Old School Value Nugget Fest (Nov 14th Edition)
Some good reads this week. My favorites were the ones on Buffett’s hurdle rate and the two in the “Company & Strategy” section.
If you want to hone your financial statement analysis, I’d recommend Einhorn’s Netflix Short thesis, which dives into GAAP financials and makes you think about why they are misleading for NFLX.
This is the best description of Buffett’s back-of-the-envelope math on valuation and hurdle rates I’ve seen.
“We don’t want to buy equities where our real expectancy is below 10 percent. That’s true whether short rates are 6 percent or whether short rates are 1 percent. We just feel that it would get very sloppy to start dipping below that.”
You read a lot about how Buffett is underperforming the market YTD, but you really should expect that. Historically, Buffett bounces back strongly.
“Short-term underperformance should be expected once in a while, even by the top-rated managers, according to the prevailing research.”
Markets & Investing
The World Has Gone Mad and the System Is Broken [Ray Dalio]
This came out a couple weeks ago but I got around to reading it this week. It’s kind of doom-and-gloom, but it’s also worth thinking about the macro picture, too.
Occam’s razor is not intended to be a substitute for critical thinking. It is merely a tool to help make that thinking more efficient. The point is to keep things as simple as they can be.
“We look around us and imagine that today’s largest corporations will always be with us, but that simply isn’t the case. That brings me to my second key point: We should want companies to return cash to shareholders—and preferably lots of it.”
Company & Strategy
David Einhorn: The Bear Case For Netflix [The Acquirer’s Multiple®]
I feel like I learn the most from reading short theses. This did not disappoint.
“At least we have heard of House of Cards; NFLX’s balance sheet likely contains capitalized values for unpopular shows like The Get Down, Lilyhammer, Atelier, Longmire, the aptly-named Disjointed, and the even more aptly-named Everything Sucks. While we enjoyed Aziz Ansari’s Right Now, we suspect 80% or more of its lifetime viewing has already happened. How and why does something like that deserve a multiple-year accounting life? We believe that management’s approach to expense recognition renders NFLX’s GAAP financials nearly meaningless.
The point is that NFLX needs to maintain a constant stream of popular new content in order to sustain, let alone grow, its subscriber base. Thus, the cash burn of over $3 billion (which NFLX promises will improve “slowly” and “gradually”) better reflects the business economics than do its GAAP financials.”
THE CASE AGAINST REITS [FactorResearch]
I’ve struggled with how to think of REITs as part of my asset allocation. I generally think of them as equity, but this piece points out they’re more a combination of small cap equity plus bonds of varying yield. And this research suggests holding those asset classes directly may result in better risk-adjusted returns, despite REITs’ relatively low correlation with major stock market indexes.
Podcast of the Week
Jesse Livermore – The Search for the Truth with the Anonymous Master – [Invest Like the Best, EP.136]
Great, long, wide-ranging interview with Jesse Livermore, who wrote OSAM’s “Earnings Mirage” paper (my favorite paper of the year) and is just a great data analyst.