Fortnightly Review February 18, 2018
The Psy-Fi Blog focuses on behavioral finance. The latest post looks at the recent stock market crash and action bias. (link)
This is a transcript of Warren Buffett’s interview with Financial Crisis Inquiry Commission. (Buffett_FCIC_transcript) A few key ideas came from the interview.
Warren Buffett’s (WB) ultimate indicator of the quality of a business is whether it has pricing power or not. “And basically the single most important decision in evaluating a business is pricing power. You’ve got the power to raise prices without losing business to a competitor, and you’ve got a very good business. And if you have to have a prayer session before raising the price by a tenth of a cent, then you got a terrible business.”
He also mentioned that he did not interview management prior to the investment. “I’ve also said many times in annual reports and elsewhere that one of the many, but with reputation of for brilliance in him gets hooked up with a business with a reputation of bad economics, it’s the reputation of the business that remains intact.”
The Bank of International Settlement studied the structure of China’s shadow banking system. (link)
The Economic Times profiles Piramal Enterprise and its pharma division. (link)
Chuck Akre’s Talk at Google (link), he is an insightful value investor. You can also view his discussion with Consuelo Mack on Wealthtrack (link). Mr. Akre’s investment approach is also in a Gurufocus article. (link) His three legged investment approach focuses on business quality, management quality, and opportunity for reinvestment.
The first leg has to do with the quality of the business enterprise, and we’re looking for businesses that earn high returns in the owner’s capital. We spent a lot of time trying to focus on what’s causing that better-than-average result, return on capital, to occur, and is it getting better or worse.
The second leg of the stool goes to the issue of the people who manage the business. And not only are they terrific managers, but are they honest and do they have high integrity? Do they see that what’s happening at the company level is happening identically at the per share level?
And then lastly, the third leg is the issue of reinvestment. We call it sometimes the glue that holds these together. That is, is there an opportunity that exists because of the skill of the manager, the nature of the business to reinvest what we presume is excess cash. To reinvest that in a way to continue to earn these above-average rates of return. And then to that, we apply our valuation overlay, which is our quantitative way of saying we’re just not willing to pay very much for it.
India stock exchanges pulled offshore data in an attempt to bring trading to India. (link)
McKinsey’s recent article Strategy to Beat the Odds (link) analyzes the people side of setting strategy. The article also contained some interesting insights on Economic Profit.
- Companies in the top quintile capture nearly 90% of economic profit created.
- Industry matters a lot with the industry driving 50% of your position on the economic profit curve.
- Mobility is possible but rare.
Investment Wisdom on Twitter posted a great quote from Warren Buffett “Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results.”
Baidu plans a US IPO of its video streaming unit. (link)
FT believes many Chinese companies owned by regional governments may be on the brink of default. (link)
The Heilbrunn Center for Graham & Dodd Investing has an excellent resources page on deep value investor Walter Schloss. (link)
Boston Consulting Group issues their finding from a recent study of CPG Supply Chains. (link)
GMT Research’s latest newsletter investigates window dressing in Asian markets. (link)
Deep Throat is bearish on Alibaba and believes it is a fraud. (link) The blog has been writing about Alibaba related concerns for some time.
Unfortunately, Punjab National Bank in India is facing losses from fraud. (link) The alleged perpetrators are related to the promoter of Gitanjali Gems. (link) Within India, the vast majority of bad loans are at state banks. (link) Bloomberg wrote an article on how the Reserve Bank of India is trying to fix the problem. (link) In 2013, another alleged fraud occurred in the jewelry sector. Winsome Diamonds defaulted causing losses at banks. (link)
The FT discusses changing consumer habits are posing to large food companies. (link)
McKinsey provides its view of the future of airfreight forwarders. (link)
SageOne Investments latest newsletter looks at recent performance in the Indian market. (link)