handycap5

when someone finds a good transcript of the event, would they mind posting a link? I've been pleasantly surprised how there always seems to be one diligent go-getter willing to take super fast notes during the meeting...

i have a different view than some other posters on this thread: 1) i do not believe that one should just ignore currency movements and rely on PPP figures to assume some sort of long-term mean reversion. there are lots of historical examples of sustained differences between PPP and FX rates. second, a sustained adverse FX change is the same thing as a permanent impairment. 2) the "best" owners of an earning stream in a given currency have their "liabilities" in the same currency. my bills come in USD, so I am generally a better owner of a USD stream than a foreign owner, all things being equal, and vice versa. That is because the common currency between assets and liabilities hedges out the risk. said another way, my hurdle rate should be higher for foreign earnings compared to domestic. many smart investors i admire were blithely looking-through potential currency changes in the past when evaluating their holdings because the inputs were "macro" forecasts. i think this is unwise. 3) because interest rates and currency rates are monetary policy tools, and we are in a period of unusually strong and sustained policy action, i think it is smart to not be naive about stated and reasonably predictable policy actions. this is true, even if one is "long-term" oriented. i welcome ideas from others, particularly those that don't agree with me...

i found the second page of this pdf very interesting. i believe if you extended into the 1800s, it would not change the results materially. if you exclude the highly unusual 2000 period, the lowest number is 8.1 CAGR for any starting year 1929 to the present (over 10 years). one can get wrapped around the axle on the question of "whether it is different this time" but I wouldn't bet on a material change in the past pattern. http://www.realclearmarkets.com/docs/2014/04/ac_2014_04-StockMarketCenterfold.pdf

very good - great question and focus on the numbers. i don't know. might be allocation differences. might be the length of the product life cycle. amphenol seems to have a lot of niche products that they can milk for a long time without significant R&D. TEL may have to more often "pay upfront" to get business through fairly significant R&D spend, on products that have shorter life cycles. TEL also may have sized itself differently. they are well short of their financial goals from a few years ago, electronics market generally has been softer than many expected over the last 5-6 years. also might reflect TEL's acquisitive history... if it is none of those things, just blame it on kozlowski.

amphenol has better mix, more high-end usages where the connectors cannot fail so premium prices. TEL's consumer electronics business has held back margins, though their auto business is very strong. bishop & associates does a very thorough review of industry if you can get your hands on one. molex was bought by koch brothers as a recent and well informed comp. it is a deflationary business, requires modest invested capital but huge headcounts, making it hard to manage. selling to sophisticated OEMs. the cost of the product is often minuscule compared to the cost of failure, which may provide pricing power at times. often "engineered in" to an OEM product. raw materials are important, including gold/copper, etc., pass-through may not match the letter of the contract. but what do i know? good luck!

good discussion, thanks for having it. coc, one obvious concern with the "deposit franchise" is what happens when interest rates eventually rise. i am concerned that the combination of: 1) the ease to ACH money around, 2) everyone having smartphones, etc. 3) national competitors at marketing/advertising scale like Capital One Direct/ING will make the stickiness/competitiveness of deposits "different this time." the first iphone was released in 2007. interest rates have been basically 0% since that time. isn't it possible that interest rates required to retain deposits are much more competitive than the past?

industrial gas. check out AI FP's long-term stock appreciation at their recent investor day (since 1913!).

First rate discovery. Thanks a million, 2 million, 3 million...

I infer from your response that you are focused on the NA land market. I note that rig count has been steady over last year, with increased oil directed activity absorbing a 50% drop in gas directed drilling because of increased efficiencies. Not sure how many more land rigs we need. I believe that NOV makes monopoly like profits on its equipment built for floaters, which is where I was focusing my question. If you think this is wrong, let me know.

One of the things that gives me pause with NOV is the concern that they sell a long lived capital good which has already gone through a huge boom. Just as an example, when I looked at the capex of Diamond, Ensco, Nabors, Rowan, and Transocean, they together had $1.6B in capex in 2003, but averaged ~$5.7B in each of the years 2008-2011 (I'm sure 2012 was similar). How do you get comfortable that you are not purchasing a capital goods manufacturer that is not a decade into a very strong cycle which will inevitably turn down? thanks in advance.

It is important to understand that MI is not a typical insurance product, but is more akin to assuming the junior portion of home mortgage. In years with low defaults, losses are much less than "premiums," which are much more analogous to assuming writing CDS. In years of high defaults, losses will exceed "premiums" many fold. A now deceased contributor to Calculated Risk website described the mortgage insurance industry in great detail prior to the financial crisis. I recommend you review her writing.

I cannot vouch for accuracy, but this is what I had from previous notes: There were three times in the past where Warren and my holdings dropped 50% from top tick to bottom tick. It is the nature of markets and businesses that the quoted. If you do not have the disposition to act with equanimity to these types of vicissitudes, you will not do well in common stocks.

Ben, I also want to suggest that you decrease the quantity and increase the quality of your posts. We can all do better to improve the thoughtfulness of discussion on this board.

During the crisis, NPR Planet Money staff (at the time I think it was a show on This American Life) did a detailed one hour segment on the CP market, which was quite informative. I'm sure you can find it. I think the more interesting question is what will happen with money market funds and the rates they provide. My understanding is that to keep petty cash available on demand, investors could make a deposit in some form at a bank or put the money in a money market fund, which in turn invests in CP. Over the last two decades, the money market yield has averaged roughly 1.5% higher. One wasn't getting the FDIC insurance on the money market balances, until you needed it, and then in fact, the Fed guaranteed them. What is interesting today is that CP yields are very low at around one quarter of 1 percent, while demand deposits at banks (such as ING Direct) are offering 1%. The historical relationship between the rates has inverted. A number of businesses, such as Schwab's, are impacted by this. What is going to happen?

I'm looking for businesses where software/IT spending is a key component of costs and providing a quality service, while revenues are not driven software per se, but by another activity or pricing dynamic. Can you help me brainstorm businesses which would fit this description? Below are some examples and why I believe they fit or don't fit: Amazon (YES): As is obvious, software development represents a significant portion of costs but revenues are driven by volume and price on the shipped items. Competitive pricing dynamics in retail versus Target, Wal-Mart, Barnes & Noble, etc. are not driven by software. Microsoft, Salesforce.com, IBM (NO): Costs are software development, but they basically sell software too. Even though software-as-a-service businesses are not selling software per se, I think revenues will basically be driven by the same dynamics. IBM represents a hybrid of selling software wrapped in a service, in my view. Schwab, Ameritrade (YES): Costs of servicing client activity increasingly driven by software, but revenues are driven by interest rates, trading activity, investor choices. Bank of New York, State Street, Northern Trust (NO APPARENTLY): I would have thought that this would have been a business where costs were driven more by software development but revenues were driven by interest rates and balance sheet management. My quick look at history prior to the financial crisis shows that they did not seem to enjoy any fundamental operating leverage. Title insurance, such as First American (NO APPARENTLY): I would have thought costs would have been driven by maintaining database and revenues driven by home sale and refinancing activity. But they do not seem to generate operating leverage by my analysis, perhaps because the archaic sales channel prevents it being meaningful. Can you help me brainstorm other businesses which might enjoy cost deflation due to software, but revenues driven by other factors?

Thank you for posting. Please let us know if you find any additional notes on the presentation. I recommend his comments related to the financial crisis investigation, some of which provide insight into how he found the idea.

Thank you for the posts and thoughts. I must say, however, that I am disappointed that there are not more creative or counterintuitive suggestions. I am hoping for something like the US railroads in 2004, when pricing power was emerging but not self-evident. So far we have: The obvious: tobacco companies, cigar, spirits, KO/PEP/DPS, US RR’s. The debatable: FDX/UPS, THI/SBUX, ARM, RSG/WM, Canadian chartered banks. The wrong (in my view): MSFT, LUV. The luxury consumer (I don’t know): TIF, COH, LVMO, DECK, TPX. One more, which I categorize as “debatable,” but I mention because the CEO states explicitly in the annual letter that he believes the company has pricing power, is STRA. Please add additions. For my purposes, the “debatable” additions are more useful than the “obvious.”

I want to start a thread of companies which have emerging or temporarily depressed pricing power. Concerning the definition of pricing power, Buffett's example of not having to hold a prayer meeting before asking your customers for a price increase will do. Please exclude cyclical pricing power (i.e. a farmer who today gets more for his corn). My best example is Federal Express and United Parcel Service. DHL has exited the US domestic parcel business. The United States Post Office is loosing money and will be forced to raise prices at some point soon. A duopoly is emerging in US domestic freight and Federal Express and UPS both say the right things in terms of "yield management" being "the number one priority" and returns on capital needing to improve. A thoughtful response will be greatly appreciated. I look forward to the discussion!