Which Would You Say Emulates Early Buffett the Best: GLRE, SHLD or BH?

[Guest Hester]

I wouldn't say Jobs is an awful capital allocator, but he certainly isn't good. There are the people who maximize capital allocation, fail to maximize capital but mostly preserve the principle, and those who just piss it away like a drunken racehorse. Jobs is definitely the second.

 

I think Apple trades at a lower multiple, deservedly so, partly because the market respects the fact that their earnings are based on incredible popularity of their current products, and due to the extremely short product cycles, just maintaining this level of innovation and popularity over the next decade with different products will be difficult, expecially if Jobs health goes south. Apple either innovates and keeps winning or goes the way of RIMM. Today's earnings don't tell you anything about whether they will do that and so multiples to past or current earnings are less important for Apple than for say, a Coca-Cola.

[given2invest]

Yes, that's part of the reason it trades at the current multiple.  I strongly believe Apple, along with many Tech stocks, trade at discounts due to the bozo things we saw GOOG and HPQ do last week though.

 

 

 

[Guest Hester]

Yes, that's part of the reason it trades at the current multiple.  I strongly believe Apple, along with many Tech stocks, trade at discounts due to the bozo things we saw GOOG and HPQ do last week though.

 

I would agree, and again I think it's deservant. I usually shy away from tech, but I bought GOOG in June and sold quickly after the Motorola acquisition. It's back to my first buy price but I will not be buying. Even the great semi-predictable (long term) tech firms that don't have the lightining quick product cycle, like EBAY and GOOG, are a wildcard when it comes to capital allocation. And they both produce a ton of cash. When EBAY used to trade at low multiples, I would fantasize about using my billions to take them out and just handle the cash flow myself. It's a great business with terrible people.

 

In any case a valuation of these cash rich tech firms demands a severe or total discount of the net cash.

[given2invest]

Yes, that's part of the reason it trades at the current multiple.  I strongly believe Apple, along with many Tech stocks, trade at discounts due to the bozo things we saw GOOG and HPQ do last week though.

 

I would agree, and again I think it's deservant. I usually shy away from tech, but I bought GOOG in June and sold quickly after the Motorola acquisition. It's back to my first buy price but I will not be buying. Even the great semi-predictable (long term) tech firms that don't have the lightining quick product cycle, like EBAY and GOOG, are a wildcard when it comes to capital allocation. And they both produce a ton of cash. When EBAY used to trade at low multiples, I would fantasize about using my billions to take them out and just handle the cash flow myself. It's a great business with terrible people.

 

In any case a valuation of these cash rich tech firms demands a severe or total discount of the net cash.

 

Totally agree.  Paypal and eBay are fantastic businesses that should have little R&D and pay a fat dividend. 

 

But if you are willing to discount all the net cash on their balance sheets, why wouldn't you discount all the future cash too?  We're saying the same thing.

[Guest Hester]

But if you are willing to discount all the net cash on their balance sheets, why wouldn't you discount all the future cash too?  We're saying the same thing.

 

True, we are. That's why I don't own any of these big, low multiple tech firms.

[Parsad]

How are the Markels and Tom Gaynor not in this conversation?  Insurance, investments, whole businesses, shareholder friendly, conservative compensation, fantastic results in both underwriting and investments, honest, ethical and forthright.  I would say Leucadia should be in the conversation as well.  But if you want people who have done it almost exactly like Buffett, then Markel comes to mind ahead of anyone.  Cheers!

[DCG]

I dont agree with the 'terrible people' comment about eBay.I was skeptical about John Donahoe at first, but think he is doing a very good job so far. And I think people undervalue the potential of Paypal. I don't know if they'll execute with Paypal over the long term, but the potential is there.

 

-I don't own any shares of eBay, but have in the past. Starting to look at it again as it gets cheaper.

[given2invest]

I don't know if they are terrible but I'd halt most cap ex and tech spending and just enjoy it for what it is.

[DCG]

Well, eBay has made some good acquisitions.

 

And to clarify my earlier point about Steve Jobs - I'm not saying he's on the same level as someone like Buffett in terms of capital allocation, but to say he's 'awful' is ridiculous. Go look at companies like HPQ and CSCO, and then go back and look at how Apple has allocated cash.

 

 

[given2invest]

Well, eBay has made some good acquisitions.

 

And to clarify my earlier point about Steve Jobs - I'm not saying he's on the same level as someone like Buffett in terms of capital allocation, but to say he's 'awful' is ridiculous. Go look at companies like HPQ and CSCO, and then go back and look at how Apple has allocated cash.

 

Agree, I was being hyperbolic ;)  But in 2002 to 2003, he was sitting on a market cap that was 80% cash and was not burning cash and never bought back a dollar of stock ahead of the greatest stock run of the decade.  Imagine if he optimized the capital structure? 

[Liberty]

Agree, I was being hyperbolic ;)  But in 2002 to 2003, he was sitting on a market cap that was 80% cash and was not burning cash and never bought back a dollar of stock ahead of the greatest stock run of the decade.  Imagine if he optimized the capital structure?

 

Hindsight is 20/20, though. Back then, I'm sure making sure the company could live through almost anything had priority, and even he probably didn't think Apple would be worth 300+ billion less than 10 years later.

[Guest Hester]

I dont agree with the 'terrible people' comment about eBay.I was skeptical about John Donahoe at first, but think he is doing a very good job so far. And I think people undervalue the potential of Paypal. I don't know if they'll execute with Paypal over the long term, but the potential is there.

 

-I don't own any shares of eBay, but have in the past. Starting to look at it again as it gets cheaper.

 

Maybe terrible is too strong a word, but certainly not great. EBAY would be best if it and Paypal were just left alone, and the company got a capital allocator to invest the cash. Or just pay all the cash back through divi's/buybacks. Either way. They could be a See's Candy of modern proportions to Berkshire Hathaway. They are cash spitting machines. He could of probably acquired them at a 10 multiple ex cash or lower for a very long time, until recently. Of course he would of had to fire management, which he doesn't like, and there's the whole "it's a tech company" thing.

 

Operationally both past and present management have created a religion of customer hatred (I'd say cult but it has too many followers). There are communities of people out there who's sole purpose in life is to evangelize the gospel of "EBAY SUCKS." EBAY is saved because the core network moat is unbelievable. But a lesser network would of been very damaged or maybe even ended.

[Guest Hester]

How are the Markels and Tom Gaynor not in this conversation?  Insurance, investments, whole businesses, shareholder friendly, conservative compensation, fantastic results in both underwriting and investments, honest, ethical and forthright.  I would say Leucadia should be in the conversation as well.  But if you want people who have done it almost exactly like Buffett, then Markel comes to mind ahead of anyone.  Cheers!

 

None of them is emulating Buffett much, Markel and FFH are the more mini-berkshires.

 

;)

[bargainman]

Hindsight is 20/20, though. Back then, I'm sure making sure the company could live through almost anything had priority, and even he probably didn't think Apple would be worth 300+ billion less than 10 years later.

 

Exactly.  Some forget how dark those days were, but I remember.  The freeways in silicon valley were like something out of the dust bowls (hyperbole but just barely).  There were Ph.D's in CPSC from Stanford and Berkeley being sent back to their countries of origin because there were no jobs.  Super qualified people were doing day long interviews involving implementing real code competing against eachother.  it was really something.  To contrast, today, perhaps in the midst of another mild tech bubblette, people are fighting left and right for tech talent.  I know of several people who got lured away for big bucks at some other startup.

 

As for capital allocation, I agree in the traditional sense of a value investor that Jobs doesn't fit the bill.  But you know what, it's a darned good thing that value investors don't run tech companies or you'd end up with a million HP Mike Hurds cost cutting everything into the ground.  As far as allocation of capital, he cut a pile of projects (Newton anyone?), Apple has the most streamlined product portfolio of any computer company.  The fewest skus.  Jobs once said their entire product portfolio could fit on a board room table.  They have a million ideas and only the very very best make it to production and then in a massive focused way.  They cut everything else out.  This leads to massive scale because they can buy in bulk on the same components, plus massive leverage over their suppliers. During the Japanese Quake they literally sent execs to Japan with cash in hand to tie up the supply so no one else could get it.  He understands a lot about capital allocation and the power of cash, not unlike another certain guru who always has cash and doesn't do buy backs...  On top of that if you look at the ratio of $ spent on R&D vs MSFT or other tech firms, Apple spend a massively amount less.  Yet they are the far more inventive company.  That's capital allocation at its best, where the capital is spent on R&D.

 

That said, does he put shareholders first and foremost?  of course not..  But in a way, by putting the product and invention and ecosystem and customer above all else... he does.  That's the odd dichotomy of the tech world and Apple.

[Myth465]

Hester's posts are always gems.

[ubuy2wron]

Each of these companies have one ultimate goal...The wise distribution and reinvestment of free cash flows with the aim of constant compounding of book value.

 

I just want to get your idea of who most reminds you of a young Mr. Buffett of the following three men:

 

1. Einhorn

2. Lampert

3. Biglari

None of the above Einhorn and Biglari lack his ethics and Lampert lacks his humility ( no humble person would try to turn around Sears for crying out loud ) I think the person who best channels the young Buffet is our gentle host Parsad I just do not know much about his ukelele proweress however to be certain LOL ;D

[vinod1]

Each of these companies have one ultimate goal...The wise distribution and reinvestment of free cash flows with the aim of constant compounding of book value.

 

I just want to get your idea of who most reminds you of a young Mr. Buffett of the following three men:

 

1. Einhorn

2. Lampert

3. Biglari

None of the above Einhorn and Biglari lack his ethics and Lampert lacks his humility ( no humble person would try to turn around Sears for crying out loud ) I think the person who best channels the young Buffet is our gentle host Parsad I just do not know much about his ukelele proweress however to be certain LOL ;D

 

+1

[JSArbitrage]

I always enjoy people calling SHLD Lampert's mistake.  The guy paid like ~$650M for what is now a $3.5B stake in SHLD 8 years later.  I hope I make those kinds of mistakes in my investing life!

[Matson125]

Couldn't agree more JsArb.

 

When you look at his stakes in AZO and AN the gains speak for themselves.  Also in AN the 2nd largest Shareholder behind ESL is Bill Gates and his Foundation.

 

I am interested to see how many shares Eddie is buying back at $52.00 a share,  My guess is a whole lot!

 

Cheers

 

Michael

[BargainValueHunter]

I always enjoy people calling SHLD Lampert's mistake.  The guy paid like ~$650M for what is now a $3.5B stake in SHLD 8 years later.  I hope I make those kinds of mistakes in my investing life!

 

That is my feeling too.

 

Before judging Lampert too harshly at least read this article:

 

http://www.businessweek.com/magazine/content/04_47/b3909001_mz001.htm

 

Lampert and Buffett crossed paths in dealmaking in the early '90s. In 1989 and 1990, Buffett bought a 19.9% stake in PS Group, which ran a stagnant aircraft-leasing business. Buffett made that investment -- which caught Lampert's eye -- because of a promising new division that would recycle industrial metals, but that unit ran into trouble. As PS Group's stock sank, Lampert jumped in, attracted by the value of the PS aircraft, and began amassing a 19.7% stake at bargain-basement prices in 1993.

 

Buffett stayed on the sidelines, recalls Larry Guske, PS Group's vice-president for finance, but Lampert -- convinced PS had no future -- kept prodding management to sell assets and pay dividends. In the end, Lampert doubled his money while Buffett lost about a third of his -- because he had paid much more for his shares, Guske calculates. Buffett's overall record will be extremely hard to beat. But at least in this instance, the pupil had outperformed the master.

 

It gives a little more insight into how he ticks. Doesn't mean that he is Warren II...but the guy is a crafty investor.

 

Also Berkowitz laid out his reasoning for being such a Lampert fan...

 

http://streetcapitalist.com/2010/01/12/bruce-berkowitz-on-sears-leucadia-and-berkshire/

 

On the other hand, Eddie Lampert was quite astute in the way he handled capital allocation in the last couple of years. In hindsight, you can say it was a mistake for him to buy stock at $150 to $170 – it was a different environment. But by creating a company such that there is significant free cash flow being generated, the company has a huge number of degrees of freedom. If deflation was causing a decline in value and Sears’ shareholders overreacted or very smart people start shorting the stock, then the company has more than enough cash to buy all the shares that Lampert and I don’t own – and together we own over 60% of the company.