Business News

Why Everyone Feels Insane Right Now

Thu, 02 May 2024 15:43:24 +0000

How One Woman Got Into (And Out Of) $36,000 Of Credit Card Debt

Wed, 01 May 2024 21:02:31 +0000

Live Q&A With Chelsea!!

Tue, 30 Apr 2024 16:29:35 +0000

Sorry our healthcare system is so bad I guess!!!

Mon, 29 Apr 2024 21:26:10 +0000

an underrated milestone tbh

Sun, 28 Apr 2024 22:43:14 +0000

Don’t buy the hype!! Only accept what you’re worth

Wed, 24 Apr 2024 00:57:12 +0000

A Couple's Therapist On How Money Poisons Relationships

Tue, 23 Apr 2024 23:08:03 +0000

Not to continue the SAHM discourse but we need to talk about the risks of relying on just one income

Mon, 22 Apr 2024 22:05:53 +0000

How about we try some boundaries when they actually count?

Sun, 21 Apr 2024 01:47:00 +0000

How One Woman Quit A Nightmare Job And Reclaimed Her Life

Thu, 18 Apr 2024 07:56:08 +0000

SAHMs deserve financial stability just like everyone else (pt 1)

Thu, 11 Apr 2024 19:23:57 +0000

Childfree =/= selfish!

Thu, 11 Apr 2024 03:43:03 +0000

Why Filing For Bankruptcy Could Be Your Best Financial Decision

Thu, 11 Apr 2024 03:34:38 +0000

SAHMs deserve financial stability just like everyone else (pt 2)

Sun, 07 Apr 2024 23:26:06 +0000

Join the Society to get instant access to our workshop “How to Budget for your Personality Type”

Sun, 07 Apr 2024 06:39:14 +0000

With a total return of over 12% in the last year, the S&P 500 has climbed one hell of a wall of worry.pic.twitter.com/ahIw7kxJMm

Mon, 01 Jun 2020 14:12:44 +0000

With a total return of over 12% in the last year, the S&P 500 has climbed one hell of a wall of worry. pic.twitter.com/ahIw7kxJMm

Supply chains being rethought. Quote from Machinery sector in ISM report: “looking at what really needs to be in China.” https://www.instituteforsupplymanagement.org/ISMReport/MfgROB.cfm?navItemNumber=12942 …

Mon, 01 Jun 2020 14:05:24 +0000

Supply chains being rethought. Quote from Machinery sector in ISM report: “looking at what really needs to be in China.” https://www.instituteforsupplymanagement.org/ISMReport/MfgROB.cfm?navItemNumber=12942 …

Because of its low share price, Pfizer's $PFE 7.5% drop this morning is costing the Dow only 20 points of downside.

Mon, 01 Jun 2020 13:46:54 +0000

Because of its low share price, Pfizer's $PFE 7.5% drop this morning is costing the Dow only 20 points of downside.

NEW: New York dentists can reopen statewide tomorrow. Dentists' offices will be subject to safety and social distancing guidelines.

Sun, 31 May 2020 19:10:41 +0000

NEW: New York dentists can reopen statewide tomorrow. Dentists' offices will be subject to safety and social distancing guidelines.

Where did COVID come from, how restaurants are coping with their customers, stadiums on AirBnB, markets for influencers, fraud, and more in this week's Brunch Reads: https://www.bespokepremium.com/think-big-blog/bespoke-brunch-reads-6-1-20/ …

Sun, 31 May 2020 12:31:00 +0000

Where did COVID come from, how restaurants are coping with their customers, stadiums on AirBnB, markets for influencers, fraud, and more in this week's Brunch Reads: https://www.bespokepremium.com/think-big-blog/bespoke-brunch-reads-6-1-20/ …

Best two months for the S&P 500 since the bounce off the 2009 lows.

Fri, 29 May 2020 20:33:17 +0000

Best two months for the S&P 500 since the bounce off the 2009 lows.

We've seen some wacky charts this year, but that action from 2:30 to 3:00 was really something else.pic.twitter.com/DYDcvSIu3y

Fri, 29 May 2020 19:11:15 +0000

We've seen some wacky charts this year, but that action from 2:30 to 3:00 was really something else. pic.twitter.com/DYDcvSIu3y

Here are # of cases and # of tests across the six US regions. West Coast is only area seeing a slight uptick in cases but testing continues to rise sharply there as well.pic.twitter.com/0g7D7CGTHW

Fri, 29 May 2020 18:45:17 +0000

Here are # of cases and # of tests across the six US regions. West Coast is only area seeing a slight uptick in cases but testing continues to rise sharply there as well. pic.twitter.com/0g7D7CGTHW

The positive Covid test rate across the six US census regions continues to trend lower. Northeast, South, West Coast and Mountain West are all below 5%.pic.twitter.com/EUsdcWDqHa

Fri, 29 May 2020 18:43:52 +0000

The positive Covid test rate across the six US census regions continues to trend lower. Northeast, South, West Coast and Mountain West are all below 5%. pic.twitter.com/EUsdcWDqHa

Pretty much the only difference between crude oil prices today and on 4/20 is a minus sign.

Fri, 29 May 2020 18:32:27 +0000

Pretty much the only difference between crude oil prices today and on 4/20 is a minus sign.

Lowest number of people in ICU in US since early April.pic.twitter.com/Sb15gL3e9T

Fri, 29 May 2020 15:42:48 +0000

Lowest number of people in ICU in US since early April. pic.twitter.com/Sb15gL3e9T

You'd think that if people gambling their stimulus checks was really what's driving the market, that bitcoin would be flying too.pic.twitter.com/YwwRrol7qi

Fri, 29 May 2020 14:50:07 +0000

You'd think that if people gambling their stimulus checks was really what's driving the market, that bitcoin would be flying too. pic.twitter.com/YwwRrol7qi

After falling 28% and then rallying 35%, the Health Care sector has been stuck in a 5% range for the last 6 weeks. $XLVpic.twitter.com/8EW35eymsG

Fri, 29 May 2020 14:41:06 +0000

After falling 28% and then rallying 35%, the Health Care sector has been stuck in a 5% range for the last 6 weeks. $XLV pic.twitter.com/8EW35eymsG

As a result of the spending drop and income gain, the personal savings rate came in at a staggering 33% in April, by far the highest on record.pic.twitter.com/gOvNldNRXv

Fri, 29 May 2020 12:42:32 +0000

As a result of the spending drop and income gain, the personal savings rate came in at a staggering 33% in April, by far the highest on record. pic.twitter.com/gOvNldNRXv

The "Other" category of "Government social benefits to persons" which is anything other than Social Security, Medicare, Medicaid, UI, or Veterans' benefits rose from $528bn SAAR in March to $3.1trn SAAR in April; that $250bn at monthly rates ($2.6trn at a

Fri, 29 May 2020 12:39:17 +0000

The "Other" category of "Government social benefits to persons" which is anything other than Social Security, Medicare, Medicaid, UI, or Veterans' benefits rose from $528bn SAAR in March to $3.1trn SAAR in April; that $250bn at monthly rates ($2.6trn at annual rates) checks.

Wages & Salaries dropped 8.0% MoM, proprietor income dropped 12.2% MoM. That's roughly what was to be expected. UI payments surged from $70bn to $430bn SAAR, but the real kicker was stimulus checks which look to have driven 153% of the sequential increase

Fri, 29 May 2020 12:36:26 +0000

Wages & Salaries dropped 8.0% MoM, proprietor income dropped 12.2% MoM. That's roughly what was to be expected. UI payments surged from $70bn to $430bn SAAR, but the real kicker was stimulus checks which look to have driven 153% of the sequential increase in personal income.

Consumer spending for April down 13.6% vs 12.8% expected. Personal income surged 10.5% versus -5.9% expected. We'll dig into details and figure out what drove that huge bounce.

Fri, 29 May 2020 12:31:26 +0000

Consumer spending for April down 13.6% vs 12.8% expected. Personal income surged 10.5% versus -5.9% expected. We'll dig into details and figure out what drove that huge bounce.

Things finally falling back into place. https://twitter.com/businessinsider/status/1266165491292405761 …

Fri, 29 May 2020 11:43:44 +0000

Things finally falling back into place. https://twitter.com/businessinsider/status/1266165491292405761 …

Costco was negatively impacted by $283 million in costs - 47 cents per share (a third of the quarter's earnings) "from incremental wage and sanitation costs related to COVID-19."

Thu, 28 May 2020 20:17:52 +0000

Costco was negatively impacted by $283 million in costs - 47 cents per share (a third of the quarter's earnings) "from incremental wage and sanitation costs related to COVID-19."

Twitter is the hot prospect that never quite manages to break out in the majors.pic.twitter.com/rHTloYsAWf

Thu, 28 May 2020 19:49:56 +0000

Twitter is the hot prospect that never quite manages to break out in the majors. pic.twitter.com/rHTloYsAWf

Bespoke offers a complete toolkit for investors of any size or strategy. Use us to make the most out of market upswings and to stay grounded when times get tough. You can get started with a two-week free trial.

Tue, 28 May 2019 18:10:18 +0000

Bespoke offers a complete toolkit for investors of any size or strategy. Use us to make the most out of market upswings and to stay grounded when times get tough. You can get started with a two-week free trial.

Tips To Help You Invest In Your First Property

Wed, 02 Jan 2019 09:19:22 +0000

Buying property, whether as a home or an investment, is most people’s biggest financial decisions. Proper research and planning are crucial to ensure that it is a sound investment that can yield good returns. Property experts, country head of JLL Malaysia Y.Y. Lau, and Propedia Consultancy principal Vicky How, share some advice for women who are looking to invest in property.

Is investing in property a good idea?

Lau: There are a number of options for investments such as fixed deposits, government securities and bonds, shares and properties. Each of these have different risks attached to them. The current inflation rate is from 3% to 4%. Fixed deposit rates are also around the same level, which wipes out any gains from placing money in fixed deposit.

Investing in property is a good idea as it is a fairly good hedge against inflation as land is a scarce resource, especially near city centres.

How can property investment improve women’s financial standing?

Lau: Most people cannot reach financial independence by being full time property investors as you need cash for the deposit when buying any type of property.

You would need a steady income to service the property loan. Active income is also necessary for the banks to assess how much credit or loans they are willing to extend to you.

But income from real estate can be a form of passive income that will help you build your retirement income quicker or enable you to live as well as you did during your peak earning years.

Property investment can be an investment to make your surplus money work for you.

What must a woman consider before investing in a property?

Lau: Affordability is key. As a general rule of thumb, a third of your monthly income can be apportioned for mortgage payments.

It is also important to have the necessary savings for the deposit and check whether you can obtain financing for your intended investment

Facebook Is Undervalued

Wed, 05 Dec 2018 15:17:58 +0000

As I mentioned in a note to my investors earlier this week, the spirit of the Holiday shopping season has been extended to certain parts of the stock market, with a number of bargains to be found.

In terms of interesting ideas to be excited about, my watchlist is beginning to rival the ever-growing wish list that my kids have diligently been preparing for Santa.

I wrote a letter to Saber Capital investors this week with some thoughts on Facebook, which IU think is one of these opportunities, and one of my firm’s recent investments.

Here is the link to the note I sent to investors: Facebook Is Undervalued

I thought I’d post the Facebook thoughts here as well:

“A simple rule dictates my buying: be greedy when others are fearful.”

Warren Buffett wrote those words in an op-ed during the fall of 2008, which was certainly a time of fearfulness. The simple philosophy has been a foundational part of his investment approach for his entire career, and regardless of how often it gets repeated, it remains as useful and as valuable today as it was when Buffett first coined the phrase decades ago. Human nature doesn’t change, and the stock market continues to provide opportunities to be greedy when others are fearful.

As I’ve outlined before, there is no informational edge in most large-cap stocks, but there absolutely is a time-horizon edge for those who are willing to thoughtfully analyze what most people want to avoid out of fear of what the next year might look like.

Currently, fear is creating an opportunity with Facebook. The stock, at $140 per share, is currently trading around 18 times earnings (16 P/E excluding net cash). This is a company that grew its revenue by 49% last year, and while growth will obviously slow from that level, Facebook is one of the most profitable businesses in existence and still has a very long runway ahead. If you have the ability to look out two or three years, this is the time to be capitalizing on that fear.

“Best Business Model Ever Created”

Facebook has one of the best businesses in the world. In some ways it operates like a traditional media company that provides content to readers and collects advertising revenue from businesses who want to reach those readers. But the key difference is that Facebook has the largest readership base in the world (2.3 billion people), and the readers themselves provide the content for free. This is why John Malone once said Facebook has the “best business model that’s ever been created”.

The result of billions of readers providing free content for each other is a massive network effect and a business that can serve each incremental ad at a very low marginal cost. The company’s 85% gross margin leaves a lot of meat on the bone that the company can spend on hiring new engineers and developing new technology that is needed to maintain and grow the business. But even after paying the engineers, growing the headcount, spending over $9 billion on R&D, and paying the tax bill, shareholders are still left with around 40 cents of profit for each dollar of revenue.

Facebook reinvests these earnings into data centers, technology, and the occasional acquisition, but even so, the cash in the till has been piling up, and now exceeds $40 billion and counting ($14 per share). Facebook has spent $10 billion on buybacks in the last year, and this will likely accelerate in the coming years.

A Durable Moat

All of Facebook’s properties have huge network effects, and the great thing about networks is that as they grow, their moat widens. The sheer size of the network acts like a magnet to get people and businesses to join, and it acts like gravity to get those participants to stay. It’s hard to leave a place that all of your friends and acquaintances are a part of. And for the same reason, it’s hard for a business to leave a place where all of its customers are. The strength of the network compounds exponentially as it grows.

Facebook’s network of 2.3 billion people is much stronger than Twitter’s 300 million or Snap’s 200 million. And for those who compare Facebook to MySpace: keep in mind the latter had 75 million users at its peak in 2008, roughly 3.3% of Facebook’s current user base. So far in 2018 alone, Facebook has added 142 million users, a sum that is nearly twice the number of users that MySpace ever had in total.

Facebook’s huge user base doesn’t mean the network is invincible, but it is much more durable than many people believe.

Growth Potential

Facebook’s business is still growing fast (33% revenue growth last quarter), and despite the company’s large size, the runway is still long. Benedict Evans, a partner at the VC firm Andreessen Horowitz, recently pointed out that roughly $1 trillion is spent each year by businesses who are trying to reach customers who are asking the question: “What should I buy?”:

A few weeks ago, Sears finally filed for bankruptcy, and I decided to read through some of my notes I’ve compiled over the years on that company. During this review, I came across a couple old posts that I wrote on the topic of circle of competence:

As I recently mentioned, I think one of Warren Buffett’s most underrated skills is his ability to recognize when a situation is getting outside of his well-defined circle of competence. He not only recognizes when a situation is too hard, but I think he doesn’t waste much time even considering the investment. I doubt he spent more than an hour thinking about whether or not to invest in Sears when Lampert reorganized the retailer in the early 2000’s. I’ll highlight a few comments Buffett said in 2005 when asked about Sears. What strikes me is the common sense and simplicity of his logic:

“Every day retailers are constantly thinking about ways to get ahead of what they were doing the previous day…

“Retailing is like shooting at a moving target. In the past, people didn’t like to go excessive distances from the street cars to buy things. People would flock to those retailers that were nearby. In 1966 we bought the Hochschild Kohn department store in Baltimore. We learned quickly that it wasn’t going to be a winner… We had an antiquated distribution system. We did everything else right. We put in escalators. We gave people more credit. We had a great guy running it, and we still couldn’t win. So we sold it around 1970. That store isn’t there anymore. It isn’t good enough that there were smart people running it.

“We would rather look for easier things to do. The Buffett grocery stores started in Omaha in 1869 and lasted for 100 years. There were two competitors. In 1950, one competitor went out of business. In 1960 the other closed. We had the whole town to ourselves and still didn’t make any money.

“How many retailers have really sunk, and then come back? Not many. I can’t think of any. Don’t bet against the best. Costco is working on a 10-11% gross margin that is better than the Walmart’s and Sams’. In comparison, department stores have 35% gross margins. It’s tough to compete against the best deal for customers.”

It’s not that Buffett was certain that Lampert couldn’t turn it around, it’s just that he thought it would be extraordinarily difficult. I think one of Buffett’s key strengths is not just passing on these types of long-shots, but also doing so in such a quick manner. I don’t think he wastes much time or spends much mental energy at all with these kind of ideas. He’ll miss some turnarounds that turn into big winners, but he’s not bothered by that. He simply chooses to focus on the more certain bets, and seemingly has no trouble resisting everything else.

One thing that is interesting about Buffett is how very few major errors there are on his record. I think this stems from his incredible ability to say no, and the even more impressive ability to change his mind when he realizes he is wrong. He has exhibited this on numerous occasions. Two recent examples are when he sold IBM and Tesco, the British grocer.

Selling Freddie Mac

An example that is even more significant in my opinion is when he decided to sell Freddie Mac in 2001. As I mentioned in the previous post, I’ve done a lot of reading lately on Fannie and Freddie, out of interest and curiosity (not out of anticipation of making an investment in their securities, as I think the company is likely to remain in the purgatory-like state of government conservatorship until there is some sort of shock that upsets the status quo).

Regardless of their future, they are really interesting companies to study. Thanks to CNBC’s excellent website on Buffett (which includes the transcripts of each Berkshire annual meeting going back to 1995), I was able to go back and read everything Buffett said on the GSE’s. I wanted to know what he was thinking when he decided to sell Freddie Mac in 2001.

Basically, as I outlined in my last post, Fannie and Freddie had two main businesses: they collected a fee for guaranteeing mortgages, and they earned a spread between the interest they earned on their own portfolio of mortgages and their cost of funds.

In short, Buffett became uncomfortable with the size of Freddie’s ever-expanding mortgage portfolio, and noticed a few red flags (why was Freddie Mac buying RJR bonds? What does the junk debt of a cracker company have to do with providing liquidity to the housing market?).

I also read through Buffett’s comments on the financial crisis that he made in front of the FCIC in 2010, and one sentence summarized his views on Freddie a decade prior: “I just figure that when you see a cockroach, there are more hiding.”

Being Honest With Yourself

The main point of this post has nothing to do with Freddie Mac or Sears specifically, but rather the remarkable ability Buffett has to change his mind when he realizes he is wrong. Buffett seems to have the temperament and personality which allow him to easily overcome the typical biases that haunt most investors. There are many types of biases associated with investments that you currently own, including the so-called “endowment effect”, where you tend to view more favorably the positions you already own. This can cause you to overlook, ignore, or de-emphasize problems that are becoming evident with one of your holdings. In addition to overcoming this bias, Buffett also also avoided getting trapped by his previous public stance on Freddie Mac, which was obviously a stock and a company that he spoke about positively on many previous occasions, as Berkshire was the largest shareholder at one time.

He was honest with himself about what he saw developing in Freddie Mac’s mortgage portfolio, and he was very willing to change his mind once he recognized the budding risks that made him uncomfortable.

I think this point – intellectual honesty – is another one of Buffett’s most underrated traits as an investor. This goes hand in hand with his ability to stay within his circle of competence, but the reason he is so successful at staying within his circle of competence is because he is honest with himself about what it is that he knows, and what it is that he doesn’t know.

I think the vast majority of investment mistakes can be traced back to the inability to be honest about your own knowledge or level of understanding about a subject matter. It’s hard for smart people who have spent their lives being right far more often than they are wrong to admit to themselves that something is too challenging. It is even harder to admit that their original assessment was completely wrong.

So I think intellectual honesty can be a source of a powerful edge for those who can harness it to their advantage. I recently highlighted this point in a post I wrote about Li Lu.

To Sum It Up

I think it’s remarkable how quickly and easily Buffett was able to avoid what appeared to be an interesting situation that was so popular at the time in the investing community. I think part of the reason it was so easy for Buffett to avoid was because he recognized how hard retail was. Buffett is an expert at using pattern recognition to his advantage, and he saw a lot of similarities between the difficulties Sears would end up facing and the troubles he had at both the department store that he bought in 1966 and also with Berkshire Hathaway itself (the textile business).

But his comments in 2005 about the Sears/Kmart merger and its potential pitfalls were not necessarily the popular viewpoint at the time. I think it’s a great lesson to watch how easily he passed on the situation, and how much common sense he exhibited with his simple explanation.

He didn’t know for sure that it would fail, just like he didn’t know for sure Freddie Mac would fail. But he did know for sure that it was too complicated, had too many variables, and the hurdles to clear were very high, and that was the overriding factor in his decision to pass on Sears (and to reverse course and sell with Freddie Mac).

I think the circle of competence gets probably far too much lip service and not enough actual implementation in the investment world, and I think one of Buffett’s most underrated abilities is his willingness to both admit when he’s wrong, change his mind, and generally just avoid altogether complicated situations.

John Huber is the portfolio manager of Saber Capital Management, LLC, an investment firm that employs a value investing strategy with a primary goal of patiently compounding capital for long-term oriented investors.

To read more of John’s writings or to get on Saber Capital’s email distribution list, please visit the Letters and Commentary page on our website. John can be reached at john@sabercapitalmgt.com.

Fannie Mae, Freddie Mac, Investor Sentiment and the Housing Market

Thu, 04 Oct 2018 02:03:06 +0000

I’ve been spending some time studying the housing market and a number of companies that directly and indirectly do business in that industry. I have a view on the fundamentals of the housing market that I might write about another time. But as a somewhat related aside, a few studies out there have noted how we, as humans, naturally fear financial panics but incorrectly and inadequately prepare for the next panic using tactics that would have helped prevent the previous one. In other words, we frequently engage in “fighting the last war”. This also leads us to fear that the next crisis will unfold in a very similar way that the last one did. There is some sense in this; financial crises and market crashes have many common denominators. But I think it also leads to some irrational fear at times, and this can lead to inefficiently priced securities.

The bank stocks in 2016 were a prime example of this sentiment-driven inefficiency. Until 2017, bank stock valuations were unduly held down in part by the memory of the fall of 2008. Any time there was even a whiff of macroeconomic trouble, these stocks were crushed. This occurred despite the large banks having far greater capital levels, much safer balance sheets, stronger competitive positions, and much better earning power. Bank of America traded for around 7 times what I estimated their current earning power was in early 2016. J.P Morgan traded at similar levels. But the scars of a crisis take a long time to heal, and thus these stocks got cheap whenever the memory of 2008 resurfaced.

As a side note: the banks are also an example of something I have tried to illustrate previously: that sometimes even large cap stocks get mispriced. There was no “edge” to be gained (at least not by me) from analyzing Bank of America. But that doesn’t mean that the stock can’t be mispriced. In fact, Bank of America is currently valued around $300 billion, which is nearly $200 billion more than it was valued at just over two years ago. The intrinsic value of the business has changed some, but it certainly hasn’t changed by anywhere near as much as its market value has.

Regardless, I think sometimes broad sentiment can lead to mispricing, because broad sentiment and herd behavior are a part of human nature, and this influences stocks of all sizes.

In a much less severe manner, I think a similar focus on the rearview mirror might be leading to some undue negative sentiment in housing stocks. Some of the stocks are cheap, but many are mediocre businesses that earn low returns on capital and are highly leveraged, making them largely unappealing to me. And some are not investment candidates, but yet are really interesting to study. Two that fall into that category are Fannie Mae and Freddie Mac, the so-called government-sponsored enterprises (GSE’s).

The Business of Fannie and Freddie

10 years ago last month, these companies were seized by the government and put into conservatorship, where they have remained ever since. I recently read Shaky Ground by Bethany McLean. It’s a great book, and it prompted me to read through a few of the old Fannie Mae annual reports. I’ve looked at the GSE’s in the past, and I’m familiar enough with their business, but the 10-year anniversary of the crisis seemed like a great time to revisit the history books. The following are some notes and thoughts I collected as I read about these firms.

Fannie Mae is a story of how problems arise when there are massive conflicts of interest, attempts to serve two masters (government altruism and private capitalism), and misguided management incentives that encouraged risky bets and aggressive accounting.

Basically, Fannie makes money in two main ways:

They collect a fee for guaranteeing mortgages (specifically, Fannie promises to pay investors for any shortfall on principal or interest payments on the loans that back the Fannie MBS)
They earn a net interest margin on their own portfolio of mortgages (they make a spread between the cost of their funding and the interest they collect on their assets)

So there were two main businesses inside of Fannie Mae (and Freddie Mac). One was a great business that had essentially a monopoly on guaranteeing prime quality mortgages. Fannie’s core business was effectively a toll bridge that a huge swath of the US housing market had to cross (it collected a residual fee on roughly one out of every four mortgages in the US). The other business was effectively a giant hedge fund, that was leveraged to the hilt and engaged in a multi-trillion dollar carry-trade.

The second business got them into major trouble during the crisis. Using low interest debt to buy higher interest assets was an easy way for them to make money (they had cheap cost of funds because Fannie’s lenders viewed their debt as essentially government credit). Cheap debt combined with management incentives to make more and more profit led to a very risky situation that eventually blew up.

Fannie feared losing market share to “private label” MBS (which were securities created by banks and weren’t guaranteed by the GSE’s). This fear was driven in large part due to misplaced incentives and pressure from Wall Street. Fannie began buying riskier and riskier assets for its own portfolio (subprime loans and other risky mortgage assets). What I found crazy about this is that one division of Fannie’s business (the “hedge fund”) was buying these securities for investment while the other segment (the good business that collected guarantee fees) determined those same loans were too risky to guarantee.

Government Conservatorship

The book outlines some of the history of the GSE’s and then goes into the post-crisis period of conservatorship, when the government seized control of the firms, fired their management, and propped them up by giving them a large credit line, which guaranteed that Fannie’s lenders would get paid. Essentially, the government made explicit what was already implicit and widely accepted to be true: that Fannie’s debt was backed by the full faith and credit of the US government.

This process saved what certainly would have been a systemic crisis of epic proportions, involving trillions of dollars, millions of American homeowners, and even foreign central banks, which owned GSE debt (which meant, as McLean says, a Chinese citizen with a savings account was effectively providing the financing for an American homebuyer in Kansas).

In fact, one of the main motivations for bailing out Fannie and Freddie was that the US government didn’t want to alienate foreign central banks, which not only owned Fannie and Freddie mortgage-backed securities but were huge lenders to the GSE’s under the (technically false) assumption that their debt was guaranteed by the government. In other words, foreigners were under the false impression that they owned government debt, and Hank Paulson was worried that if the GSE’s defaulted on their debt, foreign investors would begin doubting the credit of the US government itself.

The post-crisis period since 2008 is just as strange. Conservatorship is designed to conserve the company’s assets and basically nurse the company back to life. Fannie and Freddie are certainly back to life, and making massive profits (the GSE’s borrowed a total of $191.4 billion and have now sent back $279.7 billion and counting). Sometime in the next year, the taxpayers’ cumulative profits on Fannie and Freddie will eclipse $100 billion. Lots of people complain about the GSE’s lack of capital since the government takes all of their profits, but taxpayers have a nice cushion to draw on if the GSE’s do require capital in the future.

The whole situation is hugely controversial, from the duration of government ownership to the unilateral decision the government made in 2012 to begin taking all of the GSE’s profits (in lieu of the 10% interest on the money lent).

Political Gridlock and the Status Quo

The conservatorship has no expiration date, and there seems to be no political will to change the status quo. Politicians on both sides of the aisle claim to have a desire to end the government ownership and many talk a tough game about abolishing the GSE’s, but no one wants to be responsible for doing something that would almost certainly increase the cost of mortgage financing for millions of Americans. Without a government guarantee, not only would the cost of an average mortgage rise, but there would likely be no lenders willing to finance a house at a fixed rate for 30 years. No politician wants to be held responsible for disrupting the functioning of a $12 trillion mortgage market (in which 87% of those mortgages are 30-year fixed).

The result is that Congress introduces bills that get rid of the Fannie and Freddie name, but essentially keeps the current system in place. Everyone knows what the key ingredient is, and that is a government backstop. The popular opinion at the time was that Fannie and Freddie exemplified what happens when the government gets involved in private sector matters. Vocal constituents at both ends of the political spectrum led to a fair amount of bipartisanship agreement that Fannie and Freddie had to be done away with (this consensus included more Republicans than Democrats, but it did have the Obama administration on board as well).

But at the same time, politicians understood that despite the negative sentiment, killing the GSE’s and removing the government from the mortgage market would result in far worse political consequences (because killing Fannie and Freddie without a government-backed replacement would mean more expensive or even unattainable mortgages, and politicians know that their voters don’t like paying more for things or having things taken away from them, especially something as important as a fixed-rate 30-year mortgage). So what do you do if you’re a politician with these two competing motivations? You write a piece of legislation that technically abolishes Fannie and Freddie, but builds something very similar with the same key ingredient (a government backstop).

What’s Next?

So all of this gridlock has left us with an unsolved situation. Conservatorship isn’t intended to be permanent, but my own reading of the situation leads me to believe that there is no near-term solution and I wouldn’t be surprised if we are in the same situation a decade from now (the government’s warrant to buy 79.9% of the GSE’s common stock expires on September 7th, 2028, so maybe that will be a date that ends up being the catalyst for legislative action, but then again, the government has been known to rewrite their own contracts when it comes to the GSE’s).

The issue for those interested in reform is that the status quo does appear to be working fine. Banks and mortgage companies are able to write loans and sell them to Fannie and Freddie, investor demand for GSE securities is strong, the secondary market has plenty of liquidity, and as a result, homebuyers can finance their homes with a fixed-rate 30-year mortgage at a competitive interest rate. This doesn’t mean what the government did was right, and there is some evidence that the US Treasury changed the rules of the game because they knew windfall profits were around the corner (plus, no one in the administration wanted to see headlines of hedge funds making billions thanks to a government-revitalized GSE profit machine). The courts have thus far sided with the government on the legality of the “net worth sweep”, but it’s clear to me that regardless of whether the government should or should not be involved, the mortgage market is functioning well and that the GSE’s are one of the main reasons for that.

And so I think it’s likely that the GSE’s will remain in existence, and likely will remain in conservatorship until something upsets the status quo. That “something” might have to be another financial crisis, which doesn’t seem likely (at least in the near-term), and so I think investors hoping for a resolution will continue to be disappointed.

Investing in the GSE’s?

I’ve done this recent reading about Fannie and Freddie partly because my research the past couple months has taken me to various parts of the housing market, of which these two giants are still ever-present. But I’m not at all interested in investing in any of the GSE common or preferred securities. The value of a business is based on the amount of cash you can extract from it over time, and I don’t feel like I have any good way to predict how much cash shareholders will be able to extract from these firms until and unless the government sets them free.

The problem is this: Fannie and Freddie are absolutely needed in America’s housing market, but that doesn’t mean the current Fannie and Freddie will survive. They could be killed and replaced by essentially an exact replica (with a different name). This seems more likely to me as it attempts to satisfy those who have come to despise the existence of Fannie and Freddie, while also preserving the sacred cow that is the 30-year mortgage and the important impact it has on our economy. (The reality of course is that to accomplish the latter, you need the government backstop that Fannie and Freddie provide, so Congress might change their names and restructure their organizations, but they likely won’t change much about the way the current system works.)

To Sum It Up

Despite my lack of interest from an investing standpoint, these companies and their history are really interesting to study. As I’ve mentioned before, a side interest of mine has always been to study some of the great financial panics in the past (see here and here for two related posts). This last month has given me an excuse to revisit the 2008 crisis (which nicely coincided with my interest in investigating certain companies in the housing market).

This wasn’t really a book review, and was more of just a collection of some notes I wrote down in my Fannie and Freddie file. But I highly recommend Bethany McLean’s book Shaky Ground. It is an excellent primer on the GSE’s, and it tells an interesting story of how they were started, how they evolved, and what led to their epic collapse. In addition to the specific economic and financial causes of their downfall, the GSE’s are a fascinating case study on incentives, herd behavior, and conflicts of interest, and also a glaring example of what can go awry when these ingredients are cooked up together.

China Thoughts and the Circle of Competence

Tue, 07 Aug 2018 13:23:12 +0000

I had a great week in China with Jake Rosser and Connor Leonard, two good friends and fellow investors. We spent our time visiting a few companies, talking with employees and business owners, and just observing some day to day life in Beijing and Shanghai. I have spent a significant amount of time over the past few years reading and learning about China, and it was very helpful to apply the learnings with some real world on-the-ground observations.

I have a lot of thoughts on China in general, and I’ll probably discuss some of my company-specific thoughts at some point in a letter to my investors, but my broad takeaway is that China’s economy and its people have a very bright future. The energy in Shanghai and Beijing was palpable, and I think the entrepreneurial spirit, the work ethic, and the technological and engineering know-how of the Chinese people are significantly underestimated by the Western media and by many of us who live outside of the country. I think there will be lots of opportunities for investors who put in the effort to understand China and the companies that do business there.

There are also a lot of false narratives about the Chinese companies, the government, and the nature of their economy. There will be growing pains, as there are with all economies, but China is becoming more and more of a market-driven economy, and they are much more entrenched into the global economy, which is good for China, the US, and the rest of the world. Much of the narrative is focused on the wrong variables. A trade war is not good for either party, but even if that comes to fruition, it will be just a blip on the radar. Not only will it fail to correct the trade deficit, as trade imbalances are a byproduct of regional spending and savings rates (and those won’t change overnight), but more broadly, global trade in general is a good thing, and it is certain to be higher over time. The world’s economy is too interconnected and consumption habits are too ingrained for that to change. So a trade war could hurt China in the near-term, but it won’t change the future in the long-term. Other than economists, most people don’t know about the devastating Smoot-Hawley tariffs of the 1930’s. Strong economies will sometimes face headwinds, but they’ll keep moving forward.

Another somewhat misplaced narrative involves China’s large debt load (which is always compared to GDP but never to the other side of the balance sheet: e.g. the vast amount of assets that the Chinese government owns or controls. It would normally be reasonable to compare Apple’s $110 billion of debt to its annual income, but that datapoint would portray a very inaccurate picture of Apple’s credit risk if you ignore the $240 billion of cash that the company has in the bank).

But high total debt-to-GDP ratios has caused China bears to anticipate a debt crisis and an economic debacle. I have no idea if or when this occurs (and it certainly could), but like the politicians and the trade spats, I think the bears are missing the forest for the trees. Both groups are focused on the wrong time frame. I think the much more certain bet is on China’s long-term future and the inevitable rise in standards of living, consumption, and earning power of the Chinese people and their companies.

It’s important to remember that great businesses will continue to do well, regardless of temporary setbacks caused by economic downturns. Also, the timing is always tough when you’re betting on a downturn in the macroeconomic cycle. Tencent has seen its earning power grow 20-fold since I first started reading about China’s debt nearly a decade ago. This doesn’t mean the debt problems aren’t real or should be ignored, but great businesses that are providing valuable services to Chinese consumers will continue to do well on balance, over the long run. The future growth in buying power of the burgeoning Chinese middle class is significant.

Rapid Pace of Change

From a broader perspective, one thing the trip to China got me thinking a lot about was the concept of the circle of competence. There are hundreds, if not thousands of companies in China that will create fortunes for investors over the coming decades, but at this moment I am aware of only a few that I would be confident enough to say that their competitive position will be stronger in five years than it is today.

The problem for investors in China is that the pace of change is fast and the competition is so fierce that it will be very difficult to determine which companies will succeed and which companies will fold. New companies are cropping up everywhere and can quickly gain scale in a way that threatens seemingly entrenched incumbents, and this process can happen in exceedingly short periods of time. CATL didn’t exist eight years ago. Today, it is the largest electric-vehicle battery producer in the world, surpassing BYD, Samsung, LG, and Tesla-supplier Panasonic. An ecommerce company that currently serves primarily lower-tier cities called Pinduoduo didn’t exist four years ago, but today it has a burgeoning platform with over 300 million users and a $25 billion valuation. A year ago, Starbucks was the unchallenged leader in China’s premium coffee industry. Today, an upstart named Luckin Coffee has established a foothold with over 800 stores and plans to grow to an astounding 2,000 by the end of this year. The business life cycle seems to be getting more and more compressed.

So one of my main takeaways from the trip is that I am certain that China has a bright future, but I think it will also be very difficult to pick winners. It’s a massive land rush where everyone is in the process of trying to stake their claim.

The good news is that there are a few companies that I am very confident in, and a couple that I would consider to be “inevitables”, a term I borrowed from Buffett to describe Tencent in a presentation I did last year. Luckily for investors, a few great ideas might be all you need in order to benefit from the massive tailwinds in China. But resting on the laurels of those select few great companies is not my only plan, and I came home excited about the country’s future and eager to continue learning about the businesses that operate there in an effort to steadily build out the watchlist of potential future investments.

But this is where the concept of circle of competence is really important. It’s crucial to be intellectually honest about what you know and about what you don’t know, and there is a lot that I don’t know about China. But fortunately there are a few things I do know, and I’m working to build on that base and work to expand that small circle over the coming years.

Li Lu on the Circle of Competence

I’ll have more to say about China in future letters to Saber Capital investors, and over time, I’ll discuss investments that I’ve made, but for now, on the topic of circle of competence, I thought I’d share some quick notes that I took on a talk by Li Lu that I recently reviewed in preparation for my trip. I think he captures one of the most important things to remember when thinking about investing, whether it’s in China or anywhere else. This is a subtle, yet extremely important aspect of the circle of competence concept:

“The more honest you are intellectually, the more prosperous you tend to be. I have never met intellectually arrogant people who can successfully practice the game of investment.”

That was a portion of what Li Lu said in response to a question on what sectors he thinks are undervalued at the current time. I’m going to simplify and paraphrase the other portion of his reply. He basically said that he doesn’t know which sectors are cheap, but he also implies that this isn’t really the right question. You don’t need to know everything about everything. Anyone who says they have a view on so many different things is usually not being honest.

What he’s saying is that sticking to your circle of competence is key, and not straying outside that circle requires being honest with yourself about whether you truly understand the investment idea that you’re currently analyzing. If not, then it’s best to keep learning, and not invest. This is very difficult to do, and since many investors are smart people, they convince themselves that they know more than they actually do about a particular investment.

I love Li Lu’s reply to that question, and I think that being honest with yourself about your own knowledge-level is one of the absolute requirements for avoiding debilitating losses.

Gaining an Edge

A couple years ago I wrote a piece titled “What is Your Edge?”. Basically, my point was that gaining an edge in today’s market is no longer based on gathering information (which has become commoditized because of technology). Information gathering is obviously crucial to investing, but it usually won’t give you an edge. Each piece of information that you think is proprietary is – with very, very few exceptions – known by scores, hundreds, or usually thousands of other investors out there. So technology has leveled the playing field when it comes to gaining information. But what hasn’t become commoditized is the ability to gain an edge by understanding and acting in a way that gives you a behavioral advantage.

Investors can gain an edge through thinking differently than the crowd and also through thinking on a different time horizon than the crowd. These are potential advantages that have not only not gone away, but they’ve likely strengthened as attention spans, patience, and the time that investors are willing to wait for positive results have all gotten much shorter. This pervasive short-term thinking creates a gap between price and value as sometimes short-term investors are selling stock because they think the next few quarters will look bad (even when they know the next five years will look good).

I think the intellectual honesty that Li Lu is talking about in this talk is a key concept that is part of what it takes to capitalize on this potential behavioral edge in the stock market.

To Sum It Up

The circle of competence is talked about constantly, but one subtle truth that each investor should remember is that part of sticking to what you know is being honest with yourself about what it is that you know (and what it is that you don’t).

I think this is especially important when evaluating companies in China, because the incredibly attractive future has led to an incredibly competitive landscape. There will be fortunes to be made, but I think it will pay to be very selective, patient, and of course honest about your own level of understanding. As is the case with investing generally, it will only take a few great opportunities to make all the difference.

I’m excited to be back in the office, and I look forward to learning more about some of the companies we visited during our stay in China. For the Saber Capital investors who are reading this, I will be sending out my mid-year update in the next week or two, which will contain some other thoughts on the portfolio.

Thanks for reading!

Disclosure: John Huber and clients of Saber Capital Management own shares of Tencent Holdings.

Two Berkshire Takeaways and Thoughts on Competitive Markets

Tue, 15 May 2018 10:49:51 +0000

On a morning run a few weeks ago, I was listening to a talk by Alice Schroeder, author of the outstanding Buffett biography Snowball. She was discussing some things she learned from Buffett in front of an audience of Microsoft employees. Schroeder is always someone I like listening to. She’s an excellent storyteller, she has a thorough understanding of both business and investing, and she has had more access to Buffett’s files than any other outsider. The combination of these attributes resulted in her magnum opus on Buffett, but it’s often interesting to hear her interviews because even though the book was extensive, it still is likely a small fraction of the information she gathered up during her thousands of hours of time she spent with Buffett.

In the talk referenced above, the following clip stood out to me. Here’s Schroeder talking about why Buffett doesn’t use a computer much:

“What he’s really done is he’s created this immense, vertical filing cabinet in his brain of layers and layers and layers of files with information that he can draw on from more than 70 years of data. He’s like a human computer. He’s wonderful at math. He can recall phone numbers from his childhood, and populations of cities from his childhood. He can do square roots in his head. He does present values and compound interest in his head… The biggest thing he’s done is to learn and create this cumulative knowledge base in his head. So one reason he doesn’t use a computer is because, in a sense, he is one.”

Last week I was in Omaha for the Berkshire annual meeting, and while I sat there in the CenturyLink arena, I was thinking about Schroeder’s description while listening to Buffett rattle off trade deficit data from 1970 off the top of his head in response to a question. His mind is an incredible machine, and it appears to be working as well as ever.

I also got to thinking how unique Buffett is and how unlikely it is for anyone to really replicate the scale of his success. This thought reminded me of how important it is to focus on your own skillset, your own opportunities, and to think independently. I think it goes without saying that it is imperative to learn from Mr. Buffett and Mr. Munger. Their common sense, investing skills, and business acumen that they share freely with the public are critical building blocks for the rest of us. But I also think it’s important to keep in mind that — in addition to the God-given gift of having a mind that works like a Microsoft Excel spreadsheet, and a Peyton Manning-like focus on his craft that has been maintained over decades — a big part of Buffett’s success was that he and Munger were very independent thinkers. They have always done things their own way. They made independent choices and followed paths based on the unique situations and opportunities that they faced throughout their careers. They learned from Ben Graham, but did things very differently than Graham did.

So it’s obviously important for investors to study Buffett and Munger, but I think it’s also helpful to keep in mind that we each have our own set of opportunities, and the situations we face and the opportunities we come across will be much different than the ones Buffett and Munger (or anyone else) encountered.

This general idea of independent thinking dovetails with the first of my two main takeaways from the weekend in Omaha:

There are a lot (and I mean a lot) of people out there doing what I’m doing (running an investment firm and trying to produce market beating results)
Patience is still underrated and remains a real advantage for those who are able and willing to utilize it (even the market average produces a stunning result over a long enough time horizon)

Neither of these points are groundbreaking. Both are obvious, and well-cited. Everyone knows that the market is extremely competitive. Everyone knows that patience is a critical component of great investment results.

However, it has dawned on me over the last few years that the former (the extreme competitiveness) has actually led to an aggregate squandering of the benefits of the latter (patience). In other words, as competition in markets has dramatically increased over the years, time horizons and patience levels have significantly decreased. I actually think that the two are not only inversely correlated, but I think one has caused the other. Growing competition has caused people to think in shorter time horizons.

Is Beating the Market Harder Now?

Last year I wrote a summary of the 2017 Daily Journal meeting with Charlie Munger, where I discussed some of my own thoughts on Munger’s view that the markets are harder today because of intense competition. I think it’s nearly impossible to win the way they won, which is why I think it’s crucial to keep their principles at the core of an investment philosophy, but be independent-minded about the way you deploy those principles. And one of the key things to understand today is something I’ve mentioned frequently in the last few years: I believe the information advantage that Buffett and Munger exploited in the early days is gone, which makes it imperative for investors to extend their timeframe. And extending the timeframe means focusing more on the quality of the business, its return on capital, and its durability and staying power. Those attributes become more important to the success or failure of an investment than finding a piece of hidden information that the market doesn’t see.

It is extremely difficult to separate yourself from the crowd as an investor, especially if you are focused on trying to make investment decisions based on how you think securities will perform in the next few quarters (which despite what most people in the investing community say, is really what they are doing). As I flew back from Omaha, I was thinking about the events I attended, the talks I listened to, and the conversations I heard at restaurants and hotel lobbies. Everyone was telling everyone about their favorite stocks. I was too. We all are talking about our ideas, in the hopes that our ideas are the ones that will separate us from the average.

Of course, there is nothing wrong with discussing investment ideas. It’s a lot of fun, and a big reason why I love going to these events. I like talking about stocks with other investors as much as the next person. But it did become very evident to me while I was observing – and contributing to – the cacophony of investment pitches, that the unspoken truth is that most investors seem very focused on what the stock they own will be doing in the next six months, and much less focused on what the business underlying that stock will be doing in the next five years. No one says this, and there is no hard and fast evidence I could produce if I were forced to prove this, but it was a palpable observation I had over the weekend.

So the takeaway here: yes, the markets are extremely competitive. Being in a city with so many other investors really drives this point home. But it also drives home the point that competitiveness tends to shorten investors’ collective time horizon, which makes it all the more important that one avoids groupthink and tries to utilize a time horizon that other investors aren’t capable, willing, or structured to take advantage of.

Buying a Farm Based on Next Year’s Rain Forecast

It’s interesting to look at Berkshire’s largest equity investment as an example. It is notable that a stock like Apple, as widely followed as it is, happens to be up about 100% from where it was valued two years ago. I think Apple is a great example of the potential advantage that can be garnered from time horizon arbitrage – basically looking out a few years when so many people are focused on the short-term.

I recently heard an analyst – prior to Apple’s recent earnings report – who was telling investors to “be cautious into the print”. (The “print” is Wall Street lingo for the earnings report).

What was interesting is that the analyst hedged that comment by saying that any dip from earnings would be a buying opportunity. In other words, “we wouldn’t buy the stock here, but if it falls 3% or 4%, it’s a buy”. The fact that someone’s opinion of the attractiveness of a security can be so different between just a few percentage points is a microcosm of how short-sighted most market participants are.

Buffett gave an interview before the meeting last week where he summarized the basic principles of thinking of a stock like a business in a manner that he’s done many times before, and in a response to a question from Becky Quick regarding his view on Apple’s recent quarterly results, Buffett said:

“We don’t own it for the next quarter. It’s incredible to me how you read the investor conference calls… you read all the analyst reports… they talk about what it’s going to do next year. No one buys a farm based on whether they think it’s going to rain next year or not.”

Dissecting the results of suppliers or analyzing the fluctuations in iPhone channel inventory might be helpful to know if you want to predict the next quarter’s EPS number, but it’s largely just noise if you’re hoping to form an opinion about what Apple’s business will look like five years from now.

Obviously, most value investors have timeframes that are much longer than the average, but I still think a lot of the language and discussion points I hear are very focused on short-term data points, events, or catalysts that have lots to do with where the stock price might go in the next few months, but little to do with the long-term value of the business.

There is nothing inherently wrong with trying to focus on short-term catalysts in hopes of increasing the velocity and turnover of your capital. It’s just that I think this is an extremely competitive and crowded approach, which makes it very tough. There is a reason why investors focus on the short-term. In addition to our general human nature, the simple fact is that we’d all rather make money today over tomorrow, if given the choice. So, most of the emphasis and effort is focused on making money sooner rather than later.

There are some investors who are exceptions to this general pattern of short-term focus, and I talked with a number of people this weekend who I consider to be exceptional. One of the things I’ve learned from those exceptional investors, and from Buffett and Munger as well, is the importance of thinking independently.

The irony of attending an event with 40,000 like-minded investors was not lost on me! But it did reiterate the importance of doing your own work.

Compounding Plus A Long Runway

My favorite part of the entire meeting was when Buffett put up some slides showing newspaper headlines from early March, 1942. The mood was pessimistic. Pearl Harbor was attacked a few months earlier, Europe was at war, and the US was in the midst of preparing for conflict both in Europe and in the Pacific. The Dow was hovering around 100. Warren Buffett just bought his first stock (he was 11 years old).

Buffett then referenced that a $10,000 investment in a broad swath of American stocks in March of 1942 – a low point in sentiment – would be worth $51 million today. Compounding, combined with patience, is an incredible force over time.

I think Buffett is right that the vast majority of investors who are trying to jump in and out of ideas (even every few years) will have a very difficult time beating someone who just buys a basket of American stocks and does nothing for a few decades.

I know that terms like patience, “long-term thinking”, and the general idea of buying stocks and ignoring short-term prices are words and phrases that get thrown around by all of us in the investing community. But I think that while we probably overuse the verbiage, we continue to collectively underutilize the concepts to our advantage. People yawn when Buffett talks about indexing and “buy and hold”, but I’m convinced that the simple logic of value investing, long-term thinking, and patience can go a long way toward trying to produce great investment results over time.

This weekend didn’t generate any new groundbreaking insights for me, but it did reinforce some principles that make up the bedrock of my investment approach that I think are crucial to success. This is a competitive game, but I think that investors who can actually implement those principles, while simultaneously possessing the wherewithal to avoid groupthink, will have the best chance to succeed over time.

Disclosure: John Huber and clients of Saber Capital Management own shares of AAPL.

John Huber is the portfolio manager of Saber Capital Management, LLC, an investment firm that manages separate accounts for clients. Saber employs a value investing strategy with a primary goal of patiently compounding capital for the long-term.

To read more of John’s writings or to get on Saber Capital’s email distribution list, please visit the Letters and Commentary page on Saber’s website. John can be reached at john@sabercapitalmgt.com.

Discussion at Markel

Wed, 02 May 2018 15:09:00 +0000

I sent this to Saber Capital clients last week, and I wanted to post it here on the site as well.

Last month, I had the great privilege to visit Markel and speak with Tom Gayner and a few of his colleagues at Markel in Richmond, Virginia. Markel has always been a company that I’ve greatly respected, in large part thanks to the leadership of Tom Gayner, who has done an outstanding job stewarding the culture that the Markel family established and maintained over many decades. I wrote about my thoughts on Markel as an investment idea a few years ago, which you can review if you’re interested in reading more about the business.

At our meeting, I gave a brief presentation to the Markel guys about my thoughts on a few of the stocks we own, including Google and Facebook, which are my two most recent investments.

This presentation was not designed to be a comprehensive discussion of these firms, but rather just an overarching view of some of the common denominators I have found in a few of these high-quality technology companies. Part of the presentation uses some slides from a talk I did on Tencent last year (see that original Tencent presentation here).

I’ll have more to say about those two companies in Saber Capital’s next investor letter (to get on our mailing list, you can sign up on our site). But suffice it to say that I think Facebook and Google, despite their size, offer some of the most compelling risk/reward opportunities in the stock market currently. It’s somewhat stunning that FB and GOOG trade around a 5% free cash flow yield, which is roughly in line with the broader market averages. This is despite virtually infinite returns on tangible capital, monopolistic strongholds on their respective industries, large addressable markets, and huge growth – FB recently traded at around 20 times what it will earn this year, despite growing its sales at 49% and its profits at 63% last year. Google has a similar valuation, after accounting for its $100 billion (and counting) cash pile, and is growing its top and bottom lines at over 20% currently. The typical large, blue-chip stock in the S&P 500 trades at a similar valuation or higher, despite growth rates that are often in the single digit range (not to mention competitive positions that, in my opinion, are much weaker).

Obviously, growth rates will slow down, but I think it’s very likely that these two companies will continue to grow at above average rates for a long time to come. They still occupy only a small portion of the advertising market, but they offer the best value proposition for advertisers. They also both have compelling “call options” on other assets that haven’t yet been monetized.

There are some headwinds to be sure, and there are regulations (such as Europe’s GDPR) that will have an impact on their data-collection practices and their advertising business models, but I am very confident that these firms will be doing more business in five years than they are today. The nature of their network effects and the incredible value they provide to their users and their advertising customers gives me confidence that their moats will continue to widen.

What is Your Edge?

There isn’t much to say about Google and Facebook that already hasn’t been said. I often get the question that goes something like this: “What is your edge in Google?”, or “What do you know that the market doesn’t?” But I think this is the wrong question for investors to ask themselves, at least when it comes to mega-caps. There is no information edge to be found there. Yet Apple’s stock is almost 100% higher than it was just 24 months ago. How does a $450 billion fluctuation in quoted value occur on the most widely-followed company in the world, in just two years?

It’s a question I’ve spent a lot of time thinking about, and I wrote about the concept of edge in this article a while back.

Along these same lines, I wrote in my recent letter to Saber Capital investors some comments on Bill Belichick’s famous saying: “Do Your Job“. Our job as investors is not to be the most original. It’s not to have the most compelling investment write-up, or the most unique ideas. Our job is to try and compound each dollar of capital at the highest possible rate with a minimum of risk. For me, this means looking for the most obvious bargains in the stock market.

Sometimes, the best bargains (in terms of risk/reward) really are hiding in plain sight. As I mentioned in a recent note, I think some investors have a condition that in one small way reminds me of the Genovese bystander effect, where everyone witnessed the crime but no one called the police because they all thought someone else would. Lots of investors don’t own these widely-followed stocks because they assume everyone else does and they assume they are fairly priced and there is no edge.

Regarding informational edge on these large companies, that is absolutely true. But when it comes to human behavior and thinking differently about a certain set of widely acknowledged facts, there can be an edge. Optimism, pessimism, patience, fear and greed, and other human behavioral patterns exist across geographies, industry groups, and market caps. And this is part of the reason why even large-cap stock prices fluctuate so much in the stock market.

As I’ve said before, I have no preference for large caps over small caps. I look at everything that I think I can understand. Smaller stocks certainly offer more opportunities in general, but I’m certainly not opposed to investing in large companies when they are cheap. I do believe that the market under-appreciates certain companies that have really strong moats because often times this durability allows for the company’s runway to last longer than many expect.

Apple and Tencent are examples of how even the largest companies in the world can be significantly mispriced from time to time, and I believe Google and Facebook are also in this camp at the current time.

Again, I’ll have more to say on these companies over time, but I wanted to post this presentation that outlines a few common denominators of great companies that I’ve been thinking about. I simplified some sections to make it more succinct, and the valuation numbers are updated as of about two weeks ago.

Thanks for reading! If you’re interested in learning more about investing with Saber Capital, or would like to discuss anything regarding this topic or anything else, feel free to reach out to me (contact info below).

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Connor Leonard’s 2017 IMC Letter

Tue, 24 Apr 2018 12:39:37 +0000

Long-time readers are likely familiar with Connor Leonard, but for those who don’t know him, Connor is a good friend of mine who runs the public securities portfolio at Investors Management Corporation. IMC is a holding company located in Raleigh, North Carolina. The firm focuses on long-term ownership of outstanding companies in both the public and private markets.

Connor has shared some thoughts with BHI readers in the past, including a post on Reinvestment Moats, Capital Light Compounders, as well as an investment idea and annual letter that exemplify some of these concepts.

These posts were key additions to my series on the Importance of Returns on Invested Capital, and Connor does a great job at laying out those principles in a simple, common-sense fashion. I strongly recommend giving them a read if you haven’t yet.

While IMC is a privately-held company, they have allowed Connor to share a condensed version of his 2017 Annual Letter with my readers. Enjoy!

Saber Capital Annual Investor Letter

Tue, 20 Feb 2018 13:26:48 +0000

Here is Saber Capital’s annual letter that I sent to my investors last week: Saber Capital 2017 Review

If you’d like to get on Saber’s email distribution list, you can do so here. Some of the letters and write-ups I send to clients get posted here as well. This email list will receive some of the writing that I send out to my investors, usually one or two pieces of commentary every few months.

Thanks for reading!

John can be reached at john@sabercapitalmgt.com.

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Saber Capital Discussion with Googlers

Mon, 05 Feb 2018 14:01:36 +0000

In late January, I had the great experience of visiting Google in Mountain View, California, where I had the chance to do meet with some Google employees to discuss investing (here are the slides from the talk).

The timing was fortunate, as it was my good friend Saurabh Madaan’s last week as a Googler. In addition to his post as a senior data scientist at Google, the value investing community knows him for his side gig: hosting the Investing Talks at Google series. Saurabh did brilliant work organizing that series, preparing quality questions and engaging in thoughtful discussions with his guests, and his selfless efforts and contributions will be missed (although we hope that a certain insurance company headquartered in Richmond will begin their own series of investing talks under his direction). Saurabh is a major asset for any company that has the good fortune of employing his services, and Tom Gayner added a meaningful amount of intangible value to Markel when he made the decision to offer Saurabh a position at his firm.

During my visit to Google, I had the chance to talk with a number of employees at Google as well as some of the other leading firms in Silicon Valley. It was a great experience, and my overall takeaway is that the culture (and more specifically, the incredible talent) of these firms is somewhat under appreciated, despite being cited often. Google has an unusually large number of employees who are not just super smart, but also very humble. There is an introspective focus on continuous improvement and long-term thinking that is very palpable there. I think it is also very unique.

Culture, employee talent, and workplace satisfaction are three things that don’t show up in the numbers, and thus they are difficult to quantify and difficult to value, but they are extremely important to the long-term earning power of the company (especially in the fast-moving world of technology).

I believe these intangible qualities, when combined with powerful network effects, can create a durable position that makes some of these firms very difficult to beat in their respective areas of dominance.

In my presentation, I described a couple key points that are helpful to keep in mind as an investor, and I also briefly summarized the investment case for one of the stocks in our portfolio.

Here are the slides to my presentation: Investing Discussion with Googlers

Also, congratulations to Eagles fans. 15 of the last 17 Super Bowls have seen the AFC represented by either a Brady, a Manning, or a Roethlisberger led team. It’s nice to see an upset by a team that has never won it all, led by a backup quarterback who stepped up and went toe to toe with the greatest of all-time. It’s noteworthy that all eight Super Bowls that Brady/Belichick have been in have been close, one-possession games. There were some incredible games in that stretch with some epic Super Bowl moments, but yesterday’s game was one of the greatest (at least if you like offense).

Have a great week!

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Human Behavior and The Panic of 1907

Mon, 18 Dec 2017 21:46:07 +0000

I recently wrote a post about a book I really liked called America’s Bank, by Roger Lowenstein. The book talks about the formation of the Federal Reserve, and the events that led to it. One of the major catalysts that started the process of banking reform was the Panic of 1907.

What Caused the Panic of 1907?

Basically, the Panic of 1907 was caused by a classic run on the bank, leading to the failure of the Knickerbocker Trust company in New York, which drained cash reserves from the financial system and created a shortage of liquidity all over the city and eventually in the broader economy. Merchants couldn’t use credit to pay for inventory, cash wasn’t available to pay workers, farmers couldn’t sell their crops, and the economy entered a recession.

The First Domino

It all started with a routine speculation that went awry. In those days, it was common for “stock operators” to borrow huge sums of money to finance an effort to manipulate a stock price for their own personal gain. The big speculators and their syndicates had enough buying power to move the prices of even the largest stocks.

In October of 1907, one of these operators, a banker named F. Augustus Heinze, attempted to corner the market of a copper mining stock. The operation failed, and the stock, which reached a price of 60 during the attempted corner, almost immediately collapsed to 10. Because of the leveraged nature of these manipulations, Heinze’s bank, Mercantile National Bank, was feared by the public to be bankrupt. In fact, Heinze’s bank was still solvent, but in banking, perception can become reality, and as depositors pulled their money out, Mercantile needed an emergency loan to stay alive.

On its own, the prospect of a small bank failure shouldn’t have been more than a blip on the economic radar. But without a central bank to act as a lender of last resort and without deposit insurance that would have calmed nervous savings account holders, this tiny bank run was the spark that led to contagion (a fancy word economists now use for widespread fear).

Fear Spreads

Other depositors around New York City wondered if their own deposits were safe, and like Lehman in 2008, the panic spread when a much larger organization suffered its own “no confidence” vote. Just two days later on October 18th, 1907, news broke that the president of one of the largest trusts in New York (The Knickerbocker Trust) was an associate of Heinz, and people all over the city began to question the safety of their deposits.

It was a classic run on the bank – fear begat more fear, and everyone wanted their cash back at once.

Trusts in New York at that time were not technically banks, but they acted just like them – taking in deposits and making loans. The problem was that these trusts were not regulated. Trusts made riskier loans, such as uncollateralized loans to stock brokers, who then used that capital to lend to their customers who bought stocks on margin. The trusts also had much more leverage. Banks in those days kept around $1 of cash in their vault for every $4 of deposits. At the trusts, each $1 of reserves was stretched across every $20 of deposits.

This meant that the trusts were much more vulnerable to runs. A trust could become insolvent if only 5% of its deposits were redeemed. In those days, with the right amount of fear, that could happen in an afternoon. And in October of 1907, it didn’t take much longer than that to cause the failure of the Knickerbocker.

Around that time, a group of bankers, led by J.P. Morgan himself, were going over the Knickerbocker’s books, to determine whether or not it should be saved. In the end, the bankers, who were essentially acting as a central bank of sorts, decided to let the Knickerbocker go down (technically, the trust didn’t fail, it just closed its doors for six months and locked out depositors, but practically speaking, it was bankrupt).

The Knickerbocker failure sparked massive fear all around New York, and the contagion quickly spread to other banks, and even larger trusts. Morgan and his cohorts realized they may have made a mistake, and quickly reversed course by extending a lifeline to The Trust Company of America and a few other major financial institutions in the city.

This may have mitigated the worst possible outcome, but just like in 2008, the bailouts didn’t stop the crisis from spreading. Depositors continued to ask for their cash back, and the banking reserves of the entire financial system rapidly evaporated. An astonishing 48% of the deposits left New York trusts and found safety in mattresses and dresser drawers.

The panic eventually spilled over into the broader economy. Businesses didn’t have enough cash to finance their operations or pay their workers, and many had to close their doors and halt production lines. The stock market plummeted 40%.

Economic devastation has real consequences and it’s never fun to read about the plight of those who feel the effects most acutely. But from a human behavior standpoint, the Panic of 1907 is a fascinating sequence of events to read about.

Financial Panics Rhyme

As a side note, the similarities between the Panic of 1907 and the crisis that occurred 101 years later in 2008 were remarkably similar. Heinze’s bank failure was like Bear Stearns – it was the first domino, but on its own it should have been manageable. But the Knickberbocker – just like Lehman in September of 2008 – was the catalyst that accelerated the crisis and nearly brought down the financial system. In both instances, the men in charge (Morgan and his syndicate in 1907; Bernanke and Paulson in 2008) decided against saving what turned out to be a systemically important bank. And in both cases, this decision led to panic, crashing stock prices, and additional bank runs. Everyone wanted their cash in hand. Both bank failures also caused the decision makers in each case to reverse course and save other teetering institutions – in 1907 Morgan saved the Trust Company of America, and in 2008 the US government saved AIG.

In addition, before the bailouts in 1907 and 2008, both groups of bankers were concerned about propping up doomed banks. Prudent lending was the concern in 1907; moral hazard was the concern in 2008. But ideology quickly was tossed out the window, and the focus became the practical matter of putting out the fire – the financial system had to be saved.

The Aftermath – The More Things Change, The More They Stay The Same…

The aftermath of both crises unfolded in a similar way as well. In both cases, the run on the bank created further panic, people demanded cash above any other asset, liquidity dried up causing businesses that relied on credit to suffer, which caused a broad economic downturn. (One difference is that the 1907 recession was very deep, but the recovery was swift, unlike the aftermath of 2008). The political aftermath was very similar between the crises as well. As is the case with most crises, Congressional leaders of both parties got on their collective populist and moral high-horse and dragged business leaders to Capitol Hill, demanding an explanation for what went wrong.

The general result of every crisis is always the same: after the finger pointing is finished, the remedy is new legislation and increased regulation – all designed to prevent the next crisis. Sometimes, this post-mortem results in sensible reform. 1907 gave us the Federal Reserve Act, at the time a wildly controversial piece of legislation that was viewed as a vast overreach of government power, but one that has proven to be a necessary linchpin to our financial system. The Great Depression gave us the FDIC and the SEC. And the most recent crisis gave us Dodd-Frank and the CFPB. The merits of any of these could be debated, but I think it’s really interesting to study the common denominators and the human behavior aspect of all of these crises.

Given the fact that human nature doesn’t change, the next crisis is inevitable. Laws and regulation can be effective at times at preventing what caused a previous crisis, but greed and fear are two constants in financial markets, and they will be the two key ingredients that will lead to the next great crisis. The cause will be different and unexpected, but the human behavior before, during and after the panic will look very similar.

Practical Takeaway

From a practical standpoint as an investor, I think it’s always interesting to study the various financial crises that have occurred throughout market history. Reading first-hand accounts of these events as they unfolded gives you a great sense of how much asset prices can be impacted by sheer emotion and herd behavior. This is obvious to most of us, but it’s helpful to keep in mind, as even the most level-headed investors can be influenced by fear.

It’s also helpful to remember that the greatest investors are usually the ones who capitalize on such panic. Morgan was making loans when no one else was in 1907, and acquiring assets on the cheap. Buffett was providing capital and buying stocks when very few others would in the midst of the panic in 2008 (and coincidentally, J.P. Morgan’s eponymous bank would also be buying cheap assets 101 years after he helped save the system in 1907). Just like some of the banks in Morgan’s 1907 syndicate that came out of the crisis in a stronger position than when they entered it, some of the best companies in today’s world actually added to their intrinsic value because of 2008 (Berkshire and JPM are just two examples – extending credit and buying companies when few others had the means or will to do so).

One good lesson here is that it’s important to own stocks of companies that can take advantage of crises rather than be at the mercy of them. Even if you are fully invested and all the stocks in your portfolio decline, if you own shares of businesses that can capitalize on the meltdown, the intrinsic value of your portfolio will increase (and stock prices will eventually catch up with that value). Almost every crisis turns out to be an incredible opportunity for those who can think clearly and make rational decisions.

Again, “being greedy when others are fearful” is one of the most obvious and most widely-repeated phrases in investing. But it’s easier said than done, and studying these crises gives you a sense of why that is. Human nature is a very powerful force that impacts us all.