Introduction
Sam Zell, Charlie
Munger, Warren Buffett, The Kentucky Derby betting, and the laws of economics were this week's input to
my investment thinking. The common theme of my reactions to each of these
inputs is that an understanding of odds leads to better investment decisions.
Odds
Odds are the generally
expected returns on successful execution of an action. Every single thing we do
is premised on the conscious or unconscious expectation starting with our
getting out of bed in the morning. Either we accept the odds set by others or
we believe that there will be a higher payoff than generally expected.
Sam Zell
I had the pleasure of
attending "A Conversation between Lee Cooperman and Sam Zell" at The
New Jersey Performing Arts Center last Thursday night. Sam is a very much a
self made billionaire through many entrepreneurial ventures largely built
around real estate. Similar to our friends at Marathon in London, he is a believer
in the capital cycle. They are attracted to investment opportunities when
capital has been removed and are sellers when there is a rush of new capital
entrants. They like unique assets where there is limited competition. This is
not real estate today. As a singular buyer, he has improved his odds. (He is
the chair and a large shareholder of a non-real estate public company with
limited competition in which I happen to own a few shares.)
Charlie Munger
Charlie Munger's family
hold a large family dinner the Friday night before the Berkshire Hathaway
annual meeting. He has been a major educational input to his senior partner,
Warren Buffett which Warren states is one of the reasons for many of the
successes of the company. I am combining Charlie's comments at the dinner and
at the meeting which can be summarized below:
Learning
is the key to their success. They have learned from their numerous past
mistakes. Warren is a learning machine. Proof of his learning is the Apple
purchase.
Charlie
would be willing to put $150 Billion to work if they had the right opportunity.
China
will do very well in the future due to the character of the people.
As
a business, BYD is building well in terms of people and products. Looks for big
returns with favorable odds.
Warren
Buffett
One of my sons and I go
to the Berkshire Hathaway annual meeting with perhaps 40,000 others. We view
this as a learning experience as to investing principles and a review of
business conditions at the entrepreneurial level. While it is difficult to
summarize five and half hours of questions with some answers, there were a
number of points made that were useful to us as portfolio managers shown below:
They
look for competitive advantages. Often they are the only choice for an
entrepreneur who wants to sell a private firm, that wants to take good care of
loyal employees.
Medical
costs are the tapeworm that is growing in corporate expenses.
In
2017 there is a slight bias in favor of recognizing losses.
Trying
to be a genius is dangerous.
Opportunities
are more difficult to find.
The
five largest operating companies within the S&P500 generate enough capital
that they do not need any new equity capital.
Very,
Very IMPORTANT: In some cases Intellectual Capital may be more important that
Financial Capital. I also suggest customer capital in terms of relationships(at
least in the financial services businesses) should be valued more the cash
capital.
Betting
on The Kentucky Derby
I was asked who to bet
on in the historic Run for the Roses race. I had not the time or the
inclination to spend time on handicapping or analyzing these immature three
year old horses in the spring. However, I did say that the horses that had odds
of around 5 to 1 made sense and that at least one of the three top finishers
would be a long shot. The table below shows the payoffs on a two dollar bet in
each of the winning pools-to win, place, or show:
The
Winner
$11.40
$7.20
$
5.80
Second
$26.60
$18.20
Third
"We are All Odds Players"
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