21. According to Morningstar: KO 9.76%, TD 10.47%, RY 11.88%, CM 6.8%, BNS 7.92%, BMO 6.94%, SBux 12.68%, Pepsi 8.11%, JNJ 7.2%, P&G 7.05%, MCD 13.46%, AAPL 36.93%, WDC 26.61%, ORCL 13.2%, Gen. Mills 9.64% , Hershey 8.13% .... only 5 out of 16. 3 of the 5 barely surpassed 12%.
  22. Are you sure about that???? I must be misunderstanding you. You can't add the % dividend increase to the stock price change. It is total dividend plus stock price change. And you calculate the dividend increase as a percentage of the stock price not the prior dividend level. http://performance.morningstar.com/stock/performance-return.action?region=USA&t=KO&stocktab=returns&culture=en-US
  23. I realized after I posted that I shouldn't do it first thing in the morning. I was clearly a bit on the grumpy side. Since I am not fluent in any other language I am impressed with anyone who can learn a second one, and to be able have a more technical discussion in their non native language is even more impressive. I would say deep dives into math are essential (not that what I did was a deep dive, it was more back of the envelope). It often provides greater clarity. In other words the math shows that lower prices will decrease the trade deficit not increase it. Of course the money consumers are saving may be directed to other imports. It seems to me that you reference Buffett as the basis for part of your argument, yet Buffett is not worried about the fiscal deficit at this level. So he doesn't see the same link between the two as you do.
  24. That implies that USA will maintain its production quota with WTI @ $47 ?!? Production will fall and imports will rise putting pressure on the trade deficit. Plz read EIA paper on projection. Depends on what side of equation you are on. Importing more than exporting for decades, buying more than you produce for decades and borrow to do so - yes that is inherently bad for future americans imo. A constant outflow of USD will at some point find its home again. The discussion is about the trade deficit. 'So far' does not mean permanent. I think it is a interesting topic since it touches “intergenerational inequities”. It will be very interesting to see how the US will handle the debt level when it becomes inbearable. For decades the US has been selling pieces of the country coupled with increasing the debt level. If thus the Fed start embracing highly inflationary policies (which I believe is the case) the holders of USD will most likely opt for US land instead of US Bonds and, a true colonization of USA by purchase would be initiated. Rgds 1. Can you show me the math on that? 2.5 billion barrels at $100 per barrel = $250 billion per year. Oil is now $45. Imports would have to rise to 5.5 billion barrels ($250 bn / $45 per barrel = 5.56). Current daily usage is about 16mm bopd. We import 7mm bopd, produce 9mm. To have the trade deficit from oil increase, we would need production to fall by 3 billion barrels per year. In other words usage remains at 16mm per day but import rise from 7mm bopd to 15.2mm bopd. Thus US production would need to fall from 9mm bopd to 0.8mm bopd. I have a hard time believing that is what anyone projects. BTW we don't have a production quota, but a production level. 2. Who is borrowing to do so? This is where you blur trade deficit with debt. I don't export anything, but I buy imports so I have a personal trade deficit. My net worth has climbed. Sure the Fed may need to pull dollars out of the system at some point. So. 3. Glad you cleared that up (sarcasm). If so, then isn't the only way to "pay it back" to run a surplus?? Yet you use terms implying it is similar to real debt. How do you inflate away a trade deficit? How does Treasury forgive the debt? 4. Correct. "So far" does not mean permanent. Pretty sure it means "to date." Buffett has been wrong since 1987. As he admits in the article "But first I need to mention two reasons you might want to be skeptical about what I say. To begin, my forecasting record with respect to macroeconomics is far from inspiring." He has been wrong on a many macroeconomic, political and tax issues.
  25. I don't want to derail a great skiing discussion, but I don't follow the point of the original post. 1. Lower oil prices shrinks our trade deficit substantially. We import around 2.5 billion barrels per year. So that is a $100 to $150 billion decrease. 2. Is a trade deficit inherently bad? We exchange x dollars for a barrel of oil. How is that not a wash? 3. You seem to blur a trade deficit with fiscal deficit. Two totally different things. 4. So far Buffett has been shown to be wrong on the whole issue.
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