Latest Activities And Some Of The Books I Read Lately.

Posted on July 12, 2013 by jrv

More than anything I have been focusing my energy on building a house. Since I am doing most of it alone, including the bricks, it goes slow. I could hire help, specially here being quite cheap, but the enjoyment would be lost if I did it. That is a probable reason why I have been writing little. Another reason is because lately I prefer reading than writing.

I have also dedicated time to do some other things like follow some of the companies I have. I sold out recently a small investment in Ryan Airlines. Ryanair is an exceptionally well managed company but in a business that the more I learn about the more I get convinced that it’s bad. I am also not too fond on having small investments. I sold out while the profit was decent. I have finished increasing substantial positions on a Spanish train company called CAF. That’s the only investment I’ve done this year if I remember well. There are also a couple of new companies I have been reading about that seem quite interesting. One of them is National Oilwell Varco and the other is a Sweedish company called Sandvik. Sandvik is a supplier of machine tools, services, and construction materials for the mining and several other industries. It is widely diversified internationally in most of the markets I am interested about. It seems to be very well run, conservative, shareholder friendly and with a very sustainable future. National Oilwell Varco is a supplier for the Oil and Gas industry. It has acquired several companies and integrated them quite profitably. It’s market is also quite diversified, although not as much as Sandvik. It is focused on new non traditional drilling activities, which I think have a good future. It’s debt load is also quite reasonable. Both companies seem to be trading at reasonable prices, but of course if they get cheaper I would be even happier about investing in them.

I read some books. A very interesting classic book was “The Crowd – A Study of the Popular”, from Gustave Le Bon. It is a serious study on the behaviour of crowds. The book was referenced by Roger Lowenstein’s “Buffett The Making of an American Capitalist” and has also been more deeply referenced by Ludwig Van Mises. The book makes me further think that the more people that get involved in investing decisions the worse the results are. Not only does a crowd decision lead to mediocre results, I even tend to think more and more that the intelligence of a crowd is often quite worse than the average intelligence of its members and tends to the lowest of them. This helps me understand why sometimes very bright people acting together act worse than each of them separately. It also helps me understand why Warren Buffett, in its early partnership letters, said that the investment results obtained by groups of more than one member are often bad. Note that if you read French I recommend you reading the original, even though the English version seems well written.

Another interesting book, quite recent, was Ronald Chan’s “The Value Investors”. It’s not nearly as deep as the previous one. It’s interest lies in being kind of an interview to several successful investors. The ones that interested me quite much, besides Walter Schloss, who I already knew, were Francisco Parames, from Spain, sometimes referred as the Spanish Warren Buffett and Teng Ngiek Lian from Singapore. It was interesting to note that several of the investors read enormously, specially the centenary Irving Kahn, which by the way gave a very interesting interview. Kahn highlighted that, even though the classical value opportunities have changed, now there are as many opportunities in the investing world as before. There are much more securities and countries where to invest, and the amount of available information is much bigger. Another interesting point that impressed me quite much is that both Jean-Marie Eveillard, a french investor interviewed, and Francisco Parames were followers of the Austrian school of economics. I have noticed that several of the investors I admire follow that school, or think very similar to it, specially Charles Munger and Phil Carret. Carret was also a friend of Buffett and one of it’s relatively early investors. He is actually the one who introduced me to Von Mises and his thoughts.

Speaking of Von Mises, another great book I read was Ludwig Von Mises’ “Theory and History An Interpretation of Social and Economic Evolution”. An incredible underrated book, philosophical, practical and centered on human action. It shows how human acts and ideas shape history and economical evolution. A must read for any serious investor who wants to increase his analytical thinking.

A very interesting book about financial analysis I am currently reading is Martin S. Fridson’s “Financial Statement Analysis: A Practitioner’s Guide”. The book was referenced by one of the investors interviewed by Ronald Chan. It was a surprise to learn about it. It has nicely shaped and cemented some of my views about the nature of financial reporting and what can be extracted from it. It shows why it pays well to be quite skeptic and focus on human motivations when reading financial information.

I had unfortunately never found a woman investor whom I admired until I stumbled upon Hetty Green. I knew about Hetty Green since I was eight, but forgot completely about her for many years. The first time I read about her was in the Guinness Book of World records. Her record was being the greediest person ever. It is interesting to note that she was a Hathaway investor, even before it was merged with Berkshire or that Buffett entered into the scene. She was infamously remembered as the Witch of Wall Street. Besides her terrible reputation she is currently widely unknown and after reading about her I have shaped a completely different opinion than the rest. She seems to me an outstanding investor, better and sounder than many other much more famous. She survived the great depression with almost no scars and multiplied her fortune through a lifetime of very conservative investments. Holding cash and not leveraging was one of her characteristics, as well as never panicking when others did, buying cheap and selling dear. For those interested about her I recommend her biography written by Charles Slack.

Cheers !
jrv

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Comment On Buffett’s Early Partnership Letters And Latest Activities

Posted on May 17, 2013 by jrv

I here below talk about what I’ve done lately. I address it like a mail because it’s based on what I just sent to a fellow investor friend from Germany:

Hi T,

Thanks, I’m doing quite fine. I’m building a house in the woods just out of town. I’m quite entertained and busy doing that. I lately do not feel like dedicating all day to investing. Therefore I seized the chance to invest in building a country house for me and my family. I dedicate some hours to that, at least to supervise the construction. It has been a very valuable experience and I’m enjoying it a lot. It is also a great physical exercise. We have had to shape the natural surroundings in order to adapt the house to the wild topography. I am more and more sure that the final result will be very nice. If you want to come, or know anyone who does, and help build it you’re invited to stay in my house. It’s hard work but it will let you be in one of the most beautiful natural places on earth and we might have fun talking about investing.

Besides that I’ve been reading several books, lots about human action and economy. The most interesting ones about Ludwig Von Mises. I also read some other good books, from David Einhorn and Roger Lowenstein. I even found an interesting one about Buffett’s sister (Giving it all away).

I here send you Buffett’s partnership shareholder letters. It’s another very interesting compilation book I have read lately. You could say that it’s about portfolio tactics. I would indeed classify those letters as giving a big insight into learning tactical portfolio management. You learn a lot about that subject by reading them, just by seeing how Buffett acted back then. But its also teaches much more than that. I’ve learned a lot more with them than with the “modern” ones. You see very clearly how he managed his portfolios in the early days and I find it much instructive for little guys like us. He had quite a fast turnover and talks very personally about his investing philosophy and portfolio management techniques. In those days he seemed to buy and sell a lot. He concentrated more than anything in cheapness and was deeply value oriented. His strategy was to find and buy undervalued companies and sell them when the undervaluation corrected. He also sold fast if he needed money for a better idea. It is interesting to contrast this early strategy with how his portfolio management evolved. In his more mature phase he would concentrate more on great companies, as opposed to undervalued companies. Therefore he would not be too eager to sell just because the undervaluation corrected. He evolved to mainly focus on outstanding businesses. As he grew older it seems that he got more comfortable with the idea that great companies at a fair prices are great investments.

The value to us is that we can learn a lot from what he did back then, it’s more akin to our reality and portfolio size. I also realized that he addressed his partners at a higher intellectual level back then than how he addresses his shareholders now which is one more reason to learn from those letters. Those early letter have been one of the most, or the most, practical investment learning sources that I’ve ever read about. It gives a lot of insight into practical portfolio management tactics.

Thanks for you analysis about Tesco taking into account that Asian competitor DF. It’s a very interesting observation to see how undervalued Tesco ex/Asia would be if you value it’s Asian operations based on its Asian competitors. Then again the apparent cheapness might be inflated if you consider that there are some serious bubbles in some parts of Asia, specifically in retailers. There are indeed probably some serious market inefficiencies world wide.

I have hardly written in the blog because I have more than anything been busy reading. I have not felt the urge to write. This year I have just bought a Spanish train builder (CAF), both for me as well as some family members. I also sold out a small position (XHB). I could write a lot about why I liked that Spanish company but I felt too lazy to do it and invested my time instead in studying it more. My time is split between reading books / building a house / and following my companies, also reading a bit about new ones.

The only company that interests me a bit more now is NOV aka “No Other Vendor”, all the rest I’ve seen does not seem attractive enough. So meanwhile I keep observing, studying and having fun.

Best wishes to you and S.
jrv

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What Does Martin Whitman’s Funds Manager Think Of Applied Materials?

Posted on February 16, 2013 by jrv

Martin Whitman is the Chairman of the board of Third Avenue Funds. Here is what Ian Lapey, the manager of his Value Fund thinks of Applied Materials (source: Third Avenue 2012 second Quarter Shareholder Letter):

In March, I attended the Applied Materials investor meeting in New York along with my colleague Yang Lie, who has followed Applied Materials and other technology
stocks since joining the firm in 1996. Applied Materials’ Chairman and CEO Mike Splinter, along with several other members of the senior management team, presented a compelling long-term investment case for the company, which is the leading global provider of semiconductor capital equipment, driven by increasing consumer demand for mobility. While it is difficult to predict who will produce the next top-selling consumer electronics gadget (although the odds appear to favor Apple at the moment), it seems to be a safe bet that the demand for equipment and services provided by Applied Materials should increase, given its market dominance in many areas of semiconductor equipment, as semiconductor chips become more ubiquitous and more complex, necessitating a greater number and more advanced tools.

This favorable longer-term outlook seems to have been lost on many, as the company’s modest reduction in 2012 earnings guidance triggered a 3% decline in the stock price that day and a subsequent 4% decline through quarter end. Specifically, owing primarily to weak demand for solar power capital equipment, the company projected fiscal 2012 earnings of $0.85 to $0.95 per share, compared to the previous Wall Street consensus forecast of $0.96 per share. As a result, we added to our position in Applied Common at very attractive multiples of about 9 and 13 times 2011 and expected 2012 earnings, respectively. Importantly, we believe that earnings are likely to exceed recent peak 2011 earnings of $1.30 per share in the next few years, driven by the favorable dynamics noted above, as well as an increase in addressable market from the recent acquisition of Varian Semiconductor. Although Applied Materials paid a rich price for Varian ($4.2 billion; 18 times earnings), the transaction was financed with excess cash and very low cost debt and should be accretive next year. Varian is the market leader in the ion implant market, a critical step in semiconductor chip manufacturing, which enables the manufacturing of high performance chips, e.g., for applications requiring faster speeds and longer battery lives. Even after the Varian acquisition, Applied Materials has a very strong financial position, with about $3 billion of cash and $2 billion of debt consisting of senior unsecured notes due from 2016 to 2041 at rates ranging from 2.7% to 7.1%. Applied Common accounted for 1.3% of the Fund’s net assets at quarter end, and we have been increasing our position on further share price weakness this quarter.

I also read the investor presentation and saw its webcast. I was deeply impressed by it. Mostly due to its comprehensibility and above all because I agreed with the idea that whoever wins on the new computing gadgets race (be it Apple, Intel, ARM, Microsoft, Google, Nokia, Blackberry… ?), Amat will keep on selling their machines to build semiconductors. It seems to offers a safe way to invest in the mobility and computing trend without betting for the winner.

I liked to read about someone who basically invested in Applied Materials for exactly the same reasons as I did.

Besides the top quality of their machines and technological moat I would also highlight their strong free cash flows and point out the reduction in shares as well as the stability of it’s dividend as signs of shareholder friendliness.

While Applied Materials had worse earnings than expected in 2012 Ian Lapey had the conviction and seized the opportunity to keep on substantially increasing his positions both in the 3rd and 4th quarters of 2012. Applied Materials’ worse earnings were mostly due to the low capital expenditures from their clients as well as a write down in their solar business. Capital expenditures in the semiconductor industry is generally hard to predict and is very lumpy. This makes Applied Materials earnings very unstable. Personally I do not care about that, on the contrary, that generates volatility on the stock, which makes it ideal for long term holders to build a position at good entry points. It might explain why Ian Lapey kept on adding.

Cheers!
jrv

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Some Thoughts About Warren Buffet, Heinz And Big Cat Insurance

Posted on February 15, 2013 by jrv

This article is published in Gurufocus. It can be read here: Some Thoughts About Warren Buffet, Heinz And Big Cat Insurance

Cheers!
jrv

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“How to Win Friends and Influence People” – A Great Book I Learned About Thanks To Warren Buffett… Plus A Great Poem!

Posted on February 13, 2013 by jrv

When I read the Snowball it stroke me how sensible Warren Buffet was towards criticism and how much his critical mother’s behavior affected him and his elder sister. In that book it is mentioned that one of the best things he ever learned about how to behave was from a self improvement course he took in order to learn how to overcome his fears and speak in public. The man dictating the course was Dale Carnegie who wrote a book called “How to Win Friends and Influence People”. That’s one of the best books I’m reading now (another one is Dan Ariely’s “Predictably Irrational; The Hidden Forces That Shape Our Decisions”). Carnegie’s book is a great self improvement book, entertaining, and refreshingly written. It starts by showing how important it is to avoid criticizing. I’m just on Part One: Fundamental Techniques In Handling People, “If You Want To Gather Honey, Don’t Kick Over The Beehive”. One of the things that impressed me most was a poem mentioned in the book. Here is a transcript :

Father Forgets
by W. Livingston Larned
________________________________________

Listen, son:
I am saying this as you lie asleep,
one little paw crumpled under your cheek and
the blond curls stickily wet on your damp forehead.
I have stolen into your room alone.
Just a few minutes ago,
as I sat reading my paper in the library,
a stifling wave of remorse swept over me.
Guiltily I came to your bedside.

These are the things I was thinking,
son: I had been cross to you.
I scolded you as you were dressing for school
because you gave your face merely a dab with a towel.
I took you to task for not cleaning your shoes.
I called out angrily
when you threw some of your things on the floor.

At breakfast I found fault, too.
You spilled things.
You gulped down your food.
You put your elbows on the table.
You spread butter too thick on your bread.
And as you started off to play
and I made for my train,
you turned and waved a hand
and called, ‘Goodbye, Daddy!’
and I frowned, and said in reply,
‘Hold your shoulders back!’

Then it began all over again in the late afternoon.
As I came up the road I spied you,
down on your knees, playing marbles.
There were holes in your stockings.
I humiliated you before your boyfriends
by marching you ahead of me to the house.
Stockings were expensive -
and if you had to buy them you would be more careful!
Imagine that, son, from a father!

Do you remember,
later, when I was reading in the library,
how you came in timidly,
with a sort of hurt look in your eyes?
When I glanced up over my paper,
impatient at the interruption,
you hesitated at the door.
‘What is it you want?’ I snapped.
You said nothing,
but ran across in one tempestuous plunge,
and threw your arms around my neck
and kissed me,
and your small arms tightened
with an affection that God had set blooming in your heart
and which even neglect could not wither.
And then you were gone,
pattering up the stairs.

Well, son,
it was shortly afterwards
that my paper slipped from my hands
and a terrible sickening fear came over me.
What has habit been doing to me?
The habit of finding fault, of reprimanding
- this was my reward to you for being a boy.
It was not that I did not love you;
it was that I expected too much of youth.
I was measuring you
by the yardstick of my own years.

And there was so much that was good and fine
and true in your character.
The little heart of you
was as big as the dawn itself
over the wide hills.
This was shown by your spontaneous impulse
to rush in and kiss me good night.
Nothing else matters tonight, son.
I have come to your bedside in the darkness,
and I have knelt there, ashamed!

It is a feeble atonement;
I know you would not understand these things
if I told them to you during your waking hours.
But tomorrow
I will be a real daddy!
I will chum with you,
and suffer when you suffer,
and laugh when you laugh.
I will bite my tongue
when impatient words come.
I will keep saying as if it were a ritual:
‘He is nothing but a boy – a little boy!’

I am afraid I have visualized you as a man.
Yet as I see you now, son,
crumpled and weary in your cot,
I see that you are still a baby.
Yesterday you were in your mother’s arms,
your head on her shoulder.
I have asked too much, too much.

I liked the poem a lot, here below is a modern youtube video version. Apparently the voice is the same from the book’s audio version.

Here is what Dale Carnegie said about criticism:

Instead of condemning people, let’s try to understand them. Let’s try to figure out why they do what they do. That’s a lot more profitable and intriguing than criticism; and it breeds sympathy, tolerance and kindness.

After several interesting historical examples about the negativeness of criticizing that poem marks the end of part 1. It concludes with the first principle: Principle 1 – Don’t criticize, condemn or complain.

Dale Carnegie had a huge influence on Buffett. He said that his course was the most important he ever took and changed him the most.

I think that today, when lots of communications are indirectly done online, in a written way that can easily be misinterpreted, Dale Carnegie’s practical advice is worth as much as ever.

I’m sure that the young Warren Buffett saw fast how immensely profitable, in every sense, that advice could be. Since that moment he started to live by the wise principles learned from Carnegie and to practice them in order to improve his behavior towards people and himself.

Being eager to see what other principles influenced Warren Buffett’s behavior I’ll go back to my reading now

Cheers!
jrv

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