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Robert C. Merton is perhaps one of the most brilliant financial theorists in the world.  He received the Alfred Nobel Memorial Prize in Economic Sciences in 1997 for a new method to determine the value of derivatives, Merton’s research focuses on finance theory, including life-cycle finance, optimal intertemporal portfolio selection, capital asset pricing, pricing of options, risky corporate debt, loan guarantees, and other complex derivative securities. No doubt, he is an incredibly brilliant man, but at the same time, he was the principal of Long-Term Capital Management, a speculative hedge fund that collapsed in the late 1990s after losing $4.6 billion.  Not only was he extremely smart, but all 15 of his partners were super smart too.

Long-Term Capital Management did business with nearly everyone important on Wall Street. Indeed, much of LTCM’s capital was composed of funds from the same financial professionals it traded with. After its collapse on September 23, 1998, Goldman Sachs, AIG, and Berkshire Hathaway offered to buy out the fund’s partners for $250 million, to inject $3.75 billion, and to operate LTCM within Goldman’s own trading division. The offer was stunningly low to LTCM’s partners, because at the start of the year their firm had been worth $4.7 billion. Warren Buffett gave Meriwether less than one hour to accept the deal; the time period lapsed before a deal could be worked out.

Unfortunately similar to the case of Robert C. Merton and LTCM, the stock market is full of smart people and companies doing stupid things… the list is long: Jeff Skilling of Enron, Bernard Madoff, AIG, Lehman Brothers, Fannie Mae, Freddie Mac, and so on.

As Warren Buffett mentioned in this great speech–what is important are the qualitative factors of a person, because everyone has the intelligence to do just the right thing.

When asked about Long-Term Capital Management just 4 weeks after the final call to agree on the bailout, Warren Buffett recounted one of the most valuable lessons I have ever heard in financial advice: [click to continue…]

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Ted Williams

The Science of Hitting was a book that attracted Warren Buffet’s attention. The book was written by Ted Williams, one of the greatest baseball hitters of all times. His impact on the game, both as a player and as an inspiration to generations of hitters who followed, continues to this day. Williams combined the following:

  • Power (521 lifetime home runs)
  • Patience (he received more walks than any batter in his day); and
  • Control (a .344 lifetime average) that no player had ever done before.

He had the intelligence of a lead-off hitter and the brawn of a power hitter; the patience of a bench warmer, and the bat control of a single hitter.

His contribution to the game was to reduce the waiting time to hit a perfect pitch; he said that a good hitter can hit a pitch that is over the plate three times better than a great hitter with a questionable ball in a tough spot. Williams knew, for example, that a high and inside strike pitted his weakness against the pitcher’s strength. If he consistently swung at those pitches, his batting average would suffer. A low and outside pitch produced the same results – a success rate far below Williams’ lifetime batting average. However if Williams received a pitch in his optimum strength zone, he put all his muscle into it, knowing that he could consistently produce a higher batting average. In constructing a template for success, Williams outlined a pattern of patience. He realized that it was often better to take a pitch on the fringe of the strike zone rather than swing for a low average. A called strike was better than making an out.

Buffet extends the same reasoning to stock picking. The stock market is like a major league pitcher who fires thousands of pitches a day, with each pitch representing a certain stock at a certain price. As the batter, you must decide which of the thousands of pitches to swing at, and which you will let whiz by. What distinguishes you from a baseball player, however, is that you don’t ever have to swing. The game of investing doesn’t force you to take the bat off your shoulder and swing, unlike the batter in the stadium. No one will “call you out”. Buffet says: [click to continue…]

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Danger Ahead! A must see advice from Carl Icahn

by admin on February 29, 2016

In this video, one of the most successful investors in the world: Carl Icahn speaks about the great danger we are facing ahead. Carl Icahn speaks about the carried interest loophole, the problem of repatriation and inversions and how these problems don’t get fixed in Washington.

He also speaks about companies engineering their finances. Companies today artificially inflate their earnings through mergers and acquisitions and stock buybacks. Finally, he speaks about the two biggest problems of all: Introduction of permanent low-interest rates by the Fed, and oversell of high bond yields to the public, especially by BlackRock.

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Is Expedia spending too fast, too much?

by admin on May 10, 2015

Expedia-logo-and-wordmarkUnquestionably, Expedia Stock is a great business and for that reason one of the top positions in my portfolio. Lately however, I have been seeing that the company is spending too much too fast on marketing and acquisitions, betting heavily on a future that looks bright on paper, but has yet to be proven.

While Expedia may be right, in some instances organic growth is more important that growth through acquisitions and over spending on marketing When this kind of rapid growth happens, companies can accumulate dangerous amounts of debt too quickly; the smallest tailwind can cause serious trouble and instability.

To illustrate my concerns, I’ve included a list of the most recent Expedia acquisitions/strategic investments:

Wotif

In November 2014, Expedia completed its acquisition of Australian-based Wotif Group for $658 million. Wotif Group is a prominent player in the Asia Pacific market with a host of travel brands under its umbrella, including Wotif.com, lastminute.com.au, travel.com.au, Asia Web Direct, LateStays.com, GoDo.com.au, and Arnold Travel Technology. Wotif’s portfolio focuses on hotel and air, offering consumers more than 29,000 bookable properties across the globe. The group currently operates from Australia, China, Indonesia, Malaysia, New Zealand, Singapore, Thailand, UK, and Vietnam.

Auto Escape

Expedia acquired French car rental company, Auto Escape, in June 2014 for $85 million. The acquisition increased Expedia’s exposure to the $36.9 billion global car rental industry, which is expected to grow at a compounded rate of 13.6% to reach $79.5 billion by 2019, according to Transparency Market Research.

Auto Escape offers car rental services from over 300 car rental suppliers in 125 countries, and has a fleet of over 800,000 vehicles. It is estimated that Auto Escape’s revenues increased fivefold in the last five years to €120 million ($160 million). Auto Escape became a part of the CarRentals.com brand, a business unit managed by Expedia’s Hotwire Group.

Travelocity

In January 2015, Expedia acquired online travel agency Travelocity from technology company Sabre Corp for $280 million in cash. The deal follows a 2013 marketing agreement in which Expedia Inc’s technology powered platforms for Travelocity’s U.S. and Canadian websites, while Travelocity drove additional web traffic to Expedia.

Orbitz

Expedia is currently trying to seal a $1.34 billion takeover of Orbitz. Expedia’s blockbuster purchase of Orbitz may not significantly alter the competitive landscape for consumers, but it still represents a dramatic move in the larger, ongoing battle for travelers’ clicks, dollars and long-term loyalty. The newly enlarged Expedia will essentially control 75 percent of the U.S. online travel agency (OTA) market, based on 2013 figures. However, OTAs handle just 16 percent of total bookings, meaning that the company’s total is closer to 12 percent, hardly a monopolistic scenario – at least in the current market.

Trivago

In 2013, Expedia agreed to take a majority stake in leading German travel metasearch site Trivago in a cash and stock deal worth $632 million.

Founded in 2005, Dusseldorf, Germany based Trivago has a strong presence in hotel metasearch in Germany, Spain, the UK, Italy, France, and has recently entered the U.S. market.

Expedia has signed a definitive agreement to take a 62% stake in Trivago, which expects to take in $132 million in net revenue in 2012.

Decolar/Despegar

This year, Expedia made a $270 million investment in Decolar/Despegar, getting close to a 20% stake of the largest online travel agency (OTA) in Latin America. Expedia is known for making these strategic investments before fully acquiring companies, and if history repeats itself, this may be the first step in a future acquisition, two or three years down the road. That was the model they used with Travelocity – they began investing back in 2013, and finally acquired the company two years later.

When taken together, these acquisitions add up $3.2 billion since 2013. For a company that is generating a yearly net income of ~$300 million putting their debt to equity ratio at 1.05, double that of Priceline at 0.45.  This means Expedia is highly leveraging its acquisitions through debt. To a certain point this strategy makes sense, but things may not materialize as quickly as they would like or need. For instance, the company is losing tons of money on its venture with elong, one of the biggest OTAs in China, where Expedia is betting bi. Last quarter the company lost $33 million on this deal, and they expect to continue losing money at the expense of positioning and expansion in the Chinese market. This investment is an example of a big bet that may or may not produce the expected results. There is fierce competition in China including Alibaba and Ctrip, and the market is not as mature or proven as those of the United States and Europe.

For Q1 2015, Expedia reported an operating loss of $51 million including China, compared to a $3 million operating loss last year. This led to an adjusted loss per share of $0.03, while analysts were expecting a profit of $0.09 per share. Excluding China, the company delivered an operating loss of $10.9 million. In the short terms this may not be a problem, but spending and acquiring companies like is 1999 won’t be sustainable in the long run. Since 2010, shareholder equity has decreased -36%, while Priceline’s shareholder equity is up 518%.

In order to maintain growth and market share Expedia is spending heavily on advertising. Total sales & marketing are up nearly 70% of core OTA revenue (22% Y/Y). Meanwhile, SG&A expenses rose 17% Y/Y. Overall, spending is outpacing revenue growth, which is expected to continue as competitive headwinds remain.

If this trend of massive acquisitions continues at the expense of shareholders value and debt, I may sell my position in the coming months. I already have the company under close observation, and will be monitoring all future developments. While I think acquisitions can be quite valuable when they make good strategic and business sense, they also have the potential to be very dangerous if they are leveraged and made on assumptions that may never be fully realized.

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I recently watched a recording of a brainstorm session with Steve Jobs and his ‘Next Incorporated” 11 team members back in 1985. It is an incredible 20 min episode highlighting some of the characteristics we all already knew about one of the greatest entrepreneurs of our era.  In the video, Steve Jobs said this to his team:

“Companies come and go with the crest of the wave”

I have found that through history there is nothing more true than that statement. People, governments, and companies have all come and go with these cycles.  Sometimes this happens slowly and sometimes quickly, but they all are born, grow, diversify, expand, decline, and often eventually disappear.

Peter Thiel, one of the most successful startup investors in Silicon Valley says “every moment in business happens only once”. These are his words:

What I dislike about business books, is that they all have a formula: the 7 (or 5, 8, 10) steps to success. But the truth is, every moment in business happens only once; the next Bill Gates won’t be building an operating system. If you’re just trying to copy, you’re not learning from them…

… Take Google, for example, and ask yourself: why is it so successful, on so many levels? Because they’ve been able to carve out a unique category that has put them years ahead of their competition; they are not competing like crazy (the way a restaurant in San Francisco would, for example).

This statement articulates the main reason I will be keeping Google (GOOG) in my portfolio for years to come. Google right now is a very successful company, and every single technology company on the planet wants to operate just like them. The model is perfect for our time, and I expect the company to keep growing and diversifying at least for 10 more years. However, this doesn’t mean that the Google model will be the perfect model for the future. At some point Google will stop growing, it will slow down, and eventually will start to decline.

As companies grow they become more difficult to operate and responsibilities and goals inevitably decentralized. While Larry Page and Sergey Brin may have hired their own employees, I assume that’s no longer the case now that they have more than 40,000 employees worldwide. The original Google employees from the 80’s and 90’s are now married, have kids and priorities in their lives may have changed. Over time this shifting in employee focus and tenure can result in a slow down in efficiency and innovation, change frequently becomes difficult, and new smart people that want to move up the ladder face a lot of internal barriers from “originals” employees more interested in protecting their jobs before retirement than in coming up with the next great idea (let alone investing the energy required to realize it).

If a life cycle can be applied to a company, Google is still in the expansion phase, and it may stay in this phase for as many as 10 more years. At the same time, Google’s innovation and diversification has slowed. Google maps was launched in 2004, and Youtube in 2006 – both from acquisitions, in the case of Google maps from Keyhole, and YouTube from former PayPal employees that created the company in 2005. Since 2006, Google has not launched any significant product or service as big or with the potential of Google Maps or YouTube. However, despite the lack of recent innovation, these two products, plus Google Fiber and Google AdWords offer Google a lot of room for growth. The focus of the company has changed from innovation to expansion and distribution. That is what it makes Google so attractive it is a company that, with its current lineup of products, has the potential for growth every single year over the next 10 year at a reasonably healthy rate. It is true that the company may have its ups and downs like any other company, but a company in this phase has a very good chance of outperforming the S&P 500 over the next 10 years.

Personally, I look for businesses that have a competitive advantage, a big barrier to entry for competitors, and are expanding, just as Google is right now. As long as technology trends don’t change, Google would be a reasonably safe bet. 20 years from now, Google may not be that relevant anymore (even if that is hard to imagine), but today they can easily sustain their growth and the expansion and continue to be a company that will do well for years to come.

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Another great lesson of Warren Buffett

March 10, 2015

Warren Buffett is by far the greatest investor of all time. His way of thinking, perseverance, and tough negotiation skills are all qualities that set him apart from everybody else. As Warren Buffet’s prepares to retire (he is already 84 years old), he continues to give investors, (and frankly all of us) incredibly valuable lessons […]

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Improvement in the travel sector may signal economic recovery and new opportunities

February 10, 2015

The global economy is a complex machine, the result of many small transactions that take place in different markets and sectors. When a particular sector is down, another may be up, and vice versa. Money moves around as things change, and in our world, change is a constant. When changes are taking place, opportunities abound. […]

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An Interesting Sector for Value Investors in 2015

January 7, 2015

2014 is over and the stock market did well for the third year in a row. The market was up 16% in 2012, 32.39% in 2013, and 13.69% in 2014 (including dividends). In other words the S&P 500 is up 62% since 2012. This is an impressive comeback after the -37% drop of 2008. Unfortunately, […]

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Oil prices, the challenge for many economies in 2015

December 4, 2014

2014 is coming to an end, and if anything is becoming crystal clear at the end of this year it is that economies around the world are deeply and intrinsically linked. Since June a roller coaster of events has pushed up the price of the Dollar in Russia by 38%. This is the biggest increase […]

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Why I increased my investment in Energy?

November 7, 2014

While there has been a lot of talk these days about the energy prices, specifically about oil and gas prices, two of my largest holdings are in this sector (Ecopetrol EC and Lukoil LUKOY). In October, I increased my position in Ecopetrol, so the question is why? In order to explain why, first we need […]

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The legacy of Larry Ellison at Oracle

October 9, 2014

Larry Ellison will be remembered for founding one of the most successful companies of our times. Only time will tell if he will also be remembered as king of the acquisition. Ellison, of course, was a specialist in product engineering, but he was also an excellent salesperson to corporate clients and extremely good in analyzing […]

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The future of Intel is not computers, it is wearables, servers and the Internet of things.

September 4, 2014

In 2013, Intel underperformed the Nasdaq index by 12.7%, and investors became concerned about the end of the era of Wintel domination. The Wintel alliance was virtually unstoppable from the 1980s to 2000. In April 2013, the research firm IDC issued an alarming report saying that world-wide shipments of laptops and desktops fell 14% in […]

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