A look back how Buffett invested into special situations back in 1962
Meb Faber compares investing based on Buffett’s disclosures with the Berkshire stock
Driverless cars’ chances halted by tumbleweed (Paywall, Google for title)
Broyhill Capital likes Sea World
The short case for Union Pacific Railroad
Why a Chinese Billionaire paid for a 170 mn USD art purchase with his Amex
Interesting Michael Bloomberg interview from the Robin Hood 2015 conference:
Management summary
In the short term, I don’t think that the Apple Watch is a big danger for Premium Swiss Watch brands. Why ?
– putting some gold on a mass-produced electronic gadget didn’t work for smart phones either
– the smart watch doesn’t have a killer app yet and we don’t see an overall smart watch boom
– the observed decline in Swiss watch exports seems to be mostly caused by overall weakness in Hong kong and Macau
– however lower or medium priced brands could be affected especially in the coming Christmas seasonThe short-term danger to Premium Watches is much more a further cooling of Chinese and Emerging Market demand. Mid to long-term there could be issues as the market seems to be in the early stages of significant technical changes
Before I jump into more details I have to make a confession: I am myself not an expert on watches. As a matter of fact, I haven’t worn a wrist watch for the last 25 years.
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After bashing David Einhorn for his Consol Energy WACC assumption last week, by chance I read at the very good 25iq blog an article on how Buffett and Munger publicly speak about those things.
Indirectly, this is clearly a slap in my face because even the headline already says it all:
Why and how do Munger and Buffett “discount the future cash flows” at the 30-year U.S. Treasury Rate?
The post summarizes what Charlie and Warren have said over the years with regard to cost of capital and discounting. I try to summarize it as follows:
So if Buffett doesn’t use more elaborated methods why should any one else ? Was I wrong to beat up David Einhorn because he used a pretty low rate for Consol Energy ? Add to this Mungers famous quote “I’ve never heard an intelligent cost of capital discussion” and we seem to waste a lot of time here, right ?
This is basically part 4 and a half of my “watch series”. The founder of Swatch Group, Nicolas Hayek who died in 2010 was such an interesting character so I thought it made sense to read this biography.
The biography is unauthorized, Hayek was against it. The author is one of the most well-known Swiss Journalists. I actually read the German version because it was 10 EUR cheaper as hardcover than the English version.
Hayek was born in Lebanon into the “affluent middle class”. He went to Switzerland because he fell in love with a Swiss Aupair girl. His parents would not let marry him because of”low status” of the girl, so he left and went to Switzerland.
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Just to be clear: I have nothing personally against David Einhorn. I am just wondering how he comes up with his underlying valuation assumptions these days.
I already had issues with funding cost assumptions at AerCap as well as his return assumptions for SunEdison.
Now I came across his latest pitch for Consol Energy this week. This is the slide which explains the value of the coal business:
Without going into the other details, the question here is of course: How the hell did he come up with a WACC (Weighted Average Cost of Capital) of 8,4% ?
The WACC is supposed to be the blended total cost of capital of a company, including both, debt and equity. For Consol Energy however the obvious problem is the following: Their bonds are trading at a level of 12-15% p.a. Even if we us an after-tax figure of maybe 8-10%, even the after-tax cost of debt is higher than the assumed WACC.
As the cost of equity has to be higher than senior debt (it is more risky), there is no way in ending up with a WACC of 8,4%. Maybe some of my readers can help me out if I am missing here something, but I am pretty sure that 8,4% is not the right number for Consol’s cost of capital. He uses the same WACC later for the shale gas part of the company, so it is certainly not a typo:
On his website he then explains how they (or his intern) came up with the WACC (slide “A-1”):
The real joke however is to be found a little bit below:
Edit: Now that I know that it was meant as a joke it reads somehow different 😉
So he somehow believes that his WACC is actually conservative.
Let’s look at some “real world” data. This is the overview of Consol’s currently outstanding bonds:
The average yield based on outstanding amount of Consol’s bonds is 14,5%, a full 11% (or 1.100 basis points) higher than in Einhorn’s calculation. As I have said above, the cost of equity has to be higher than the cost of debt as thee is no protection to the downside. So if we use Einhorn’s quity risk premium of around 6%, we would get cost of equity of around 20,5%.
Based on Einhorn’s weighting, we would get a WACC of (20,5%*0,75) + (15,5%*0,65*0,25)= 17,73%, roughly speaking double the charge that Einhorn uses. You might say this is conservative but in effect it is just realistic and based on current market prices.
Even at issuance, Consol’s cheapest bond had a 5,875% coupon, far above the assumed 3,5%, so it is not even a question of current market dislocation.
Either Einhorn assumes implicitly that cost of capital goes down dramatically or he has some “secret” that I don’t know. If I look at Einhorn’s last pitches, especially AerCap, SunEdison and Consol, there seems to be a common theme: He is always pitching capital-intensive companies with significant debt where he assumes pretty low cost of capital in order to show upside.
So what he seems to do these days is effectively betting on low funding costs which, at least for SunEdison and Consol didn’t work out at all.
In my opinion, this has nothing to do with value investing. Value investing requires to make really conservative assumptions to make sure that the downside is well protected as first priority. For those leveraged, capital-intensive businesses however, the risk that you will get seriously diluted as shareholder in those cases is significant, there is no margin of safety. On the other hand I somehow admire his Chupza. Standing in front of a lot of people who paid significant fees to hear the “Hedge Fund honchos” speak and pitching such a weak case with unrealistic assumptions is brave.
Of course a stock like Consol can always go up significantly after dropping -75% year to date, but the underlying analysis is really flawed. I would actually like to ask him if he really believes in those assumptions or if he just didn’t pay any attention to the details. This would be really interesting.
Maybe a final word on this: I am always criticising David Einhorn on his assumptions. Which is easy because he actually is very transparent about them. Many other Hedge Fund managers just tell nice stories. I am pretty sure that in many cases the assumptions behind those cases are not much better.
This is the 4th post in what developed into a kind of “Watch series”, see Fossil part 1 and part 2 plus Movado.
Swatch is the largest wrist watch producer in the world. The company is the brainchild of legendary founder Nicholas Hayek who turned around the whole Swiss Watch industry and created Swatch out of insolvent Swiss watch makers.
On Thursday after close, Fossil came out with their Q3 numbers. Without adjusting for currencies, numbers looked pretty bad. Sales were down 14%, watches even -17%. In the earnings call they blame most of the decline on Michael Kors:
Movado is the second US-based company specializing in watches (see my previous posts on Fossil part 1 and part 2). The company has a quite interesting history. Cuban Refugee Gerry Grinberg founded the company in the 1960ties basically as a Swiss Watch importer. Later on they actually acquired the rights to the Movado brand with the iconic Museum Watch.
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…..
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.
value and opportunity 