Notes on parts of The Graham and Doddsville Issue of January 2018 (Part 1/2)

Leon Cooperman of Omega Advisors, Inc.

1. "To be successful, you must love what you do. It is both my vocation and my avocation (as well as a means of supplementing my income)."

2. "Every recession leads to the next economic recovery, and every recovery leads to the next recession," because "everything in the world is cyclical"

3. "His philosophy: invest in any stock or bond at the right price." By contrast, most people will buy "only the right stock, at any price." Essentially, the price paid is pivotal. As Howard Marks says, "Well bought is half sold". Indeed, if the fixed assets are worth more than the market capitalisation, it is a good investment. However, it may be better to buy only good businesses which are available cheap. This is because, to paraphrase Buffett, when even the best manager attempts to tackle an industry with poor economics, it is usually the reputation of the industry, that survives.

4. "You evaluate management teams twice, once through the numbers and once face to face."

5. "You want to get rich quietly. I don't go on CNBC trying to talk a stock up." This is particularly true in relation to shorts. Cooperman makes this remark with regards to Bill Ackman's public campaign to expose Herbalife as a pyramid scheme. Though it is possible, that Ackman had no other option, it also resulted in Carl Icahn attempting to squeeze his short position.

6. "You need people that are long term thinkers because short term greed will jeopardise the firm."

7. John Templeton said, "Bull markets are born in pessimism, grow in skepticism, mature in optimism, and end in euphoria".

8. "The most important thing is to surround yourself with people smarter than yourself and fairly share the loot."

9. William Ward said, "Before you think listen. Before you spend, earn. Before you invest, investigate. Before you pray, forgive. Before you quit, try. Before you retire save. Before you die, give."

Notes on the Berkshire Hathaway Shareholder Letter 1981

1. "Predicting rain doesn't count, building arks does". i.e.: Predicting rain and cold doesn't count, but carrying a coat does :)

2. "We may very well pay a fairly fancy price for a business if we are reasonably confident of what we are getting. But we will not normally pay a lot in any purchase for what we are supposed to bring to the party - for we find that we ordinarily don’t bring a lot." In effect, most business, NOT all, are usually running at close to maximum efficiency. This ties well with the idea that usually, the reputation of an industry is more durable than the reputation of a fantastic manager. This also relates to the idea that potent "managerial kisses of wonder" are rare, because "turnarounds seldom turn."

3. Consider:

A. The management you are electing to join

B. The future economics of the business

C. The price you are (i) having to and (ii) are willing to pay

If A, B, and C are favourable its probably a good investment. If your investment goes wrong, where did you miscalculate?

4. INFLATION

    "For inflation acts as a gigantic corporate tapeworm.  That 
tapeworm preemptively consumes its requisite daily diet of 
investment dollars regardless of the health of the host organism.  
Whatever the level of reported profits (even if nil), more 
dollars for receivables, inventory and fixed assets are 
continuously required by the business in order to merely match 
the unit volume of the previous year.  The less prosperous the 
enterprise, the greater the proportion of available sustenance 
claimed by the tapeworm."

Essentially, inflation increases costs of operation, and if you do not have the pricing power to pass on this rise in costs to the consumer, even if, by some miracle, you are able to maintain the same nominal profitability, people will be willing to pay less for said profit stream. This is because you may be putting "cash into their wallets, but your not putting food in their stomachs." Thus, when risk free rates rise, and people demand greater compensation for the risk they undertake on the equity market, if companies cannot increase profits, the share prices fall.

5. FORECASTING

A. Sam Goldwyn said, "Forecasts, are dangerous, particularly those about the future".

B. Pogo says, "The future isn't what it used to be".

6. A company with a high ROCE should retain and reinvest earnings, whereas a company with a low ROCE should, ideally, return profits to investors as dividends, so that they can reinvest this to generate a higher return.

7. INSURANCE

Berkshire "sacrificed much volume, but have maintained a substantial underwriting superiority in relation to industry-wide results." Essentially, Buffett is saying that it is better to ensure you are correctly compensated for the risks you take in the long run, than to maintain a high underwriting volume and premium revenue, at the risk of becoming insolvent when policyholders claim insurance.

Learnings from Berkshire Hathaway Shareholder Letter 1980

Key takeaways from Buffett's letter to the Shareholders of Berkshire Hathaway in the year 1980.
1. a. "The value of retained earnings is determined by the use to which they are put and the subsequent level of earnings produced by that usage"

1. b. "We would rather have earnings for which we did not get accounting credit put to good use in a 10%-owned company than company by a management we did not personally hire, than have earnings for which we did get credit put into projects of more dubious potential by another management - even if we are that management."

Essentially, Buffett is saying that a company which reinvests retained earnings and generates a good ROI or increase in market value by doing so, can and should retain earnings. He says, "If a tree grows in a forest partially owned by us, but we don’t record the growth in our financial statements, we still own part of the tree." This essentially reiterates the idea that reinvestment for substantial ROI or increases in market value often benefit the investor more than dividends do. In brief, A good return on equity for retained corporate earnings generates value.


2. "If a company can repurchase its shares at a price under 50% of that needed to acquire the same earning power through acquisitions", share repurchases are often a better (and more tax-efficient) way of returning capital to investors, than negotiated acquisitions, in which the company often pays a premium over market value to purchase the company and hence the same increase in earnings.


3. "A silly purchase price for a block of stock in a corporation, can negate the effects of a decade of reinvestment of retained earnings by that corporation." This is applicable to both, point two, regarding reinvestment and acquisitions, and to an investor; this echoes of Howard Marks' statement, "Well bought is half sold".


4. "Only gains in Purchasing power represent real earnings on investment." Only if you can buy more have you really increased the money you have in terms of the value it holds.


5. Make investments in "well-run, favourably-situated businesses, which often pay out only a small proportion of their profits as dividends."


6. "When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact." This reiterates the idea that turnarounds very rarely occur. This is because in most cases, incumbents are already working hard and smart, in order to survive. Nota Bene, however, that unlikely and unusual do not mean impossible.

7. An opportunity is often a company which is "temporarily reeling from the effects of a fiscal blow that did not destroy its exceptional underlying economics." Look for businesses undervalued as a result of temporary turbulence, which the management is resolving, and which are not a result of unfavourable industry changes.


8. "Short-term forecasts of stock or bond prices are useless. The forecasts may tell you a great deal about the forecaster; they tell you nothing about the future."

Learnings from the Berkshire Hathaway Shareholder Letter 1979

1. Earnings per share:
This important metric must not be used blindly, as it can be manipulated or improved through higher risks such as leverage, and accounting gimmicks.

2. Power of compounding.

3. "Neither a short-term borrower or a long-term lender be." (In most cases you are better compensated for risk by equities than bonds, in the long run. However, this must be implemented with a grain of salt.)

4. "Companies obtain the shareholder constituency they seek and deserve"
A focus on long-term profitability instead of short-term high flying attracts long-term investors. Pick your game, tinker with it a little from time to time, but be largely consistent.

5. " 'Turnarounds' seldom turn. "

6. A "good business at a fair price is better than a poor business purchased at a bargain" (Sometimes, however, if you are being able to buy a bad business at a value blow that of the fixed assets, you could close shop and sell the fixed assets at a profit)

7. "Despite a fancy price tag, the 'easy' business may be the better route to go" (Yet, you most certainly don't want to engage in fad-investing)

8. Some failures are not "reflections on managers, but rather on the industry in which they operate"

9. "Better to stick with business you understand" even if the frequency of business decreases.
(Of course, a balance is essential.)

10. "Mistakes will not be cured immediately or without cost"

11. It is often "futile, trying to be very clever in an area where the tide is running heavily against you"

Learnings from the Berkshire Hathaway Shareholder Letter 1978

My key learnings from Warren Buffet's 1978 letter to the shareholders of Berkshire Hathaway:

1. UFHC:
a. Understand
b. Favourable long-term prospects
c. Honest and competent management
d. Cheap

Essentially, you want to look for 'Good quality businesses with a Margin of Safety'.


2. People who think and feel like owners work harder, more happily, and more effectively.

3. Praise good quality people.

4. Willingly accept and learn from your errors.

5. Return on Capital Employed (ROCE) is a measure of profit relative to investment:

ROI = PROFIT / Investment