What stocks will make their owners rich over the next generation?

[yadayada]

cheap internet and computers together with websites like coursera and khan academy will boost education.

[Guest ajc]

I really like the two qualities you identified. A disproportionate number of truly great investments have owner operators. I keep a list of companies that have been tremendous investments and about half were new industries the other half are often growth industries like Steel during Carnegie's time but they just as often fit more into the McDonalds, Walmart, or Starbucks types. None of these were growth industries necessarily until Krok, Walton, and Schultz transformed the way we looked at dining out, discount retail, or a corner coffee shop.

 

I think very old industries that are being transformed by new thinking or technology can be just as fruitful as new industries.

 

An industry that comes to mind for me is booming in the Dakota's as we speak and helping to boost Burlington Northern's profits. I'm reading Oil 101 currently trying to broaden my circle of competence into the energy sector. There could be a Rockefeller out there rising from the Bakken formation. I'd be interested if anyone has any interesting companies in this sector identified. It's an old industry but new technology is being used so it's a fertile ground for a strong growth story.

 

Yes, that makes it quite a bit clearer. Combining new ideas - or ideas from different industries like that - has worked really well for any number of these companies.

 

McDonald's (with its industrial production line, hamburgers and supplier relations) or Amazon (with its warehouses, the modern day parcel delivery network as well as the internet), in some ways simply brought a few really powerful ideas together which created some clear efficiencies over the old way of doing things.

And while there are necessarily many more factors at play in every business, this mixing of various concepts that you wrote about is definitely a big multiplier given the right conditions and operators.

 

Related to this, I think AirBNB, SpaceX, Twitter and Uber are all doing a great job of bringing a few excellent ideas together and amusingly they all seem to be getting more trouble from regulators and the status quo than perhaps almost any other transformational companies out there.

Anyway, I plan on tracking their progress in case the reasons for that aren't significantly related to their managements.

For whatever it's worth, I'm not sure they are.

 

But while I find all this stuff is fun to discuss and speculate about, some have correctly and regularly pointed out how seductive the thought of becoming this type of shot-caller can be.

I mean, it's usually completely underestimated. By everyone.

Consistently.

So, I think whether it's possible to develop a profitable skill in this area is still unproven. And maybe it always will be.

Like being one of those unfortunate countries of the future...

 

Then again, Phil Fisher is probably a good counter-example to that previous point. So, maybe there's a way to develop a process here that works out more often than not.

Or, even just often enough to earn a market-beating return.

 

 

[BG2008]

One of the reasons why I don't actively look for compounders is the really tough decision deciding when to sell vs hold.  Anyone has any insights regarding when to sell compounders?

 

I'll also put a shout out to Boston Beer Co (SAM). It's still pretty small in the grand scheme of things. I'm still bitter over passing on it at 82, given the amount of due diligence I've done on their products. ;D

 

SAM is one I found early, I bought it at $21.50 in 2005, and sold way too early ($113 in 2012).  I unfortunately no longer own it.

[Packer16]

I agree.  The buy decision is also hard as in most cases I can find a cheaper non compounder that even has some growth.  I have a hard time buying MKL and other compunders that can compete with a 50 cent dollar today.  The only exception was Dhando Holdings at BV.

 

Packer 

[Guest ajc]

One of the reasons why I don't actively look for compounders is the really tough decision deciding when to sell vs hold.  Anyone has any insights regarding when to sell compounders?

 

I'll also put a shout out to Boston Beer Co (SAM). It's still pretty small in the grand scheme of things. I'm still bitter over passing on it at 82, given the amount of due diligence I've done on their products. ;D

 

SAM is one I found early, I bought it at $21.50 in 2005, and sold way too early ($113 in 2012).  I unfortunately no longer own it.

 

 

Regarding selling, Kraven referred to this piece of advice the other day. It helped me a lot with my decision-making process.

 

bit.ly/1hrKHXv

 

 

 

[Spekulatius]

Anyone thought about Under Armour (UA)? I don't see why they cannot be Nike and Adidas' equal.

 

Adidas' market cap is ~22B$ vs UA's ~10B$, so even if UA catches up to them, it's not going to get you far.

 

I think it is pretty far fetched to find a stock that makes you rich based on buy and hold right now, given, extended valuations and a pretty extended economic cycle (5 years into a recovery). Once we head into a recession and the market turns down 30% or more and some baby's do get thrown out with the bathwater, things will get easier.

 

Yes I get excited just thinking of that day..... someone once said, you make all your money in the bear market, you just dont realize it at the time.

 

HOWEVER, we can spend our lives waiting for the bear, Warren Buffett has said if he was starting over with 1 million he'd be fully invested.....

 

Bear markets in average occur every five years or so. I have seen 1982, 1987, 1990,  1998,  2002,  2008,2010 and there were some pretty good opportunities in between. I have experienced all the above (started out in 1982 with 600 DM then)

 

The key is not to lose too much going into the bear markets. Guy Spiers Aquamarin (just to name one example)  lost ~47% in 2008, this is just too much. I lost a great deal too in 2008, but not 47%. So getting more defensive towards the end of a bull market cycle is key. Problem with value investing is that many value investors are starting to stretch at the end of the cycle and growth stocks simply become unaffordable. Just take SAM at 20x EBITDA and 30x earnings . It just does not make any sense to own these things from a risk/reward perspective, since they can loose 50% in a bear market, even if fundamentals stay intact and even more if they don't.

 

I am not claiming to have a solution to this as there are issues with market timing and opportunity cost, but I do like to keep a healthy cash buffer around in times like this (20%, preferably more)

[no_free_lunch]

Spekulatius,

 

Just curious how severe the 98 recession was?  I know that was in the middle of a raging bull, so did it get to the point where there were great deals or were prices just cheap in comparison to prior levels?

[Sportgamma]

FRMO

[Shawn]

Apple - some are still sceptical but I'm a firm believer that it will probably become the next GE in technology and software

 

Fairfax Financial - their best years are yet to come, the general market is underestimating the performance of it's subsidiaries over the long term

 

The U.S. & Canadian Banks - goes without saying *shrugs*

 

Wal-Mart

 

Exxon Mobil

 

Berkshire Hathaway - say what you want but at this point any theory I think is speculation, once again I don't think we should discredit the effectiveness of that whole ship and the subsidiaries 20-30 years out. I think Buffett's successor(s) will make it work.

 

Algoma Central - ahh yes the odd one on the list (btw I don't have a position in it), high ROE, good profits and good mgmt, has all the workings of a company I wouldn't even mind owning down the road. I think it will make it's owners rich over the next generation.

 

Goldman Sachs

 

 

 

There's others but I think the above are likely to make their owners work.

[HJ]

One of the reasons why I don't actively look for compounders is the really tough decision deciding when to sell vs hold.  Anyone has any insights regarding when to sell compounders?

 

I'll also put a shout out to Boston Beer Co (SAM). It's still pretty small in the grand scheme of things. I'm still bitter over passing on it at 82, given the amount of due diligence I've done on their products. ;D

 

SAM is one I found early, I bought it at $21.50 in 2005, and sold way too early ($113 in 2012).  I unfortunately no longer own it.

 

Not that I have that much insight about when to sell vs. hold, but Buffett speaks about holding an investment forever, and in many cases he did, even for the less successful ones.  Yet he sold Freddie Mac, which makes it an interesting case study.  See the interaction below of him explaining why he sold his position. 

 

https://www.youtube.com/watch?v=QrFyo5Ettcw

 

So I think 1) you have to identify the nature of the business, in the case of a "compounder", understand what allows it to generate and sustain high return on equity, (in the case of Freddie Mac, the ability to have a cheaper cost of funds advantage vs. any other financial companies out there), and 2) have that "sixth sense" to see what could alter the risk / return dynamics, and be able to walk away when others are still fully enamored with, in this case, a legislatively mandated "moat".  So it requires one to understand the nature of the investment and risk and return dynamics so much that one sees it coming, whether its a certain management behavior, or external factors, a level of understanding probably only possible after observing numerous successes and failures in all kinds of businesses in all kinds of environments.

 

And then, everybody makes mistakes, it's also how you deal with the mistakes and improve yourself that matters.  It's not the end of the world if I owned a compounder which, in hindsight, stopped compounding some point after I bought it.  Maybe I simply failed to fully understand the dynamics that caused it to have compounder investment characteristics to start with.  I just need to sharpen the pencil and read some more K's.

 

[Guest longinvestor]

 

Berkshire Hathaway - say what you want but at this point any theory I think is speculation, once again I don't think we should discredit the effectiveness of that whole ship and the subsidiaries 20-30 years out. I think Buffett's successor(s) will make it work.

 

 

+1. The circle of competence of the BRK team arguably gets larger with the distribution of capital allocation across the BRK team. Of course, some screw ups are certain to happen. Who knows, the distribution makes it effectively 5 to 10 mini-BRK's and there is no more of the "Berkshire is too big". I'm predicting that BRK gets to the trillion dollar market cap first!

 

"rich" could mean different things to folks, but BRK will do just fine over 20-30 years. I'm reasonably confident of this, so I plan to harvest BRK later (last) in my retirement, giving Buffett / successors as much time as I can afford, to compound. In other posts, I used the term "urban myth" to debunk several theories that assume BRK = Index investing as a foregone conclusion.  Every Jan 1 starting 2014, I've committed to posting a BRK/Vanguard Index Fund/CoBF fund performance comparison. Time will tell. 

[Palantir]

Berkshire is designed to run by WEB alone, I believe it is unrealistic to assume that someone else could simply step in to the post and run Berkshire smoothly. WEB is a skilled executive and an icon, it's difficult enough to replace his skill set and impossible to replace the icon. His successor will not have the stature, respect, or gravitas to command a team of stars, and I expect them to struggle after his departure. Given that WEB has been absolutely cryptic and unclear about succession planning, my prediction is the David Moyes scenario.  :-[

 

 

Just IMHO of course.  :)

[Spekulatius]

Spekulatius,

 

Just curious how severe the 98 recession was?  I know that was in the middle of a raging bull, so did it get to the point where there were great deals or were prices just cheap in comparison to prior levels?

 

There was no recession in 98 in Europe or the US per say, but there was a severe and short lived bear market in many tech stocks. Of course there was a severe bear market with asian stocks and even quality companies could be bought for a song.

 

This was similar to 2010 (Europe crisis) or 2011/2012 (Japan, Fukushima). Bottom line is that there are buying opportunities at least every 5 years in major stock markets.

[Guest longinvestor]

Berkshire is designed to run by WEB alone, I believe it is unrealistic to assume that someone else could simply step in to the post and run Berkshire smoothly. WEB is a skilled executive and an icon, it's difficult enough to replace his skill set and impossible to replace the icon. His successor will not have the stature, respect, or gravitas to command a team of stars, and I expect them to struggle after his departure. Given that WEB has been absolutely cryptic and unclear about succession planning, my prediction is the David Moyes scenario.  :-[

 

 

Just IMHO of course.  :)

 

OK, plan B then. WEB life expectancy is now 103 to 113. So there's my 20 to 30 year horizon, secured ;)

[LC]

Berkshire is designed to run by WEB alone, I believe it is unrealistic to assume that someone else could simply step in to the post and run Berkshire smoothly. WEB is a skilled executive and an icon, it's difficult enough to replace his skill set and impossible to replace the icon. His successor will not have the stature, respect, or gravitas to command a team of stars, and I expect them to struggle after his departure. Given that WEB has been absolutely cryptic and unclear about succession planning, my prediction is the David Moyes scenario.  :-[

 

 

Just IMHO of course.  :)

 

If you could choose anyone in America to design a major corporate owner/operator succession plan, who would it be and why? Until I can come up with an answer better than Buffett/Munger, I'll remain confident in Berkshires future.

[Palantir]

How do you know Buffett/Munger are the best choices to come up with a succession plan? Should we just assume that Buffett/Munger are automatically  the best choice at everything?

[Uccmal]

Apple - some are still sceptical but I'm a firm believer that it will probably become the next GE in technology and software

 

Fairfax Financial - their best years are yet to come, the general market is underestimating the performance of it's subsidiaries over the long term

 

The U.S. & Canadian Banks - goes without saying *shrugs*

 

Wal-Mart

 

Exxon Mobil

 

Berkshire Hathaway - say what you want but at this point any theory I think is speculation, once again I don't think we should discredit the effectiveness of that whole ship and the subsidiaries 20-30 years out. I think Buffett's successor(s) will make it work.

 

Algoma Central - ahh yes the odd one on the list (btw I don't have a position in it), high ROE, good profits and good mgmt, has all the workings of a company I wouldn't even mind owning down the road. I think it will make it's owners rich over the next generation.

 

Goldman Sachs

 

 

 

There's others but I think the above are likely to make their owners work.

 

I think your onto something with the US and Canadian Banks.  Under sufficient regulation, after the fall, a basket of these should compound for couple of decades, now at least.  Of course the one caveat,is that you have to know when to get out of the way.  But, that applies to anything, of course.

[yadayada]

what about any of malone holdings? He still has some years to go. Excellent capital allocator, and they are cheap now.

[CorpRaider]

I would probably say MKL if forced to pick one.

[randomep]

China may have had lower levels of literacy in the past but that is not the case anymore with the younger generation. My understanding is that the literacy levels in China are high and they are increasing even in India and Africa.

 

As a society gets richer - it will find the money and ways to educate it's people.

 

I beleive the literacy levels across the world today are over 80%. It is not the same world that existed 30 years ago.

 

There are huge problems with what you said. China is squeezing the population growth artificially. There isn't enough young growth to fill for the aging. China has to make do with their 20yr and 30yr olds for decades to come. And you know... once a person is 20's they have to make do with whatever education they got, nobody goes back to school at 25. So those hundreds of millions of 20-40 yr olds in china living on $2 a day have very little chance of improving themselves. So that will contradict what the original poster said, $20-25k salary in 20yrs, not when you got hundreds of millions living on $2 a day.

 

The 2nd thing is education. Literacy is a world away from making $20-25k a year. Right now that kind of salary is reserved for the best in engineering classes or whatever other profession. I am in engineering so lets talk about that. How many engineers can a university produce? 100-200 a year? and how many of those type of first rate unversities can you have? 5? 10? in the country? You are talking a few thousand to notch grads capable of making 20-25k. And china cannot build unversities the way they build high rises. And this is not even mentioning the law and risk taking culture that is required for innovation which China is sorely lacking.

 

The same goes for South America, like Brazil. When you imagine in your mind a world where those countries can become like the west, you'll see the numbers just don't add up. The last 10-20 yrs for the brics for example has shown that a bit of progress does not project into indefinite growth.

 

 

[LC]

How do you know Buffett/Munger are the best choices to come up with a succession plan? Should we just assume that Buffett/Munger are automatically  the best choice at everything?

 

Of course we shouldn't assume anything. Their history on executive compensation, accounting honesty, and other issues relating to the long-term health of American corporations does count for something, however.

 

Seriously, I cannot think of anyone else who I would, ex-ante, give better odds to successfully design a succession plan. If you can then I would love to hear it, and I'm sure other Berkshire shareholders would as well.

[bizaro86]

China may have had lower levels of literacy in the past but that is not the case anymore with the younger generation. My understanding is that the literacy levels in China are high and they are increasing even in India and Africa.

 

As a society gets richer - it will find the money and ways to educate it's people.

 

I beleive the literacy levels across the world today are over 80%. It is not the same world that existed 30 years ago.

 

There are huge problems with what you said. China is squeezing the population growth artificially. There isn't enough young growth to fill for the aging. China has to make do with their 20yr and 30yr olds for decades to come. And you know... once a person is 20's they have to make do with whatever education they got, nobody goes back to school at 25. So those hundreds of millions of 20-40 yr olds in china living on $2 a day have very little chance of improving themselves. So that will contradict what the original poster said, $20-25k salary in 20yrs, not when you got hundreds of millions living on $2 a day.

 

The 2nd thing is education. Literacy is a world away from making $20-25k a year. Right now that kind of salary is reserved for the best in engineering classes or whatever other profession. I am in engineering so lets talk about that. How many engineers can a university produce? 100-200 a year? and how many of those type of first rate unversities can you have? 5? 10? in the country? You are talking a few thousand to notch grads capable of making 20-25k. And china cannot build unversities the way they build high rises. And this is not even mentioning the law and risk taking culture that is required for innovation which China is sorely lacking.

 

The same goes for South America, like Brazil. When you imagine in your mind a world where those countries can become like the west, you'll see the numbers just don't add up. The last 10-20 yrs for the brics for example has shown that a bit of progress does not project into indefinite growth.

 

Any reason why a competent engineer in China should always make 25k instead of the 100k+ someone with those credentials makes in the developed world?

[Guest longinvestor]

How do you know Buffett/Munger are the best choices to come up with a succession plan? Should we just assume that Buffett/Munger are automatically  the best choice at everything?

 

Of course we shouldn't assume anything. Their history on executive compensation, accounting honesty, and other issues relating to the long-term health of American corporations does count for something, however.

 

Seriously, I cannot think of anyone else who I would, ex-ante, give better odds to successfully design a succession plan. If you can then I would love to hear it, and I'm sure other Berkshire shareholders would as well.

 

+1; Would like to add a few:

 

1. The Berkshire owner's manual which has been prominently published, promoted at every chance over the 50 years in business binds the successor/s. Heck, it has even shaped the subsidiaries even before they became part of Berkshire.

2. The trust factor which Munger talked about earlier this month is huge. Trust but verify has been an admitted weakness of WEB, he has been slow on the verify part. Imagine the next guy getting that somewhat better without giving up on the trust. On balance, they both said the benefit of trust has clearly been overwhelming relative to the slowness of the verify. As long as the BOD keeps this fresh in their minds for another 20-30 years (there are several 50 somethings on that board), the successor is unlikely to take detours. An indirect way for the world to tell if something is different would be if the HQ headcount goes up significantly from the current 25.

3. The power of well crafted incentives to drive the right behavior is uniquely Munger. If any of this is etched in(even if confidential to BRK), similar to the owner's manual, the incoming CEO would have to be an idiot to change much of that. 

 

I trust (with my money of course) that WEB will do a fine job with the transition.

 

 

[yadayada]

http://www.thestreet.com/story/12083751/1/bill-erbey-made-23b-off-your-underwater-mortgage.html

 

anything by this guy has huge potential.

[Patmo]

If you hold the eventual spin-offs, probably GOOG.