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The best read letters


augustabound
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I could have sworn we already had this topic going, but I can't seem to find it.

 

I thought of this today after being led to Jeff Harp's letter, CEO of Trinity Bank, from The Frog's Kiss blog. 

http://www.frogskiss.com/2011/09/how-to-think-like-businessman.html

There's a link in the post to Harp's letter and he seems candid and intelligent.

 

Other than the usual's like Buffett, Watsa, Marks, Klarman (if you can get your hands on it), Dimon etc., who's letters are a can't miss?

 

I found a post from Sanjeev on Vito Maida's letter, anyone else have a must read list?

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augustabound, in that Frogs Kiss blog, I like the following statement:

 

"People mindlessly believe share buybacks are an absolute positive, but it is really just an ordinary business decision that can turn out poorly like any other."

 

I actually see a lot of people on this board mindlessly cheer buybacks with absolutely no regard to if they are done below intrinsic value. 

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I actually see a lot of people on this board mindlessly cheer buybacks with absolutely no regard to if they are done below intrinsic value.

 

Be careful not to confuse the absence of a mention of buybacks below IV with the absence of the consideration itself.

 

For example, I will often write about buybacks without putting the disclaimer that I like them because they are under what I consider to be IV, but it doesn't mean that I don't think about it. For me it goes without saying, but I can understand how some people (mostly on other boards) will cheer any buyback, at any price.

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thx for the link to trinity ceo letter. its been a while since i revisited that name. wonder if john linnartz is still involved there?

 

another shareholder letter that i consider a wonderful read is fastenals (fast). a shame that its stock price always so darn expensive.

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another shareholder letter that i consider a wonderful read is fastenals (fast)

 

I'll check that one out, thank you. 

 

Of course I left out in my O.P. LUK, Sequoia, Tweedy and Third Avenue.  This past letter for T.A. I read Ian Lapey's letter for the first time and I though it wasn't bad considering he's in the shadow of a master.  8)

 

I agree about his reasoning for the buybacks is important, but more importantly he spells it out number for number why he believes it to be a great deal for shareholders.  Most management who announce buybacks vaguely state that their shares are trading at an attractive level and this would be a smart way to return money to shareholders, blah, blah, blah, heard it a thousand times.......

 

I agree that buybacks need to be done below I.V. like mentioned above.

 

I've read a couple of the Trinity letters today, before Notre Dame thumps Michigan State of course.  ;)  He's pretty candid on their goals and their failures and they're small enough that he welcomes phone calls and emails to him directly. 

 

My only question for those better at the financials that I am, what is the 12% that he refers?  ROIC?  I can't seem to find that number for the quarter he was talking about the buybacks.

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augustabound, in that Frogs Kiss blog, I like the following statement:

 

"People mindlessly believe share buybacks are an absolute positive, but it is really just an ordinary business decision that can turn out poorly like any other."

 

I like that line too.  :)

 

Buybacks are a grey area for me though.  Most investors and management love buybacks but I don't always see why.

 

I read that Charlie Munger loves Costco, does anyone read their letter?

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The reason buybacks below IV are great is they are cheap low risk ways to reinvest capital and porvide leverage.  There is a great Forbes article on the board somewhere that describe how Henry Singleton used expensive stock to purchase companies (when times were good - 1960s) and when times were bad (1970s) he created value via buybacks.  If the market is going to go sideways for awhile buybacks may be one of the best places to compound value.

 

Packer

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Well I know the theory behind it, have read Buffett's view on it etc, I just can't get my head around why it's such a great deal for me as a shareholder.

I'm by no means saying it's wrong, I just don't see it.

 

Not knowing much about Teledyne, is it safe to say the share price followed his buybacks to the positive?

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Yes it did.  I think the key to buybacks is the leverage effect.  Teledyne focused on profitabilty and sold or shutdown underperforming businesses and buying back shares with cash flow and proceeds.  As you say in theory, it is great but there are number of firms that have used them to keep FCF/share steady in a declining FCF situation.  Buybacks work in areas where the re-investment opportunities are low or the returns in those investments low. 

 

Look at Journal Communications, a newspaper and radio/TV firm.  JRN has had declining FCF of $89 million in 2003 to $62 million in 2010 about a 5% decline per year.  However, from share buybacks the FCF/share has declined from $1.19 to $1.13/share less than a 1% decline per year.  However, the share price collapsed from $18/share to about $4/share today.  Also, given that the underlying mix of profitability is not 70% radio/TV and 30% newspaper, it looks like the decline may slow down (as the decline is due to the newspaper with radio/TV holding steady) and it can re-invest at FCF multiples of 3.5x or about 29% return on cash.  WPO has done the same thing with recent buybacks.

 

Packer     

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Good stuff Packer, thanks for the explanation. 

 

I think your example is what I couldn't get my head around.  I've heard people say that per share earnings, cash flow etc increase with buy backs, "you get a bigger piece of the pie", but to me that was always just playing numbers games. 

 

Like I said in my post above as to why I liked the Trinity letter, he spelled out why he felt the buy backs were great for shareholders and it made sense. 

 

And I read the Costco letter, not much there. 

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