Stanley Druckenmiller interview

Read as PDF…

Goldman Sachs interviewed Stanley Druckenmiller on the 4th of February and he had a lot of interesting takes on the current state of the markets. The video is twenty minutes long so if you want the summary continue reading, else just watch it.

0:44 Current framework. What is your current framework for the markets? Druckenmiller’s response “Buckle up… This is about the wildest cocktail I have ever seen.” We increased the deficits more in three months in 2020 than the last 5 financial crises in total.

04:00 Monetary stimulus. M2 to Nominal GDP in China is the same as three years ago while the US is up by 25%. We have borrowed a lot more from our future. There is a lot of pent-up demand which will be unleashed when people have been vaccinated. At the same time stimulus is likely to continue. The world may look a lot different after that.

05:40 Positioning. Doesn’t position himself against one scenario but the main theme is that inflation will be higher than the market expects. Have a short treasury position, a large position in commodities and a very short dollar position.

7:35 The runway for tech. High inflation would be very negative to growth stocks. But… “Comparisons with the 2000s are ridiculous.” We are in the third or fourth inning of the cloud journey. FAANG stocks have been underperforming vs the tech stocks that are losing money during the last three months but Druckenmiller is not too worried about the big ones. 

11:00 Asia vs the West. Asia is the big winner coming out from COVID. Asia looks a lot better compared to the US during the next five years or so.

13:00 Process. Has had no down years since 1981! A lot of it is luck “coincidence of the calendar”. Have a lot of tools in the toolbox with 5-6 asset classes. Go to the place where there is most opportunity. Put all eggs in one basket and look at it very closely. Follows the P/L daily and changes his mind quickly when he is wrong. 

16:50 Bitcoin. Could be a bubble but he has some bitcoin in the portfolio. A lot of problems with it, could be a new asset class but he doesn’t really know.

18:15 The future of capitalism. “The reason I am worried is we haven’t really engaged in capitalism for quite some time.” Millions of kids in the US don’t get an opportunity.

Niklas Sävås, February 28, 2021
Twitter @Investbythebook
www.investingbythebooks.com

Buffett, Gates and Munger after 2014 and 2015 Berkshire Hathaway meetings

Read as PDF…

It’s always refreshing to hear the views of Warren Buffett, Charlie Munger and Bill Gates so I was happy finding this video where they are interviewed after the shareholder meetings of 2014 and 2015. The questions are better than the average at the AGMs. The topics I found most interesting:

·       Buffett’s insights on Moody’s

·       Gates on how Bing is an important tool for Microsoft in understanding what to do next based on what people search for (my take: Google knows more)

·       Buffett believes driverless cars will be a negative to car insurers

·       All three read the Wall Street Journal and New York Times daily

·       Buffett says that Berkshire don’t write any long-term policies related to climate change

·       Buffett will not buy Microsoft due to his association with Gates

·       All of Mungers sharp comments

12:30 Buffett on Coke’s incentive structure: We would not have done the same. At Berkshire we have large incentive structures, but they are always connected to what the specific manager can accomplish. If a manager takes care of the Canadian market, then he gets compensated for the results on that market.

16:00 Buffett on activism: We are not looking to change people”. “We want to join with people we like and trust”.  “You don’t want to get married with the idea of changing the other party”.

17:30 Buffett on Carl Icahn: Carl goes into different kinds of companies. We are not doing the same thing. 

19:00 Buffett on Moody’s: It’s a good business, a very good business. Have seen their competitive position by being a customer. We are not in a position to negotiate on price and we need their rating and S&Ps rating.  High return business that has great potential to grow over time.

20:30 Gates enters the conversation – Buffett: When I first met Bill in 1991, I bought 100 shares of Microsoft and I still own them. Gates: Geico has been a leader in capturing customers through the internet (implicating that Buffett understands technology).

24:00 Gates on Satya Nadella: Satya is free to run the company as he wishes. He is off to a great start. He has used more of my time than was the case before. He is re-examining all the things. It’s exciting that we have new blood and new ideas. 

25:30 Gates on spinning off Xbox and Bing: The Bing technology has been a key for us in how to build large scale data centers. Bing lets us see what is going on by what people search for. It’s a pretty fundamental part of the company. Satya and the team will look at Xbox but it’s not as obvious as it seems.

28:00 Gates on hardware and data centers: You will never have the same profitability in hardware, tablets and data centers, as in software. Understanding where cost of goods sold are going for Microsoft is important for investors going forward as it’s not a pure licensing business anymore.

32:00 Buffett on IPOs: IPOs by design are not offered at a bargain price. In 2008 nobody was bringing IPOs but that was the time to be buying stocks. It’s not our game.

34:00 Munger enters the conversation – Munger on Bitcoin: I was holding back when I called it rat poison. I think the government should issue the currency. Gates: I like digital currencies but don’t think they should be anonymous. Buffett: The US dollar will be the world’s reserve currency for a long, long, long time.

40:30 Buffett on driverless cars: If they work well, they are good socially, but they could reduce the cost of insurance which is bad for Geico. I would never sell Geico though.

42:00 Munger on pollution in China and BYD: Chinese pollution is good for BYD. China will understand that they shouldn’t kill people which will be good for BYD.

43:00 Munger on climate change: People pretend to know more what will happen in the future, but they are very sure. Global warming is a reality though. Gates: We need more ways of making energy without emitting CO2 and over a 30–40-year period we need to change.

46:00 Munger on Thomas Piketty’s views on income inequality: I don’t agree, Hong Kong that has great income inequality has been one of the glories of the world. He is full of error. I am all for fair taxation. Buffett: We are for equal opportunity but not equal outcome.

48:00 Buffett on higher education: It’s worth it for some students but not all. Munger: Being liberal on student loans has definitely raised tuitions, that is how capitalism works. A lot of education is counterproductive but on average it’s positive.

50:00 Munger on redistribution of wealth: Munger: I don’t support it much. Buffett: More than Charlie. Gates: Same as Warren.

50:30 Buffett on owning whole businesses vs stocks: I rather own whole businesses but stocks are a very good alternative.

53:00 Hillary Clinton as president – Buffett: I would support her. Munger: I am a republican, but she is probably a good democratic alternative.

53:30 Morning reading - Gates: Wall Street Journal and New York Times. Buffett: Wall Street Journal, Omaha Herald, Financial Times, New York Times and USA Today. Munger: Wall Street Journal and New York Times and I particularly read what I disagree with, especially Krugman.

57:00 Gates on self-education: Reading, work on what you are interested in, surrounding yourself with smart people, other domains.

1:03:30 Buffett on what businesses he is buying: I try to buy business which I can understand the future of for 5, 10 and 20 years and I try to buy them at a reasonable price. Munger transformed me from a cigar butt investor to a buyer of wonderful businesses at a fair price.

1:06:40 Buffett on the minimum wage: Raising the minimum wage would lead to people losing their jobs. Income tax credits are better.

1:11:10 Buffett on insurance related to climate change: We are only running one-year policies related to the climate.

1:12:00 Buffett on renewable energy: I am pro wind and pro solar. The sources of energy are changing but it can’t change over-night. It will take trillions of dollars of investment to change it.

1:19:30 Munger on bad conduct of activists: I like people who work constructively without all the noise. 

1:21:30 Munger on Berkshire after him and Buffett: Berkshire will flourish after we’re gone. We had good alchemy but now we have great assets. Both the assets and culture have great forward momentum.

1:25:45 Gates on Buffett buying IBM: I have a bias because of my association with Microsoft. I would not buy that stock. Buffett:We can’t buy Microsoft because of Bill. People would think I got tipped off by Bill.

Niklas Sävås, January 7, 2021
Twitter @Investbythebook
www.investingbythebooks.com

John Malone - The Mavericks Lecture 2012

Read as PDF…

I saw this fascinating lecture by John Malone from 2012 and wanted to share the highlights. There are some profound lessons to be learned from Malone both for students of business and investing. William Thorndike honored him with a whole chapter in The Outsiders which we reviewed some years back while Marc Robichaux honored him with a whole book in Cable Cowboys, reviewed by us recently. I want to give my special thanks to Tren Griffin who brought me into studying Malone through his blog posts and podcast episodes! 

Find my highlights from the video below:

Mergers & Acquisitions

“If synergies are real then it’s a very good idea to make an acquisition”

Horizontal vs vertical deals

Horizontal acquisitions are much easier. Vertical deals seldom work as the buyer doesn’t understand the business.

Culture is the most important factor in mergers – in horizontal deals its often wise to fire the top guy as the culture is seldom aligned. In vertical acquisitions, you need to keep the people at the top as you don’t understand the business as well as them.

Main synergies in horizontal acquisitions in the cable business

“The two most important and straightforward synergies in the cable business are programming costs and overhead costs.” 

Programming costs - you get them down due to bargaining power, driven by size

Overhead costs - you don’t need two offices if you have operations in a nearby town

Financial synergies - Sometimes you can optimize taxes by buying a money-losing business

Operating synergies - Be skeptical on these

Revenue synergies - Use the existing platform to distribute the new programming content. 

 Due diligence

“There is no easy answer on how to best conduct due diligence - you need to learn the business the best you can, use the best people you can find and you need to avoid becoming emotional in order to understand if the acquisition will work out or not.”

The people who are most affected by the merger are often not involved in the diligence process which is a mistake. The lower level staff must be involved. Lack of diligence is what kills most deals.

 Leverage

“I like leverage, I think leverage is your friend if you are prudent about it”.

What is the optimal amount of leverage? It very much depends on the predictability of the cash flow stream from the business. The more predictable - the easier it is to increase leverage. Up to five times cash flow is good. But you need to understand how much capital the business really needs. In manufacturing businesses, you shouldn’t take it up nearly as high.

In Liberty Global International (editor’s note: where Malone is chairman) four times EBITDA is the floor and five times is the ceiling. If you can’t find an acquisition, then you buy back shares and take the leverage ratio back up. It’s also very much a function on how much you can borrow for - if you can borrow cheap then your ROE can be very high.

Taxes and offshore money

“The Government is your partner, you just don’t want them to take their share early.”

If you buy a company with stock, you are not able to amortize the cost over time and reduce future taxes against your operating profit which you can do with cash or debt. 

Monetizing tax losses - you must use the tax law as a friend.

Tax deductions on debt interest

“No wonder why money is not invested in the US”.

Bringing money back to the US leads to high taxes - business therefore keeps the money offshore (editor’s note: at the time the US tax rate was 35% which was brought down to 15% changing the dynamics a bit).  When you look at international business the money shown on the balance sheets is offshore. 

 Tracking stocks

“Tracking stocks has only worked for us and not for others and that is down to me having control over the whole structure”

The benefits of a tracking stock are that there are no tax costs in separation. Furthermore, if one business is profitable and the other isn’t then you net the two and reduce taxes. The sum of the parts value is also clearer as the right investors can own the respective stocks. The focus from management on its business is also better.

Other reasons for issuing a tracking stock: Sometimes you are not allowed to spin-off a business. Other times the business is not ready to live on its own.

Niklas Sävås, February 9, 2020

Twitter @Investbythebook
www.investingbythebooks.com

Book club - December 2019

Read as PDF…

During last night’s InvestingByTheBooks book club meet-up the theme was biographies. The following four books got presented: Med Blicken på Stigen on Gustaf Douglas, How to Fail at Almost Everything and Still Win Big on Scott Adams (the creator of Dilbert), Black Edge on Steven A. Cohen & Stephen Schwarzman with What it Takes: Lessons in the Pursuit of Excellence.

When reading biographies, it’s important to emphasize the risk of stepping into survivorship bias. How many failed while these successful people won? Was the success driven by mostly skill or luck? It’s very hard to grasp as a story may be truthful but are also an after the fact description. It’s easier to judge a diary but who writes a book not knowing that they will be successful, and who will publish it? Not many. Therefore, we read what we can get our hands on which is biographies. We are, however, armed with Rosenzweig’s The Halo Effect in our back pocket to guard us from being too carried away by the fascinating stories. Discussing the books with a group of tough critics may be the best way to keep our feet on the ground.

Med Blicken på Stigen, Mats Hallvarsson

The first book is about one of Sweden’s most successful businessmen and the main owner of the industrial conglomerate Latour. It’s a book about his life but also a guide on how to build a fantastic business. Douglas goal has been to become the best possible business owner and it’s difficult to argue against the end-result. 

Recipe for success: Hire the right people, buy the right businesses and let them grow.

Highlight from the group discussion: People such as Jan Svensson and Melker Schörling has been vital for the value creation of Latour. How much of the success has been due to them compared with Douglas?

How to Fail at Almost Everything and Still Win Big, Scott Adams

Judged by the title this could have been a book by any of the successful venture capitalists. In fact, this is a book about Scott Adams, the creator of one of the most successful comic books - Dilbert. Adams created a system to achieve success in life and the book is filled with interesting life hacks. 

Main idea: By being good (not excellent) in many different disciplines Adams believes it’s possible to come out ahead which is comforting for all generalists out there.

Highlight from the group discussion: Which disciplines are truly relevant for achieving success?

Black Edge: Inside Information, Dirty Money, and the Quest to Bring Down the Most Wanted Man on Wall Street, Sheelah Kolhatkar

This is a book that should be read like a self-help book in reverse. How do you build a life centered around major financial wealth creation but end up with no loved ones? Ask Steven Cohen. For all financial catastrophe book junkies out there, this one is for you. 

Key insight: Act with integrity and work in environments that keep the same high standards or risk disaster.

Highlight from the group discussion: How deliberate was the quest for a black edge? A gradual journey from white to gray to black or all black from the start? 

What it Takes: Lessons in the Pursuit of Excellence, Stephen A. Schwarzman

In this biography about the co-creator of Blackstone Stephen Schwarzman the reader gets insight into how he built a hugely successful company. He presents his 25 rules for success and many fascinating stories into how the company became such a success. Although some may say that it mostly came down to some lucky circumstances it’s difficult to say and what we are left with is a vastly successful business. 

Major takeaway: Just because something offers a bigger payoff doesn’t mean it will be harder to achieve. Go for the big ones!

Highlight from the group discussion: How much was luck vs skill?

Niklas Sävås, December 9, 2019

Twitter @Investbyhebook

www.investingbythebooks.com

Podcast Series: Housel at Invest Like the Best

Read as PDF…

The Invest Like the Best podcast is hosted by Patrick O’Shaughnessy. In this episode he interviews one of the best writers within the investing space - Morgan Housel.

Housel is a partner at the Collaborative Fund, a Private Equity firm owned by Craig Shapiro. Housel is famous for his great writing both at the Motley Fool where he spent the first nine years of his career and then at his current workplace. In the interview he mentions that he loved his job at the Fool but asked himself the question “If you are 70 years old and you had worked with what you do for your whole life would you feel comfortable?”– and decided to shift gears. He is writing on everything related to investing and I recommend everyone to read his work at the Collaborative Fund. I have summarized the key insights I took with me from the episode. Enjoy!

Public markets vs Private markets

Housel describes how investing in public markets are all about analyzing data while in private markets doing a thorough evaluation of the founder is key. In private markets there is often not enough financial data to make an in-depth analysis and therefore vital to find the right people.

In my view, trusting the right jockey is sometimes a tempting approach also in public markets - evident from books such as The Outsiders and The Intelligent Fanatics (don't miss our interview with the authors of the latter Sean Iddings and Ian Cassel).

Insights into active management

Housel thinks active management is here to stay but that fees for asset managers will continue to go down. “A good asset manager should make as much as a good doctor”. 

I listened to a podcast episode with Ken Fisher recently and his take was that the average fee has gone down due to that more money has gone into passive funds and not necessarily because active managers have lowered their fees. At one end we have index funds charging a few basis points and at the other active funds charging a few hundred basis points.

Housel also discusses financial advisors and thinks they are needed to fill the gap where the information online is not enough. Marrying the two is a recipe for success – which Vanguard has succeeded with.

Reading and writing

Housel describes himself as a late bloomer as he started reading in his early twenties (it is never too late!).  A large chunk of his reading today is to scan Twitter and reading blogs to find new ideas on what to write about. He describes his work as a serendipitous journey where nothing is deliberate, and the best ideas come randomly when he is doing something unrelated.  When taking long walks, he thinks the best and he is relying a lot on the subconscious to bail him out. 

One of my favorite quotes in this regard – of priming yourself to think better - is from Marcus Aurelius “The things you think about determine the quality of your mind, your soul take on the color of your thoughts”.

Personal finance

Housel stresses the importance of understanding that there are two ways to achieve wealth. Either focus on the top-line or bottom-line. The problem is that many focuses on the first and forgets the second. Remember: If you spend all you earn you still end up with a big fat zero. If the large expenses - like tuition, house and car - are kept down you are well on your way to financial safety.

Housel himself focus on the bottom line as it works best for him: Less stuff = More happiness.

The lesson is to find your own way based on your preferences – just make sure that you end each month with something more than nil. Simple but timeless advice.

Learning from history

For those of you who follow Housel knows that he has written a lot about what one can learn from history. I urge you to read his piece about the Wright Brothers. That story and similar stories (for example about how Penicillin was invented and how Scurvy was avoided) are examples of titanic events. But at the time, nobody cared. The lesson: It’s not just about the quality of the idea - timing needs to be right too.

Housel thinks reading old newspapers is great as it makes you appreciate how things were not evident at the time. Some books he recommends in this vain are Benjamin Roth’s: The great depression: A diaryand Frederick Lewis Allen’s three books: Since yesterday, Only yesterday & The big change.

Corporate strategy

Housel thinks centralization has not been a good strategy – and that decentralization is the way to go. This is not new as the trend of decentralization has gone on for some time, however the degree of decentralization has shifted. New firms such as Zappos and Valve have no formal hierarchy but instead operate using self-organizing teams. An example of how good the strategy can be – and also how few individuals can create tremendous wealth - is that of the game Doom.  It was created by 10 developers from Texas. Another one from my country, Sweden, is that of the game Minecraft - a billion-dollar company (Mojang) more or less created by one brilliant developer in Markus "Notch" Persson.

Personal skills

Housel describes how personal skills are hugely important, in addition to technical skills, to become successful. He thinks that is often forgotten. Having worked a lot with complex software development projects I empathize strongly with this - if the customer and the vendor have problems communicating, integrating their systems will be way more difficult. A person who knows both is the most valuable, by far.

Another topic discussed, which is related to the earlier point on history, is the impact of how one will view investing if growing up when the stock market crashed or boomed. Being raised in a crash seems to make people more risk averse and vice versa. Sometimes what makes intuitive sense is actually true.

Blog recommendations from Housel and O’Shaughnessy

In the episode Housel and O'Shaughnessy mentions a couple of the blogs they follow:

The Waiters pad with Mike Deriano 

Slate Star Codex with an anonymous Doctor 

Paul Graham's blog with Paul Graham

Abnormal returns with Tadas Viskanta

Melting Asphalt with Kevin Simler (recommended by Patrick) 

If you liked this brief summary of the episode you will love the whole one. Happy listening!

Niklas Sävås, September 20, 2019

www.investingbythebooks.com

@Investbythebook

Twenty Lessons from Enron

Read full text as pdf… Link to Amazon

During the summer I read Bethany McLean’s and Peter Elkind’s book about Enron ”The smartest guys in the room”. I found it to be a gem of a book, with tons of lessons for investors - of what not to do... It’s scary how a company (primarily management) can fool regulators, rating agencies, sell-side equity analysts and investors for such a long period. And how auditors – paid by the company – have short-term incentives to be part of the fraud (hopefully the fall of Arthur Andersen acts as a lesson, but I wouldn’t bet on it considering human nature being what it is).

Enron was a darling at the time and the seventh largest company in the US. It had good business areas and bad business areas; the main issue was that management wanted the company to seem better than it was. Without whistleblowers and outstanding work from investigative journalists the fraud would likely have gone on even longer. For long-term investors whose style is to invest in companies with outstanding management teams the lessons from this scandal should act as a reminder. In my view, investors should behave as if management is hiding the truth and do the detective work needed to understand if that hypothesis is correct. Here are twenty lessons from the book that may help you with that:

1. Always validate the accounting profits with the reported cash flows

2. Keep tabs on what management do and not what they say

3. Watch out for companies that are re-pricing options

4. Remember that Wall Street extrapolates the results of their darlings (whom have over-performed the quarterly forecasts over time)

5. Be wary of investing in companies dependent on debt (without having stable cash flows)

6. If a company puts too much emphasis on the next quarter – stay away!

7. If a company obsess over their own stock price look elsewhere (Enron had monitors showing the current stock price – everywhere!)

8. Watch out for huge write-downs amid management changes

9. If the company continually books non-recurring charges – they are recurring charges

10. Are you anchoring on valuations from sell-side analysts? Don’t!

11. Don’t mix the stock price performance with the performance of the underlying business

12. Don’t rely on reports from rating agencies, sell-side analysts and auditors. Sometimes they are worth much less than zero.

13. Validate your analysis with that from short-sellers – ”invert always invert”

14. Beware of company excesses – Why do you think Buffett called his jet ”The Indefensible”?

15. That the employees are financially rewarded is not a clear sign of a good incentive structure – in fact it tells little about the rewards for the shareholders

16. Don’t trust the predictions from management

17. If a text from a quarterly or annual report is impossible to understand – the company is probably hiding something

18. A cash flow statement is not the holy grail as it can also be tampered with – you need to understand how the cash flow is created.

19. Read stories about the company from investigative journalists – then re-evaluate your story

20. You are always susceptible to be fooled

Niklas Sävås, August 19 2019

www.investingbythebooks.com

@Investbythebook

Podcast Series: Katsenelson at Planet MicroCap

Read full text as pdf…

The Planet Micro Cap Podcast is hosted by Robert Kraft. The podcast’s main topic is interviewing though-leaders in the micro-cap space but from time to time other guests take part. This time I was thrilled to see that Kraft had interviewed Vitaliy Katsenelson.

For those of you who are avid readers of InvestingByTheBooks will know what we think of Katsenelson and his books. Both his first book Active Value Investing and his second The Little Book of Sideways Markets  are top-rated at the site.

For those who have read Katsenelsons books this episode is partly a repetition of how he views investing, but it also gives another angle as he discusses his own views of his books, how the last years have shaped him as an investor, his current view of the market, and his advice for young investors. He also mentions a 15-page article he hasn’t published yet about the pain and suffering he has experienced as an investor…

Margin of Safety - From Engineering to Investing

Read full text as pdf...

Warren Buffett has often stated that the Intelligent Investor by Benjamin Graham is the best book ever written on investing. The two chapters that Buffett rates most highly are chapter 8, The Investor and Market Fluctuation where Graham came up with the metaphor of the manic-depressive Mr. Market, and chapter 20, "Margin of Safety" as the Central Concept of Investment. The focus for this brief and introductory text is the latter.

Margin of safety as a concept

"Long ago, Ben Graham taught me that "Price is what you pay; value is what you get" / Warren Buffett

Margin of safety is in investment terms often described as the difference between value and...