Wednesday, March 30, 2011 2 comments ++[ CLICK TO COMMENT ]++

David Sokol, a driven executive

The Wall Street Journal has some notes on Daid Sokol's character:

The 54-year-old Mr. Sokol and Mr. Buffett have much in common. Both men live in Omaha, worked as newspaper-delivery boys and grocery-store employees. Early in his career, Mr. Buffett succeeded with a famed private investment partnership. Mr. Sokol was the chief of an energy company while he was still in his twenties.

But Mr. Sokol's hard-charging personality is a contrast to the folksy popular image of his boss. Mr. Sokol, chairman of Berkshire's MidAmerican Energy Holdings Co. utility operation and CEO of jet-rental company NetJets Inc. until he resigned late Monday in a letter to Mr. Buffett, was known for coming into the office at 6 a.m. and seldom taking vacations.

In a self-published 2007 book on management style, "Pleased But Not Satisfied," Mr. Sokol attributed his relentless work to a "driving fear of failure."

"Early in my career, I recognized that I was not always the smartest individual in the groups that I worked in," he wrote. "I would come in earlier, stay later and do whatever I could to create a better result in whatever I was assigned to do."

Mr. Sokol has said that he kept a notebook updated at least once a month with the "successes or failures" of employees, who were then ranked "in the order in which I would terminate each member if I was forced to do so one at a time."

Mr. Sokol entered Mr. Buffett's world when MidAmerican shares tumbled after several geothermal projects in Indonesia were delayed amid the Asian currency crisis. Mr. Sokol began to weigh a management-led buyout, and broached through a go-between the idea of doing a deal with Berkshire.

Mr. Buffett offered to purchase a 75% stake in MidAmerican, then trading for about $27 a share, for $35 a share. But Mr. Sokol and other MidAmerican managers drove a hard bargain, rejecting the offer. After several weeks, Mr. Buffett finally agreed to raise his bid by five cents a share, according to a 2010 profile of Mr. Sokol in The Wall Street Journal.

Mr. Sokol has said that he kept a notebook updated at least once a month with the "successes or failures" of employees, who were then ranked "in the order in which I would terminate each member if I was forced to do so one at a time."

Mr. Sokol entered Mr. Buffett's world when MidAmerican shares tumbled after several geothermal projects in Indonesia were delayed amid the Asian currency crisis. Mr. Sokol began to weigh a management-led buyout, and broached through a go-between the idea of doing a deal with Berkshire.

Mr. Buffett offered to purchase a 75% stake in MidAmerican, then trading for about $27 a share, for $35 a share. But Mr. Sokol and other MidAmerican managers drove a hard bargain, rejecting the offer. After several weeks, Mr. Buffett finally agreed to raise his bid by five cents a share, according to a 2010 profile of Mr. Sokol in The Wall Street Journal.
Seems like a pretty aggressive manager... not my type of boss... driven to succeed but probably alienates many along the way.

One of the problems with Warren Buffett is that he under-pays workers. He doesn't pay them, whether low-level worker or senior management, much, but in return allows them greater freedom. David Sokol clearly suggests that he wasn't being compensated enough (at least that's my read based on his comments about trying to create a financial future for his dependents).

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Wow... David Sokol resigns from Berkshire Hathaway

A very surprising move:

Berkshire Hathaway Inc. said late Wednesday that David Sokol resigned after it came to light that he bought millions of dollars in Lubrizol Corp. shares shortly before urging Chairman Warren Buffett to buy the company.

Sokol was considered a possible successor to Berkshire Chairman Warren Buffett. Sokol is chairman of several Berkshire Hathaway subsidiaries.

Buffett said that he was surprised by Sokol’s decision and stressed in a statement that he and Sokol don’t consider the Lubrizol trades “unlawful.” Buffett said that Sokol told him that the trades were not a factor in his decision to resign.

“It is my goal to utilize the time remaining in my career to invest my family’s resources in such a way as to create enduring equity value,” Sokol wrote in his letter of resignation, according to the statement.

Sokol had talked about resigning twice before, most recently about two years ago, according to the statement.

Here is a letter by Warren Buffett on the matter.

The media focus will be on the insider transaction but that seems to have nothing to do with the resignation. It looks like David Sokol was thinking about this for a while. This is definitely a blow for Berkshire Hathaway, although the CEO position isn't as critical as the CIO role.

I didn't know Sokol wanted out and indicated he wanted to leave two years ago. A lot of Berkshire Hathaway shareholders and followers probably didn't know that either. David Sokol tackled a very hard problem at NetJets and I wonder if that drained everything from him.

Sunday, March 27, 2011 0 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle CXV

Panama Canal Expansion

(source: The Globe & Mail, published March 25, 2011)

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Tuesday, March 22, 2011 0 comments ++[ CLICK TO COMMENT ]++

A quick note about the evolution of the hotel industry

I always like reading about how certain industries evolved over time—partly to see how the business economics had changed over time; partly to see how life used to be. I ran across an interview with the founder of the Four Seasons hotel chain and he briefly touched on how the hotel industry has changed.

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Sunday, March 20, 2011 0 comments ++[ CLICK TO COMMENT ]++

Opinion: Should auditors provide interpretation in the accounting statements?

The way the accounting profession is going, it may very well end up like the legal profession. What I mean is that, once upon a time—say a hundread years ago—lawyers were respected individuals; Abraham Lincoln was one and many were held in high regard. Right now, the public has a very negative perception of lawyers. Some even claim they are not helping society very much. If you are a lawyer, you still earn above-average (relative to the whole economy) compensation but the respect you get is nothing like it used to be.

My feeling is that the accounting profession may head in that direction. There have been quite a number of crises of late—the recent accounting by financial firms and the fraud at companies like Enron and Worldcom a decade ago come to mind—which the auditors didn't catch. The auditors are well-paid professionals that earn above-average compensation but if they are incapable of flagging serious accounting problems then why are shareholders paying them so much?

Writing for Barron's, Jim McTague summarizes the investigation being undertaken by the Public Company Accounting Oversight Board with respect to the auditing of accounting statements of financial companies before the financial crisis. I found one of the suggestions interesting (bold by me):

The advisory group suggested enhancing auditor reports to provide investors with the equivalent of color commentary. For example, close to 80% of the survey respondents would like auditors to assess the accuracy of significant estimates and judgments by management; and 67% would like an auditor to discuss unusual transactions by management. One possible problem: Auditors, who are fond of boilerplate language, simply might add more boilerplate, says Anne Simpson, senior portfolio manager for global equities at Calpers.

Turner [forensic accountant Lynn Turner] said auditors would be flirting with obsolescence if they played boilerplate games. If data in SEC reports were electronically tagged, he asserted, computers could be programmed to analyze the adequacy of a filing firm's accounting at far less cost to the company than an auditing firm. And since auditors uncover few miscreants among managers, sites like WikiLeaks might usurp them as watchdogs.

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Barron's is bullish on Japan

Now that a major publication is bullish on Japan, I suspect it isn't much of a contrarian call anymore. In fact, it didn't seem like much of a contrarian call last week during the thick of the crisis. The article appears to be free so anyone interested in Japan should check it out. There is a list of stocks and ETFs (not shown below) that are mentioned in the article. Unless you are a macro investor, I would stay away from the ETFs and CEFs.

Many Japanese companies are worth more dead than alive... and that's the problem for investors.


Some articles to kill your time

Here are some articles I found interesting. Not in any order...

  • Disclosed Fairfax e-mails show short-seller attacks on company (The Globe & Mail): More details from the bizarre situation from a few years ago. It's amazing what some short-sellers will do. Daniel Loeb from Third Point doesn't come out looking good, that's for sure.
  • (Recommended) Jacob Wolinsky interviews Roger Lowenstein (Jacob Wolinsky for GuruFocus): Newbies may not be familiar with Roger Lowenstein but he is one of the top (business) authors of the last few decades. He is most famous for writing a biography of Warren Buffett.
  • (Recommended) The high-profit-margin risk (Vitaliy Katsenelson for GuruFocus): Many who are bearish, including me, are most concerned, not with earthquakes, wars, and the like, but, with the seemingly high profit margins of American companies. This article runs down the author's view of the risk.
  • WikiLeaks cables - US diplomats' view of BYD (Reuters via The Star): Leaked WikiLeaks cables suggest that US diplomats view BYD, the up-start Chinese car manufacturer, as nothing more than a company that copies others and skirts intellectual property rules. The diplomats and other (unaffiliated) analysts also think BYD will face legal problems when it tries entering foreign markets. It'll be interesting to see how Warren Buffett's investment pans out. Buffett is betting on the person and not necessarily on the auto business so there will be a lot of twists to this saga.
  • China's furious growth may mask dangers (Reuters): I'm still not sure what is real when it comes to China.
  • (Highly Recommended) Warren Buffett CNBC March 2, 2011 interview transcript (CNBC): Some of you may have already seen the videos from a few weeks ago but here is the sixty-page transcript from CNBC. You are looking at one of the last moments of the greatest investor of all time.
  • The danger with Buffett-Prime-type investing (Value Investment Institute): A brief overview of the differences between Graham-type investing and, what I call, Buffett-Prime-type investing. A lot of the risk with Buffett-Prime-type investing has to do with the evaluation of the "moat," which is a qualitative call (i.e. it's more an art than science).
  • (Recommended for anyone interested in Japan) The problem with Japanese companies (Value Investment Institute): Written earlier this year, this short article attests to the core reason why investing in Japan is risky. I, as well as others have alluded to the poor corporate governance and lack of shareholder activism in the past, but this article presents a case study of an actual company. Although this is just one company and I hate to stereotype, my feeling is that nearly all Japanese companies are like this one (except for multinationals with wide ownership like Toyota and the like). Be careful with Japanese companies.
  • (non-investing) "The 18-minute presentation" (The Globe & Mail): If you do a lot of presentations, either for work or some recreational/entertainment activity, here is a suggestion by an expert to cut down the presentation to 18 minutes.
  • (non-investing) What went wrong at the Japanese Fukushima Daiichi-1 nuclear power plant? (IEEE Spectrum): It's kind of ironic how the worry turned from the nuclear reactors to the spent-fuel rods. Who would have thought that the serious contamination risk was with the spent-fuel rods that aren't even in the main nuclear reactor vessel? Hopefully the nuclear power industry will learn from this and come up with safer designs... I also find it remarkable how much heat is produced even when the nuclear reactor is not in operation. All the plants were shut down yet all of our problems are with the "shut-off" rods not being cooled.

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Sunday Spectacle CXIV

Deleveraging in America

(source: "The Leveraging (and Deleveraging) of America," New York Times, March 18, 2011. Graphic accompanied the article, "A Shift in the Balance of Debt Obligations" by Floyd Norris)

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Wednesday, March 16, 2011 3 comments ++[ CLICK TO COMMENT ]++

Is Japan really cheap? Not quite... but there is huge divergence in specific stocks

(This post was written yesterday (Tuesday in Canada) and given the huge moves in the Japanese stocks in the last few days, some of the numbers may have changed quite a bit. Japan rallied strongly yesterday but I suspect it will sell off today given how the US markets were off today.)

If you're feeling brave, how do you fancy investing in the Japanese stock market right now?

The Tokyo Stock Exchange plunged more than 10 percent overnight. It has now fallen by a fifth in the three trading days since the earthquake first hit. This is the scariest stock market on Earth. It's one of the fastest market collapses in history, comparable to 1929 and 1987.

But Japan is still the world's third biggest economy - and a much better one than many imagine. (More on that below). So is this the time for the brave to start buying?
— Brett Arends
Writing for The Wall Street Journal, Brett Arends wonders if Japan is attractive—at least for those that can tolerate the risk.

The Nikkei has seen one of the biggest declines in history yet I feel the market isn't exactly cheap. The following weekly chart from shows the current state of affairs:

The decline is big, no doubt; but it's just a bit below what it was in mid-2010 and late-2009. Attractive? Perhaps. But not extremely cheap by any means.

Sunday, March 13, 2011 0 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle CXIII

Japan Devastated by Earthquake and Tsunami

(click through for more pics and videos)

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Saturday, March 12, 2011 0 comments ++[ CLICK TO COMMENT ]++

Raj Rajaratnam Galleon trial gets underway

(Correction to the last sentence made on April 12, 2011, 9:45PM EST)

Perhaps the biggest investment-related corporate trial in 20 years, the insider trading charges against Galleon hedge fund manager, Raj Rajaratnam, just got underway. The New York Times' DealBook has good coverage of the case and some of you may find it interesting. Unlike many other trials, prosecutors have lengthy recorded conversations and you can listen in on them. Although brief, it sort of gives an idea of what happens in some of these (trading-oriented) hedge funds.

Here are some articles you may find interesting:

Accused insider trading network (according to SEC)
Who will be called to the stand?
Recap of first day of the trial
Select audio recordings
Transcript of trader talk

One good thing about fundamental investing is that tips don't necessarily make or break you, since you are in it for the long run and short-term price movements are a small bump on a long-term chart. However, the difference between inside information and primary research is always a blur. Some value investors rely on primary information, such as those gained from talking with management or employees, and such investors need to be careful and ensure they are not trading on material information. Even if the information is accidentally disclosed by some other party, you will be liable if you act on it. [CORRECTION: John from Bronte Capital corrected me and said this statement is false (unless you pay for it or engage in some sexual conduct). Does anyone know what constitutes insider trading? Are you only be liable for insider trading if you pay for it or compensate the other person in some manner?]

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Sunday, March 6, 2011 4 comments ++[ CLICK TO COMMENT ]++

Nokia and its Risky Strategic Bet [VERY LONG]

(Source: Illustration by Peter Kraemer for Strategy+Business. "Strategic Bets," Strategy+Business, February 7, 2011)

There is a pertinent story about a man who was working on an oil platform in the North Sea. He woke up one night from a loud explosion, which suddenly set his entire oil platform on fire. In mere moments, he was surrounded by flames. Through the smoke and heat, he barely made his way out of the chaos to the platform's edge. When he looked down over the edge, all he could see were the dark, cold, foreboding Atlantic waters.

As the fire approached him, the man had mere seconds to react. He could stand on the platform, and inevitably be consumed by the burning flames. Or, he could plunge 30 meters in to the freezing waters. The man was standing upon a "burning platform," and he needed to make a choice.

He decided to jump. It was unexpected. In ordinary circumstances, the man would never consider plunging into icy waters. But these were not ordinary times - his platform was on fire. The man survived the fall and the waters. After he was rescued, he noted that a "burning platform" caused a radical change in his behaviour.

We too, are standing on a "burning platform," and we must decide how we are going to change our behaviour.
— Stephen Elop, "Burning platform" employee letter

I have only been seriously investing and following business news for a few years. I think I have just seen one of the biggest strategic bets in history. A $40 billion market-cap company has just abandoned its core strategy and embarked on something radically new. This company is none other than Nokia (NOK). The CEO of Nokia, Stephen Elop, is literally betting the whole company on a risky strategy. Nokia, for those not familiar, has decided to partner with Microsoft and abandon its internal mobile operating system and mobile services platform.

The move by Nokia reminds me of what IBM did in the 1990's. IBM, which was once a dominant computer hardware company radically changed its business in the mid-90's to that of a 'solutions' or services business. It worked for IBM; its market capitalization was three times higher by the late 90's (admittedly some of it was due to the TMT bubble) than it was at the beginning of the decade. Will it work for Nokia?


Sunday Spectacle CXII

US Ethnicity
(self-identified survey)
(source: 2000 US Census. Downloaded from

Canadian Ethnicity
(self-identified survey)
(source: 2006 Census. Downloaded from

The maps here are flawed but I thought I would show them anyway since they are interesting. Since the maps plot self-identified results, they may or may not be reflective of the truth. Furthermore, respondents can write in anything so ethnicities such as "American" and "Canadian" can mean anything.

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