America’s Infrastructure

The Economist has an article about the current infrastructure in America. The article contains some of the same figures which Sellers Capital use in their VMC investment thesis.

A few excerpts from the article:

In 2005 the American Society of Civil Engineers estimated that $1.6 trillion was needed over five years to bring just the existing infrastructure into good repair. This does not account for future needs.

The private sector is hungry to invest. In May Morgan Stanley raised $4 billion for its new infrastructure fund.

In January a national commission on transport policy recommended that the government should invest at least $225 billion each year for the next 50 years.

The article also outlines the underfunding of water infrastructure. Which is one the reasons behind Whitney Tilson picking MWA in July 2007, as mentioned in Kiplinger.

America’s ageing water infrastructure is sorely underfunded: the Environmental Protection Agency forecasts an $11 billion annual gap in meeting costs over the next 20 years.

Spinoffs: A Quick Summary

Below is an excerpt about spinoff investments from Joel Greenblatt’s You Can Be A Stock Market Genius.

1. Spinoffs, in general, beat the market.
2. Picking your spots, within the spinoff universe can result in even better results than the average spinoff.
3. Certain characteristics point to an exceptional spinoff opportunity:

• Institutions don’t want the spinoff (and not because of the investment merits).
• Insiders want the spinoff.
• A previously hidden investment opportunity is uncovered by the spinoff transaction (e.g. a cheap stock, a great business, a leveraged risk/reward situation).

4. You can locate and analyse spinoff prospects by reading the business press and following up with the SEC filings.
5. Paying attention to “parents” can pay off handsomely.
6. Partial spinoffs and rights offerings create unique investment opportunities.
7. Keep an eye on the insiders.

This points are useful when looking at investment opportunites like EMC and SATS.

Good to Great by Jim Collins

I have just finished reading Good to Great by Jim Collins and was going to post a brief book summary. But a quick search reveals a mindmap of the book and WikiSummaries already has a chapter by chapter summary.

2008 Berkshire Hathaway Shareholder Meeting: Detailed Notes

Reflections on Value Investing has posted some notes from the recent Berkshire Hathaway meeting. Below are some quotes that I noticed.

I started investing when I was 11. I believe in reading everything in sight. I wandered for 8 yrs with technical analysis. I read Intelligent Investor, chapters 8 and 20 I recommend, and if you absorb it you won’t be a lemming.

Our job is not to select great managers, our job is to retain them.

In business school the amount of time spent teaching option pricing is total nonsense. You only need 2 courses, how to value a business and how to think about stock market fluctuations.

We never want to trade reputation for money.

There is a lot I wouldn’t buy even if best management in world, as it doesn’t make much difference in a bad business.

We want a company with durable advantage, which we understand, can trust management, at a good price.

If I were working with small sums of money, it would open up thousands of possibilities. We found very mispriced bonds. We found them in Korea a few years ago. You made big returns but had to be small size. I wouldn’t be in currencies with small amount of money. I had a friend who used to buy tax liens. I’d look in small stocks or specialized bonds.

Several times I have had 75% of my non-Berkshire net worth in a situation. You will see things where it would be a mistake not to act. You won’t see them often, and the press and your friends won’t be talking about them.

We have lower due diligence expenses than anyone in America. I know of a place that pays over US$200m to its accountants every year, and I know we are safer because we think like engineers – we want margins of reliability.

A brand is a promise.

We waste a lot of time, but we waste it on things we want to waste it on.

Macquarie Group

The Economist has an article about Macquarie Group, talking about their business model and if they can continue their sucess.

Here is a good quote about how they manage their staff:

For some, this optimism is based on an aspect of the Macquarie model that is hard to pin down: its people. Much of Mr Moss’s (current CEO) 30-year experience has been on the trading floor, which has taught him to be adventurous—within limits. The trick, he says, is to encourage employees to come up with fresh ideas, back them if they are good, and award big bonuses if they are successful, and, importantly, contain losses.

Seth A. Klarman

gone to the dogs has a post featuring a speech by Seth A. Klarman (the author of Margin of Safety) at MIT. Here are a few quotes from the speech:

Seth Klarman makes the point that most investors lack a strategy that equips them to deal with a rise in volatility and declining markets.

Buying at a discount creates a margin of safety for the investor—room for imprecision, error, bad luck or the vicissitudes of volatile markets and economies.

The best investors do not target return; they focus first on risk, and only then decide whether the projected return justifies taking each particular risk.

Recourse leverage changes this equation, as you can seemingly own all the investments you want simply by borrowing to buy them. There is no healthy portfolio discipline enforced by the desire to make new purchases or the anticipation that you may want to. There is also a bit of a slippery slope in that if a little leverage is good, why isn’t more leverage better? When do you stop?

Value investing, the strategy of buying stocks at an appreciable discount from the value of the underlying businesses, is one strategy that provides a road map to successfully navigate not only through good times but also through turmoil. Buying at a discount creates a margin of safety for the investor—room for imprecision, error, bad luck or the vicissitudes of volatile markets and economies. Following a value approach won’t be easy for everyone, especially in today’s media-dominated, short-term oriented markets, in that it requires deep reservoirs of patience and discipline. Yet it is the only truly risk averse strategy in a world where nearly all of us are, or should be, risk averse.

We’ve delivered great returns to our clients for a quarter century—a dollar invested at inception in our largest fund is now worth over 94 dollars, a 20% net compound return. We have achieved this not by incurring high risk as financial theory would suggest, but by deliberately avoiding or hedging the risks that we identified. In other words, there is a large gap between standard financial theory and real world practice.

Value investing involves the purchases of bargains, the proverbial dollars for fifty cents. Unlike speculators, who think of securities as pieces of paper that you trade, value investors evaluate securities as fractional ownership of, or debt claims on, real businesses.

Value investing lies at the intersection of economics and psychology. Economics is important because you need to understand what assets or businesses are worth. Psychology is equally important because price is the critically important component in the investment equation that determines the amount of risk and return available from any investment.

My firm’s approach is to seek situations where there is urgent, panicked or mindless selling. As Warren Buffett has said, “If you are at a poker table and can’t figure out who the patsy is, it’s you.” In investing, we never want to be the patsy. So rather than buy from smart, informed sellers, we want to buy from urgent, distressed or emotional sellers. This concept applies to just about any asset class: debt, real estate, private equity, as well as public equities.

The stock market is the story of cycles and of the human behavior that is responsible for overreactions in both directions.

Berkshire Hathaway

Few highlights from Berkshire Hathaway’s 2007 annual report.

Charlie and I look for companies that have:

• a business we understand
• favorable long-term economics
• able and trustworthy management; and
• a sensible price tag.

A truly great business must have an enduring “moat” that protects excellent returns on invested capital.

But if a business requires a superstar to produce great results, the business itself cannot be deemed great.

There’s no rule that you have to invest money where you’ve earned it. Indeed, it’s often a mistake to do so.

[Talking about investments in different types of companies] To sum up, think of three types of “savings accounts.” The great one pays an extraordinarily high interest rate that will rise as the years pass. The good one pays an attractive rate of interest that will be earned also on deposits that are added. Finally, the gruesome account both pays an inadequate interest rate and requires you to keep adding money at those disappointing returns.

[On buying Dexter, a shoe business with Berkshire stock] In essence, I gave away 1.6% of a wonderful business – one now valued at $220 billion – to buy a worthless business.

[On buying Amazon bonds at 57% of par] Yes, Virginia, you can occasionally find markets that are ridiculously inefficient – or at least you can find them anywhere except at the finance departments of some leading business schools.

easyLecture

Stelios the founder of easyJet held a free lecture at LSE. I attended, here are the main points I picked up on:

• After founding easyJet he decided to keep the brand in his own personal company.
• When starting easyCruise they used the side of the ship as a billboard as per easyJet. Turned out this did not really work as passengers have a different relationship with a ship (which they will be living on for a week or two) from a plane (which they only spend a few hours on). Plus the branding on the side of each plane was to drive direct sales via their website rather than through a travel agent.
• When expanding the easy brand Stelios mentioned he is happy if he gets a 1/3, 1/3, 1/3 mix between failures, ok businesses and great business. Said after starting so many businesses he has a good idea of the level of risk he is taking before each business gets started.
• But did mention in expanding the brand he can not let one of his ideas fail - as that could damage the brand for all the businesses.
• Gave the example of easyCinema, which used the easyJet type business model of trying to optimise yield management. So if the cinema is empty then sell tickets at £0.20 each, as £0.20 is better than an empty seat. But this failed to catch on as the companies that make the movies spend a lot on marketing and generating hype. So don’t want to see tickets for the latest blockbuster being sold at low prices. He went on to say the business then became a property play, with the easyCinema website now being used for a Netflix / Love Film online DVD rental business and customers being able to book tickets to other cinemas online.
• Talked about eight values a business needs to be an easy business:

1. great value
2. taking on the big boys
3. for the many not the few
4. relentless innovation
5. keep it simple
6. entrepreneurial
7. making a difference in people’s lives
8. honest, open, caring and fun

• Then went on to talk about how these brand values rule out entering a lot of markets. For example funeral services and healthcare. And how the values tend to apply to consumer facing businesses rather than business to business type companies.
• He also discussed the drawbacks of using the easy brand, and that it carries the values of the budget airline. So sometimes needing to explain for easyCrusies, that the cabins are spacious, and you won’t have to pay for each bag of peanuts etc.
• When asked about if starting again with no capital what he would he do, Stelios thought getting into a franchise was a good idea. Due to the low capital requirements.
• Couple of points about running a business:
  • Always look to get at least three bids or tenders when purchasing something.
  • Did not see cross selling as particularity useful for easy group of companies. Just wanted each company to be competitive in its own market. So someone might fly easyJet then stay in a five star hotel rather than easyHotel. But noted that when booking on easyJet you are asked if you would like to book an easyHotel at the destination.
• Best time to take a risk as an entrepreneur is 28 to 29 years old. At that point you have enough experience but not too much that rule out what others may tell you is impossible.
• When BA launched a competitor to easyJet Stelios brought a few tickets for the first flight, then turned up in an orange boiler suit and started handing out free easyJet tickets to passengers. Highlights the power of using your persona to grow the business.
• Most admired business people:
  • His Father
  • Richard Branson
  • Michael Dell
  • Founder of IKEA
• On Airline the TV program featuring easyJet, in 1998 he saw no downside to doing it. Even if the TV programme showed unhappy customers, some publicity was better than none. And trusted that any intelligent viewer would realise the show is dramatisation and most flights / check in etc go smoothly. Mentioned that as the company matures the TV programme may not suit the company, but did point out if it is not easyJet then someone else will probably do it and try to take business away from easyJet.
• Talked about the difference of charity, business and social entrepreneurship. He liked the distinction that businesses make money while charity is giving back / repaying your debt to society.

Simplicity

Great quote on simplicity from Evan Williams, the guy behind Blogger and Twitter in this week’s Economist.

The irony of trying to plan accidents, and orchestrate their frequent occurrence, is not lost on Mr Williams. So he tries mental tricks. One is to ask “what can we take away to create something new?” A decade ago, you could have started with Yahoo! and taken away all the clutter around the search box to get Google. When he took Blogger and took away everything except one 140-character line, he had Twitter. Radical constraints, he believes, can lead to breakthroughs in simplicity and entirely new things.

Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor

Here are a few quotes from Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor by Seth A. Klarman. 

Seth Klarman is a value investor and Portfolio Manager of the investment partnership The Baupost Group. Founded in 1982, The Baupost Group now manages US$5.4 bn, his Baupost partnerships have averaged returns of nearly 20% annually since their inception [bio from GuruFocus]. 

Value investing is the strategy of investing in securities trading at an appreciable discount from their underlying value. 

Value investors have as a primary goal, the preservation of capital. 

Once you adopt a value-investment strategy any other investment behaviour starts to look like gambling. 

Value investors continually compare potential new investments with their current holdings in order to ensure that they own only the most undervalued opportunities available. 

Value investing is simple to understand but difficult to implement. 

The number of securities that should be owned to reduce portfolio risk to an acceptable level is not that great; as few as ten to fifteen different holdings usually suffice. 

My view is that an investor is better off knowing a lot about a few investments that knowing a little about each of a great number of holdings. 

Buying a partial position leaves reserves that permit investors to “average down” lowering their average cost per share, if prices decline. 

Here are a few links to other posts and an article about the book: 

• Value Investing: 3 Lessons from Seth Klarman’s “Margin of Safety”.. and 1 Value Investment Recommendation from Investing Tips & Opportunities.
• Margin of Safety by Seth Klarman from Value Vixen.
• Probabilistic Thinking from QUANTUM INVESTING LIFE.
• And a set of notes to Margin Of Safety by Ronald R. Redfield on The Motley Fool.