Buffett, Graham and Munger

Moat or Buffett/Munger style investing happens to be the latest trend. Clearly I am very biased as you will see.

I wanted to share a few thoughts over the Buffett vs Graham argument. Over the years, I have noticed is that what Buffett says and what he does are two different things. Alice Schroeder mentioned this during one of her talks.

Buffett is a cheap guy. Apart from some random event, I doubt he bought anything more than 10 times FCF. That said, it is a lot easier to find mispriced securities in the areas where few people are looking. If there is one big accusation one could throw on the Buffett name that is that he simplifies investment thesis for the sake of a talking point. Munger on the other hand says that it is always good to buy a company with high ROE when prices are depressed. You could see his purchases for DJCO during the crisis.

Graham on the other hand, was interested in Assets and not on the earnings side of the finances. Schloss talks a lot about this and he truly followed Graham to bring wonderful results. Graham was consumed by the Great Depression and that made him focus more on the downside compared to Buffett. There is some significant lack of details as to why Graham closed his partnership. Some say he got bored, others say that there were personal issues. If you look at the partnership details, as they grew their money, it got harder for them to invest in things. I think Graham too hit a roadblock and he couldn’t figure out what to invest in. That combined with personal issues, I think, was the factor in Graham closing his partnership. Buffett too hit a similar road block with this problem and he had to adapt to handling large sums of money. He was trying different options and figured out that investing in earnings power combined with some assets also brought good returns.

As a small retail investor, there is always something to invest using Graham’s style. US may run out of net-nets but you could find them in Greece or Japan. As one goes about growing their assets, it gets harder to invest in these kinds of small businesses where float is very less.

Probability and Investing

I have spoke many times about no-brainer investment. i.e) Investment where there is a margin of safety and you have an upside which will bring you profits eventually.

But, there is a but. Even with the best investment there is a chance that you may lose money on it. We may have imagined 100 scenarios but a new 101st scenario may come and wipe out that investment. 

So what does this bring to.. There is a always, always a chance you will lose all of your money on an investment. So there is a probability of failure with any investment. One must always work towards reducing the probability of losing money in an investment. If you reduce the amount of downsides in any investment, the upside will usually take care of itself over a period of time. 

Investment made without analyzing the probability of losing money is like facing a 100 miles per hour pitch without a safety gear. You may hit it out of the park, but there is a high chance of you getting hurt.

Greenspan on Bill Clinton and Income Inequality 

He (Clinton) had an eye for the big picture too, like the historic connection between income inequality and economic change. He believed dot-com millionaires were an inevitable by-product of progress. “Whenever you shift to a new economic paradigm, there’s more inequality”, he’d say. 

“There was more when we moved from farm to factory. Vast fortunes were made by those who financed the Industrial Revolution and those who built the railroads.” Now we are shifting into the digital age, so we had dot-com millionaires. 

Change was a good thing, Clinton said-but he wanted ways to get more of that new wealth into the hands of the middle class.

Text above is from the book – “The Age of Turbulence” by Alan Greenspan, Page no. 162.

The Best way to begin analyzing a company

Many people do the mistake of looking at Income Statements, Cash Flow reports, new business news, projections about revenues, profits and make their analysis of the valuation of a company. 

The best way suggested by Ben Graham, father of value investing, is to begin with the Balance Sheet. A company can show wonderful income, amazing cash flow and can make wonderful projections about the future.  But one can clearly see from the Balance Sheet, how the company has historically handled its profits.

A company with a wonderful Income Statement full of profits and a bad Balance Sheet must have something bad in the previous years. May be it was the economy or bad management, but a Balance Sheet will tell you how and why the company performed the it did. Let not the current beautiful Income Statement fool you into thinking it is a great company.

A Balance Sheet will also clearly show if there is a Margin of Safety in the current valuation of the company. Margin of Safety is a term introduced by again, Ben Graham and it is defined as the safety net an investor has if something goes wrong that he/she did not anticipate while analyzing a company.

Now, we all invest in a variety of things – home aka real estate, stocks, mutual funds, fixed deposits/GIC/CDs, but rarely we consider “Margin of Safety” when doing an investment.

So going forward, when analyzing a company begin looking at the Balance Sheet before you look at anything. The worst thing one can do is to look at a stock price before the analysis. 

And Run when you hear a recommendation of a stock from an analyst. The analyst is paid money by a company whose stock he is analyzing. Now tell me how his analysis will be. His incentives are based on how good he recommends a stock. So do you think he will be ever on your side?

Online Retail Startups

I have seen the movie of Retail Startups. It ends. 
Long ago in Silicon Valley time, I was part of a retail startup – Moxsie and it was widely acknowledged as one of the pioneer in combining Social Media and Retail. Moxsie also was the first company that sold Independent Designer fashion online. But as the history goes with retail startups, it went under and sold finally to Fab.com. 

Recently (ok its been over six months) the online retail darling for the past few years, Fab.com is slowing down into a small operation and is doing pivot yet another time and/or getting/got sold, I couldn’t help but thinking the fate of all the Internet based Fashion startups. 

Online fashion retailers have folded or going through a terrible time – Fab.com, Modcloth, Moxsie, Zappos – yeah, they ran out of cash and/or sold to Amazon, the list goes on. 

Amazon.com kickstarted the online retailing business but the key difference is that they chose the way of Walmart where they focussed only on pricing to build a business. Their website is not that fancy but really helps someone buying something. While this is going on let us look at the brick and mortar fashion retailers. Specifically they year they were founded – 

Saks Fifth Avenue – 1898
Nordstrom – 1901

Bloomingdale’s – 1861

Lord & Taylor – 1826

Neiman Marcus – 1907

Barneys Newyork – 1923

Interesting isn’t it?

So there is something going on in the fashion retail industry. We all know certain strip malls where any business that springs up there folds eventually. I think there is even a Seinfeld episode based on that. Looks like the online fashion retail industry is following a similar pattern.

I haven’t done any research on why these retailers failed but I see a pattern emerging all around.
Would love to hear your thoughts !