value and opportunity

Disclosure: One of the authors did send my a copy for free.

This (German language) book is a very unique book. It only deals with so-called Hybrid bank capital which clearly could be called a “distressed asset class”. Hybrid bank capital before the financial crisis was a “win-win-win”: Banks liked it because they could replace expensive equity capital and buy back shares. Regulators gave happily credit for it because the banks told them that if there would be trouble, those instruments would behave as equity. Investors were happy, because the banks told them that if there is trouble, the bonds will always pay because they were bonds.

Well, after the financial crisis, it was suddenly “loose-loose-loose”: The banks did not get equity credit anymore, the regulators were pissed of and a lot of bond investors were suddenly owning very equity like investments.

“Renditperlen aus dem Scherbenhaufen” is a collection of case studies about a couple of those hybrid bonds which traded at very attractive levels at various points in times. The special thing about this book is that it is written by individual investors which are active on at least one of the many German internet message boards. Nevertheless (or because of this ?), the case studies are better quality than anything you will ever read in analyst reports, newspapers etc.

There is a lot of extremely valuable knowledge in the book plus a lot of background about the capital structure of banks. When the book was released, some of the case studies were still “active” and generated very attractive outcomes since then.

For beginners, it is maybe a little bit too detailed, but for investors which like to increase their circle of competence, it is a must read in my opinion. Also for anyone wanting to buy a banking stock, this book will give a lot of insight how the balance sheet of a bank works. The only drawback is that it is only available in German.

Edit: The autors asked me to set a direct link to Amazon. As I do almost anything for a free book, here it is:

Paperback
Kindle

And no, I don’t get any money if you click the link and buy….

This book was a recommendation of the editor of Poor Charlie’s Almanack and is the Autobiography of legendary US Tire sales guru Les Schwab.

Les Schwab created one of the biggest independent Tire Dealerships in the US from scratch. The book is a mixture of Autobiography, short stories and lots and lots of business wisdom.

The story of Les Schwab is to a certain point very similar with Sam Walton (Walmart). A no BS guy starts with a small shop in a rural area in the US and then branches out all over the country.

However, the biggest difference with Wal Mart is the fact, that from the beginning, Les Schwab shared almost 50% of his profits with the employees. Although he seems to have been one tough cookie, he didn’t want to keep all the profit but actively included employees in the profit-sharing to align them and the interest of the company.

The system is quite simple: Overall, a little less than 50% of the profits of each store is shared with employees. When a new shop opens, employees have to keep their profits in the store, until the store has positive net worth. If they then want to take out money, the head office takes out the same amount of money. If someone retires, the stake will be bought out by the company.

This employee profit-sharing system with clear communication, target setting etc. seems to have been one of the major “competitive” advantages for Les Schwab within an extremely competitive market.

Compared to stock or option programs,this program has the advantage that it better aligns the long-term goals of employes and company. For further promotions for instance, the amount of money that an employee has kept in the company is an important factor. Compare this with stock option programs for listed companies…..

I have never been to a LEs Schwab tire station but this picture seems to be the reality:

This is a quote from the same blog:

For those of you not from the Great Northwest, Les Schwab is the bomb-dot-com for all things automotive. They don’t require an appointment, they come running out to greet you like you’ve just returned from a tour in ‘Nam, they have complimentary popcorn and espresso, and every year they give away a shit ton of free beef if you spend over $500. Free. Beef. There is so much majesty in those two words that I am in overwhelming awe. Oh, Les Schwab. . .you had me at rump roast.

Back to the book: He describes in great detail, how he was able to expand the business despite the fact that he had to deal with those tire producers which run their own tire centers and how he improved the business step by step.-

The special thing about this book is the fact that Les Schwab has written it without the help of an editor directly for his employees. What it lacks in “polish”, it makes up with very interesting insights from the unfiltered perspective of a succesful hands-on entrepreneur.

It is fascinating to see how Les Schwab thinks about motivation and management. On top, there are a lot of gems in the book. For instance why it makes a lot of sense to run one giant warehouse despite large distances. In one chapter, he describes how he was approached several times by Private Equity buyers. In a few lines he describes the private equity business better than I have ever read before.

From a “theoretical” perspective it is interesting to see that competitive advantages exist which are outside the “typical competitive” advantages (barrier to entry, size, network effects). Great management and employee motivation in combination can create a “moat” even in a business with low barriers to entry.

Summary:

All in all, I think this is an outstanding book for anyone remotely interested in how business are run or should be run. One of the best business books / Autobiographies that I had ever read. HIGHLY RECOMMENDED !!!!

For anyone interested, there is an interesting article about Les Schwab to be found here which was written in 1997, 10 years after he wrote his book.

The author of this book is a former JPM banker who ran an “in-house” fund-of-fund hedge fund pool of money.

The big idea of the book is the fact that if you calculate a “money weighted” performance for hedge funds, the sum of all returns hedge fund investors have earned since the 1990ties is less than if they would have invested in treasury bills.

The “Money Weighting” return method does not adjust for in and outflows of money into a fund. “Money weighting” is usually used for Private equity funds and real estate funds because there the fund managers can control the in and outflow of money. For open-ended investment funds, the “time weighted” series is a better proxy because here the fund manager has no control on money flows.

Simon Lack argues that for Hedge funds, the money weighted method is much more appropriate because hedge funds to a very large extent can control their in and outflows. However in “standard” asset allocation models and performance measurements, hedge funds calculate their returns time weighted.

The author uses only broadly available data and then calculates a money weighted return for the hedge fund industry since the early nineties and comes to the quite sobering result as mentioned above.

This low return for investors basically results out of two main factors:

1. Returns for the hedge fund industry were much higher when the industry was small ( 100 bn USD in the early 90ties).
2. Returns for the hedge fund managers have been gigantic

As in the book “Where are the customer’s yachts” the author asks: Where are the rich hedge fund investors ? There are plenty of billionaire hedge fund managers but apart from the Harcard and Yale foundation, few investors really made money with those hedge funds over time.

According to the author, there are some good hedge funds, especially small ones with “hungry” managers, but those funds are difficult to find and hard to get in.

Summary:
Overall, I find it a good book, written from an insider with a very simple but powerful idea. I guess this book will not be very popular with the asset consultant and hedge fund industry. It clearly shows that hedge funds as a group are not the great asset class which will save pension funds but rather a brilliant marketing trick to make some people very rich.

For me, Monish Pabrai is mostly known as the guy who bid a couple of hundred thousand bucks in order to have lunch with Warren Buffet. But actually he has written a book as well.

The book claims as subtitle: “The Low-Risk Value Method to High Returns”.

The book shows a couple of “real world” examples, where people made a lot of money with somehow limited investments for instance a group of Indian refugees which went into Motels in the 70ties or Richard Branson with Virgin and Lakshmi Mittal.

He then lays out his “Dhando framework”:

1. Focus on buying existing businesses
2. Buy simple businesses with an ultra-slow rate of change
3. Buy distressed businesses in distressed industries
4. Buy businesses with a durable competitive advantage
5. Bet heavily when th odds are overwhelmingly in your favour
6. Focus on arbitrage
7. Buy businesses at big discounts to their underlying intrinsic value
8. Look for low-risk high uncertainty businesses
9. It’s better to be a copycat than an innovator

The book itself is very well written and quite accessible even for investment beginners. That is the big strength of the book. However I have also some “quibbles” with the book:

– In the “arbitrage” section, i think how confuses arbitrage and competitive advantage. The low costs of GEICO, WB insurance company is clearly the simplest form of competitive advantage (cost) and not any kind of arbitrage

– I personally find the combination of large bets and distressed situations quite dangerous. If you read the book, you could come to the conclusion that it is a good strategy to invest a large portion of your portfolio into a few, highly indebted companies. I would say this is in % of the cases a very good way to lose a lot of money, especially if you do that before a general recession.

-some of his own investments mentioned in the book rather look like lucky timing (buying in 2002) than anything else

Summary:

Overall, I think it is a well written book, which nicely summarizes several aspects of “Value Investing”. In my opinion, it is clearly not any kind of new method, but that doesn’t matter and you will not be producing superior invetsment returns after reading it. But it is a good book to wet ones appetite for value investing and hopefully read other books (Bruce Greenwald, Seth Klarman).

Although the book is clearly written for “the average investor”, one should however be careful not to misinterpret the different approaches, especially position size and “distressed” investments.

Many thanks to reader N. for this !!!

I would like to recommend the book: “The Outsiders, Eight unconventional CEOs and their radically rational Blueprint for Success”. It is written by William N. Thorndike Jr. and a team of Harvard students.

I first heard about the Book in the write-up of the annual Meeting of the Daily Journal as a book recommendation from Charlie Munger.
When reading the subtitle of the Book I was really eager to read it as soon as possible.

My first impression is that the book, considering its high price, is fairly short. The book has only got 225 pages.

The main content of the book is:

The 8 CEOs are so successful, because they follow 4 simple rules:

1. Run a decentralized organization which releases entrepreneurial energy and keeps both costs and “rancor” down.

2. Cash flow, not reported earnings, is what determines long term value.

3. Share buybacks increase in per share value and in the long run that is the only thing that matters – not the overall growth of the company.

4. With acquisitions, patience is a virtue… as is occasional boldness.

The author of the book points out that the outsider CEOs shared an interesting set of personal characteristics: They were generally frugal and humble, analytical, and understated. They were devoted to their families, often leaving the office early to attend school events. They did not give chamber of commerce speeches, and did not attend Davos and last but not least they did not exude charisma.

The outsiders are not like Jack Welch an example of a charismatic, action-oriented leader. They are more like Ben Franklin; they avoid bankers and other advisers and prefer their own counsel and that of a select group around them.

In the word of the author: “The outsiders are iconoclasts. The word iconoclast is derived from Greek and means ‘smasher of icons’.”

The outsiders are:

1. Tom Murphy and Capital Cities Broadcasting
2. Henry Singleton and Teledyne
3. Bill Anders and General Dynamics
4. John Malone and TCI
5. Katharine Graham and The Washington Post Company
6. Bill Stiritz and Ralston Purina
7. Dick Smith and General Cinema
8. Warren Buffett and Berkshire Hathaway

Summary:

It is a quite interesting read with many interesting stories about the company’s and the CEOs.
The book is really easy to read and there are summaries at the end of every chapter. At the end of the book, the author presents the outsiders mind frame in a simple approach and a checklist.

But I did not think that it is as easy as it seems comprehending the book. I think you always need the right time and the right location to be successful.

So if you want to enjoy a well written book about a really interesting topic which can help you figure out the right management of the company in which you like to invest you might consider buying it.