Some links

Market Folly with notes on all pitches from the “Invest for Kids” conference

You still believe that Operating Cash Flows are a better indicator than earnings ? Well, maybe not at Valeant.

Whole Foods is having a pretty hard time right now, maybe it’s worth having a closer look into ?

Wexboy likes Finish company Saga Furs

A rare glimpse into Baupost Group, especially they way the look at cash (H/T Valueinvestingworld)

Carl Icahn tells his story (8 minute video)

Adjusted EBITDA conquers the world or at least the S&P 500…..

Book review: “Damn Right: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger” – Janet Lowe

The success story of Berkshire for a long time has focused only on Warren Buffett, the front man with the knack of explaining even the most complicated issues in a funny and folksy manner. Charlie Munger was for a long time only considered to be the “funny side-kick” who seems to be asleep most of the time during Berkshire’s annual share holder meeting.

This changed somehow in the last few years, among them the excellent “Poor Charlie’s Almanack” from Peter Kaufmann and there seem to be a couple of Charlie Munger books already released or in the pipeline.

So I was pretty surprised that there is a much older book about Charlie than the others. “Damn Right” was written and released in 2000 and is based on many interviews, some with Charlie Munger directly but also with his family and former colleagues and friends. 2000 was a year where many people thought that Berkshire had lost it, maybe one reason why the book didn’t become more well-known.

The book starts slowly with some stories on his parents and grand parents but gets more interesting pretty quickly. Munger started early on as a lawyer but discovered that he can make more money by being a real estate developer and started buying plots, building and selling apartments and houses. He then started to buy parts of or whole small companies. For a very long time he did so as a pure “Graham investor”, picking up bargains or even net nets.

Munger then started Munger Wheeler in the 60ies but was already discussing investment ideas with Buffett over the phone. He also invested together with Buffett and another Californian investor and friend Rick Guierin (One of Buffett’s “Superinvestors”) into the same companies sometimes even closely held ones. The most famous common acquisition of this time was the Blue Stamp company.

Wheeler & Munger performed greatly from 1962 to 1969 but did badly the next few years when Warren Buffett hat already closed his partnership. Munger dissolved the partnership in 1976 but still had a track record of making ~24% p.a.against 6% p.a. fr the Dow Jones.

The changing point in his history is clearly the purchase of See’s where they paid, for the first time in their history, above book value for a company. Munger is quoted that they would not have bought Coke if they hadn’t started with See’s.

After that the book covers some of the major Berkshire stories but with an interesting perspective. For me the most surprising facts from the book were:

– Munger and Buffett were fined by the SEC in 1974 (WESCO)
– Munger’s Partner had the original See’s Candy idea
– Munger was a “Graham style investor” for a very long time
– there were really big draw downs in the Munger partnership

Interestingly enough, the book says that already in the late 90ies, Munger wasn’t involved that actively in Berkshire anymore. For me the question always remains: Would Buffett had been as succesful without meeting Munger or would he would have become “just another succesful” investor ? Who knows.

Overall the book is definitely a good read for any value investor and tells most of the Berkshire story from a slightly different perspective. HIGHLY RECOMMENDED.

Fossil (FOSL) – Share buy backs & Management (part 2)

This is a follow-up to my first post on Fossil. The short summary:

Fossil has a good but not great business with some issues, among others the potential success of smart watches. The reason to dig deeper was the unusual combination of CEO/owner with zero salary and capital allocation with a focus on share buy backs.

Share buy backs

There is a great collection of articles on Teledyne and Henry Singleton “available at CS Investing. One absolute gem inside is a classification of stock buy backs in order of usefulness to shareholders from Hedge Fund Honcho Leon Cooperman:

Read more

Banking update: Handelsbanken, Lloyds Banking & Gronlandsbanken (sale)

Although I usually don’t care that much about quarterly earnings, let’s start with two interesting ones:


Handelsbanken is on my watch list, I consider them as one of the best bank franchises globally but still a little bit too expensive. Officially, “Mr. Market” was disappointed because earnings were below expectations. The stock dropped around 8% on that day:

Read more

Globo – lessons learned: Don’t outsource your research

Over the last few weeks, I discussed the Globo Plc case quite extensively with other investors. I think many people were attracted to it because it looked so cheap despite having a “sexy business”. Sometimes I was succesful in my efforts to talk people out of it, sometimes not.

And just to be clear: I don’t think that investors who owned Globo shares are stupid. As it seems for now, Globo has been a “pretty well-managed” fraud with a true core and very good actors as management. Everyone makes mistakes and the only sin is not to learn from them for the future.

What I found interesting is that some arguments in my discussions tend to show up almost each and every time in those situations, for instance also in the German-Chinese fraud cases I had written about. Most of the arguments circle around certain facts that because x, y or z is involved it cannot be a fraud, which often turns out to be not the case. So without wanting to insult anyone who I talked to or trying to be the “head teacher”, I just wanted to list some of the arguments I encountered multiple times in those discussions. Maybe they help in the next case, maybe not.

1. Famous investor xyz has a big position in the stock and they are well-known for in-depth due diligence and direct contact to managemnt

Everyone makes mistakes, even the most famous investors. Don’t outsource your due diligence to famous investors. You never know if the “famous investor” has deeply looked into the stock or just a (soon to be fired) junior associate.

2. I have actually talked to famous investor xyz with the big position about that stock and they seem to be really sure about it

Well, what would you expect if you talk to an investor who has a large position ? Will he tell you “I am not sure anymore and I will start selling next week” ? Most probably not. This is the famous “Don’t ask the barber if you need a haircut” situation. In situations like this it is much more helpful to talk with investors who don’t own the stock or who are even short. Everything else is just playing into the “Confirmation Bias” behaviour.

3. But they have an (well-known) audit company who checks the accounts

Many investors seem not to be aware what auditors actually do. Auditors are not responsible to uncover fraud. They are only responsible for checking the documents provided by the company for consistency. It is not the responsibility of the auditors to detect a “consistent fraud”. Don’t outsource due diligence to auditors, they don’t work for investors, only for the management of the company. Auditors get paid for the fees they generate, not for being right or wrong.

4. Reputable bank ABC has lent them money. They would not do this if there would be something wrong

Well, if this would be a general rule, we would have not had a financial crisis. In Globo’s case, significant “upfront fees” were involved with the loans. Anyone who has contacts with banks knows that once there are “juicy fees”, lending standards often become secondary. In most of the German-Chinese frauds, reputable banks extended loans as well. As with the famous investors, don’t outsource your research to others especially not banks !!

5. Reputable bank ABC has a “buy” rating on the stock

Sell side research is really the least reliable source of true information in capital markets. Most of the research is still driven by a desire to get business and most sell side researchers who are really good don’t work there very long.

6. I have spoken to management directly and they explained me this and that. They were really nice guys.

My experience is the following: If you really have large-scale fraud, the people running the scheme are often brilliant and charismatic. Otherwise they would have been detected much earlier. Direct involvement with those persons often doesn’t help, in contrast, one gets entangled by their “charisma” and accepts things which are simply not acceptable seen from a distance. Bernie Madoff seems to have been a very charming guy when you met him privately. The longer the fraud works, the more confident people get. I have read lot of books on frauds and in quite a lot of cases, the fraudsters at some point started to believe their own lies which made them even more convincing. At remember: As with driving a car, on average we are only average judges of people and character.

7. I have spoken to management and they gave me additional reassuring info which is not in the official reports

Well, this is a big RED FLAG. Management disclosing material non-public info to investors in “one-on-ones” is in my opinion a big problem. Any reputable management would never do this. As the recipient of this information, you feel privileged but on the other side: If they cheat the other investors by selectively disclosing stuff to you, then it is not a big step to cheat everyone.

8. They account aggressively because everyone in Tech does it

Well, no. Not everyone accounts aggressively, even within tech. As a value investor, the trick is to find those who run their business conservatively and stay away from aggressive ones.

9. It can’t be a fraud. I have seen the product, it is for real

Many frauds have a “real” core. Enron had some divisions which made money, even Bernie Madoff ran a “real” brokerage business as a front. Rarely, everything is totally made up. The question is not “do they have a real product” but “Do they have real sales and real profits”.

10. The company is so cheap, even when this one thing turns out to be fraud, the stock is still a bargain

Charlie Munger said something like this: “Cockroaches rarely travel alone”. Which means if there is one big problem that you can see, there are often many more problems that you don’t see. Once there is serious doubt with regard to integrity of the management, there is no margin of safety anymore.

11. They are financially unsophisticated, that’s why they did this and that one normally wouldn’t do

In Globo’s case it was the super-expensive loan and the potential bond, in the Chinese cases it was why they were selling new shares at a P/E of 4 or lower. When it comes to loans and new shares, one can be pretty sure that management is quite sophisticated. Especially when a company does a lot of M&A, uses a complex structure to avoid taxes and claims to do things like cash pooling, then unsophistication is a pretty unprobable explanation for strange and unlogical things. Underestimating the sophistication of a potential fraudster is not very sophisticated from an investor’s perspective.


Most of the prinicipal issues which I see in cases like Globo can be summarized in 3 major points:

1. Don’t outsource due dilligence to 3rd parties (auditors, banks, other investors)
2. Don’t believe in what management says, especially when it is on a “privileged” basis.
3. Don’t underestimate potential fraudsters.

The best strategy to hopefully avoid such cases in my opinion is to fight the Confirmation Bias and search for opposing opinions wherever you can find them.

Globo – without further comments

From Globo’s website:



(“Globo” or “the Group”)

Company Statement

Globo plc issues the following statement:

On Friday 23 October 2015 the Board of Directors of the Group became aware of a report published by Quintessential Capital Management (“QCM”).

Following the announcement by the Company on the morning of Friday 23 October 2015, an emergency Board meeting was convened as soon as practicable for Saturday 24 October 2015 to discuss the allegations in the report and to ascertain the actions that would be required to resolve the matter. It was intended that an appropriate independent forensic accounting team be appointed to investigate the claims.

However, at the Board meeting, Costis Papadimitrakopoulos the CEO of the Group brought to the attention of the Board certain matters regarding the falsification of data and the misrepresentation of the Company’s financial situation, and offered his resignation, as did Dimitris Gryparis the CFO of the Group.

Following the meeting and receipt of legal advice, a committee of the board was set up, comprising the non-executive Directors only (the “Committee”). The Committee has accepted the resignations of Costis Papadimitrakopoulos and Dimitris Gryparis from the Company with immediate effect. Gerasimos (Makis) Bonanos (the COO) has been suspended from his duties with the Company also with immediate effect, pending the outcome of appropriate investigations. All of the executive directors have agreed to make themselves available and fully co-operate with any investigations.

The Committee has initiated discussions with appropriate advisers in relation to the next steps and to ascertain the true financial position of the Company. In addition, the Committee has asked the Company’s lawyers to notify the matter to the appropriate authorities and the Committee has informed the Company’s principal bankers.

Further announcements will be made in due course. In the meantime the Company’s shares will remain suspended from trading as per the dealing notice on Friday 23 October 2015.

Edit: It keeps getting better:

Globo also said that Papadimitrakopoulos had informed the company that up to last Thursday he has sold 42.05 million shares in the company, and pledged 10 million shares under a personal loan agreement with Lantau Holdings Ltd – a loan that will default at close of business Monday due to two consecutive days of the suspension of the company’s shares from trading.

At Globo’s last quoted price before suspension of 29.45 pence, the share sale would amount to GBP11.9 million.

This means Papadimitrakopoulos’ holding in the company has been reduced from 18.67%, or 69.78 million shares, to 7.42%, or 27.73 million shares. Globo noted that it has requested additional details about these dealings, and does not yet “possess all relevant information about their timing and nature.” It will make a further announcement once this information is received.

Some links

A bad week for Globo: Bond issuance cancelled, detailed short thesis published (“Greek Parmalat), shares suspended

MUST WATCH: Wiliam Thorndike (“The Outsiders”) gives a “Google Talk” (Note to myself: Check Colfax, Arch Re, Crown Castle)

Damodaran looks at the Beer-Mega-Merger. A very good template for how to look at mergers / M&A.

Interesting look at “FitBits”, a potential “Watch killer”

Einhorn’s Greenlight Q3 2015 comment (Defends SUNE, bought Michael Kors, sold Citizen)

Why driverless Uber cars might not be the individual car killers generally thought

John Hempton (Bronte) scores big against Valeant plus of course the Citron Report on Valeant

8 reasons why no one cares for earnings anymore these day…

Finally Ben from WertArt on Rolls Royce and “investor hearding”

« Older Entries Recent Entries »