Tuesday, February 28, 2017 0 comments ++[ CLICK TO COMMENT ]++

Charlie Munger post-Daily Journal Feb 2017 meeting Q&A

(update Mar 5: Replaced the video with the list version which lists all the videos and added a URL link in case embedded video doesn't work. Actual video is the same but now it is easier to navigate to the other videos.)

Here is a good Q&A with Charlie Munger that occurred after the Daily Journal meeting (refer to post from prior week for that). I like Munger because he is opinionated and speaks his mind, and these set of videos are great. I think there is more to be learned from these videos than the main meeting video. I am always impressed with how much knowledge Munger has. I'm amazed at how much he knows about topics that has little to do with him and doesn't invest in.

Thanks to J. Bryan Scott for posting these videos. First few videos are short but they get longer afterwards.

Monday, February 27, 2017 0 comments ++[ CLICK TO COMMENT ]++

Purchase (Special Situation): Manitoba Telecom Services

Talk about picking up pennies in front of a steamroller...

The market becomes less and less attractive by the day so I'm mostly just doing research on various industries/stocks and tracking numerous special situations (mostly risk arbitrage). Even investing in mergers has become risky in my eyes because I don't have a good feeling for the new US administration. There is elevated risk of the US government blocking deals (particularly CFIUS blocking foreign deals).

I don't recommend this to anyone who doesn't invest in Canadian dollars since the returns very miniscule compared to potential currency movements. So, unless you invest directly in C$ or can hedge the fx rate, this isn't a very safe deal.

Anyway, I decided to take a position in the Manitoba Telecom Services (TSX: MBT) buyout by BCE (TSX: BCE). It's a cash and stock deal with maximum cash limit (prorated) so it complicates matters. The return is very tiny but it closes within a month. I have typically not done deals with such tiny returns so not really sure if I'm going down the wrong path here.

Deal details

BCE has agreed to buy MBT and MBT shareholders can receive: (A) $40 cash, or (B) cash+share.

Full deal is prorated so that BCE only pays a maximum of 45% in cash. This means that if all MBT shareholders choose cash, only 45% of the payment with be cash, with the remaining in BCE stock (0.6756 BCE share for each MBT share). But if only some MBT shareholders accept cash then the payment can be full cash ($40). Professional investors will have difficulty hedging this transaction since you don't know which outcome is going to materialize (although I think it is highly probable that you will end up with the cash & share option).

Shareholder votes and regulatory approvals have been granted. I consider there to be zero risk of deal not being closed. The last major regulatory approval was granted on February 15, 2017 and parties expect transaction to close by March 17, 2017.  I wasn't following this closely enough but it would have been better to invest before the final regulatory approval given how the spread narrowed significantly after that.

Current Prices (Feb 27 2017)
 $    39.17 MBT
 $    57.76 BCE

A. All cash
$40     best case all cash 2.1%
B. Cash+Stock 
0.6756     ratio
worst case if only 45% cash (if less MBT shareholders take BCE shares, can receive more cash)
 $    18.00 45% cash
 $    21.46 55% BCE
 $    39.46 0.7%

So, in the best case, where you receive 100% cash, you are looking at a return of 2.1%.
Worst case, with the proration, is 0.7% based on my calculations.

If you end up receiving BCE stock, there is risk that your return can be worse if BCE share price falls. I am not hedging by shorting BCE stock here so I'm fully exposed to potential downside in BCE shares. (Professional arbitrageurs will short BCE stock here but the possibility of cash payment makes it a bit difficult to fully hedge.)

I think 2.1% return is very attractive given the very short holding period. Even the 0.7% seems ok to me for the less than 1 month holding period. The question is whether it is worth it if BCE shares fall.

The way I look at it, I'm comfortable holding BCE shares if I end up with them. BCE is a well-run low-growth telecom/media oligopoly in Canada. Here are some key points I wrote down when I started following this deal (not necessarily from today's price): P/E 18, net profit margin 12%, ROE 22%, div 4.5%+; wide moat, low/no-growth, high ROE. I  think a P/E of 15 is more reasonable in the long-run for BCE, so this means it is probably overvalued by 20% and can easily fall by that much. This is not a bad company to hold long-term and should do ok even in bear markets or recessions (share price will obviously fall but don't think intrinsic value will decline).

Last time I got involved in a BCE special situation (LBO, in 2007 I think), the deal collapsed and I ended up losing some money. I sold the stock after deal failed but if I had kept it for an year, I would have broken even. Not saying the stock will recover the same way if it collapses, but one thing about stable high ROE companies is that they will continuously compound and make up a lot of the lost ground.

Purchase Price (TSX: MBT): $39.16

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Sunday, February 26, 2017 0 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle CCXV

American Consumer Debt

Since consumer spending is a huge driver of American GDP (almost 70% of GDP), it's a big deal for any investor. The same isn't true for some other countries where consumers aren't a big part of the GDP. Consumer spending is heavily influenced by consumer debt and here is how the picture stands right now.

As can be seen from the very good Bloomberg chart (original source is New York FedRes I think), consumer debt shot up to around $13 trillion in 2008. After the financial crisis, debt declined, as mortgages shrunk. But as the economy improved in the last few years, it looks like debt has been increasing and is near the pre-crisis levels.

(source: "Car Loans on the Rise as U.S. Households Borrow More: Chart," Anne Riley Moffat‎, Bloomberg, February 17, 2017)

Not easy to tell from the chart but the big changes in my opinion are the increased auto loan and student loan portions. Auto loans apparently stand at the highest amount in more than 17 years (based on another article I read recently). Anyone investing in the auto sector should be careful. There is no doubt that auto loans should be higher now than, say, in 2000, because the economy is bigger and population is higher. However, it's not clear how much of it is unsustainable. The market is already pricing some of this in--P/E ratios of many car companies are at or less than 10 vs S&P 500 at more than 25--but you should still be cautious.

Student loans are much bigger (at least 2x more) than what it was a decade ago. More of the population is pursuing higher education so it should be higher. However, it seems far larger than what it should be, and I suspect it is unsustainable (given that median household income has not increased materially for almost 20 years). Having said that, we probably won't see as much adverse outcome from student loan defaults since it is largely socialized (i.e. government subsidized and government will probably write off a chunk of the student loans).

As for credit card debt, it looks similar to what it was for the last few decades. In fact, it looks a little bit smaller than 2008. Not sure what happens if interest rates rise but we shall see.

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Sunday, February 19, 2017 0 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle CCXIV

Emerging Market Valuations & Returns

Most people already know this but emerging markets tend to have lower valuations and produce higher returns. The difficulty is that emerging markets have much higher valuations, with a few countries/regions experiencing catastrophic declines. If you can avoid those blow-ups then emerging market generally offer higher return potential.

Having said all that, we had a massive global trade boom, with massive growth in developing countries--right from Brazil to China to Vietnam. It's not clear to me if we are entering a protectionist era where emerging markets, who tend to be exporters and hence will get hit asymmetrically during any trade war, will suffer for a long period, maybe a decade.

(source: "Trump Puts U.S. Valuation Premium at Risk," Nir Kaissar, Bloomberg, February 14, 2017)

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Saturday, February 18, 2017 0 comments ++[ CLICK TO COMMENT ]++

Charlie Munger's Daily Journal February 2017 Annual Meeting

I don't really agree with many of Charlie Munger's political, and some business and economic, views, but the thing I love about him is that he is outspoken and doesn't care what people think of him. Munger hosted the 2017 Daily Journal annual meetings and here is a video someone shot, along with a transcript.

The last part of the transcript file contains 2 articles written by Charlie Munger (possibly never published anywhere?) starting on PDF page 11. I haven't read them yet but if I find it interesting, I'll blog about it. I wish someone close to Charlie Munger or with access to his files publishes similar stuff that he wrote (especially when he was more active and at his prime in the 70's/80's) and is probably lost to time. It's going to be hard to get access or permissions to his writings once he isn't around (it'll be hard for his family or estate to tell what is confidential and sensitive and what's not). Some of Munger's thoughts are very insightful and his article/speech(?), Art of Stockpicking, is one of the best investment/business articles I have ever read (it changed my perspective of the stock market and I came to understand it as a pari-mutuel betting system). If you have never read the Art of Stockpicking, I suggest you go and download that -- read that instead of my blog!

Other than the 2 articles, I don't think there was anything radically insightful from Munger's comments, but if you haven't heard him in a while, like I am who was away from investing for a few years, it is a good listen/read. As usual, he didn't comment much on specific stocks and most of it was broad comments. Here are some things I noticed:

  • He mentioned the Daily Journal is transforming into a software business which is a tough battle with long sales cycles--may not see profit for as long as 5 years--but he is ok with investing for the long run
  • He did suggest that Berkshire Hathaway invested in airlines because the structure of the industry has improved (he likened it to railroads which were terrible for decades but then economics improved in the last decade).
  • He is bullish on China and not India--I share the same view but am medium-term bearish on China due to credit bubble--and mentioned that some established, strong, Chinese companies are trading with low valuations. I suspect he is talking about the Chinese SOEs (state-owned enterprises) which are some of the largest companies in the world and typically trade at somewhat low P/Es. For example, Sinopec trades at a P/E of 8 vs Valero at 14; China Mobile P/E is 14 vs AT&T at 18; etc (these are my quick semi-random and companies are not necessarily comparable but the Chinese companies have far higher growth rates). Obviously market is discounting China due to its capital controls, dubious accounting--one joke is that there are 3 accounting books: one for the tax authorities, one for the shareholders/public, one that is the truth--weak shareholder rights, and less efficient companies. But in the long run, I would agree that Chinese companies provide greater investment potential. Chinese companies that are run like American companies are good candidates. Maybe something like BYD is like that--I don't know.
  • Munger had some comments on the rising popularity of index funds. He said it made it tough for the investment industry but didn't think it was an issue in general. However, he seemed to suggest that index funds could cause bubbles in certain narrow areas: as index funds buy more, they drive up the price and as more people pile into the funds, price will rise, and so on (he didn't seem to think this is an issue with broad large-cap index like S&P 500). He gave the Nifty-Fifty bubble example saying how everyone wanted to be in a select few top/best stocks and kept driving up the price to something like P/E of 50.
  • Munger reiterated his preference for extremely concentrated portfolios. I think he was saying the vast majority of his net worth (over $1 billion) is tied up in just 3 positions: Berkshire Hathaway, Costco, and Li Lu's fund. He doesn't think any of them will go to zero and thinks it's almost impossible for all three to go to zero. He did suggest one needs to be able to tolerate temporary declines of 50% (as mentioned by one of the attendees, his portfolio was down around 50% during the brutal 1974 bear market). His view is that it only takes a few good choices to be successful and make it in life. Munger pointed out that if you had a rich uncle who offered you a job/ownership in his business, you would go and work for him, and be basically betting 100% on your uncle's business. He also speculated that Berkshire Hathaway only made around 100 good decisions over 50 years, or around 2 good decisions per year. His point is that you don't need to make many good decisions (especially with an even smaller portfolio) and when you see a great opportunity, you invest heavily. This is very hard to do and if you don't know what you are doing--maybe for people like me--you could lose a lot. Yet, Munger's view is consistent with the pari-mutuel betting system approach where you only bet when odds are in your favour and to do so heavily if the odds are really good.

I. 2017 Daily Journal Annul Meeting transcript by Adam Blum (DropBox PDF)
II. Charlie Munger Daily Journal 2017 Video by Laixin Wei (YouTube link)

Thanks to Adam Blum for providing the transcript of the event, and Laixin Wei for the YouTube video. (h/t @MohnishPabrai on Twitter for mentioning them https://twitter.com/MohnishPabrai)

This could be one of the last times we hear much from Charlie Munger so check it out while he remarks about current events...

Sunday, February 12, 2017 0 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle CCXIII

Wage Gap Continues to Widen in USA
(and likely other countries too)

(source: "U.S. Wage Disparity Took Another Turn for the Worse Last Year," Sho Chandra and Jordan Yadoo, Bloomberg, January 26, 2017)

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Sunday, February 5, 2017 0 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle CCXII

Potential Impact of US Border Tax

Bloomberg recently had an article quoting Deutsche Bank report on the impact of the proposed American border tax--there are several ones being floated around but this report seems to assume 20% tax, which is closer to the Republican House position--and there was a nice graphic of the impact on various countries. The biggest negative impact is forecast to be in Mexico, Vietnam, and Canada. All three will likely enter a recession immediately (assuming retaliatory taxes offsetting the GDP contraction aren't enacted). For some reason the data doesn't seem to include China, which will probably be the #2 loser from such a tax.

(source: "Here's a Glimpse of the Global Trade Carnage From a U.S. Border Tax," Jeff Black, Bloomberg, February 1, 2017)

When we are closer to the imposition of the US border tax, which seems almost certain under the Trump administration, I'll write a more detailed post but here are some quick thoughts. The last time there was a big global trade boom followed by big trade wars was the 1930's. At that time, countries running trade surpluses (like USA, which occupied a place similar to China now), suffered a lot, while the trade deficit countries (such as the UK, which was similar to USA now) did not suffer much. In the present, USA, which has big trade deficit, will likely not suffer as much as others. But the situation is very different now (vs 1930s) and I wonder how things will play out.

In particular, we are not on a gold standard (or any quasi-gold standard) or a fixed exchange rate. Unlike the 1930's, most currencies (except something like Chinese renminbi or Indian rupee) are freely convertible. It is quite possible that an adjustment may happen through the currency and the competitive position--basically comparative advantage of one country over another--may end up being maintained, resulting in trade relationship continuing (i.e. imports still flooding into USA in manufactured electronic goods, clothing, etc). Indeed, already, the Mexico peso has fallen around 10% since the Trump election--it fell a lot the prior few years due to the collapse in oil prices--and is down something like 40% over the last 3 years. Even with a border tax, Mexico might be competitive--their labour definitely will be.

It'll be interesting to see how a trade war plays out. As a free-market proponent, I'm against trade barriers but Trump and his associates are not fans of free markets.

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Saturday, February 4, 2017 0 comments ++[ CLICK TO COMMENT ]++

Articles for the Week Ending February 4, 2017

Certainly an interesting start to the year, with an unusual US presidency, FedRes tightening underway, US$ strengthening, and Chinese capital outflows still continuing (or at least seems that way). Some governments appear to be becoming nationalist and protectionist and we may be seeing the end of the global trade boom. I need to think about this more but it sort of resembles the change from 1910s/1920s to 1930s. Things aren't exactly the same but that period was also characterized by a trade boom--countries were different and Asia/Latin America didn't play much of a role--followed by extreme retrenching from global trade.

I also have a feeling that labour (workers) may do better over the next decade while capital (investors) don't do as well (relatively speaking). Basically the opposite of the last decade (if you are interested in this thinking, read the Jeremy Grantham GMO letter). Note that everything I say is from a developed country (USA/Canada/Europe/etc) point of view (situation is very different in developing countries).

Anyway, here are some articles over the last month or so that you may find interesting (not in any order):

  • (Highly Recommended) Importance of ROIC: 'Reinvestment' vs 'Legacy' Moats (article by Connor Leonard; John Huber via GuruFocus): Good comparison of a company that is able to reinvest at high ROIC vs one that doesn't.
  • "Is Emirates Airline Running Out of Sky?" (Matthew Campbell for BloombergBusinessweek, January 5, 2017): I haven't read this article fully but seems an interesting read. On another note, some US airlines are lobbying Trump administration to ban the Middle-Eastern airlines on the grounds they are subsidized. Whatever it may be, it's truly remarkable that Emirates has come out of nowhere to be one of the top airlines in the world.
  • "Tesla Flips the Switch on the Gigafactory" (Tom Randall, Bloomberg, January 4, 2017): Important event for Tesla and may end up being one the key events in the history of the electric vehicle (EV) industry. If EVs are to take off, battery prices need to drop significantly--$10,000+ of the cost of an EV can be the battery alone--and it remains to be seen if Tesla's massive factory (along with its partners like Panasonic) can lower the cost of batteries.
  • H&M: Stuck Between a Rock and a Hard Place? (Hurricane Capital, Jan 28, 2017): Very good evaluation of the retailer, H&M. I don't know much about the company as an investment but I do like the store as a customer. I think retailers are outside my circle of competence--although I AM looking at Staples (SPLS) and Whole Foods (WFM)--and I don't really understand them very well. All I know is that many chains come and go and the ones that grow to national level seem to last about 30 years in North America (maybe it is a generational thing). H&M's P/E seems high (20+) and its operating margins have been declining for several years (always risky) but its balance sheet is strong (no debt), big chunk (almost 38%) owned by founders (they will be more careful than random outside management), and is still a top global brand.
  • "Why Trump Tariffs on Mexican Cars Probably Won’t Stop Job Flight" (David Welch and Dave Merrill for Bloomberg, January 4, 2017): Good, quick, summary of the auto manufacturing situation. It doesn't seem like a tariff on Mexican car production will level the competitiveness of American car production as much as some (particularly in the Trump administration) imagine. It will definitely reduce production and hurt Mexico in the near-term but when it comes to the long run, as economists, perhaps going all the way back to Adam Smith, might say, comparative advantages are hard to overcome via tariffs.
  • "Who Will Pay for San Francisco's $750 Million Tilting Tower?" (James Tarmy and Kartikay Mehrotra, bloomberg, February 1, 2017): Sad story for the buyers of condominiums in a recently-built skyscraper in San Francisco that is tilting over :(
  • "“Becoming Warren Buffett,” The Man, Not the Investor" (James Surowiecki, The New Yorker, January 31, 2017): HBO produced a new documentary on Warren Buffett. Haven't seen it but it seems to be more of a recap of his life.
  • (Recommended) "Immigration Orders and Odd Tenders" (Matt Levine, Bloomberg, Jan 30 2017): "If the president can, without consulting the courts or Congress, banish U.S. lawful permanent residents, then he can do anything. If there is no rule of law for some people, there is no rule of law for anyone. The reason the U.S. is a good place to do business is that, for the last 228 years, it has built a firm foundation on the rule of law. It almost undid that in a weekend. That's bad for business." Very good opinion piece by Matt Levine on the Trump immigration order. Not sure if it is incompetence or if they purposely did some of the things they did but I suspect we are going to see even more draconian measures in the future. Biggest future action I can think of is Trump's idea of confiscating Mexicans' (but it can apply to anyone) own money they send back home in order to pay for a wall. Talk about government intrusion into one's personal property (although US laws don't necessarily have to apply to migrants)--anyway we shall see what actually happens. 
  • GMO Quarterly Letter - 4Q 2016 (click here for link to main site): Jeremy Grantham suggests the rise of Trump had a lot to do with rising inequality.
  • (Recommended) "The Real Legacy of Steve Jobs" (Sue Halpern, New York Review of Books, Feb 11 2016)(review of "Steve Jobs: The Man in the Machine" film directed by Alex Gibney; "Steve Jobs" film directed by Danny Boyle; "Becoming Steve Jobs: The Evolution of a Reckless Upstart into a Visionary Leader" by Brent Schlender and Rick Tetzeli"). New York Review of Books is sort of radical and left-leaning but some of their articles are amazing (not this one though). Not sure Steve Jobs fans will agree with everything said here but it's a good read. The documentary, "Steve Jobs: The Main the Machine," is quite good in portraying the negative aspects of Steve Jobs and is more balanced than many Steve Jobs films I have seen. I would recommend that. Another unrelated documentary that shows Steve Jobs' brilliance and his vision of the future is the raw 1990's documentary-interview, "Steve Jobs: The Lost Interview." Most of Steve Jobs' interviews are promotional or attempts to sell his products but this one is not. If you are into technology and want to see why many say he was waaayyyy ahead of the time, check out that interview. Both are on Netflix Canada presently.
  • (Highly Recommended) A Half-Dozen Ways to Look at the Unit Economics of a Business (Tren Griffin, 25iq.com, Dec 31, 2016): "McCaw Cellular Communications sold to AT&T for $12.6 billion in September 1994. And yet the business did not show an accounting profit on its income statement until the second quarter of that year (after the deal was announced on August 17, 1993). The McCaw  Cellular example shows that you can create a tremendous amount of value for shareholders without showing any profit on an income statement. Or not...Amazon and Netflix are examples of the same value creation phenomenon as are many businesses that John Malone has created over the years. This post will try to help people understand why this is true." Very good post on how companies that show losses or very low profits can still be creating value for shareholders. John Malone and Jeff Bezos famous for doing this.
  • "Is the World Big Enough for Huawei?" (Scott Cendrowski, Fortune, Feb 1, 2017): Many may remember Huawei for its dominance in networking equipment but now it has risen to be one of the top mobile phone manufacturers.
  • (Highly Recommended) "The Best Advice I Ever Got" (Fortune, March 21 2005 archive article): From Fortune's archives, here is a gem. Short responses from many successful individuals such as Warren Buffett, Richard Branson (Virgin), Sumner Redstone (Viacom), Howard Schultz (Starbucks), Peter Drucker (great management strategist), and so on. A very good collection of diverse thoughts. Some of them are obvious whereas some of them probably don't apply to you but I always find simple wisdom can go a long way. I said this in the early days of this blog and I'll say it again: most people reading this blog won't be good at investing--probability of outperforming is slim--and many will give up; but even if you don't go anywhere in investing, I hope you learn something that improves your career or family life or entrepreneurship or something...

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