In a recent article, Jeremy Grantham calls raising fees in the investment industry actually is a "raid" of the balance sheet of investors.
"If we [the investment industry] raise our fees from 0.5 percent to 1 percent, we actually raid the balance sheet. We take 0.5 per cent from what would have been savings and investment and turn it into income and GDP. In other words, you're taking money that would have become capital and chewing it up as bankers' bonuses." - Jeremy Grantham
Good to hear someone from inside the industry be straightforward about this kind of stuff.
As recently as the 1960's financial services was ~2% of GDP while today it is above 6%. Late last year after pointing out this fact to some senior level bankers, Paul Volcker said:
"Is that a reflection of your financial innovation, or just a reflection of what you're paid?"
The individual money manager someone hires may or may not do a good job but collectively the industry is "nothing but costs". These frictional costs literally subtract capital from the system and convert it into income.
"What is Wall Street supposed to do? It's not a creator of wealth. It's a handmaiden to creators of wealth. It occupies an essentially parasitic, but usefully parasitic relationship with the rest of the society. It's totally out of control. It's not making America a great place; it's making America a worse place right now." - Michael Lewis in this Bloomberg article
Usefully parasitic but like Volcker says, all the so-called "financial innovation" has gotten a bit expensive relative to GDP. More importantly, it's expensive relative to the value it actually adds to society.
A hidden tax on capital development.
Adam
Related post:
Bogle: History and the Classics
When Genius Failed...Again
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Thursday, April 29, 2010
Wednesday, April 28, 2010
Coin Flip
"Absent a lot of surprises, stocks are relatively predictable over twenty years. As to whether they're going to be higher or lower in two to three years, you might as well flip a coin to decide." - Peter Lynch
Monday, April 26, 2010
1958 Buffett Partnership Letter
Some excerpts:*
Adam
* Written in early 1959 by Buffett to discuss the previous year's performance. Copies of all the Buffett Partnership Letters can be found here.
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and are never a recommendation to buy or sell anything.
- During the past year, almost any reason has been seized upon to justify "investing" in the stock market. There are undoubtedly more mercurially-tempered people in the stock market now than for a good many years and the duration of their stay will be limited to how long they think profits can be made quickly and effortlessly.
- I make no attempt to forecast the general market--my efforts are devoted to finding undervalued securities.
- It is obvious that we could still be sitting with a $50 stock patiently buying in dribs and drabs, and I would be quite happy with such a program although our performance relative to the market last year would have looked poor.
- ...our performance for a single year has serious limitations as a basis for estimating long term results. However, I believe that a program of investing in such undervalued well protected securities offers the surest means of long term profits in securities.
- Such a policy should lead to the fulfillment of my earlier forecast--an above average performance in a bear market or neutral market, and a normal performance in a bull market. It is on this basis that I hope to be judged.
Adam
* Written in early 1959 by Buffett to discuss the previous year's performance. Copies of all the Buffett Partnership Letters can be found here.
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and are never a recommendation to buy or sell anything.
Friday, April 23, 2010
American Express
Not surprisingly, the earnings strength of American Express (AXP) was reinforced by yesterday's report. Earnings are normalizing quickly. AXP's net income was $ 885 million in the 1st quarter of 2010, more than double 1st quarter 0f 2009. Revenue in 1Q 2010 increased to $ 6.6 billion from $ 5.9 billion in 1Q 2009.
It's worth noting that American Express remained profitable throughout the crisis whereas most other financial institutions posted at least one, if not multiple, quarters of losses. This has a lot to do with AXP's "spend-centric" model, where most revenue comes from the "tolls" collected each time someone uses one of their cards. They get in the neighborhood of 2.5 percent of the transaction value each time a card is used. Most competitors get only a small fraction of that amount and rely on a "lend-centric" model. Also, the average AXP customer spend at least 3x more than customers of other credit card companies.
Some comments by Ken Chenault, chairman and ceo of American Express from the 1Q 2010 Earnings Report:
"Cardmember spending was up 16 percent, rebounding strongly from the recessionary lows of last year," said Kenneth I. Chenault, chairman and chief executive officer. "Credit metrics also continued the improvement that began in the second half of 2009."
And,
"Our ability to generate strong volumes comes at a time when cardmembers are paying down their outstanding debt. This compares favorably to the major issuers who traditionally have had to rely on lending-oriented customers to generate billed business. At a time when so many consumers are focused on value, our relative strength also reflects the importance of pay-in-full charge cards and the appeal of our rewards, customer service and benefit programs."
The company should earn over $ 3.5 billion this year with a return on equity among the highest in the financial services industry. So the earning power is there and should grow in the coming years.
Of course, AXP is not perfect. Its balance sheet is solid now but I did not consider it a strength a few years back. That changed during the financial crisis. The strain of the crisis put pressure on AXP to strengthen its funding sources. Prior to the crisis, my biggest concern with AXP had been too much reliance on capital markets for short-term funding (commercial paper). That does not seem like a dangerous thing until a time like 2008 when capital markets stopped functioning properly and seized up.
Today, they rely very little on commercial paper and have continued to increase their use of FDIC insured deposits. These days most funding comes from 1 of 3 sources: long-term debt, FDIC insured deposits, and securitizations (they also have other sources of liquidity...since they converted to a bank holding company this includes the discount window from the fed). The important thing to me is they no longer need to routinely roll over so much short-term debt and that they are increasing their insured deposits. Also, AXP has more equity and less total debt (including what was previously off-balance sheet securitizations*) and generally carries more cash compared to back in 2007. Not perfect...but a better situation.
So the pressure of the crisis pushed the company to make its balance sheet more sturdy. As a result, I think AXP is a better company. It can still be messed up much more easily than a Coca-Cola or Diageo, but in the context of financial services, it has a great model.
Unfortunately, the stock is no longer cheap. As of a few minutes ago it was trading at ~$ 48.80/share giving it a ~$ 58 billion market cap.
Adam
Long position in AXP
* The off-balance sheet securitizations were moved onto the balance sheet this quarter.
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
It's worth noting that American Express remained profitable throughout the crisis whereas most other financial institutions posted at least one, if not multiple, quarters of losses. This has a lot to do with AXP's "spend-centric" model, where most revenue comes from the "tolls" collected each time someone uses one of their cards. They get in the neighborhood of 2.5 percent of the transaction value each time a card is used. Most competitors get only a small fraction of that amount and rely on a "lend-centric" model. Also, the average AXP customer spend at least 3x more than customers of other credit card companies.
Some comments by Ken Chenault, chairman and ceo of American Express from the 1Q 2010 Earnings Report:
"Cardmember spending was up 16 percent, rebounding strongly from the recessionary lows of last year," said Kenneth I. Chenault, chairman and chief executive officer. "Credit metrics also continued the improvement that began in the second half of 2009."
And,
"Our ability to generate strong volumes comes at a time when cardmembers are paying down their outstanding debt. This compares favorably to the major issuers who traditionally have had to rely on lending-oriented customers to generate billed business. At a time when so many consumers are focused on value, our relative strength also reflects the importance of pay-in-full charge cards and the appeal of our rewards, customer service and benefit programs."
The company should earn over $ 3.5 billion this year with a return on equity among the highest in the financial services industry. So the earning power is there and should grow in the coming years.
Of course, AXP is not perfect. Its balance sheet is solid now but I did not consider it a strength a few years back. That changed during the financial crisis. The strain of the crisis put pressure on AXP to strengthen its funding sources. Prior to the crisis, my biggest concern with AXP had been too much reliance on capital markets for short-term funding (commercial paper). That does not seem like a dangerous thing until a time like 2008 when capital markets stopped functioning properly and seized up.
Today, they rely very little on commercial paper and have continued to increase their use of FDIC insured deposits. These days most funding comes from 1 of 3 sources: long-term debt, FDIC insured deposits, and securitizations (they also have other sources of liquidity...since they converted to a bank holding company this includes the discount window from the fed). The important thing to me is they no longer need to routinely roll over so much short-term debt and that they are increasing their insured deposits. Also, AXP has more equity and less total debt (including what was previously off-balance sheet securitizations*) and generally carries more cash compared to back in 2007. Not perfect...but a better situation.
So the pressure of the crisis pushed the company to make its balance sheet more sturdy. As a result, I think AXP is a better company. It can still be messed up much more easily than a Coca-Cola or Diageo, but in the context of financial services, it has a great model.
Unfortunately, the stock is no longer cheap. As of a few minutes ago it was trading at ~$ 48.80/share giving it a ~$ 58 billion market cap.
Adam
Long position in AXP
* The off-balance sheet securitizations were moved onto the balance sheet this quarter.
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Thursday, April 22, 2010
Energy Drinks
Even with traffic down at convenience stores, the energy drink segment continues to grow. According to a report using data from Nielsen Co., energy drink sales have improved recently with Hansen's Monster (the # 2 energy drink in the US behind Red Bull) growing faster than the overall energy drink market.
article
...growth of the overall energy drink category and Hansen Natural Corp., maker of Monster, both accelerated in the four weeks leading up to March 20. Overall energy drink sales in convenience stores rose 5.1 percent and Hansen's sales rose 8.6 percent. Convenience stores account for about 75 percent of energy drink sales.
Hansen Natural Corp. should earn ~$ 220 million this year on over a $ 1.2 of sales. Its current market value is ~$ 3.7 billion with no debt and over $ 400 million of cash on the balance sheet. They have created a very successful brand but distribution still depends on the likes of Coca-Cola. With a ~15x enterprise value/earnings it is definitely not an inexpensive stock. As of now, the company's economics are excellent with extremely high returns on capital. If those returns on capital are at all durable over time then the current multiple is cheap. The difficult part is: 1) a lack of product breadth (90% of sales comes from energy drinks), 2) dependence on others for distribution, and 3) fierce competition between Hansen and larger (financially stronger) companies. These 3 things will continue to be hard to gauge risks going forward. As a result, estimating intrinsic value is not easy for this one.
On the other hand, if someone wants to make a concentrated investment in one of the two leaders of the energy drink segment Hansen is pretty much it. I've noted what I'd pay for HANS in Stocks to Watch for quite a while (up to $ 30/share). I think a large margin of safety is warranted on HANS to account for the 3 risks noted above (Current market price is ~ $ 41/share).
It is possible that Hansen will be acquired one of these days by Coca-Cola or Pepsi to more firmly tie this strong brand with distribution. That's a reasonable guess but who knows. Coca-Cola seems more likely considering the existing distribution relationship. The CEO of Coca-Cola Enterprises (CCE) has said recently he'd like to have more Monster to distribute.
Hansen has obviously done a lot of things right up to now. They have been going up against some pretty tough competitors for a long time and winning. Building a highly profitable $1 billion brand in a decade or so with competitors like Coca-Cola, Pepsi and Red Bull is no small feat. It will interesting to see if they can continue to execute as they move from being primarily a US brand to a global one.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
article
...growth of the overall energy drink category and Hansen Natural Corp., maker of Monster, both accelerated in the four weeks leading up to March 20. Overall energy drink sales in convenience stores rose 5.1 percent and Hansen's sales rose 8.6 percent. Convenience stores account for about 75 percent of energy drink sales.
Hansen Natural Corp. should earn ~$ 220 million this year on over a $ 1.2 of sales. Its current market value is ~$ 3.7 billion with no debt and over $ 400 million of cash on the balance sheet. They have created a very successful brand but distribution still depends on the likes of Coca-Cola. With a ~15x enterprise value/earnings it is definitely not an inexpensive stock. As of now, the company's economics are excellent with extremely high returns on capital. If those returns on capital are at all durable over time then the current multiple is cheap. The difficult part is: 1) a lack of product breadth (90% of sales comes from energy drinks), 2) dependence on others for distribution, and 3) fierce competition between Hansen and larger (financially stronger) companies. These 3 things will continue to be hard to gauge risks going forward. As a result, estimating intrinsic value is not easy for this one.
On the other hand, if someone wants to make a concentrated investment in one of the two leaders of the energy drink segment Hansen is pretty much it. I've noted what I'd pay for HANS in Stocks to Watch for quite a while (up to $ 30/share). I think a large margin of safety is warranted on HANS to account for the 3 risks noted above (Current market price is ~ $ 41/share).
It is possible that Hansen will be acquired one of these days by Coca-Cola or Pepsi to more firmly tie this strong brand with distribution. That's a reasonable guess but who knows. Coca-Cola seems more likely considering the existing distribution relationship. The CEO of Coca-Cola Enterprises (CCE) has said recently he'd like to have more Monster to distribute.
Hansen has obviously done a lot of things right up to now. They have been going up against some pretty tough competitors for a long time and winning. Building a highly profitable $1 billion brand in a decade or so with competitors like Coca-Cola, Pepsi and Red Bull is no small feat. It will interesting to see if they can continue to execute as they move from being primarily a US brand to a global one.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Wednesday, April 21, 2010
POSCO: Most Competitive Steelmaker
From this article:
POSCO Wins Back Most Competitive Steelmaker Title
Korean steelmaker POSCO has reclaimed the title of the world's most competitive steelmaker after losing it six years ago.
World Steel Dynamics (WSD), a steel information service, ranked POSCO as the most competitive steelmaker among the 32 major steelmakers.
Adam
Small long position in POSCO
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
POSCO Wins Back Most Competitive Steelmaker Title
Korean steelmaker POSCO has reclaimed the title of the world's most competitive steelmaker after losing it six years ago.
World Steel Dynamics (WSD), a steel information service, ranked POSCO as the most competitive steelmaker among the 32 major steelmakers.
Adam
Small long position in POSCO
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Monday, April 19, 2010
Salomon
Some comments from Charlie Munger about his experience with Salomon almost twenty years ago:
At Salomon we asked, "Where is the list of things you won't do because they’re beneath you?" We never saw it. Envy and greed lead people to doing almost anything that looks profitable and does not require use of a machine gun. Investment bankers were better when I was young. They used to care about the quality of deals – they cared a lot. Ethics attenuated a lot. This was not good.
The deterioration would be an interesting subject for social science. You'd have to understand psychology – it would be very difficult for somebody to do it.
Why is the high road the best way in investment banking? It's not very crowded. [Laughter]
Seems a bit more relevant in the wake of the SEC's charges of fraud against Goldman Sachs. Today, many investment banks still seem to have no such list and a trading culture dominates.
A big overhaul to Wall Street's culture via changes to incentives (toward "long-term greedy") and requiring that the senior players once again have more skin (i.e. more of their own capital) in the game seems badly needed.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
At Salomon we asked, "Where is the list of things you won't do because they’re beneath you?" We never saw it. Envy and greed lead people to doing almost anything that looks profitable and does not require use of a machine gun. Investment bankers were better when I was young. They used to care about the quality of deals – they cared a lot. Ethics attenuated a lot. This was not good.
The deterioration would be an interesting subject for social science. You'd have to understand psychology – it would be very difficult for somebody to do it.
Why is the high road the best way in investment banking? It's not very crowded. [Laughter]
Seems a bit more relevant in the wake of the SEC's charges of fraud against Goldman Sachs. Today, many investment banks still seem to have no such list and a trading culture dominates.
A big overhaul to Wall Street's culture via changes to incentives (toward "long-term greedy") and requiring that the senior players once again have more skin (i.e. more of their own capital) in the game seems badly needed.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Hayek
"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design." - Friedrich Hayek
Klarman: True & False Lessons From The Financial Crisis
Klarman: True & False Lessons From The Financial Crisis
Thursday, April 15, 2010
Munger on Multi-tasking
"How did Berkshire's track record happen? If you were an observer, you'd see that Warren did most of it sitting on his ass and reading. If you want to be an outlier in achievement, just sit on your ass and read most of your life. But they fire you for that!
Look at this generation, with all of its electronic devices and multi-tasking. I will confidently predict less success than Warren, who just focused on reading. If you want wisdom, you'll get it sitting on your ass. That's the way it comes." - Charlie Munger
The above quotes are from Whitney Tilson's 2007 Wesco annual meeting notes.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Look at this generation, with all of its electronic devices and multi-tasking. I will confidently predict less success than Warren, who just focused on reading. If you want wisdom, you'll get it sitting on your ass. That's the way it comes." - Charlie Munger
The above quotes are from Whitney Tilson's 2007 Wesco annual meeting notes.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Wednesday, April 14, 2010
POSCO's Earnings
POSCO (NYSE: PKX) reported 1Q 2010 earnings yesterday. The South Korean company, one of the best steel manufacturers in the world, looks to have had another very solid quarter. I'm guessing that they will soon be earning at least $ 3.5 to 4.o billion/year.
Obviously, the steel business is very cyclical yet unlike many steelmakers, POSCO remained profitable in 2009. POSCO earned $ 2.82 billion in a year where most competitors lost money or struggled to break even. Impressive financial performance considering the economic stresses of 2009. In contrast, US Steel (NYSE: X) went from earning $ 2.1 billion in 2008 to losing $ 1.4 billion in 2009.
The market value of POSCO is ~$ 37 billion (@ the current ADR price of ~$ 121/share). Not cheap relative to earnings for a steel company but they appear to be a solid business within a tough industry.
Here is an article in the Wall Street Journal on POSCO's 1Q earnings. Net profit for the most recent quarter was $ 1.29 billion.
Adam
Small long position in POSCO
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Obviously, the steel business is very cyclical yet unlike many steelmakers, POSCO remained profitable in 2009. POSCO earned $ 2.82 billion in a year where most competitors lost money or struggled to break even. Impressive financial performance considering the economic stresses of 2009. In contrast, US Steel (NYSE: X) went from earning $ 2.1 billion in 2008 to losing $ 1.4 billion in 2009.
The market value of POSCO is ~$ 37 billion (@ the current ADR price of ~$ 121/share). Not cheap relative to earnings for a steel company but they appear to be a solid business within a tough industry.
Here is an article in the Wall Street Journal on POSCO's 1Q earnings. Net profit for the most recent quarter was $ 1.29 billion.
Adam
Small long position in POSCO
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
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