Friday, February 17, 2017

"'Alpha' in Real Estate"

Great essay in PIB about real estate investing:

I’ve met many rich men in my long life, and I must confess that the category of rich man that most annoys me is the real estate landlord, simply because he seems to do the least work for his wealth. I’m not talking about visionary developers who create buildings out of nothing, but rather those who allocate their capital—or, often, the capital of their ancestors—to existing real estate, leverage it up, and sit back passively for years collecting rent checks and refinancing along the way, secure in the knowledge that the government offers explicit and implicit subsidies to their “efforts.” It’s both amazing and annoying how well you can compound wealth over time in this way, provided you’re lucky enough to avoid a downturn in which your leverage kills you.
I've seen many real estate investors blow up. They seem to operate under the philosophy that they shouldn't have as little equity as possible in their holdings, constantly tapping it with refinancings and using the proceeds to buy more property.

Great Composers: "Bach Johann Sebastian"

Thursday, February 16, 2017

Tuesday, February 7, 2017

Good Point on Trump & Markets

A comment over at MR:

I am perplexed by the strength of the markets. I think Trump is a buffoon – but a very amusing buffoon with the right sort of political enemies. I would have thought that the markets would be more upset. After all, they bought and paid for Hillary. Surely they expected value for money?

It suggests that the Clintons weren’t selling influence. They were selling protection. People had to pay them or they would regret it later when Hillary was in power. So everyone is relieved that they are gone. For now.

Sunday, February 5, 2017

Review of The White Sharks of Wall Street: Thomas Mellon Evans and the Original Corporate Raiders by Diana B. Henriques

Thomas Mellon Evans was a raider who took control of companies in the 1950s, decades before the LBO/M&A boom. This biography, White Sharks is perhaps the poorer cousin of the recent Dear Chairman, which I think is a better pro-activism book.

However, it's good to be steeped in this stuff if you want to do it, to know the history and where the rules and traditions of activism and takeovers came from. Just a funny example, the SEC's "flimsy proxy rules" were "designed for the polite coronation of incumbent management," and not, you know, an actual contested election. (Which reminds me, I do not think that it is legitimate for management to use shareholder money to lobby the shareholders to keep their sinecures.)

And speaking of roll-ups and conglomerates, this sheds light on why the 60s conglomerates were built of dissimilar companies instead of being horizontal or vertical integration strategies:

"The government's widely publicized antitrust initiatives, so infuriating to Tom Evans, had made most new company-shoppers more careful. They shunned companies whose business or products resembled their own, and they ignored vendors and distributors who stood upstream and downstream from their own manufacturing processes."
What a typical unintended consequence of regulation.


Review of Ogilvy on Advertising by David Ogilvy

Ogilvy on Advertising was published in 1985, and David Ogilvy pounds the table that long, verbose copy sells best.

He talks about copy that's 500 words, or even thousands of words, in newspaper and magazine print advertisements. As an example, Ogilvy liked the Grand Canyon Battle ads written for the Sierra Club by Howard Gosage. Overall, he thought advertisements should be hard to distinguish from the content that surrounded them.

Yet you don't see much copy like that anymore. Are people too illiterate or too low attention span? Or is advertising more like fashion, where the important thing is to be a status signal, which results in constant change?


Review of Distant Force: A Memoir of the Teledyne Corporation and the Man Who Created It by George A. Roberts

You have probably heard of Teledyne. It is one of the companies profiled in The Outsiders, and then I have mentioned it in the past in the contexts of James Ling and also share repurchases.

The man behind it was Henry Singleton. His right hand man was his West Point classmate George Roberts, who wrote Distant Force as a memoir of the company.

Teledyne was a roll-up of electronics, aerospace, and other technological businesses starting in 1960, which was after Ling started his roll-up strategy. Roberts says that Singleton studied Ling, which is interesting since he did avoid Ling's acquisition mistakes, and is now considered a genius "Outsider" (while Ling who went bankrupt is obviously not).

In his review of The Outsiders, youngmoney said, "The Outsiders is popular because it's inspiring rather than because it's informative. The book doesn't provide nearly enough detail for readers to determine why the capital allocation decisions it chronicles were successful". 

Roberts has nothing but praise in the book for everyone he worked with at Teledyne. The company's subsidiaries were criminally prosecuted multiple times for various infractions during his tenure but he mentions no names. The book is a litany of what happened at the company but has almost nothing on why it happened. This may be because Singleton left everyone in the dark about his motives and intentions. (Maybe that is the real success secret to take away from the book?)

There is a CD-ROM in the back with "Teledyne annual reports," but these are all marketing brochures and company newsletters, not the annual financial reports. Sure, the compounded annual growth of Teledyne stock and shareholder equity was phenomenal, there is really not much in this book that would be useful for reverse engineering what Singleton did.

The streak of acquisitions happened during the 1960s, which was a bull market with high P/Es. The big years for share repurchases were 1972-1976, which is when the Schiller P/E got down below 10. (The lowest it got during 2009 was 15x.) Yet Roberts does not give any interesting financial ratios to explain the capital allocation decisions.

For example, why buyback stock instead of continuing the roll-up strategy during the bear market? Not that the decision was wrong, but what was the rationale? Also, what was the story with the insurance company acquisitions? No book value multiples are given. Why didn't they buy any Geico? What did Teledyne management think of Berkshire Hathaway and Buffett? (We know that Buffett does really respect Singleton.)

Singleton made some very astute moves into and out of bonds but... what was his method for timing interest rate cycles?

Another question that should have been addressed regards the economics of conglomerates. In 1999, less than 40 years after starting, Teledyne split into three companies. Prior to that there had been three other spinoffs. It is not clear why the company parted with so many subsidiaries. Were they better off together or not? Buffett The Collector at least has a rationale for never selling anything and therefore a philosophy of conglomeration.

During the 1970s Singleton favored splitting the stock and also paying meaningless 3% "stock dividends" [pdf], which of course Buffett would regard as totally foolish. It looks as though Buffett's philosophical framework for investing, whatever you think of it, does tower over Singleton's, and his over Ling's.