A letter a day!
Letter #15 Dec’2011
1.Recognizing and correctly weighing this information in spite of the latest news flow is a matter of discipline, and it is that discipline that is so richly rewarded in the end.
"The simple deep reality for many of our firms is the virtuous spiral established when companies keep costs down, margins low and in doing so share their growing scale with their customers. In the long run this will be more important in determining the destination for our firms than the distractions of the day. Jeff Bezos, founder of Amazon, made the following point in a recent interview in Wired magazine:
“There are two ways to build a successful company. One is to work very, very hard to convince customers to pay high margins [the Colgate, Nike, Coca-Cola model alluded to above]. The other is to work very, very hard to be able to offer customers low margins [the Wal-Mart, Costco, AirAsia, Amazon, Asos model]. They both work. We’re firmly in the second camp. It’s difficult – you have to eliminate defects and be very efficient. But it’s also a point of view. We’d rather have a very large customer base and low margins than a small customer base and higher margins.”
2.It is not that the garden will always be rosy. There are lots of ways that the companies could drain the moats that surround them.
“One example might be wide-scale credit card fraud following the loss of customer information (perhaps say after a careless employee left a laptop in a taxi). Yikes! If the neglectful firm made light of the situation, pretending it was a small loss and no harm was done, then they had better be telling the truth. Making light of a far more serious situation, perhaps as News International may be finding out today, risks breaking even a long-standing bond of trust. So, in our opinion, it won’t be the on-line fraud, per se, or, heaven forbid, an airplane crash at AirAsia, that could ruin our firms, but a disingenuous response to a problem.”
3.A one penny dividend from a worthless holding means that, in accounting terms, to create money out of nothing!
“Black Arrow was founded and continues to be run by the octogenarian Arnold brothers, who own or control around eighty-eight percent of the shares outstanding. The shares were de-listed from AIM (a UK stock exchange) in February 2010. At the time, book value approximated one pound per share, although the last traded share price was fifty-two pence. There is no market for the shares, and no prospect of a market for the shares as the brothers do not wish to own more (we have tried), and so the investment has been valued at nil in the Partnership (with a paper loss of around one tenth of one percent of net asset value). Zak and I know the business is troubled, but it is also not worth nothing; then again to assign a positive value would be just as arbitrary as we could not give you cash for your shares either - so zero it is. Almost all valuations are wrong, in effect, and in the case of Black Arrow, although de-listed and in poor health, the firm has continued to operate with the resultant one pence dividend. Enjoy it whilst it lasts. We remain hopeful, but not optimistic, that the dividend alchemy will continue.”
4.The trick to being a good investor, over the long-term, is to maintain your long-term oriented discipline.
Bezos again:
“Our first shareholder letter, in 1997, was entitled, “It’s all about the long-term”. If everything you do needs to work on a three-year time horizon, then you’re competing against a lot of people. But if you are willing to invest on a seven-year time horizon, you’re now competing against a fraction of those people, because very few companies are willing to do that. Just by lengthening the time horizon, you can engage in endeavors that you could never otherwise pursue. At Amazon we like things to work in five to seven years. We’re willing to plant seeds, let them grow – and we’re very stubborn. We say we are stubborn on the vision and flexible on the details”.