Investing in Alphabet

This post is written by Mikael Tarnawski-Berlin. It was initially published in February 2017 on his blog Mikael is the portfolio manager of Pandium Global, a fund he started in 2014.

Investing in Alphabet

Although I’ve always been aware of Google’s strong business I’ve never really taken a closer look. I’ve kind of assumed that it is unlikely to be undervalued given its strong performance, size and fame. But, a friend of mine recently started an online business selling a high price, standardized service with no repeat business. During our discussions about running it, I got a different understanding of Google and its moat. My “insights” are probably known truths in the VC/tech industry, but I’ve not seen any research on Google in the public equity markets that takes this approach.

Google is in the (online) real estate business

Most sell-side analysts look at Google’s future growth potential based on how much of the global advertising market they can take. Since Google already has around 15% of the total global market and around 45% of the online advertising market the future potential seem limited. But, I think that’s an incomplete picture. What Google does for businesses, as a key gateway to the internet, is to replace physical real estate as a mean to connect with customers. Advertising is one part of it, but not all. The reason is the power of competitive forces. As businesses move online there are large cost savings compared to doing business offline, e.g. rent. But, just as lower fuel prices have limited long-term effect on airline profitability, the cost savings of the internet will not benefit businesses in industries with low barriers to entry. Instead competition will make sure all savings are spent on increased value for the consumer and on expenses related to connecting with the customer (now that the businesses do not have a physical presence).

A (very simplified) example: Pretend you start an online business selling cameras. By being based online you save 20% on costs compared to your competitor that has a store on a busy shopping street. You lower prices by 5% and hope that customers will buy from you instead. But since the internet is big, they do not even find you. So, you spend another 2% on Google AdWords and sales take off. Soon your success attracts attention and since there are no barriers to entry, a couple of other entrepreneurs set up online camera stores. To get closer to the customer they start bidding up the price for the adwords. Your sales decline so you lower prices and increase your adword budget a couple of percent. The competitors soon do the same. You get the point. In the end, competition will force the online camera stores to spend the 20% cost savings on online advertising and higher value to the customer because at that level they make just enough profit to justify staying open.

This picture shows the markets lack of understanding. Online does not lead to higher margins or returns. Competition will make sure that that profit is competed away and decline to what it used to be in offline. The winner will be the end customer and the one that has customer access (Alphabet).

To conclude, I think the online advertising market is not only taking a piece of offline advertising but from all other cost savings related to moving from an offline to an online world. That does not only include the obvious ones like rent but also others like information asymmetry and search cost. It is big. Google is therefore not only in the advertising business, but also in the real estate business. Being the main method for searching the content of the internet they have a prime location. With this as a framework and considering that we are still early in the offline to online transition I think that Google has a longer runway for growth than most seem to assume.

Will Google keep its prime real estate?

So, Google’s moat is that is one of the key connection points to the internet for consumers. They have an 80% market share of global search today and using Google is well ingrained in people’s behaviour. They have reached this position by offering the most accurate and fastest search results. Going forward, by having the most queries and user data their search results become increasingly more accurate which further strengthens their moat. Being the biggest also makes them the most attractive platform for businesses to advertise on.

Is Google’s moat impenetrable? No, none are. In time the marginal benefit of all the search data is likely going to decrease and the search quality difference between Google and its competitors will decline. Maybe, that has even happened. Also, given the low switching cost people’s behaviour could change due to external events or smart competitors. That said, even a giant like Microsoft/Bing has been slow to make a dent in Google’s search business. Another thing that will likely happen is that Bing and others will reach critical scale and justify them as advertising channels. And since you can get better returns on your advertising dollars there today (since the cost-per-click is usually lower) it is a threat. That said, I think all these changes will happen slowly given Google’s strong position today.

Another threat is the creation of other prime real estate. A good example would be Amazon. If you want to buy a product in the US today, you are probably more likely to go straight to Amazon instead of through Google. Amazon has a better platform for making informed product purchases through its wast selection and review data base. Another example would be popular apps. If consumers start to access the internet mainly through apps it would diminish Google’s value proposition to advertisers. So far, that problem has mainly been related to platforms that are already stand alone prime real estate (like Amazon).

My view is that the consumer can keep a limited number of choices/connection points/sellers in the top of their mind. Google is likely to be among those since the search function is critical to accessing the internet.

Potential outside of search

Besides Search, there are other businesses that will contribute to the growth going forward, YouTube and Cloud being the most mature today.

YouTube has over a billion users. Today the service already reaches more 18-49 year olds than any cable network in the US. In 2015 users where spending on average 40 minutes per session. Online video advertising is expected to double over the next 3 years and given YouTube’s strong position I am optimistic about its prospects. Unlike the Search business YouTube takes a piece of the “regular” video advertising budget. But it adds value by being much more exact. When video advertisers can target customers based on location, behaviour and other factors, it creates new possibilities. I have for example seen video ads for a local bicycle shop. Since I did not know about the shop and was just looking for a helmet to my daughter, it was well spent money by them.

Google is currently the third biggest provider of public cloud computing services (behind Amazon and Microsoft). The industry growth is tremendous, last year the top three players grew well above 50% in total. It is too early to tell exactly how it will play out, but I think there is a good chance cloud computing will become a meaningful business for Google.

Google is known for making many different so called “Other Bets”. They are high risk-high potential projects within different industries. It includes e.g. Nest, a producer of smart home devices, and Waymo, an autonomous car developer. The Other Bets are still small and I have not assumed any value or growth from this segment.

Management is great and financial discipline and transparency has been introduced

The main goal of management should be to protect and widen the moat. From that standpoint the leadership team of Google has been excellent. There have been at least two consumer behavior changes that could have displaced Google: mobile and video. But management saw them coming and proactively acquired and developed both Android and YouTube. Both are today dominant in their respective market and critical components of Google’s moat.

Google’s management have been criticized for how frivolously they spend money on ideas outside of the core business and the lack of transparency. Both issues were dealt with through the hiring of Ruth Porat as CFO in May 2015. She was previously CFO of Morgan Stanley and was recruited to provide “adult supervision”. She has already made an impact. Google now reports its moon shots projects separately from Search and evaluate and manage them closer from a financial perspective. They have also started to return cash to shareholders through buybacks, which is good.

Valuation is attractive

Google is being valued at ~18 times my estimate of next years earnings (on the core business, adjusted for cash), which I think is too cheap for a company I expect to produce double digit growth for many years to come. The S&P 500, which has weaker fundamentals on every key metric, is trading at a 17.5x forward multiple. I think that the investment will produce a satisfactory return with limited downside.

Why do I exclude Other Bets, especially since they are losing $3.6 billion?  Because, it is discretionary growth capex. Now, that financial discipline has been introduced I expect management to review the projects from a return perspective and close the unpromising ones. Over time, the value should be above zero.

You can follow Mikael on Twitter: @mtbpandium

Disclosure: Hurricane Capital is not receiving any compensation for publishing this text. This article is informational and the opinions expressed is solely the authors own opinions at the moment of the original posting. Always do your own due diligence and contact a financial professional before executing any trades or investments. Hurricane Capital does not (at the moment) own any Alphabet shares. 


Mohnish Pabrai: Three Great Books to Read

Mohnish Pabrai visited Talks at Google on June 5, 2017. At the end of this talk Mohnish recommended three books.

  1. The Beak of the Finch: A Story of Evolution in Our Time, Jonathan Weiner
  2. Am I Being Too Subtle?: Straight Talk From a Business Rebel, Sam Zell
  3. Damn Right: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger, Janet Lowe

Disclosure: I am not receiving any compensation for any of the links provided. I have no business relationship with any company or individual mentioned in this article. I have no position in any stock mentioned. 

#WeeklyInvestorReader | wk. 26

Note to readers: #WeeklyInvestorReader contains a few of the articles I read during the week. Visit my Twitter @HurriCap for any other articles that may not have been included. 

Jim Chanos: U.S. Economy is Worse Than You Think – Institute for New Economic Thinking, June 30, 2017 | “The famed short-seller offers a mid-2017 reality check for ‘fake fiscal news,’ economic pipe dreams, and ‘portents of even worse things'”

How a 36-year-old Wall Street prodigy saved Burger King – Business Insider Nordic, June 12, 2017 | “Daniel Schwartz had spent a decade working his way up the corporate ladder on Wall Street when he decided to test his skills in a different trade: cooking burgers and cleaning toilets at a Burger King restaurant in Miami.”

This is Your Nightmare Scenario – The Irrelevant Investor, June 24, 2017 | “What would happen if stocks crash? What would that do to people’s retirement plans? How would that change the way young people think about stocks? And what would it do to our country?”

ENDS, MEANS, AND ANTITRUST – Stratechery, June 28, 2016 | “The European Commission levied a record €2.42 billion ($2.73 billion) fine on Google yesterday for having ‘abused its market dominance as a search engine by giving an illegal advantage to another Google product, its comparison shopping service.'”

A Street Fight Among Grocers to Deliver Your Milk, Eggs, Bananas – New York Times, June 22, 2017 | “Delivering food requires military precision: Bananas can’t get cold. Produce can’t get warm. Eggs, of course, must not get broken. And people expect their food to arrive at specific times.”

4 reasons why Buffett’s partner Charlie Munger considers Albert Einstein his hero – CNBC, June 28, 2017 | “To support his claim, Munger dropped a quote from an unexpected hero of his: Albert Einstein. The theme throughout his speech is that of applying different disciplines to one’s business and career decisions. Near the close of his speech, Munger poses the question: ‘How should the best parts of psychology and economics interrelate in an enlightened economist’s mind?'”

Why Retailers Should Fear Amazon Wardrobe – L2, June 21, 2017 | “Once a sector reaches 20% e-commerce penetration, clear winners start to emerge – specifically Amazon, which generates over half of online retail growth. This has already happened in media and electronics, and now it’s happening in apparel, where e-commerce now accounts for 21% of sales in the US.”

From Music to Maps, How Apple’s iPhone Changed Business – FOX Business, June 23, 2017 | “Ten years ago, hailing a cab meant waiving one’s arm at passing traffic, consumers routinely purchased cameras, and a phone was something people made calls on.”

Google Fined Record $2.7 Billion in E.U. Antitrust Ruling – New York Times, June 27, 2017 | “Google suffered a major blow on Tuesday after European antitrust officials fined the search giant a record $2.7 billion for unfairly favoring some of its own services over those of rivals.”

Taking the pulse of ESPN – Sports Business Daily, June 26, 2017 | “Skipper’s message was simple and direct: ESPN needed top sports properties like the NBA, especially in an environment where pay television was shedding subscribers. It would be a strategic mistake to allow competitors to get such a premium sports property. ‘You have to build a deeper moat,’ he often said when discussing competition. In Skipper’s folksy Southern style, that meant keeping ESPN’s enemies at bay. It meant identifying the rights ESPN wanted — the NFL, NBA, MLB, MLS, college sports, tennis — and paying a dollar more than anyone else to get them.”

Buffett’s Bet on Store Capital Shows Not All Retail Real Estate Is Equal – Bloomberg, June 26, 2017 | “Warren Buffett is betting that some types of brick-and-mortar real estate will hold up better than others in the age of Amazon.”

Some of the shine has come off Morningstar – Chicago Business, June 24, 2017 | “Mutual fund ratings powerhouse Morningstar isn’t rating so high with Wall Street lately. A stock analyst who had been covering the Chicago investment research company for a decade dropped coverage this month, citing inconsistent earnings in recent years and a potential profit decline again this year. Shareholders seem to agree: Morningstar shares declined 5 percent for the year through June 22, even as the Standard & Poor’s 500 Index climbed 16.5 percent.”

Stop Reading This Blog. – Oblivious Investor, June 26, 2017 | “Admittedly I don’t mean for the headline to apply to every reader. But I don’t mean for it to be just “clickbait” either. I genuinely mean that some of you would be better off unsubscribing from this blog/newsletter.”

S.E.C. Lets All Firms Keep Parts of I.P.O. Filings Secret – New York Times, June 30, 2017 | “In an attempt to revitalize the public capital markets, the nation’s top regulator of stocks is turning to stealth mode. The Securities and Exchange Commission, in Walter J. Clayton’s first major policy move as chairman, is expanding a program that will allow all private companies to keep some details of their finances and business strategies under wraps early in the process of an initial public offering.”

Amazon Deal Stirs Things Up for Blue Apron – University of Maryland, June 23, 2017 | “For Blue Apron, Amazon’s blockbuster deal to acquire Whole Foods couldn’t have come at a worse time, says Jie Zhang, marketing professor at the University of Maryland’s Robert H. Smith School of Business. The New York-based meal-kit delivery service was just beginning the marketing for its initial public offering, in which it hopes to raise more than $500 million, when Amazon announced the $13.7 billion deal that could upend the food-retail industry.”

AMZN + WFM = $1T – L2, June 23, 2017 | “Amazon’s acquisition of Whole Foods, should it close, is the white flag (the kind signaling one lap to go, vs. surrender) in Amazon’s march to a trillion. This transaction will be to retail what Facebook’s acquisition of Instagram was to media — the deal everyone wishes they had done. Amazon will reach $1T in value in the next 36 months, at the expense of … everyone.”

Market-beating investor Dan Loeb trumpets ‘rare’ opportunity in Nestle, his biggest bet yet – CNBC, June 26, 2017 | “Third Point owns around 40 million shares of Nestle, according to an investor letter published Sunday. The position totals over $3.5 billion and includes options. The Nestle investment is Third Point’s largest ever, according to the firm.”

Buffett’s Berkshire Hathaway studied this stock for three years before buying in – CNBC, June 26, 2017 | “Store Capital CEO says Berkshire Hathaway followed the company “closely” beginning in 2014 before investing this year. The company announced Berkshire Hathaway invested $377 million in Store Capital, which represents a 9.8 percent stake in the real estate investment trust.”

Amazon’s Grocery Ambitions Spell Trouble for Big Food Brands – FOX Business, June 26, 2017 | “ Inc.’s deeper push into the grocery business threatens to further pinch packaged-food companies already coping with slowing sales. An enduring shift by consumers toward fresh and natural options is eating into the business of big food brands, like Kraft Heinz Co., Kellogg Co., and Mondelez International Inc. They also face growing competition from store brands and upstarts.”

In Swedish

Så stora är Uber i Sverige – Dagens Industri, 2 juli, 2017 | “Uber är omskakat, vd-löst och förlusttyngt. Men i Sverige levererar hundratusentals användare kraftig vinst, kan Di Digital avslöja. ‘Vi fortsätter att växa jättesnabbt’, säger Sverigechefen Martin Hedevåg.”

Rapporterna: en viktig detalj HM inte bemästrat – Gottodix, 2 juli, 2017 | “Tar en tur i detaljerna i HM:s rapport. Den som är lite fräck måste faktiskt ställa frågan varför det här ska vara ett globalt bolag. Riktigt bra går det ju faktiskt här hemma med omnejd.”

Richard Bråse: H&M håller drömmen vid liv – Dagens Industri, 29 juni, 2017 | “H&M håller drömmen om marginalvändningen vid liv när modebolaget levererar oväntat stark lönsamhet i andra kvartalet. Men inte ens vd Karl-Johan Persson verkar övertygad om att modebolaget kan leva upp till ambitionen att vända den fallande marginaltrenden i år.”

Karl-Johan Persson: H&M ligger inte efter digitalt – Dagens Industri, 29 juni, 2017 | “H&M:s resultat för det andra kvartalet var bättre än väntat men en svag försäljningstillväxt och höga varulager oroar. ‘Det finns en bild av att H&M ligger efter digitalt. Det stämmer inte, vi har en framgångsrik onlinehandel för samtliga varumärken och vi kommer ha en fin tillväxttakt många år framöver’, säger vd Karl-Johan Persson.”


All You Need Is… Time

“The difference between successful people and very successful people is that very successful people say ‘no’ to almost everything.” –Warren Buffett

Warren Buffett is among the richest men in the world. Warren can buy pretty much anything he wants to, and more than most other people could ever dream of. Yet he seems to be frugal, not a big spender. But there’s one thing that even Warren Buffett cannot buy, and that is time.

Time for me is also in short supply. Working in the days and then exercising, reading and blogging at night also makes you wish you had a few more hours every day. Like Warren, I also think time is the most precious thing. One thing that I have changed lately is my presence on Twitter. Right now, I haven’t been active on Twitter at all for a few months. It just takes to much of my attention and energy. That’s why I decided, at least for now, to take a Twitter break. No tweets, no retweets, nothing.

So, let’s see what old Warren has to say about time. Here’s a brief transcript from a Charlie Rose interview.

Warren Buffett: I mean I can buy anything I want basically, but I can’t buy time.

Charlie Rose: And so to to have time is the most precious thing you can have?

Warren Buffett: Yes, I better be careful with it. There is no way I will be able to buy more time.

Charlie Rose: And living in Omaha makes that easy?

Warren Buffett: That makes it a lot easier. I, for 50 whatever, well for 54 years I spent five minutes going each way now. Just imagine that was a half an hour each way. You know. I know the words to a lot more songs and that’s about it.

Charlie Rose: It adds up. Doesn’t it?

Warren Buffett: It really adds up. Now if you’re doing an hour a day difference coming and going that’s two and a half percent of the person’s work week. That means 40 years you’re talking about a year.

Source: YouTube – Wisdom From Warren Buffett (2017)

#WeeklyInvestorReader | wk. 25

Note to readers: #WeeklyInvestorReader contains a few of the articles I read during the week. Visit my Twitter @HurriCap for any other articles that may not have been included. 

Why Harvard Business School is under fire – The Economist, May 18, 2017 | “A new book, “The Golden Passport” by Duff McDonald, argues that HBS has lost its crown as the top business school in America and also become a breeding ground for toxic behaviour, with conflicts of interests rife within the school, and its alumni responsible for pushing a rapacious form of capitalism that explains many of the ills of the world’s biggest economy.”

All Supermarket Moats are Local – Gannon on Investing, June 24, 2017 | “The market for groceries is local. Kroger’s superstores – about 61,000 square feet vs. 58,000 square feet at a Village run Shop-Rite – target customers in a 2 to 2.5 mile radius. An academic study of Wal-Mart’s impact on grocery stores, found the opening of a new Wal-Mart is only noticeable in the financial results of supermarkets located within 2 miles of the new Wal-Mart. This suggests that the opening of a supermarket even as close as 3 miles from an incumbent’s circle of convenience does not count as local market entry.”

Charlie Munger’s “The Psychology of Human Misjudgment” – Value Investing World, June 24, 2017 | “The abridged and animated video of Munger’s “The Psychology of Human Misjudgment” speech that has been making the rounds led me to go back and re-read the version Munger rewrote in 2005 for inclusion in Poor Charlie’s Almanack. The copy I continuously go back to is from a Word file that I created in order to put the speech on my Kindle, which is a lot easier to carry around than the book. I also added a few additional things that I took from Tren Griffin’s book on Charlie Munger.”

Value Investor Insight, August 31, 2016 – Value Investor Insight, August 16, 2016 | “Of Sound Mind: Eric Cinnamond ‘I love investing, but the only thing I’m very confident about today is that the stocks I follow are overvalued. That will change.'”

Amazon’s Nike deal took a billion dollar bite out of competing retailers – Recode, June 22, 2017 | “Amazon is in the business of everything and is one of the biggest companies in the world. When it makes moves, retailers feel it.”

Slides From Our June Markets Webinar (Is This As Good As It Gets?) – Pension Partners, June 23, 2017

Firefox Is As Fast As Chrome Now, And No One Cares – The AWL, June 20, 2017 | “Speaking of the web browser you already have, most likely, you are using Google Chrome. Eeeevvverrryone knows you’re using Google Chrome, especially Mozilla, the creators of Firefox, who have published their own report with humbling statistics about how everyone uses Chrome.”

Checklists for Evaluating Quality of Earnings – Arizona State University

Berkshire Hathaway Invests in Embattled Lender Home Capital – Bloomberg Markets, June 22, 2017 | “Buffett’s firm to buy shares, supply C$2 billion credit line. Alternative lender attempts comeback after regulatory woes.”

How to Survive the Retail Crisis: A Master Class from T.J. Maxx – Wall Street Journal, June 20, 2017 | “Traditional retailers are in crisis, damaged by rapidly shifting consumer tastes, technological change and cut-throat price competition. And then there’s TJX Cos., which is defying gravity with the simple idea that under the right circumstances people still like to shop in stores.”

Can Uber ever make money? – Financial Times, June 23, 2017 | “Ride-hailing company’s new CEO will have to stem billions of dollars in losses”

Everything You Need To Know About Wall Street Economists – @Goldfinger, June 22, 2017 | “The following chart was too good not to publish. What would we do without Wall Street economists?”

If you can’t explain something in simple terms, you don’t understand it – Kottke, June 17, 2017 | “Feynman was a truly great teacher. He prided himself on being able to devise ways to explain even the most profound ideas to beginning students. Once, I said to him, ‘Dick, explain to me, so that I can understand it, why spin one-half particles obey Fermi-Dirac statistics.’ Sizing up his audience perfectly, Feynman said, ‘I’ll prepare a freshman lecture on it.’ But he came back a few days later to say, ‘I couldn’t do it. I couldn’t reduce it to the freshman level. That means we don’t really understand it.'”

Why Amazon Added Whole Foods to Its Cart – Morningstar, June 21, 2017 | “Nevertheless, we do see several reasons why this acquisition is more than just a push into the grocery category, and why it can enhance Amazon’s wide moat.”

Home Bias Blues: Investors Really Should Get Out More – Morningstar, June 21, 2017 | “‘Home bias” is the term used to describe investors’ tendency to tilt their portfolios in favor of domestic stocks (bonds, too, but I’m going to focus on stocks). Here, I’ll discuss how home bias is measured, the factors that underpin this phenomenon, and why it’s probably a good idea to expand your horizons a bit–especially given current valuations.”

Kroger: The World Might be Ending, but not Before a Dividend Increase and a $1 Billion Share Buyback – Sure Dividend, June 23, 2017 | “If you were to base your investment decisions solely on the news headlines, you might be convinced that Kroger (KR) is going out of business. In fact, Kroger stock lost one-third of its value… in two trading days.”

THE NAKED FUND MANAGER: Platforms are taking over the world – Proactive Investors, April 17, 2017 | “The internet has fundamentally changed the playing field for businesses around the world. It has led to the removal of geological and informational constraints that many companies historically relied upon to carve out their economic moats and turn a profit.”

Scuttlebutt: The Qualitative Way to Test for a Moat – Geoff Gannon, May 30, 2017 | “A stock being on a magic formula list is not any proof of it having a moat. We know it had high returns on capital in the past. We now need to test if it will have high returns in the future”

Costco didn’t get all that cheap – The Reformed Broker, June 20, 2017 | “Amazon’s purchase of Whole Foods put a highly discussed dent in all the retail grocery stocks, of which Costco is perhaps the most highly regarded. It’s probably an overreaction, but time will tell. In the meanwhile, the stock really hasn’t gotten all that cheap on this recent slide.”

Amazon’s Real Target Isn’t Whole Foods. It’s Everything You Buy. – Bloomberg View, June 20, 2017 | “The really tempting margins are in consumer products. Look out, Procter & Gamble and Colgate-Palmolive.”

Amazon’s New Customer – Stratechery, June 19, 2017 | “If you don’t understand a company’s goals, how can you know what the strategies and tactics will be?”

Finding High-Quality Companies Today – Contrarian Edge, June 8, 2017 | “We are having a hard time finding high-quality companies at attractive valuations.”

Rise of hard discounters to hit market share of large US supermarkets –, June 19, 2017 | “The rapid expansion of discount grocery stores is set to affect the market share of traditional retailers, with price sensitive shoppers from a range of consumer segments keen on low prices, while products stocked at the respective hard discounters tend to be perceived as of sufficient quality.”

Conglomerates Didn’t Die. They Look Like Amazon. – New York Times, June 19, 2017 | “The conglomerate was supposed to be dead, a relic of a bygone era of corporate America. Investors, we have been repeatedly told, want smaller, nimbler, more focused companies. And yet there is Amazon.”

The $31 Billion Hole in GE’s Balance Sheet That Keeps Growing – Bloomberg, June 16, 2017 | “Pension shortfall is the biggest among S&P 500 companies. Top brass ‘living in fear’ of activists with short-term goals.”

Amazon’s Move Signals End of Line for Many Cashiers – New York Times, June 17, 2017 | “Imagine this scene from the future: You walk into a store and are greeted by name, by a computer with facial recognition that directs you to the items you need. You peruse a small area — no chance of getting lost or wasting time searching for things — because the store stocks only sample items. You wave your phone in front of”

How self-driving trucks can create more jobs than they kill – Yahoo Finance, June 5, 2017 | “The economic buzzword of the moment is automation. The robots are coming, we’re told, for our jobs, our money, and our cars, among other things. But this one-way view of automation as a job-killing tidal wave that leaves mass unemployment and poverty in its wake — requiring a universal basic income — misses that re-orienting the economy around new technology often creates new opportunities and, by extension, new jobs to be filled. And potentially even better jobs.”

HEDGE FUND READING LIST: Hundreds of investors say these 10 finance books are must-reads – Business Insider, May 20, 2017 | “The list is based on 1,120 responses, and ranked from least to most recommended. You can consider it a hedge fund reading list.”

In Swedish

Grov Di-miss i HM – Dagens Industri, 26 juni, 2017 | “Di identifierade symptomen, men tog dem inte på allvar. Köprekommendationen i H&M för ett år sedan blev ett dyrköpt misstag.”

Exklusivt med H&M-Persson: “Det är nu vi ska börja skörda” – Aktiespararna, 21 juni, 2017 | “H&M-vd:n Karl-Johan Persson om: aktiekursen, konkurrensen, digitaliseringen – och arvet efter grundaren Erling Persson.”

Exklusivt: Från bubblare till storsäljare: ”Enorm resa” – Aktiespararna, 21 juni, 2017 | “I Bergslagens djupaste skogar för en av de svenska aktiekurskometerna sin vardagliga tillvaro. Nu berättar Kopparbergs vd Peter Bronsman om hur bolaget tagit Sverige och inte minst Storbritannien med storm, om hur inledande motgångar byggde ett världsimperium av cider och om drömmen att bli ännu större på hemmaplan.”

Teknisk analys: Storbolagen du ska sälja – Dagens Industri, 21 juni, 2017 | “I förra veckan gick analysfirman Investtech igenom OMXS30-bolagen med starkast köpsignaler. Denna vecka presenterar de aktierna med tydligast säljrekommendation.”

Forskare: Klarna kommer sno storbankernas kunder – och vända upp och ner på hela sektorn – Veckans Affärer, 20 juni, 2017 | “Att Klarnas ansökan om bankoktroj nu har blivit helt godkänd ger betaltjänstföretaget en möjlighet att erbjuda sina kunder en bredare produktportfölj.”

Trots raset – H&M populärt bland sparare: “Glansdagar är förbi”– Aktiespararna, 20 juni, 2017 | “Kursen har rasat över 40 procent på två år – och bolaget kritiseras hårt. Trots det köps det massvis av aktier i H&M. – Jag tror att H&M:s glansdagar är förbi, säger Nordnets sparekonom Joakim Bornold.”

The Value Investor v.23 Köp inte H&M – Tradingportalen, 9 juni, 2017 | “Samtidigt som resultatet och framförallt utsikterna har försämrats är det uppenbart att många småsparare ökar sina innehav i tron att det nu är ”billigt” att köpa H&M eller med hänvisning till att ordföranden Stefan Persson köper jättelika volymer. Problemet med detta är bara att Perssons har köpt under många år oavsett aktieutvecklingen och att H&M vid PE 19 visserligen handlas lägre mot vinsten jämfört med tidigare då PE har legat på 22-25, men absolut inte kan ses som billig om man jämför med andra storbolag med idag betydligt bättre utveckling och utsikter.”

Jeff Bezos and the Power of the Amazon Model

Here’s an interview with Warren Buffett – published February 27, 2017 on CNBC – where Buffett talks to Becky Quick about retail, Jeff Bezos, and the power of Amazon’s business model.

Becky Quick: A major investor I spoke with recently asked me this question, I’m not sure if it was supposed to be on the record or not, so I won’t use the name. But this investor said that here she had heard you recently making some comments about Amazon where you where very complimentary of Amazon, it’s founder Jeff Bezos, said he’s probably the best manager you’ve ever seen.

Warren Buffett: I think maybe he is, yeah. You know, I’ve said that. I mean, it’s remarkable I mean, here a guy, you know, gets in a car with his wife to travel. Leaves you on and starts travel across thinks “How am I going to take over the world?” Maybe I’ll sell books online. He is one terrific business person.

Becky Quick: That investor then asked me “Why don’t you own shares of Amazon?”

Warren Buffett: Well, that’s a good question, but I don’t have a good answer. Obviously I should have bough it a long ago, because I admired him long ago. But I didn’t understand the power of the model as I went along, and the price always seemed to more than reflect the power of the model at that time. So it’s one I missed big time.

Becky Quick: Is it to late? Or you just don’t know?

Warren Buffett: I just don’t know, yeah. Retailing is tough for me to figure out. I mean, if you go back to when I was a kid, in every town the guy that owned the big department store was king. I mean, whether it was Marshall Field, you know, or Dayton, or Hudson in Detroit, or Fredrick & Nelson in Seattle. You name it. J. L. Brandeis in Omaha. The department store was king. And people said “What can happen to them?” You know, it’s down there with the street car lines crossed, and the women took the street car to shop there and they could see five hundred spools of thread, and five hundred wedding dresses. And they couldn’t see anything like that. It offered this incredible array of goods. And somebody came along with a shopping center. And instead of making it vertical with all this display by one person, they spread it out one by many. And now comes the Internet. And that’s it, all of it, variety of things that you can get to very easily. People love variety, they love low prices and all bunch of things. So it just keeps evolving and the great department stores, many of them have disappeared and the rest are under pressure.

Source: CNBC’s Warren Buffett Watch

There’s an article published by Morningstar today that discusses Amazon’s $13.7 billion acquisition of Whole Foods. According to Morningstar, Amazon gets a wide economic moat rating. The article brings up and discusses some of the different parts making up Amazon’s wide moat, that is, its sustainable competitive advantages. To read the article, click here.

What’s This Business Worth?

What exactly goes through your mind when you’re actually making an investment? Warren Buffett got this question during an interview and talked for a moment about a few of the things that come to his own mind when he’s trying to evaluate a certain business and it’s future economic potential.

“Well, if I drive by a McDonald’s stand or a Kentucky Fried Chicken stand I will automatically think to myself “What is this business worth?” You know, how many customers can walk in the door? What kind of gross margins can they have? How many people do they need? How likely is it that another chicken stand opens across the street? I mean, all of those things. And that’s true of the chicken stand and it’s true of Google or you name the business. I mean, it’s all about evaluating the economic potential, the economic future of a given business. And most of them you don’t know the answer on. But every now and then you run into one where you know the answer. But that’s all business is. It’s what Aesop said a long time ago: “A bird in the hand is worth two in the bush.” You know, that was said in 600 BC and that’s now what’s called discounted cash flow and all that sort of thing. But he saw that and figured it out, you know, twenty-six hundred years ago. And all I’m trying to figure out is if I could take that dollar in my hand: When do I get the two dollars out of the bush? How sure am I of getting it out of the bush? Is there some other bush where I can get three dollars out of it instead? I mean, it’s very basic stuff. And a lot of times you look at it and you say “I don’t know how many birds there will be in the bush.” So you go in to the next one until you find the answer.”

(Source: 56:55 into Warren Buffett with B-School Students Interview from India)

The Manager’s Most Important Thing: Widening the Moat

What’s the most important thing to do as a manager of a business? According to Warren Buffett it’s all about “widening the moat.” Nothing more, nothing less.

“Well, I send a letter to the managers and I talk to them about widening the moat. I say it isn’t the question of the earnings per share this quarter or anything like that. Any business that has a widening moat is gonna make a lot of money over time. They are guardians of the moat. I say a great business is like an economic castle. And if you have an economic castle in capitalism, there gonna be a bunch of people that are going to try and take it away from you. So I need a knight in that castle, the manager, who worries about protecting that castle all the time. And then I want this moat around it, and I want that moat to get wider. It may be service, it may be better product design, all kinds of things. It can be what’s in their mind about the product, a consumer product. But I want that moat to be widening. And I want people to toss sharks and piranha, octopus, everything into that moat to keep away those competitors because they’re gonna be coming and our managers are charged with that. I tell our managers, pretend that this is the only business that you and your family can own for the next hundred years, you can’t sell it and you’ve got to make this one work. And that means every day thinking about what’s going to make it a great business over a 100 years.”

(Source: 8:46 into Warren Buffett with B-School Students Interview from India)

For some input and ideas about what makes (or breaks) a moat, check out this slide deck from Pat Dorsey.

Bill Ackman Betting on Zero

“A couple time we come across a company we think is causing harm, we can make money betting against that company.” —Bill Ackman

“Herbalife stock goes down, we make money. Herbalife stock goes up, we lose money. And that’s short selling.” —Bill Ackman

“[Interviewer] What are you accusing Herbalife of? [Bill Ackman] Of being a pyramid scheme.” —Betting on Zero, 2017

About the Movie

“From ‘Darfur Now’ writer/director Ted Braun comes a riveting docu-thriller following controversial hedge fund titan Bill Ackman as he puts a billion dollars on the line in his crusade to expose Herbalife as the largest pyramid scheme in history. Herbalife claims Ackman is simply a market manipulator out to make a fortune from short-selling their stock, but Ackman insists Herbalife deliberately targets low-income and immigrant communities and robs them of their life savings. Herbalife is joined on the counterattack by longtime Ackman nemesis (and fellow Wall Street billionaire) Carl Icahn, while Ackman finds an unlikely ally in Chicago activist Julie Contreras, who rallies the Latino community to get the Federal government to intervene. Blending tales of high-stakes corporate intrigue with working-class people caught in the crossfire, Braun paints a stirring picture of the American Dream gone wrong.” (Source: iTunes Preview)

The Betting on Zero documentary is available via iTunes.

Disclosure: I am not receiving any compensation for any of the links provided. I have no business relationship with any company or individual mentioned in this article. I have no position in any stock mentioned.