Saturday, 28 March 2015

The Bearish Investor

A bear market generally connotes depressed investment market conditions. With bearish market conditions, every investment opportunity requires due diligence and close scrutiny before investment capital can be deployed and allocated.

I would suggest that a bearish market begets a "bearish" investor. This is the time for the bearish investor to make a move on strong companies at depressed prices with value at the front of his mind.

During a bear market it is the enduring companies that should catch your eyes. Men will still want to shave and drink beer, so the economy will not die. The suppliers of the essential products will not disappear overnight, and while it will not be business as usual it will be business by all means necessary. Big business have to survive like a bear in the salmon season.

The bearish investor must deploy his capital in all streams of profitable cash generating businesses while at the same time exercising every caution to prevent permanent loss of capital.

An investment checklist is important to assist in the deployment of the bearish investor's capital.

The Bearish Investor Checklist

  1. A company with a strong balance sheet is a start
  2. A company with enduring leadership in its industry
  3. A company that is isolated from the antics of wall street
  4. A company that is constantly growing shareholder value and
  5. A company with honest stewardship.
Focus InSight: A bearish investor copies the ways of a bear in salmon season.

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Sunday, 22 March 2015

The Capital Allocator vs Owner Operator

There is a distinct difference between the businessmen who concentrates on capital allocation versus the businessman who is an owner operator of a business. The capital allocator on one hand looks very much like Dr. Henry Singleton who understood the principles around capital allocation very well. William Thorndike in his book "The Outsiders" looked at some of Dr. Singleton's investment approach in chapter two. Dr. Singleton invested the cash generated by his companies where he thought the prospect of getting the highest return on capital existed.

On the other hand, an owner operator looks more like Sam Walton, founder of Walmart who was the consummate owner operator. His investment approach was completely different. He concentrated his capital distribution on building out the Walmart franchise enterprise  in small towns where he completely dominated the retail space.

Warren Buffett mirrors both principles very well with a greater emphasis on capital allocation. Berkshire Hathaway is owner, but not the operator of most of its operating business. Mr. Buffett made it clear that he doesn't do the heavy lifting and much rather the cash be remitted to Farnam headquarter. This is worth copying.

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Wednesday, 18 March 2015

The Ways of Berkshire

I have been reading the annual report of Berkshire Hathaway for several years now, and there is always something interesting in it. I believe it is a worthy report to guide some amount of investment insight (Link) Berkshire Hathaway Annual Report 2014

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Sunday, 15 March 2015

The Top Five Economic Extractors...

Over the course of this past week I started looking at the idea of what makes a good economic extractor. 

I found elements of whom and what businesses made for leaders in this field of operation. By economic extractors I mean businesses that take cash out of an economy or simply put; take the money out. 

  • The entertainment business is an economic extractor. We assembly around the TV for the sitcoms, music videos and information to decide where to go for an evening out. Las Vegas was built on deserted land with the hub of its business activities embedded in entertainment. Everything else spins off entertainment. Getting married, room and board, food services, cleaning services and the supporting utilities to keep that engine going to complete that ecosystem. It's light, action and camera.
  • The global conglomerates are those businesses that go searching for bolt on-s and/or tuck in-s businesses to complete their collection of cash generating units (CGU) with a kind of management that treat this collection of business like a closed user group (CUG). Berkshire Hathaway is a wonderful conglomerate that keeps growing and growing like a lying Pinocchio nose or better yet,  going like a energizer battery in a bunny rabbit. Berkshire is a great cash extractor. 
  • The financial services are the pipeline of the cash ecosystem that feeds capital into the society and at the same time takes away a piece of that capital to perpetuate its relevance and continuity. In essences, it's the oxygen or life blood of all economic activities. Capital is the linchpin in the scheme of things that establishes the connection between labor and land/internet. In this year's Berkshire annual report of 2014 Mr. Buffett recommended the book: Where are the customer's yachts?: or a good look at Wall Street by Fred Schweds Jr. Financial services business is a helper that turns up party requiring capital, but it does so as extractor.
  • The internet based business is all about the connection economy. The internet is the ultimate scaler of an idea and it redefines what an economic moat looks like without land and water. Land and water no longer get into the way of commercial activities in an information age. A smart phone, the computer cloud and big data is all that matters in the world today. Google, Microsoft and Apple hold cash reserves standing over $300 billion which is more than a Germany's and U.S combined.
  • The Chinese people are the most innovative people in the field of reverse engineering and copycat learning. There is very little comparison to the Asian people when it comes to continuous learning which compounds like interest rate. The Chinese people copy everything and most of all crowd out any market that gives them competitive advantage. China leads the world in people count and they have been using that advantage as their driver for economic growth. People are everything to enable the extractor.
The investment insight here is simply to copy what existed before, build on it and succeed.

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Sunday, 8 March 2015

The Copycat Investor (Part Two)

The last time I spoke about the philosophy of a copycat investor on the investment approach taken and what drives the investment decision, I tried to distinguish the copycat investor from the coattail investor. This time I want to look at the copycat investor in a little different way. If you are going to copy the ways of Mark Zuckerberg, you cannot start another Facebook and expect the same level of success. Seek to connect the earth in a different business space.

Peter Thiel in his book Zero to One wrote about the principle of moving an idea from zero to being number one in a space. He went on further to encourage that the investor avert becoming disruptive when entering a business space, but rather try to create a difference and strive to become a monopoly.

There is only one Berkshire Hathaway and indeed only one Warren Buffett, only one Apple, and only Microsoft.

  1. Be a monopoly (the only one your investment space)
  2. Being non competitive is an advantage (market disruption is not necessarily a good thing) 
  3. Bolt on useful ideas to complete your own (reference what works)
  4. Bring different talent to bear on your efforts (check your ideas)
  5. Beware of the known risk and provide for it (caveat emptor)
I like what these bloggers are doing:

  1. Tia Lopez
  2. Brian Johnson
The copycat investor can master the cloning business by designing his own lego.

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