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Powerful Investment Wisdom From Reading - Rock Pit Is A F#@k$* Great Business


BG2008
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I was browsing the reading list and it dawned on me that I owe one of my punchcard investment success to reading Peter Lynch's book.  He said that Rock Pits are great businesses because it sells for $10 a ton, but it cost another $10 a ton to ship.  So a rock pit owner has tremendous pricing power.  He can draw a circle that is roughly 50 miles and no one from outside of that circle can compete with him.  He can basically raise his pricing power up to the trucking cost of the competitor bringing rocks into his territory.  In short, Rock Pits businesses are either monopolies, duopolies, or oligopolies depending on how many are in a local market.  This invaluable concept made so much sense and I was able to absorb it so quickly that it lead me to dig deeper into FRP Holdings  Some sell side analyst had valued the rock pits at $25mm based on some DCF with 10% discount rates.  I came up with a value that was closer to $200mm.  At the time, the market cap of FRP Holdings was only $300mm.  So this was a big swing factor in my analysis.  FRP Holdings was at one point 80% of my IRA.   

 

Are there other concepts like Rock Pits, Mr. Market, Network Effects, etc that are very important yet very readily understood that you have come across either in reading or in business where the light bulb just went on and you're like Holy Crap!  Please Share!   

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Guest Schwab711

Rock pits have average-to-above-average returns, depending on leverage. I'm looking at CRH plc (CRG LN) right now and it's probably 5% ROA (using FCF) and 10% ROA (using EBT). Leverage determines the final results from there. We are at least further along in the business cycle, since a few years ago those numbers were cut in half.

 

It's hard to compete in the industry but their pricing power is volatile and over long periods, limited. It's still a really nice business due to the likelihood it will exist in 50 years. I'd love to own one at a good price like you got.

 

I'm not sure they are as good of businesses as when Peter Lynch mentioned them but they make great examples for what a good business model looks like.

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Rock pits have average-to-above-average returns, depending on leverage. I'm looking at CRH plc (CRG LN) right now and it's probably 5% ROA (using FCF) and 10% ROA (using EBT). Leverage determines the final results from there. We are at least further along in the business cycle, since a few years ago those numbers were cut in half.

 

It's hard to compete in the industry but their pricing power is volatile and over long periods, limited. It's still a really nice business due to the likelihood it will exist in 50 years. I'd love to own one at a good price like you got.

 

I'm not sure they are as good of businesses as when Peter Lynch mentioned them but they make great examples for what a good business model looks like.

 

Rock Pits returns come from the land parcels once they are done mining on them.  You won't find that in the ROA.  Try using ROA on any REIT.  You'll think real estate people are retarded.  This is my biggest pet peeves with ppl who overly focus on ROA and ROE.  Accounting can be weird for particular industries like RE or companies that are rolling up competitors and have a ton of amortization.

 

Pricing power is volatile? Vulcan Materials increases their unit price in 2009 when their volume got cut in half! 

 

I guess sometimes you should just forget about the ROA and look at who's rich and stays rich over time and what they own.  I would speculate that there are a lot of 3rd generation "ham sandwich" heir that own rock pits. 

 

Do people have other powerful insights from reading that they can share?

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Guest Schwab711

Rock pits have average-to-above-average returns, depending on leverage. I'm looking at CRH plc (CRG LN) right now and it's probably 5% ROA (using FCF) and 10% ROA (using EBT). Leverage determines the final results from there. We are at least further along in the business cycle, since a few years ago those numbers were cut in half.

 

It's hard to compete in the industry but their pricing power is volatile and over long periods, limited. It's still a really nice business due to the likelihood it will exist in 50 years. I'd love to own one at a good price like you got.

 

I'm not sure they are as good of businesses as when Peter Lynch mentioned them but they make great examples for what a good business model looks like.

 

Rock Pits returns come from the land parcels once they are done mining on them.  You won't find that in the ROA.  Try using ROA on any REIT.  You'll think real estate people are retarded.  This is my biggest pet peeves with ppl who overly focus on ROA and ROE.  Accounting can be weird for particular industries like RE or companies that are rolling up competitors and have a ton of amortization.

 

Pricing power is volatile? Vulcan Materials increases their unit price in 2009 when their volume got cut in half! 

 

I guess sometimes you should just forget about the ROA and look at who's rich and stays rich over time and what they own.  I would speculate that there are a lot of 3rd generation "ham sandwich" heir that own rock pits. 

 

Do people have other powerful insights from reading that they can share?

 

That terminal value on RE can be many decades out. I told you I thought it was a really nice business. If terminal value is decades out, that means the 'true' ROA (from a mathematical POV) is ever-so-slightly higher than today's ROA. The value of not worrying whether you will be in business or not in many decades and the value of being profitable with a 'ham sandwich' is undervalued. I have made that very argument in many posts on here. I am totally with you in that regard.

 

Pricing power is not linear (thus, volatile). I don't know what else to tell you without spending a several hours preparing data/charts. If you have proof of the contra-argument, I'd gladly change my mind. Last I looked in to it, pricing was volatile.

 

For powerful insights, I think obvious ones are what you're looking for. Moody's/S&P have 3rd generation heirs doing quite well. Same for the beverage companies and banks. I'd think everything WEB has owned forever is what you're referring to.

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When you say rock pit, is that the same as a quarry?  I know of someone who likely made a killing on a quarry - after it was depleted.  He bought it and turned it into a little water park.  He charges like 10 bucks to get in or something like that and makes money renting out gazebos and selling concessions.  I went there one day a couple summers ago and there were hundreds of people there.

 

Other businesses that are good?  Like Buffett says, go a-z and you'll probably start noticing some weird little companies making ridiculous returns on stuff you'd never expect.  There's a lot of companies that trade otc that fit this bill.  I suspect that the situation with a lot of them is that it's a pretty small niche and no one bothers competing with them, I say this because a lot of them have tiny PPE accounts that they never seem to spend any money on.  Trouble is most of them don't pay dividends.  They either pay themselves too much in salary, or they stockpile the cash, probably waiting for the stock price to bottom out so they can buy out  the minority shareholders on the cheap.

 

Munger mentioned a guy who just bought up service businesses.  I think he meant professional services like accounting offices and so on.  There's a guy on here who buys up cleaning businesses who said he figured he could make 20% on them.

 

I think a lot of times the returns are greater in smaller businesses.  Doesn't have to be anything fancy.  I knew a guy whose father in law made a killing recycling junk from offshore oil rigs.  I can't remember if it was steel or rubber or what it was.  I don't even think he processed it, he just turned around and re-sold it.  I imagine business is tougher now, but it's not like he borrowed a ton of money to build a factory.  If worse comes to worse he'll probably just go do something else.  Lots of people were making a killing on little businesses like that down in the gulf of mexico area when oil was high.

 

I think many times there is money to be made as a service business doing work a bigger business doesn't want to bother with. Find something that offers great returns that is too small for them to bother with and build a relationship with them.  I worked for a guy who did maintenance work on the grounds of a refinery.  He had vacuum trucks for spills, mowed the grass, and so on.  He was one of the richest guys in the town and got there with a really basic business.

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