Monday, August 15, 2016 3 comments

Sold/Final Liquidation: Comdisco (CDCO and CDCOR)

I haven't done any investing in the last few years. In addition to being busy with some personal life stuff, I have felt the market is overvalued. In any case, one of my last special situations, a liquidation, I invested in 2009 finally made its final liquidation distribution.

Given the huge bull market over the last 6 years, this investment severely underperformed. However, I am ok with the outcome given how I was bearish and wanted something uncorrelated with the market.

One lesson to be learned from this investment is that liquidations can take much longer than one expects. I anticipated further delays when I made the investment but I never imagined it would last this long. It took approximately 7.5 years from when I invested (I was expecting it to close out within 3 to 4 years).

Comdisco (formerly CDCO -- security cancelled)
Purchase price (approx): US$ 7.00
Final distribution: US$ 4.564
Distributions: $3.1273, $2.3455
Total return (US$, worst case estimate*): 37.8% (4.37% annualized)

Comdisco Contingent Distribution Warrants (formerly CDCOR -- security cancelled)
Purchase price (approx): US$ 0.115
Final distribution: US$ 0.077
Distributions: $0.04985, $0.03739
Total return (US$, worst case estimate*): 51.7% (5.71% annualized)

(*worst case based on simple assumption that all distributions received at end. In practice, distributions were received in earlier years, 2011 and 2015, so the annualized return is actually a bit higher than what is shown.)

Another liquidation I have been recently looking at is Motors Liquidation Trust (OTC Pink: MTLQU). This is the former General Motors (GM) that went bankrupt (aka "bad GM" or "old GM"). It is a trust that is involved in litigation and makes distributions based on court case resolution. I haven't pulled the trigger yet and need to do more homework for a couple of reasons. I am not sure if there are adverse tax implications for Canadians who invest in this. The case is complicated and it's hard for me to tell if this is just a straight liquidation like others (such as Comdisco above). Furthermore, MTLQU has been selling off over the last few months and I can't figure out why. Not sure if it is because the market is hitting records and no one wants to be stuck owning this; or if it is due to recent negative developments with ignition key lawsuits GM is facing; or is it something else?

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Thursday, July 4, 2013 18 comments

How do App Developers Make Money? Seems Completely Unsustainable

Something that has always puzzled me is how software app developers on mobile platforms (phones, tablets) make money. Some mass market products, such as games, make money off large volume and/or advertising but how about all the others?

Writing for Stratechery, Ben Thompson illustrates the difficulty faced by app developers, particularly those developing productivity software (bolds by me):

Paper is a transformative, device-defining app, and has been awarded accordingly by both Apple and the design industry. According to App Annie, as of June 21, Paper ranked 7th in the Productivity category according to downloads (119th overall after a recent jump), and 4th in revenue (108th overall).

By every visible measure, FiftyThree, the makers of Paper, are the definition of an app store success story...
But underneath the surface, things aren't so rosy:
The problem for Paper is the same for all productivity apps in the App Store: there is no way to monetize your existing users...

My use of Paper is an essential part of stratechery, yet I needed to only pay $8.99 for two in-app purchases, for which I never need to pay again. That’s a hell of a bargain, but it’s ultimately unsustainable.
How can any developer survive on $8.99? Not only that, customers don't have to pay again for a long time (if ever).

Ben suggests (in other posts) several solutions, including the subscription model, but very few apps utilize that right now. The whole app industry seems ready to collapse in my opinion—unless their business model changes drastically.

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Wednesday, June 19, 2013 18 comments

The Power of Compounding; or How Good is Warren Buffett's Record Anyway?

Newbie investors often don't realize how much return an outperformance of 4% or 5% produces in the long run. Compounding is so powerful that, over a long period of time, the outperformance will be massive.

To illustrate, consider the returns of, arguably, the best investor of all time, Warren Buffett, versus the market (say, S&P 500). Warren Buffett has produced around 20% annual return whereas the market has returned around 10% per year (rough numbers, off the top-of-my-head). This is only a 10% outperformance but given how Buffett has outperformed for more than 40 years, the results are staggering.

Let me quote Jeff Matthews, from his well-written overview of the 2013 Berkshire Hathaway Shareholder Meeting. If you want a perceptive recap of the annual meeting, I recommend reading the entire blog post ("“We Want to Win”: The Berkshire Hathaway Annual Meeting, 2013 Edition").

...Berkshire’s stock is at a new all-time high—$162,904 per share for the A shares on the close Friday.

And considering that those same “A” shares were trading at $16 the day Buffett took control on May 10, 1965, well, it’s no surprise the crowd is feeling upbeat.

How Good Is Warren Buffett’s Track Record, Really?

But how good is Warren Buffett’s track record, really?

Well, Berkshire’s stock has appreciated—this is appreciation only, no dividends, mind you—981,150% since May 10, 1965.

And if you’d put $16 into the S&P 500 instead of into one share of Berkshire on that same day, your share of the S&P 500 wouldn’t be worth $162,905 today from appreciation (we’re leaving out the dividends for now.)

In fact, your S&P 500 share wouldn’t be worth $100,000 today.

It wouldn’t even be worth $10,000 today.

It would be worth about $600.

Throw in dividends and you’re north of $1,000 but south of $2,000 on your $16 investment. The Berkshire shareholder has $162,904.

That’s how good Warren Buffet’s track record really is.
Think about that! Just an outperformance of around 10% has resulted in approx. $160,000 vs $2000!

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Monday, March 4, 2013 4 comments

Sunday Spectacle CXCVI

Submarine Cable Map 2013
If you are interested in seeing how Internet traffic flows, check it out.

Click on image for larger picture; very high resolution of map available from source here. You can also purchase a map from the source.
(source: Submarine Cable Map 2013 by TeleGeography. Original mention by Fast Company FastCo Design)

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Tuesday, February 26, 2013 8 comments

Higher Education Losing its Value? Or Too Many Scientists?

Writing for The Atlantic, Jordan Weissmann touches on a sad—kind of scary—situation facing PhD graduates:
First, the big picture. Here is the entire market for Ph.D.'s, including those graduating from humanities, science, education, and other programs. The blue line tracks students who have a job waiting for them after graduation. The green line tracks those signed up for a post-doctorate study program. The red line stands for the jobless (though a sliver of them are heading to another academic program).
The pattern reaching back to 2001 is clear -- fewer jobs, more unemployment, and more post-doc work -- especially in the sciences. A post doc essentially translates into toiling as a low-paid lab hand (emphasis on low-paid). Once it was just a one or two year rite of passage where budding scientists honed their research skills. Now it can stretch on for half a decade .
As the article makes clear, the charts aren't perfect and there are a lot of assumptions that went into the chart. Nevertheless, if we assume it paints a picture somewhat close to reality, it illustrates a potentially new trend.

The described situation—PhDs not getting jobs—is kind of sad for those pursuing higher education. Once upon a time, only some soft areas like humanities and arts graduates had difficulties finding jobs but now it looks like science and engineering is facing the same problem.
It's not clear to me if employers are starting to discount higher education (possibly due to too many degree-holders, who are not as skilled as several decades ago)... or if it is due to a skills mismatch (America graduating too many scientists). Leave your thoughts.

Wednesday, February 20, 2013 21 comments

The Disastrous Outsourcing of the 787

source: Boeing

The Boeing 787 Dreamliner is a technological marvel. It’s built largely of carbon-fibre composites rather than aluminum, which makes it significantly lighter than other planes. Its braking, pressurization, and air-conditioning systems are run not by hydraulics but by electricity from lithium-ion batteries. It uses twenty per cent less fuel than its peers, and so is cheaper to run, yet it also manages to have higher ceilings and larger windows. It is, in other words, one of the coolest planes in the air. Or, rather, on the ground: regulators around the world have grounded all fifty Dreamliners... The Dreamliner was supposed to become famous for its revolutionary design. Instead, it’s become an object lesson in how not to build an airplane.
— James Surowiecki, "Requiem for a Dreamliner?"

Don't have much time to comment on this but it appears that the outsourcing trend is probably near its end. Like all management concepts, outsourcing tactics over the last decade generated a lot of wealth and made companies more efficient, but it has resulted in some disastrous outcomes. The textbook example presently is Boeing and its 787 airplane; I am sure there will be even worse examples to come.

The following diagram illustrates the various suppliers of the 787:

It's still not clear if outsourcing may be the entire cause of the 787's problems but one can't deny that it played a major role.

The Economist once touched on the reasons for outsourcing:
But the business logic behind outsourcing remains compelling, so long as it is done right. Many tasks are peripheral to a firm's core business and can be done better and more cheaply by specialists. Cleaning is an obvious example; many back-office jobs also fit the bill. Outsourcing firms offer labour arbitrage, using cheap Indians to enter data rather than expensive Swedes. They can offer economies of scale, too.
Having said that, as is often the case for those trying to implement something well past its shelf life—Six Sigma approach in the early 2000s comes to mind—the incremental benefit of outsourcing appears to be declining significantly. It's difficult to say what went wrong with Boeing but James Surowiecki appears to suggest that Boeing outsourced itself out of its core business:
Boeing didn’t outsource just the manufacturing of parts; it turned over the design, the engineering, and the manufacture of entire sections of the plane to some fifty “strategic partners.” Boeing itself ended up building less than forty per cent of the plane.

This strategy was trumpeted as a reinvention of manufacturing. But while the finance guys loved it—since it meant that Boeing had to put up less money—it was a huge headache for the engineers. In a fascinating study of the process, two U.C.L.A. researchers, Christopher Tang and Joshua Zimmerman, show how challenging it was for Boeing to work with fifty different partners. The more complex a supply chain, the more chances there are for something to go wrong, and Boeing had far less control than it would have if more of the operation had been in-house. Delays became endemic, and, instead of costing less, the project went billions over budget. In 2011, Jim Albaugh, who took over the program in 2009, said, “We spent a lot more money in trying to recover than we ever would have spent if we’d tried to keep the key technologies closer to home.” And the missed deadlines created other issues. Determined to get the Dreamliners to customers quickly, Boeing built many of them while still waiting for the F.A.A. to certify the plane to fly; then it had to go back and retrofit the planes in line with the F.A.A.’s requirements. “If the saying is check twice and build once, this was more like build twice and check once,” Aboulafia said to me.
The situation at Boeing isn't as bad as it could be. It is essentially an oligopoly, along with Airbus, in the large passenger aircraft market (as well as in some military aerospace markets) and hence will survive through turbulence. But I suspect it will be a different organization after all this is said and done: it may actually may end up building more than 50% of a plane by itself!

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