Book Review: Where are the Customer's Yachts?

It's been quite a while since I've been moved by a book like I was by this one. I was unable to fall asleep last night because the thoughts were so vibrant and alive in my brain. For a book published 74 years ago, much of the wisdom is very consistent to this day and I will exact quote the important points:

"God forbid! ho home and relax. Like most other Wall Streeters, bankers suffer from the inability to do nothing. Your average Wall Streeter, faced with nothing profitable to do, does nothing for only a brief time. Then, suddenly and hysterically, he does something which turns out to be extremely unprofitable. He is not a lazy man."

"As the man said after he had had the subject of relativity explained to him in a few unsuccinct phrases: 'And from this Mr. Einstein makes a living?'"

"When there is a stock-market boom, and everyone is scrambling for common stocks, take all your common stocks and sell them. Take the proceeds and buy conservative bonds. No doubt the stocks you sold will go higher. Pay no attention to this - just wait for the depression which will come sooner or later. When this depression - or panic - becomes a national catastrophe, sell out the bonds and buy back the stock. No doubt the stocks will go still lower. Again pay no attention. Wait for the next boom. Continue to repeat this operation as long as you live, and you'll have the pleasure of dying rich."

Three of the most profound insights to investing summarized very neatly and succinctly. Stop overthinking.

Reading Too Much Syndrome

Could it be possible? Is it even conceivable? Is it heretical? Is it possible that there could be a point when a person has learned too much information? This is a theory that has begun to cross my mind over the last 3 months. As I have reviewed previous blog posts, revisited Evernote bookmarks and reorganized my book collection I have come to an enlightening conclusion: I forget a lot.

I consider myself a pretty voracious reader. Certainly I go in cycles. I will go a month or two where I get a few hot books and it propels me to read more and more and I might finish 5-10 books in a matter of a few weeks. At some point, I usually cool off and go a couple weeks where nothing really piques my interest. But overall, after reviewing my book collection (app. 150 books), I'd say I've done quite a bit of reading since I reached the age of enlightenment (personally, 20). But what have I gained? Surely, a lot. I consider myself well read, well versed, and generally well rounded. I'm a good Jeopardy player, a respected businessman, and when I put effort into it, "quite an interesting conversationalist"(it certainly doesn't come naturally).

But have I gone too far? Well, possibly. While its quite conceivable to reason that subconsciously, all of the information that I have attained has made me the self-conceived "well rounded" person. It is also quite conceivable that I have dumbed down the most important lessons with mediocre lessons. Over the last few weeks, I've come to the realization on three separate occasions that I was teaching myself something for a second time. I quite literally had forgotten the information. Call it old age, call it ignorance, call it ADD but I had absolutely forgotten that I had previously learned something (and important things at that)!

Furthermore, the last couple of days I've had time to reflect on what I am most passionate about and what I want to do after this chapter of my life is complete. I've found myself reinvigorated with the equities market. The first thing I noticed was the noise. Predictions high, predictions low, massive volumes...blah, blah, blah. I found myself deeply annoyed. So I went back to my most trusted advisor, Charlie Munger. Charlie coined a term a number of years ago, "sit on your ass investing", that he applies to his investment strategy. A "sit on your ass investing" strategy is quite literally not a strategy, he just sits on his ass until good opportunities present themselves to be a strategy.

Now let me relate that strategy to reading. We are taught, and it is generally a sound principle, that the more we read, the more we will know. Well, yes in theory, but that fails to take into account that the more you learn, the more you could possibly forget. Back to "the noise" that comes from "Squawk Box" everyday (it's amazing that people actually listen to a show with that name). They fill the air with nonsense. They put thoughts in investors minds that clog reasonable thinking, causing them to make actions against sound market principles. Is that what my reading is doing? Do I read and read and read, clogging my head with "new" mediocre ideas and cloud-out the best, time-tested commandments that I should be living by?

For me, it's back to the basics. Across many different disciplines there is some acknowledgement that humans are only capable of focusing on a small number of thoughts, goals, or processes at one time. Charlie has four, clearly defined investment filters (Do we understand the business?, Does the business have a durable competitive advantage?, Does it have good management?, Is there a margin of safety?). Rather than clouding my head with more and more ideas, I need to go back and master the most basic of ideas and spend more time sitting on my ass.

What are you selling?

I have recently finished Seth Godin's latest book, The Icarus Deception (which is not good btw), and it has led me to conjure on the most basic business question: What are you selling? And I mean this in the most absolute, rock bottom sense of the question. No marketing. No advertising. What is it that you are selling?

For some reason, the question immediately led me to the thought of, "What is Starbucks selling"? How has Starbucks been on such an incredible tear opening thousands of stores a year? Starbucks sells the second most traded commodity in the world, coffee. And it's just that, a commodity. Anyone, anywhere in the world can obtain the exact same beans, roast them and brew them exactly the same as Starbucks and have the same quality of product. What is Starbucks selling?

It's truly an incredible thought. With most of the things or services you purchase in a day, your focus is on price, quality, experience etc. There are quantitative measures that you go through (even if they are subconscious) to come to a rational decision. But why do you wait in the drive thru at Starbucks to get a generic cup of hot water that you could get at any coffee shop in the country? Why do people flock to Starbucks?

Starbucks doesn't sell coffee. Coffee is just the medium through which Starbucks sells the brand. This is a very important point. No matter what line of business you are in, you're not just selling the product, you are selling the brand, you are selling yourself. Howard Shultz lives and dies by coffee. He is the most iconic, inspired coffee drinker of all time. He sold himself and in turn sold everyone on Starbucks.

For me, this is a major revelation. I am all but over the current business we are in. Mentally, I'm just checked out and ready to start anew. Everyone I've encountered has asked me, "Well what's next?". I've avoided all their questioning because I really haven't given it much thought. Certainly, there will be a "next" idea but I don't know what it is. Ultimately, it doesn't matter what it is. With this knowledge in hand, I could sell anything I am passionate about. The medium doesn't matter, it's the message that matters. And that is, "What you are selling". It's not a product or service, it's the message or feeling that that product conveys to the end user. Harness that feeling and you can sell anything.

Kill Facebook

Since my last post about Facebook on May 23, 2012, I have become an obsessive cynic. Today Facebook is trading at a PE of 1,903. Yes, 1,903. Facebook as a business is fundamentally flawed and it's valuation is even more flawed.

Facebook was founded in 2003 to connect people through the internet. I know, I was one of the original classes of college freshman who joined Facebook back in 2004. Facebook took an industry that was dominated by Myspace and became the purple cow. No longer was it hipsters and bands but it was just anyone looking to connect through the internet. Over the years, Facebook has grown to 1 billion users. Which brings me to my first point. There are only 2.5B active internet users in the world, at this point, Facebook can only grow another 250% assuming 100% market penetration. Trading at a PE like the above, should assume there is huge growth potential in the market - there isn't.

But the point of Facebook is no longer to connect people. The point is to advertise. Facebook trades at this crazy valuation because investors (and fools) believe that Facebook will change the way we communicate with customers. I say "we" because I am a small business owner who can speak from experience advertising on Facebook and not from "potential", which is Wall Streets perspective on how Facebook works. Facebook is great. It allows us to connect with our 12,000 fans through pictures and videos, allows us to communicate deals and specials and receive feedback all in the same place. A novel idea for sure. But how valuable can that really be? Advertisers spend about $500B worldwide annually. Currently, about 25% of that money is spent online. As the world races to, "get connected" surely that figure will increase. So let's say Facebook can possibly capture 50% of that market (if it will even be allowed by the FTC), that pegs us at $125B in revenue annually - currently more than AAPL.  These assumptions are at least what investors are hoping for.

Buy the Business, Not the Stock

Think more about Charlie's idea of buying a business rather than buying a stock. A reasonable valuation on a business can go to shit if the underlying business fails. Even if you find something with a huge margin of safety, the business can very easily collapse to competition or industry changes. It's a concept that you tend to think about for a second and say "yeah, that makes sense" but if you truly stop to dissect and invert the concept, more important than the price of any stock is the underlying value of the business you are buying. I know this sounds elementary but I just spent 5 minutes actually thinking about the statement and not just agreeing with it. 

To me, Facebook at any valuation is not as valuable in my portfolio as Wells Fargo at any price. Facebook is a 5 year old company in an industry that is subject to crazy breakthroughs and black swans. It's impossible to say where the internet will be in 5 years. I can much more confidently say that Wells Fargo will still have 10,000 branches and a trillion in AUM in 5 years. You say, "well what if you made this statement in 2006, you would have gotten whooped over the next 3 years". Which I did. But if you could have identified the worst offenders in the industry beforehand (Wachovia, Lehman, Bear) and bought WF through the downturn, your return would have trounced the market (WF up 300% off its 2009 low). And to that point, internet (tech) stocks have not faired so great over the last 5 years either. 

My point being: things people can not avoid using no matter what - banks, grocery stores, cars, fuel, coke, gum on the whole, should provide you with better businesses in the long run than things that can change - retail, internet, technology. I think they need to be bought at a reasonable price and if you can get them at a great price all the better but why should I clutter my portfolio with stocks that I hope will go up when I can load it with institutions that people must have no matter how living evolves over my lifetime? If I can load my portfolio with banks, X, FM, and KO their price may fluctuate but their underlying business is solid steel. And if they screw if up at some point (new coke, housing downturn, banking collapse, cars sucking), that should be an opportunity to pick up a great underlying business at a discount. 

This macbook air is absolutely amazing. Was I using it 5 years ago? No? Will I be using an apple product 5 years from now? Maybe. PNC is PNC. I was using them 5 years ago, I am using them today, and I will probably be using them 5 years from now. 

I noted on this in my previous post but I think in searching for a greater truth, most people have overlooked the message that Charlie and Warren are really trying to send. Quit over thinking investing. Models aren't needed. Calculus isn't needed. Beta isn't needed. Buy good companies at good prices and just go do something else. Its a tenant of Warren's to buy a company and not look at it for ten years. I think this should be a commandment. Revisit the company and industry once a year to make sure nothing material has changed. If not, ignore the stock price and carry on. Tdameritrade is the death of the value investor. Being able to check how much money one is making every 5 seconds allows emotion to enter an otherwise rational business decision. 

Having said, I am going to do something I never do and that is recommend to myself to review XLF in the future. The US banks are still coming off demolition in terms of earnings. They got nailed in the financial downturn. But the value of their AUM, brands, and earnings power in the future is remarkable. The whole XLF is trading less than book value. On the whole, owning American banks for the long run seems like a no-brainer to me. 

Poor Charlie's Almanack

Being only 250 pages into the book, it would be premature to call Poor Charlie's Almanack the best book I have ever read. But it is definitely up there. There will be many points to discuss but the one that is stuck with me right now is Warren's idea of "20 investments for a lifetime"

If you are only given the opportunity to invest 20 times over your whole life, you will make those investments very very wisely. This is generally counter to the way money is managed in the rest of the world. I would say the average person goes through 20 investments a year. Over a 30 year period thats 600 investments. How important then is each investment?

Charlie continually stresses how vital Berkshire's top ten investments were to the overall success of the business. For example, they bought a significant stake in the Washington Post in 1973. Their investment has returned 50 fold since. When you see a great opportunity, you need to have the liquidity and chutzpah to make it happen.

Another of Charlie's (and also Warren's tenants from past readings) tenants is a lazy approach to investing. Lazy is not the proper term. Patient is a more proper term. The most prevalent example of this is Charlie and Warren's rule to go home at 5pm while all other manager's work through the night. What could they (I) possibly be doing? Charlie and Warren are so comfortable in being patient waiting for one or two investments a year that they don't have to worry about a new investment every day. There is no rush to act. Which is also why Charlie and Warren are not in new york. They don't give a shit about what's happening on wall street. They don't want Goldman to call them to talk volume. They want to be renaissance men who can apply their omniscient knowledge to investments.

Berkshire Hathaway Annual Meeting 2012

What a day. This year, Mike, Pete and I decided that the stars have aligned and it was time for us to make the journey to Omaha to see The Oracle.

I arrived in Kansas City on Wednesday night where Pete picked me up from the airport and we drove toward Lincoln, NE. We ended up sleeping in Pete’s truck at a rest stop on the side of the highway. We picked Mike up Thursday morning in Lincoln and headed for Omaha. Thursday and Friday were relaxing days where we were able to catch up and just hang. 


Friday night I got my first taste of “Networking with Mike Morton”. We went to the YellowBRKers meeting for a cocktail hour. In retrospect, it was the best opportunity to network and get to meet people. We met some interesting people despite my absolute disdain for “networking”. We went to Borsheim’s for the shareholders cocktail hour. It was a complete zoo and we left immediately. It’s unfortunate that Berkshire has had to split thus allowing any clown to become a shareholder. We went to Gorat’s for dinner where we had a nice meal and met some good folks.

We arrived at the CenturyLink Center at 4:45am Saturday morning. We were nowhere near the front of the line. Mike was able to meet Mohnish Pabrai standing in line, which was awesome for him. It was a dead sprint once the doors opened to our seats in section 125.

What a day it was. Over the last 7 years, I have learned a lot from the teachings of Warren and Charlie. Saturday was just confirmation that I am on the right track. Listening to them speak, I found that their values are exactly the same as mine. Most importantly, we don’t act like Wall Street. I don’t have a Wharton MBA. I don’t network with other fund managers. I love being negative on an idea before being positive. The day reinspired me to be a fund manager.

We went to Whitney Tilson’s after party, which turned out to be a scam. He was there but so were 100 leaches that fall into the “networking” people mentioned above. Pete and I, tired of having the same conversation over and over, made a B-Line for the door. Going downstairs, we crossed paths with Ajit and got a picture that I can’t wait to hang on my wall.

Overall, it was one of the most inspiring days of my life. I am so glad I spent the money to go see Warren and Charlie before there is no more Warren and Charlie. I plan to send a letter to Charlie, in hopes of becoming his protégé. I will be able to tell constituents and descendants alike about the day I spent with Warren and Charlie.

For a better penned entry, see Pete McBride at:

http://harveysrun.com/2012/05/07/the-woodstock-of-capitalism/