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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FII

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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FII

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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FII

The Copycat Investor

A common investment practice of some investors is to lend themselves to coat tailing other investors with a hope of receiving similar success and they do so not knowing why a particular investment philosophy is practiced in the first place.

While coat tailing is good to practice, I believe more can be had from the benefits of becoming a copy cat investor. This investment style is a little different from coat tailing. A coat tailing investor sits and waits for the copycat investor to go to pasture first with cash and then he follows.

On the other hand the copycat investor has a principle of practice that informs his investment approach and he isn't sitting and waiting for anyone else to lead off. The copycat investor would much rather no crowd to contend with in his investment space.

The coat tail investor searches for the executed investments opportunity and follow the copycat investor.

Who is a copycat investor though?

Warren Buffett is a copycat investor.

How?

He copied;

1. Ben Graham's net net approach, 
2. Phil Fisher's scuttlebutt approach,
3. Henry Singleton's capital allocation approach
4. Charlie Munger's circle of competence approach
5. Lego's approach

Mr. Buffett was not interested in coat tailing any these folks, but his preference was to take a little piece of each person's style to make himself whole. Ben Graham turned him down when he suggested Geico as a good investment. Today he owns Geico.

Phil Fisher's approach was too focused on trading the stock at a profit as oppose to owning the company for its long term earning power.

Henry Singleton called everything he touched Teledyne, but his key principle was allocating capital where he could receive the highest and best return on capital employed.

Charlie Munger's approach was simply sticking to what works well and stay within that circle of competence of what he knew.

Lastly, the Lego approach is where Berkshire Hathaway bolts on companies and tucks in other companies into its holdings and guard its competitive advantage with a wider economic moat as much as possible.

That's all for now folks.

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FII

A Tour of Mohnish Pabrai's Office

                                          A tour of Mohnish Pabrai's Office

 Link:https://www.youtube.com/watch?v=HNyxloQYe00

There are a few steps to prequalifying an investment. Most good investors have some kind of checklist ritual that they go through before making an investment. Setting the right environment is a prerequisite and Mohnish Pabrai has a very good mental model worth cloning that by firstly moving away from Wall Street like Warren Buffett.

As I’ve always said, “copying good habits is the cheapest investment you can make”. Then the other questions an investor wants to ask are:

1. What are the goals of the investment?
2. What are the actions required to be taken?
3. When do you review your investment position?
4. Why are you still in the investment?
5. What are the risks associated with making the investment?
6. Why, Why and Why?

You need a checklist of items to assist you to avoid risk as also to stay focus on the most important things as you make an investment decision. I refer you to the following;

Atul Gawande wrote a book on the Checklist Manifesto

Warren Buffett’s Checklist

Charlie Munger’s Checklist

Howard Marks’ Checklist pages285-293

That’s all for now folks.

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FII

The Connection Economy

It is clear to me that the new business model evolves on sharing or what is otherwise called "the connection economy". I cite this only because I am wondering: how do you get a competitive advantage in this new connection economy?

The connection economy will find share of mind, share of interest, but not share of space. The connection economy business will seek to find its fan from anywhere the internet ecosystem exists. Call the fan base a clubs, tribes or Googlites or any of the other Dot.com connectors. AirBnB, Uber, Facebook and the list goes on, it is all about connecting.

What is the investment insight here? The business model must be scale-able, pollinate-able, but difficult to copy.

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FII

Understanding the effects of Compounding Interest.

Only but a few persons understand the effect of compounding interest return on the invested capital quite like Mohnish Pabrai.

He best explains how he has invested Pabrai Funds capital in his book: The Dhandho Investor.

An investor can focus on one or two ideas and have your investment come through and staying in a small space watching over that investment. I'd say "you in your small corner and I in mine". Find that one thing that works for you and go do it.

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FII