Friday, May 23, 2014

Buffett and Munger Talk Retail Businesses, Nebraska Furniture Mart, and Amazon

Warren Buffett and Charlie Munger talked about retail businesses more generally, as well as Nebraska Furninture Mart, and Amazon (AMZN) specifically, in this recent CNBC interview:

MUNGER: I think Warren and I can match anybody's failures in retail.

BUFFETT: Yeah, we have a really bad record, starting in 1966. We bought what we thought was a second-rate department store in Baltimore at a third-rate price, but we found out very quickly that we bought a fourth-rate department store at a third-rate price. And we failed at it, and we failed...

MUNGER: Quickly.

BUFFETT: Yeah, quickly. That's true. We failed other times in retailing. Retailing is a tough, tough business, partly because your competitors are always attempting and very frequently successfully attempting to copy anything you do that's working. And so the world keeps moving. It's hard to establish a permanent moat that your competitor can't cross. And you've seen the giants of retail...a lot of giants have been toppled.

MUNGER: Most of the giants of yesteryear are done.

They go on to talk about a very successful retail business Berkshire's owned since the early 1980s:

BUFFETT: Nobody is going to be able to compete with the Nebraska Furniture Mart. I mean, this store does more home furnishing business than any store in the country. And what are we in, I don't know, the 50th market in the country? This store does $450 million annually. It's doing $40 million during the Berkshire shareholders week. But there's no store that remotely can offer the variety. There's no store that can undersell us. But to achieve that kind of dominance, you can't do it with a chain of stores in Canada when you're competing with Wal-Mart up there and a whole bunch of other people.

Buffett and Munger both share a very favorable view of Amazon.* Here's what they had to say when asked about the company's business model:

MUNGER: Well, I think it's very disruptive compared to everybody else, I think it's a formidable model that is going to change America.

BUFFETT: I agree. It's one of the most powerful models that I've seen in a lifetime, and it's being run by a fellow that has had a very clear view of what he wants to do, and does it every day when he goes to work, and is not hampered by external factors like people telling him what he should earn quarterly or something of the sort. And ungodly smart, focused. He's really got a powerful business, and he's got satisfied customers. That's hugely important.

This certainly isn't the first time accolades have been directed at Jeff Bezos by Buffett.

In fact, last year Buffett said that he was "the ablest CEO in America."

Still, retailing certainly is a tough business.

Figuring out whether a moat can be built and sustained is tough to do but it sure helps to have exceptionally talented leadership.

Of course, these days Amazon has moved beyond strictly being a retailer.

Now, whether Amazon ends up being a great investment is another question altogether.

To me, the respect and admiration for Amazon has been well-earned as noted in prior posts.
(Some concerns and criticisms have also been previously highlighted.)

My main problem has always been valuation. More specifically, I've just never understood how to value the business within an acceptably narrow range.

Tough to value is very different than being overvalued.

Based upon price to earnings the company naturally appears quite overvalued and very well may even be. Yet this company -- almost uniquely -- invests with a long view in mind, often executes very well, and makes brilliant use of its working capital. With this in mind, it seems foolish to underestimate Amazon.

Amazon's business is likely intrinsically worth a lot as of now. How much?

I have no idea.

It also has seems to have a reasonable chance of being worth a whole lot more down the road. How much?

Again, I just have no idea.

In both cases, I'm NOT referring to market capitalization; I'm referring to a rough but meaningful estimate of intrinsic value based upon defensible assumptions and sound logic. If what something is roughly worth -- within a narrow enough range -- isn't clear, it's naturally just not possible to judge what an appropriate margin of safety might be.
(The price paid should be a nice discount to estimated value and protect the investor sufficiently against things not going quite as well as expected.)

This simply means, when it comes to Amazon, I can't figure out whether the returns are likely to be sufficient considering the risks and compared to investment alternatives.

Alternatives that I understand better.

Others may have a way to figure out Amazon's value with enough confidence. Those that can are far better candidates to invest long-term in the company.**

The biggest reason I still always pay attention to Amazon is their ability to potentially disrupt (or damage the economic moat of) some other business or industry. Just because the company doesn't compete directly against someone now, doesn't mean it won't down the road.

In other words, what appear to be solid business economics today, end up being badly eroded down the road.

Clearly, certain businesses and industries are more likely to be challenged some day by Amazon than others.

Though I'm not sure ten years ago many would have imagined or anticipated all the moves that Amazon has made since that time.

Adam

No position in AMZN

Related posts:
Washington Post Sold To Jeff Bezos
Amazon, Apple, and Intrinsic Value - Part II
Amazon, Apple, and Intrinsic Value
Negative Working-Capital Cycle
Amazon, Apple, and Margin of Safety
Amazing Amazon
Barron's on Bezos: Time to Reign in Amazon's CEO?
Amazon's Jeff Bezos On Inventing & Disrupting
Amazon Sells Kindle Fire Below Cost
Technology Stocks

* Keep in mind they are commenting on Amazon's business NOT necessarily the stock.
** Someone else might find Amazon's intrinsic value easier to estimate, of course. As always, it's knowing what's understandable to you and only investing in those things. This is necessarily unique to each investor. When you stick to what you know fewer errors are likely to be made.
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