How to bait value investors

[muscleman]

I think the first page of CNX presentation is a good example. The other good example is Biglari Holdings.

Look at their words. IRR, capital allocator, FCF. OMG that's a stock that I can't miss!  ;D

 

https://seekingalpha.com/article/4340191-cnx-resources-corporation-2020-q1-results-earnings-call-presentation

[bci23]

Basically anything that portrays capital allocation as the end all be all thought process instead of anything to do with growing the business/making stuff happen/customer focus is a good way to sucker in a value investor. Capital allocation is overrated imo in that it doesn't take much thought to say "hey lets only do high return investments!". In my experience it only takes 5% of your time to answer the question "is this project worth doing?" and 95% of your time is spent figuring out "how do we make this project come to life?". Capital allocation is also worthless if the underlying business is deteriorating.

[Broeb22]

Basically anything that portrays capital allocation as the end all be all thought process instead of anything to do with growing the business/making stuff happen/customer focus is a good way to sucker in a value investor. Capital allocation is overrated imo in that it doesn't take much thought to say "hey lets only do high return investments!". In my experience it only takes 5% of your time to answer the question "is this project worth doing?" and 95% of your time is spent figuring out "how do we make this project come to life?". Capital allocation is also worthless if the underlying business is deteriorating.

 

While I would agree that having a framework for making good capital allocation decisions is somewhat intuitive or even obvious, getting organizations to consistently operate in this way is much harder than it looks in my experience. At a decent size manufacturing company, I was involved in the capital planning process for 2020 and the projects people proposed were often not very imaginative or did not move the ball. A project like investing in automation that would allow multiple smaller lines to remove at least a few people from the lines who were doing very manual labor was viewed with some disdain. This is in a relatively commoditized industry where cost determines 80% of success and technology/marketing/relationships is the remainder. 

 

Getting everyone to understand the importance of reducing inventories and not yelling at the buyer if, during the transition, things don't go smoothly, is hard. Getting people to understand the trade-offs of such decisions and having thoughtful conversations about why trying to optimize inventories opens up capital for us to grow faster is challenging.

 

Talking with people on the floor about scrap and the cost of the raw material they're throwing away is another example. You would be shocked how many people don't have a basic understanding of the trade offs involved in their jobs. Most people in lower level jobs operate in some state of fear about some past event that scarred everyone. "Oh, well we could keep less inventory of that raw material but we keep 3x as much because we don't want to run out because one time that happened and I got my head ripped off."

 

Even at the Board of Directors level, I doubt how many people really get it. They constantly pay each other more every year, they reprice options lower for executives who have failed miserably, they sign off on acquisitions at prices that would be hard to justify and often don't create value, and the list could go on and on.

[LC]

Capital allocation depends on having a multitude of options.

 

The problem is you can have incredible capital allocation with zero good options to invest capital into.

 

I.e. when a good businessman meets a bad business - the bad business wins.

 

[Read the Footnotes]

I haven't looked at CNX for a couple of years and there has been a bit of a shuffling of the deck, but at the time they were thought of as being some of the smartest guys around. You definitely didn't want to be on the other side of a deal though. Basically everyone who engaged in M&A with them at the time found out that they were the patsy.

 

Thought I haven't looked at them recently, wouldn't be surprised if an investor would need to be very careful and question management's alignment in this case.

[bci23]

Basically anything that portrays capital allocation as the end all be all thought process instead of anything to do with growing the business/making stuff happen/customer focus is a good way to sucker in a value investor. Capital allocation is overrated imo in that it doesn't take much thought to say "hey lets only do high return investments!". In my experience it only takes 5% of your time to answer the question "is this project worth doing?" and 95% of your time is spent figuring out "how do we make this project come to life?". Capital allocation is also worthless if the underlying business is deteriorating.

 

While I would agree that having a framework for making good capital allocation decisions is somewhat intuitive or even obvious, getting organizations to consistently operate in this way is much harder than it looks in my experience. At a decent size manufacturing company, I was involved in the capital planning process for 2020 and the projects people proposed were often not very imaginative or did not move the ball. A project like investing in automation that would allow multiple smaller lines to remove at least a few people from the lines who were doing very manual labor was viewed with some disdain. This is in a relatively commoditized industry where cost determines 80% of success and technology/marketing/relationships is the remainder. 

 

Getting everyone to understand the importance of reducing inventories and not yelling at the buyer if, during the transition, things don't go smoothly, is hard. Getting people to understand the trade-offs of such decisions and having thoughtful conversations about why trying to optimize inventories opens up capital for us to grow faster is challenging.

 

Talking with people on the floor about scrap and the cost of the raw material they're throwing away is another example. You would be shocked how many people don't have a basic understanding of the trade offs involved in their jobs. Most people in lower level jobs operate in some state of fear about some past event that scarred everyone. "Oh, well we could keep less inventory of that raw material but we keep 3x as much because we don't want to run out because one time that happened and I got my head ripped off."

 

Even at the Board of Directors level, I doubt how many people really get it. They constantly pay each other more every year, they reprice options lower for executives who have failed miserably, they sign off on acquisitions at prices that would be hard to justify and often don't create value, and the list could go on and on.

 

All that is fair but I think we're referring more to Investor Relations and how the companies talk about their business. IR presentations that just spew on about how important capital allocation and how they only do 20% IRR projects and have little discussion of the actual business are how you sucker in the value investors.

[LongHaul]

Basically anything that portrays capital allocation as the end all be all thought process instead of anything to do with growing the business/making stuff happen/customer focus is a good way to sucker in a value investor. Capital allocation is overrated imo in that it doesn't take much thought to say "hey lets only do high return investments!". In my experience it only takes 5% of your time to answer the question "is this project worth doing?" and 95% of your time is spent figuring out "how do we make this project come to life?". Capital allocation is also worthless if the underlying business is deteriorating.

 

While I would agree that having a framework for making good capital allocation decisions is somewhat intuitive or even obvious, getting organizations to consistently operate in this way is much harder than it looks in my experience. At a decent size manufacturing company, I was involved in the capital planning process for 2020 and the projects people proposed were often not very imaginative or did not move the ball. A project like investing in automation that would allow multiple smaller lines to remove at least a few people from the lines who were doing very manual labor was viewed with some disdain. This is in a relatively commoditized industry where cost determines 80% of success and technology/marketing/relationships is the remainder. 

 

Getting everyone to understand the importance of reducing inventories and not yelling at the buyer if, during the transition, things don't go smoothly, is hard. Getting people to understand the trade-offs of such decisions and having thoughtful conversations about why trying to optimize inventories opens up capital for us to grow faster is challenging.

 

Talking with people on the floor about scrap and the cost of the raw material they're throwing away is another example. You would be shocked how many people don't have a basic understanding of the trade offs involved in their jobs. Most people in lower level jobs operate in some state of fear about some past event that scarred everyone. "Oh, well we could keep less inventory of that raw material but we keep 3x as much because we don't want to run out because one time that happened and I got my head ripped off."

 

Even at the Board of Directors level, I doubt how many people really get it. They constantly pay each other more every year, they reprice options lower for executives who have failed miserably, they sign off on acquisitions at prices that would be hard to justify and often don't create value, and the list could go on and on.

 

Just curious - how was the CEO and his tone from the top?

 

I have heard from an activist that companies now have training in how to do PR to value investors to sell their stock. 

 

[valueinvestor]

The topic is funny because it's true - these presentations have a lot of buzzwords as if they read a lot of Buffett letters - which tracks a lot of high-quality shareholders.

 

Consequently, I get more skeptical when these buzzwords are flying around in annual reports, as I don't really look at presentations.

[misterkrusty]

anyone remember Larry Swets?

[muscleman]

The topic is funny because it's true - these presentations have a lot of buzzwords as if they read a lot of Buffett letters - which tracks a lot of high-quality shareholders.

 

Consequently, I get more skeptical when these buzzwords are flying around in annual reports, as I don't really look at presentations.

 

I remember when I first started learning value investing in 2010, I got super excited when I saw presentations with these buzz words. I later found out that I was baited in and pretty much every one of them lost me money.

[Broeb22]

Basically anything that portrays capital allocation as the end all be all thought process instead of anything to do with growing the business/making stuff happen/customer focus is a good way to sucker in a value investor. Capital allocation is overrated imo in that it doesn't take much thought to say "hey lets only do high return investments!". In my experience it only takes 5% of your time to answer the question "is this project worth doing?" and 95% of your time is spent figuring out "how do we make this project come to life?". Capital allocation is also worthless if the underlying business is deteriorating.

 

While I would agree that having a framework for making good capital allocation decisions is somewhat intuitive or even obvious, getting organizations to consistently operate in this way is much harder than it looks in my experience. At a decent size manufacturing company, I was involved in the capital planning process for 2020 and the projects people proposed were often not very imaginative or did not move the ball. A project like investing in automation that would allow multiple smaller lines to remove at least a few people from the lines who were doing very manual labor was viewed with some disdain. This is in a relatively commoditized industry where cost determines 80% of success and technology/marketing/relationships is the remainder. 

 

Getting everyone to understand the importance of reducing inventories and not yelling at the buyer if, during the transition, things don't go smoothly, is hard. Getting people to understand the trade-offs of such decisions and having thoughtful conversations about why trying to optimize inventories opens up capital for us to grow faster is challenging.

 

Talking with people on the floor about scrap and the cost of the raw material they're throwing away is another example. You would be shocked how many people don't have a basic understanding of the trade offs involved in their jobs. Most people in lower level jobs operate in some state of fear about some past event that scarred everyone. "Oh, well we could keep less inventory of that raw material but we keep 3x as much because we don't want to run out because one time that happened and I got my head ripped off."

 

Even at the Board of Directors level, I doubt how many people really get it. They constantly pay each other more every year, they reprice options lower for executives who have failed miserably, they sign off on acquisitions at prices that would be hard to justify and often don't create value, and the list could go on and on.

 

Just curious - how was the CEO and his tone from the top?

 

I have heard from an activist that companies now have training in how to do PR to value investors to sell their stock.

 

 

The company I mentioned is private, which perhaps is worse since there are no short-term quarterly pressures to deal with, but getting people thinking about long-term value creation is still tough.

[Broeb22]

The topic is funny because it's true - these presentations have a lot of buzzwords as if they read a lot of Buffett letters - which tracks a lot of high-quality shareholders.

 

Consequently, I get more skeptical when these buzzwords are flying around in annual reports, as I don't really look at presentations.

 

I totally agree with this comment. I often find this type of language is almost inversely correlated with good capital allocation. A lot of companies I perceive to have good capital allocation don't really trumpet what they're doing in those terms.

[valueinvestor]

The topic is funny because it's true - these presentations have a lot of buzzwords as if they read a lot of Buffett letters - which tracks a lot of high-quality shareholders.

 

Consequently, I get more skeptical when these buzzwords are flying around in annual reports, as I don't really look at presentations.

 

I remember when I first started learning value investing in 2010, I got super excited when I saw presentations with these buzz words. I later found out that I was baited in and pretty much every one of them lost me money.

 

You and me both - I was very naive when I started out, probably still am  :P

[valueinvestor]

The topic is funny because it's true - these presentations have a lot of buzzwords as if they read a lot of Buffett letters - which tracks a lot of high-quality shareholders.

 

Consequently, I get more skeptical when these buzzwords are flying around in annual reports, as I don't really look at presentations.

 

I totally agree with this comment. I often find this type of language is almost inversely correlated with good capital allocation. A lot of companies I perceive to have good capital allocation don't really trumpet what they're doing in those terms.

 

+1

[BG2008]

Garret Motion is a case study on how to bait value investors

 

Honeywell spin this company off and saddle it with asbestos liability

 

Look at this presentation from 2018 - It just looks beautiful

 

https://s2.q4cdn.com/726657224/files/doc_events/2018/09/1/Presentation.pdf

 

On VIC, people mentioned something that was very interesting.  They said that the IR guy who works for GTX is very loosey goosey with his facts and has a reputation for unmitigated disasters.  At first, I kind of brush it off.  There was a very sexy siren song of deep value.  Trading at 3-4x P/FCF, 20% EBITDA margin, lots of patents, asset light, etc. 

 

The problem is that turbo chargers is a band aid solution till we get to electric vehicle.  Everyone knows that.  So GTX is really a terminal business with lots of asbestos liabilities.  I once asked the IR guy why Honeywell structured the deal the way they did.  He simply said "because they can"