Hello Coffeedrinkers and चाय Lovers alike,
India I'm coming! I'll visit Delhi and Udaipur in a week, so if anyone has must-see places or great restaurants to share, please reach out via mail or Twitter.
A few wrote to me about CPI Numbers and the Fed Hike.
Here are my thoughts.
Fed Hikes
Several Macro Guys call for a Fed Pivot - from the current hiking to lowering them. Given the speed in which the Fed operated the last year and being overly cautious - I can't see them reversing course to quickly. Inflation has come political and they know from the 70s, that it can become very sticky.
My opinion is that over the long run the Fed Rate doesn't really change the outcome of many companies. Money incineration machines like Coinbase or Carvana might last a few years longer with a low interest rate, but unless they can turn the course - the outcome will be the same.
But enough about Macro blabber and what is basically guesswork - and back to some good old value principles.
Learning from Buffett's mistakes
Buffett is without a doubt the most successful investor, but even he makes mistakes. Let's see what we can learn.
Dexter Shoe Company and IBM
At the time of purchase in 1993, the company had high return on capital. However it seems that he ignored the competitive nature of the business with a lot of the production moving abroad. In 1999 93% of all shoes in the US were coming from outsourced factories mostly in China - and Dexter Shoe was struggling.
No matter how good the management was, the company just could not compete against cheaper products. A business in a secular declining sector can be a great investment, as tobacco has shown us - but the shoe industry was rising and competition was getting stronger, not weaker. Additionally Buffett very much overpaid for the company, buying it with stock. Given that Berkshire's stock 28x since the acquisition it was a costly $12b dollar mistake.
Another similar company was IBM. Their return on capital also looked promising in 2011 shifting mainly to consulting. The problem with the business was, similar to Dexter. Competition increased in a rising industry, and competing firms and products were often much cheaper or easier to implement than what IBM could offer.
Not properly judging competition is one thing, but I don't think that Buffett ignored the risks here. Buffett bought into comparatively cheap companies in a fast growing industry. Yet in hindsight, they were not cheap. They did not catch the growth of the sector and look ridiculously expensive in hindsight. There is a reason why growth investors advocate to buy the leader in an industry. More often than not, it is the best company. At the same time, the stock price was not cheap to count as a cigar butt.
Cheap enough to be value, yet not cheap enough and no moat is a dangerous combination.
Airlines
I would not count Buffett selling airlines during the pandemic as a mistake. It was a truly unprecedented situation, and no one could have predicted the bull run that would take place. The mistake was buying them in the first place.
At the time of purchasing the big four US airlines the theory was simple: A big consolidation has taken place in the industry and Warren thought that this would create more value creation for shareholders, similar to what railways around the world experienced.
However it wasn't so. Even before his sales, the financial numbers were good for the industry, but not for the rest of the market. In contrast to railways, airlines don't really have moats. Airports are quick drawing up contracts with newcomers and the only real barrier is capital. Looking at other industries like car manufacturing, that is not a moat and the return on capital quickly diminishes.
Just like with Dexter, the companies were cheap - but not cheap enough given the industry.
We value investors often favor a bottom up approach, searching for cheap companies to get good returns. As a result we sometimes ignore the industry and competition that the industry is in.
Analyzing the industry from a top down perspective, might tell us a lot if it is a good investment or just a value trap (like Turning Point Brand was for me).