Getting To Yes

Below is a summary of the book Getting to Yes.

The book talks about principled negotiation. Which is looking for mutual gains and where interests conflict using some fair standard to solve the issue.

This contrasts with positional bargaining where people bargaining over positions (I offer $10, they want $20, I offer $12 etc), which can create incentives to stall and endangers the relationship.

Four main steps in using principled negotiation:

• People: separate the people from the problem.
  • Put yourself in their shoes.
  • One strategy is to listen quietly while they let off steam.
  • Communicating loudly and clearly things the over side wants to hear can be one of the best investment to make in a negotiation.
  • Agreement easier if both sides feel ownership of the ideas.
  • If you want the other side to accept a disagreeable conclusion then involve them from the start => so they feel ownership of the idea.
  • Avoid misunderstanding => interrupt with “Did I understand you correctly that you are saying … “.
  • Note that understanding is not agreeing.
  • Speak about yourself not them => “I feel let down… “.
  • Ben Franklin => asked to borrow a book off an adversary to make them more comfortable.
  • Try to structure negotiation as a side by side exercise.
• Interests: focus on interests, not positions.
  • Look at underlying positions.
  • Identify interests => ask why, and ask why not.
  • Each negotiator has a constituency to whose interests he is sensitive too.
  • Be hard on the problem, soft on the people.
  • Convert interests into concrete options => if they agrees tomorrow what do I now think I would like them to go along with.
  • Combination of support and attack works best, alone they are likely to be insufficient.
• Options: generate a variety of possibilities before deciding what to do.
  • A good negotiator is a creative at inventing options.
  • People see their job as narrowing the gap between the positions not broadening the options available.
  • Obstacles stopping people from inventing options: premature judgement, searching for the single answer, assumption of a fixed price, think that ‘solving’ the problem is their problem.
  • To create more options: separate the act of inventing options from judging them, broaden options available rather than look for a single answer, search for mutual gains and invent ways of making their decision easy.
  • Key to wise decision making is selecting from a great number and variety of options.
  • Invent agreements of different strengths => in case you need a weaker version, or can put forward a stronger version depending on the situation.
  • Look for mutual gains, both sides can always be worse off then they are now.
  • Always look for solutions that leave the other side satisfied as well, if the customer feels cheated in a purchase then the store owner has also failed.
  • Making their decision easy => however complex the other side’s decision process is look at it from the view of the person you are dealing with => what would strengthen that person’s hand or help them persuade others to go along.
  • People are strongly influenced by notions of legitimacy, one way to develop solutions easy for the other side to accept is to shape them so they appear legitimate.
  • Making threats is not enough, offers / warnings tend to be more effective.
  • Final test of an option is to write it out as a “yesable” proposition – a draft proposal to which the other side can respond with a single word “yes”.
• Criteria: insist that result be based on some objective standard.
  • Interesting concept of “one cuts, one chooses” for dividing up an object or entity.
  • Introduction of an objective standard or model to use can lead to the situation where no-one has to back down or appear weak – just reasonable.
  • Negotiating with objective criteria: frame each issue as a joint search for objective criteria, be open to which standards are most appropriate, never yield to pressure only principle.

But what if:

• They are more powerful:
  • Protect yourself by setting a bottom line (with some margin of safety) before starting the negotiation.
  • Generate the best possible BANTA: invent a list of actions you could take if no agreement is reached, improve some of the more promising ideas and convert them into practical alternatives, select the best option.
• They won’t play:
  • Three approaches to focusing their attention on the merits: concentrate on the merits hoping they will then follow your example, focus on what they can do (direct their attention to the merits, do not reject their position, just side step their attack and deflect it against the problem), use a third party to focus the discussion perhaps using the one-text tool.
  • One-text tool is an iterative process where each side can say yes or no part of the agreement one issue at a time, as the plan takes shape each side tends to raise only the issues that are most important.
  • This shifts the game away from positional bargaining as it simplifies the process of both inventing options and deciding jointly on one.

Here are some useful links to other blog posts that discuss the book:

• Litemind, which has a great graphic summarising the concepts of the book.
• Farnoosh’s Book Mania
• Y Samphy
• GigaOM

Vulcan Materials

Vulcan Materials (VMC) produces construction aggregates and other construction materials. Sellers Capital thinks the company is worth US$85 a share, compared to a current share price of US$75 (compared to US$70 when the original analysis (pdf) was done).

The US$85 estimate is the expected value from three scenarios

1. Pessimistic: US$60 a share with 30% probability.
2. Most likely: US$90 a share with 55% probability.
3. Optimistic: US$105 a share with 15% probability.

Summary of their investment thesis:

• Aggregate is a wide moat business.
• America’s infrastructure is poor and needs a investment of US$1.6 trillion according to the Society of Civil Engineers.
• Worst case is flat growth for building infrastructure.
• Demand for aggregates not dependent on residential housing.
• The last three decades has seen growing volumes in aggregates.
• Scarcity = increased pricing.

Perceived Problem: Volumes will decrease due to lower public expenditures and bad housing and commercial markets, and prices will decline.

Sellers Capital View: Volumes will decline slightly, pricing will be stable to increasing.

Resources for Value Investing

• Magic Formula
• Yahoo Screener
• Gurufocus
• Stockpickr
• Seeking Alpha
• Pabrai Investment Funds – Mohnish Pabrai
• Pershing Square – Bill Ackman
• Fairholme Fund – Bruce Berkowitz
• Greenlight Capital – David Einhorn
• Tilson Investment Trust – Whitney Tilson
• Spencer Capital Management – Kenneth Shubin Stein

Influence

Summary of Influence: Science and Practise by Robert Cialdini material from an HBR article. Wikipedia also has a similar summary under Robert Cialdini.

Liking: People like those like them, who like them.

• At Tupperware parties, guests’ fondness for their host influences purchase decisions twice as much as regard for the products.
• To influence people, win friends, through: Similarity: Create early bonds with new peers, bosses, and direct reports by informally discovering common interests – you’ll establish goodwill and trustworthiness. Praise: Charm and disarm. Make positive remarks about others – you’ll generate more willing compliance.

Reciprocity: People repay in kind.

• When the Disabled American Veterans enclosed free personalized address labels in donation-request envelopes, response rate doubled.
• Give what you want to receive. Lend a staff member to a colleague who needs help; you’ll get his help later.

Social Proof: People follow the lead of similar others.

• More New York City residents tried returning a lost wallet after learning that other New Yorkers had tried.
• Use peer power to influence horizontally, not vertically; e.g., ask an esteemed “old timer” to support your new initiative if other veterans resist.

Consistency: People fulfil written, public, and voluntary commitments.

• 92% of residents of an apartment complex who signed a petition supporting a new recreation center later donated money to the cause.
• Make others’ commitments active, public, and voluntary. If you supervise an employee who should submit reports on time, get that understanding in writing (a memo); make the commitment public (note colleagues’ agreement with the memo); and link the commitment to the employee’s values (the impact of timely reports on team spirit).

Authority: People defer to experts who provide shortcuts to decisions requiring specialized information.

• A single New York Times expert-opinion news story aired on TV generates a 4% shift in U.S. public opinion.
• Don’t assume your expertise is self-evident. Instead, establish your expertise before doing business with new colleagues or partners; e.g., in conversations before an important meeting, describe how you solved a problem similar to the one on the agenda.

Scarcity: People value what’s scarce.

• Wholesale beef buyers’ orders jumped 600% when they alone received information on a possible beef shortage.
• Use exclusive information to persuade. Influence and rivet key players’ attention by saying, for example:“…Just got this information today. It won’t be distributed until next week.”

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.

Ray Ozzie on Web Services

Techcrunch have an article about a memo from Microsoft’s chief software architect Ray Ozzie about the web and their services strategy.

A few quotes:

3Cs – content, commerce and community have expanded … and become intermixed and mutually reinforcing.

Head retailers such as Amazon utilise community extensively for recommendations, reviews and wish lists. Tail websites such as Craigslist utilise community extensively for conversation around local products.

Guiding Principles:

1. The web is a hub of our social mesh and our device mesh. The web is first and foremost a mesh of people.
2. The power of choice as business moves to embrace the cloud.
3. Small pieces loosely joined for developers, within the cloud and across a world of devices.

Investment Portfolio

Readers of this blog may be familiar with, blogs like ControlledGreed.com, Gannon on Investing, Value Investing, and a Few Cigar Butts and Value Discipline.

I intend to follow their lead and start posting about potential investments. And keep track of the resulting portfolio.

The portfolio will be highly concentrated, following the example of Mohnish Parbrai with ten positions each making up roughly 10% of the portfolio.

Companies I am looking at include:

Sears – SHLD:

• Run by Eddie Lampart, and has Mohnish Parbrai, Bruce Berkowitz and Bill Ackman as investors. My Value Idea has a post about Sears: Sears Holdings is the hype real?. Which outlines why this may be a good investment.
• Value Investing, and a Few Cigar Butts has a 18% position in SHLD.

Winn Dixe – WINN

• US Supermarket chain that has come out of bankruptcy. The Tilson Focus fund have invested 13% of their portfolio in the company.
• Whitney Tilson writes about the investment in this article: Winn-Dixie Stores: A Turnaround in Progress at Seeking Alpha.

EchoStar – SATS

• Spin-off from EchoStar Communications (which has Bruce Berkowitz as an investor). The business makes set-top boxes for subscription TV, has seven satellites and US$1bn in cash.
• The idea came from a write up by vinlin1060 at Value Investor Club, which I was able to read with a free guest membership that lets you view posts more than 45 days old.

Office Depot – ODP

• Recent investment by Joel Greenblatt.
• Controlled Greed has a position.

A Thought About Valuation and Multiples

A multiple is just someone else’s discounted cash flow – with all the messy maths and assumptions hidden behind a single number.

Market multiples (be it a price earnings, revenue or EBIT multiple) are just single number that hides the assumptions the market is making about that company’s expected future cash flow (and the level of risk associated with that cash flow).

Transaction multiples just hide the acquirers assumptions around the expected cash the asset will produce under their ownership / capital structure / management etc.

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.