Morgan

With FFH wanting to go the BRK way of owning operating companies, taking on more and more turnarounds is a sure recipe for disaster. WEB avoids 10 foot hurdles, like the plague. PW finds himself facing multiple such hurdles. This has to do with businesses coming to BRK to get bought. WEB has the right to say no and most of the time he does. FFH's foray into wholly owned businesses is rather unimpressive and leaves one scratching heads. This is an excellent point. There is a small, but drastic difference in building a collection of companies that have come from turn arounds compared to Buffetts way of getting excellent companies to begin with. In the end both investors have a group of compnies, but Buffetts are more profitable and for longer. Sometimes sitting on your hands and doing nothing really is best.

I have a friend in Boston who is in the real estate business. When he was younger, looking for one of his first loans, he said he was turned down by 91 banks (very likely an exaggeration) but the moral is he kept looking and looking and looking and eventually someone lent him the money. If you have been turned down by one bank I would suggest going to many, many more until you get the funding. Surely there is some banker out there who can see your vision and rationale that will fund you. If you're succesful you could have, say, 10-20 hotels in the next ten years. It's good business for him to successfully lend you a ton of money. It will make him look good, so go find that guy (or gal). ;D I have been focusing on the hotel industry recently. I contacted hotel brokers got there listings and worked from there. The key is to find a hotel that shows consistent revenue but, horrible management of operating expense. Can i come in with a lower operating expense structure? How much is my mortgage compared to the current owner? Cut out anything that is not needed to run a hotel while not affecting income. The holy grail of hotels is finding a independant brand turn it to a brand hotel. This will increase revenue overnight cause now you are in there hotel reservation system. I finally spoke to a younger indian hotel owner. He explained me there family's blueprint. 1.) Buy lower economy brand hotel. 2.) Fire all employees and bring in there family members from india that want to work in the U.S. 3.) Cut out all extra operating expenses. No bars/restaurants or anything. Just rooms thats it. 4.) 2-5 years sell hotel and do it again. They dont pay capital gains tax due to i believe the 1031 form. One last note his family buys a lower economy brand cause the pip ( property important plan) is almost non-existent. Thank you for that rundown. Very cool to see the angle at which people are succesfully getting into various businesses!

Good point Parsad. Is there a way to 99.99% guarantee that there won't be lawsuits from the past? I assume the issue is, you buy shell company that has done something really dumb in the past but is broke so it's not worth suing. Then eventually it makes a bunch of money and is worth suing from something the previous owners did? Or do you mean some other liability?

I just got this after putting it off for a long while because it's $30. I read four pages in the second appendix. That was worth the $30 right there. Can't wait to read the rest.

Great post oddball! I'll do some networking and more reading to learn more. Thank you!

Agreed. Control of FCF is so important in my eyes. For me, I can make better investments in illiquid investments (real estate) and generate far better returns than I have in the markets. Also there is no worry that management will just sit on the cash or pay themselves lavishly or act foolishly some other way because, well, I am the management. Less liquidity, but more upside in my case.

I would love to know how to do this -- earn a total of $1 million over 10 years and then have a net worth of $10 million. Does this involve playing Powerball? :) One way is to own real estate in a nicely appreciating market. 100k/yr FCFs from the rents, and say $1m-$2m in property that is appreciating. Powerball could work too though. :)

This is something I have wondered about. Pay differences must cause friction at a certain point for some people. There is another local business where my friend works and I learned revenues, COGS and markup and from there can estimate the other expenses. The owner probably makes 60-70k/yr and pays, in total, his three part-time employees about 29k/yr ($10/hr * 55 hours/wk * 52 weeks/yr). Only one employee is needed at a time. My friend never complains about the pay and has a few other part time jobs to make ends meet. Not that I don't agree with you, pay differences can cause friction, but I think a good portion of the population doesn't really think about it too much. Board members probably care more than average because we're investors and naturally just run the numbers in our head. Either way, it's interesting to think about and be aware of. As per the chef partnership comments, that is something I have thought about. It makes more sense, especially in a rapid expansion scenario. Thank you everyone for the comments.

Hi DTEJD1997. Detroit metro is a hard place for real estate (unless you're Dan Gilbert). I have been there three times to look at apartment complexes. There are tons and tons and tons of vacant buildings of all kinds. Some simply stunning buildings in seemingly decent locations just sit empty. It's odd in Detroit. I'm not an expert on the Detroit market, but all the rents I saw were very low and so margins were tight. I would strongly, strongly encourage you to figure out if you can rent the space and if you can, how much will it take to make it reantable. You must be intellectually honest here. 6k sq ft isn't too much space, but there is a ton of open space in Detroit. Since the seller is your friend maybe you can get a nice, no money down type deal. When we talked to banks they wanted 35% down. Perhaps you can get the seller to finance the down payment or the entire thing. He'd get out of the property and you'd be able to get into it for nothing down. If you can turn it around that's not a bad deal. Make sure you carefully run your numbers and are actually confident you can turn it around. You don't want to be in the same position as him. As for property taxes, yea they're high in Detroit. $600/mo is $7200/yr (if everything goes smoothly). Is the money worth it to you for all the work you'll likely do?

At those rates, I wouldn't have a problem if the employees robbed me blind. Those are super below market rates in either case, especially if benefits are included in that wage, and they'll want to make up for the differential some way. Why work their duffs off to make you money when they could just go find a do-nothing govt job and have less stress and generate a higher hourly rate? This is a small town in West Virginia. Living expenses are low. 37k/year isn't a terrible salary to earn here. You can live decently on that.

I got it a while back and read it. Just a you said, it is a great reference to have on the shelf. I've gone back to a few times since I finished it. ;D

I have never seen kitchen Nightmares, but I am well aware of the difficulties of the restaurant business. No one ever says it is easy. The numbers he gives have not been verified. I haven't seen his books or accounting practices. He has been in business for nine years and said he is tired of it dealing with the small day to day issues. He has hired a chef. That's where the 37k number is from. The idea that he is selling came out from a random chat with friends. I do appreciate your input though. I'm still considering it, but obviously much more due dilligence is needed. By the way, are you in the restaurant business? Any tips? :)

The above is right on target. I've never bought a business, but have thought about it quite a bit lately. There is a local upscale restaurant where I live that is for sale for $200,000. The owner says he makes $120,000/yr, but he is the chef and manager. So if I were to buy it, I'd need to hire a chef (37k/yr according to him) and a manager (30k/yr if I'm lucky) plus financing to buy it (about 18k/yr). So it goes from buying it at ~1.6x earnings to about ~5.7x earnings. That still isn't too bad, but can I invest my money elsewhere and make a higher return with less risk? Adding another 200k of real estate is much less risky in my eyes and I know how to run it well. The main reason to buy the restaurant would be to expand the number of locations dramitically. One upside of owning the restaurant would be good food all the time. That may be my downfall though ;)

I'm stealing (or cloning ;)) this from the book Value Investing: From Graham to Buffett and Beyond (Greenwald, et al), but WD-40 (WDFC) seems to have a pretty solid moat and unique market position. The normal 12oz can of the stuff is $5. I go to Lowe's about 20 times a month and I don't even know the competing brands names. Assuming there are competitors, how much cheaper would the alternative have to be for me to buy it? Super cheap. ~$1-$2 tops. Then even if it was $2, I'm not sure I would buy it because I rarely buy WD-40 so I need it to work guaranteed. I know WD-40 will. Will the competitor? WD-40 style lubricant isn't difficult to make as far as I know, so the production costs for each company should be similar. So the newcomer's margins are likely to be really small or negative as they have to lower their price dramatically and spend on advertising as well. What ways can a newcomer gain market share? Be backed by a larger company set on taking market share? What is the timeline for that to happen? Could WD-40 simply lower its prices and wait it out? Probably. They have $90m in cash and securities. That's 2-3 years of earnings. Currently trading for about $1 billion with 26x PE ratio. Seems a little pricey at the moment (up~150% since 2009), but something to keep an eye on. Edit: WDFC makes about $35m/year, at what price could they afford to service the debt load from a LBO? $500m with $150m down and $350m debt (5% for 15 years)? That's about $33.2m/year. Interesting to think about.

Wow great share! Thanks!

Working in real estate full-time for 2 years and 5 years part-time prior. Now it's back to part time, plus working in the investments department of a wealth management firm.

Seems like it's time to find a loan: http://finance.yahoo.com/q/ks?s=EDS+Key+Statistics I would be careful with chinese -EV stocks. isn't this one about to be acquired? Its being taken private for U$60M I beleive. Interesitng to note that Mr. Ding is the brother-in-law of the Chairman and CEO. I don't read tons of executive profiles, but that seems like an odd thing to add to the description. http://www.ir.xdlong.cn/phoenix.zhtml?c=217204&p=irol-govmanage This is a pretty cool situation on the surface, buy a company for U$60M and get U$85M in net cash (I think from my quick look), but since it is in China you'd have to do some serious due diligence. If you're interested in Chinese Law and all the various shenanigans that can happen, check out Dan Harris' "China Law Blog". http://www.chinalawblog.com/

The first loan we got was in early 2007 and it was from Citizens Bank. All the other loans are through WesBanco and we got them in the last two years. We haven't been turned down by them thus far (knock on wood). Hope that helps.

I'm surprised you're having so much trouble Eric. In my little town in WV, we've been able to secure loans for multifamily properties relatively easily despite using more leveage and being (a lot) less wealthy than you. The only things I can think of that would benefit us is that we run an apartment business (50 units now), and the market is different here (gas boom). Bu still just from what you say, you seem like a solid credit. Have you applied to a number of other banks?

Same to you Parsad and everyone else here! Happy Holidays! To another successful year!

I looked at M&T Bank and they have acquired quite a few banks (22) since 1987 (http://ir.mandtbank.com/acquisitions.cfm) and have gone from $2bn in assets in 1983 to $84bn today. Their stock appreciation hasnt been too shaby either - $1.20 in Jan 1983 to $115 today or about 16.5% annualized. That sounds like a pretty good business to get into. Inspired by the history of M&T I'm wondering if anyone has here been involved in aggresively growing a bank starting from something decently small? Or gone through the merger or acquistion process of a smallish community bank? Other questions: What was your process for investigating banks to buy? What made you reject a bank? Once a bank was purchased, how did put your culture in place? How did you decide which lines of business to expand?

can you give me detail in the process you look for them ? And how you value them? Hi King, I have been thinking about giving an example. Here it is. I own a company in AU called Jumbo Interactive. I bought it @ 30 cents. The annual report laid out everything very clearly. It is trading at 2.5x P/E before cash. JIN's business is to sell lotteries on the Internet, which is highly scalable. In the last five years, the business has grown just like other online businesses. In normal condition, this kind of business should garner 20x P/E. This is an outstanding business trading at ridiculous price. You see, magic formula wants good business trading at cheap prices. That is simply not enough for me. But the situation is not normal here. JIN's online business hangs on a contract with Tatts, which is expiring at the end of 2014, although the contract will be renegotiated a year earlier. Tatts is a monopoly in the lottery industry which owns the only nation-wide license given by the government. Recently, Tatts launched its own website to compete with JIN. Therefore, the probability that JIN will renew the contract seems low. I believe each of us has different opinion about risk/reward and you can make your own guess. Here is mine. Let's say JIN simply operates until the end of 2014 and then liquidate, the cash will cover more than the current market cap. This is third grade math so I would not give the details here. This is is the bottom line. I personally believe, after some thinking, that there is around 30% chance that the contract will be renewed as it is now. If it is renewed, I will hit a home run; if it is not, I would not lose much. There are also other complications, but I will keep things simple here. This is basically how I make my investment decisions. Hope this helps. Just looked breifly into JIN. Nice job on the analysis Baoxiaodao! As you said, if they sign the lease it'll be a home run. Depending on when you sold, you may have had a 10 bagger! Any update on what you did with your position?

OddBallStocks writes a good bit about banks on his blog (http://www.oddballstocks.com) and has a website with all the data you could ever want on banks (http://www.completebankdata.com/). From there you should albe able to get a decently solid grasp on banking. He also hs some banking primer posts. Read those posts and the comments: 1. http://www.oddballstocks.com/2013/02/a-banking-primer.html 2. http://www.oddballstocks.com/2013/08/a-banking-primer-part-2.html 3. http://www.oddballstocks.com/2013/09/banking-primer-part-3-first-northern.html 4. Case study - http://www.oddballstocks.com/2013/12/versailles-financial-almost-too-good-to.html From there get, and maybe sooner, get annual reports for small banks and read, read, read!

This thread is pretty old but... Why aren't the derivative markets regulated? If the big banks stand to lose potentially trillions (and presumably be wiped out) on defualts it seems that they should be regulated quite heavily. I can't remember off the top of my head but in "This Time is Different" by Reinhardt and Rogoff, on average a country defaults every, say, 15 years. From there if a country goes under, then it costs the banks hugely. Maybe they can afford it, maybe not. But what if there is another world war and a number of large countries defualt? Then how many of the TBTF banks go belly up? And how many at the same time? That has the potential to freeze the credit markets doesn't it? If Buffett thinks they are finaicial weapons of mass destruction, it seems pretty likely that that is true. What do you guys think?

I definetely agree that there can be some significant costs associated with owning real estate. One's own home isn't as investment, but a liability. Sure, some people make money buying a house and selling it later when it's time to move or they die. But I wouldn't be surprised at all if a pretty solid portion of people only break even becuase of all the transaction costs involved plus repairs/maintenance or bad market timing or whatever. I think it'll probably be a while before I own a house of my own as opposed to just living in one of our apartment buildings. Essentially free living, but obviously not as nice or as private as a single family home. I certainly know all about the costs of maintenance though. :o