Videos – Interviews With Warren Buffett, Charlie Munger, Jim Grant And Joel Greenblatt (#valueinvesting, #buffett)

I found the following interviews and lectures at John Chew’s CSInvesting blog and decided to repost and embed here for my convenience and later retrieval.

Buffett on investment philosophy and the Four Filters

Buffett lectures to UGA students (Buffett’s life and investing principles)

Buffett lectures to students in India (valuation and moats)

Charlie Munger at University of Michigan

Joel Greenblatt interviewed by Steve Forbes (problems with mutual funds and indexing)

Jim Grant lectures to students at Darden

Best of value investing (Pt 1)

Best of value investing (Pt 2)

Best of value investing (Pt 3)

Best of value investing (Pt 4)

Best of value investing (Pt 5)

Notes – Distilled BuffettFAQ.com Investment Wisdom Of Warren Buffett (#buffett, #valueinvesting)

All quotes were originally collected and compiled at the outstanding BuffettFAQ.com

On Learning Businesses

Now I did a lot of work in the earlier years just getting familiar with businesses and the way I would do that is use what Phil Fisher would call, the “Scuttlebutt Approach.” I would go out and talk to customers, suppliers, and maybe ex-employees in some cases. Everybody. Everytime I was interested in an industry, say it was coal, I would go around and see every coal company. I would ask every CEO, “If you could only buy stock in one coal company that was not your own, which one would it be and why? You piece those things together, you learn about the business after awhile.

Funny, you get very similar answers as long as you ask about competitors. If you had a silver bullet and you could put it through the head of one competitor, which competitor and why? You will find who the best guy is in the industry.

On The Research Process

It’s important to read a lot, learn about the industries, get background information, etc. on the companies in those piles. Read a lot of 10Ks and Qs, etc. Read about the competitors. I don’t want to know the price of the stock prior to my analysis. I want to do the work and estimate a value for the stock and then compare that to the current offering price. If I know the price in advance it may influence my analysis.

Pick out five to ten companies in which you understand their products, get annual reports, get every news piece on it. Ask what do I not know that I need to know. Talk to competitors and employees. Essentially be a reporter, ask questions like: If you had a silver bullet and could put it into a competitor who would it be and why. In the end you want to write the story, XYZ is worth this much because…

Narrowing the Investment Universe

They ought to think about what he or she understands. Let’s just say they were going to put their whole family’s net worth in a single business. Would that be a business they would consider? Or would they say, “Gee, I don’t know enough about that business to go into it?” If so, they should go on to something else. It’s buying a piece of a business. If they were going to buy into a local service station or convenience store, what would they think about? They would think about the competition, the competitive position both of the industry and the specific location, the person they have running it and all that. There are all kinds of businesses that Charlie and I don’t understand, but that doesn’t cause us to stay up at night. It just means we go on to the next one, and that’s what the individual investor should do.

Q: So if they’re walking through the mall and they see a store they like, or if they happen to like Nike shoes for example, these would be great places to start? Instead of doing a computer screen and narrowing it down?

A computer screen doesn’t tell you anything. It might tell you about P/Es or something like that, but in the end you have to understand the business. If there are certain businesses in that mall they think they understand and they’re public companies, and they can learn more and more about them…. We used to talk to competitors. To understand Coca-Cola, I have to understand Pepsi, RC, Dr. Pepper.

The place to look when you’re young is the inefficient markets.

Investment Process

  • Read lots of K’s and Q’s – there are no good substitutes for these – Read every page
  • Ask business managers the following question: “If you could buy the stock of one of your competitors, which one would you buy? If you could short, which one would you short?”
  • Always read source (primary) data rather than secondary data
  • If you are interested in one company, get reports for competitors. “You must act like you are actually going into that business, and if you were, you’d want to know what your competitors were doing.”

Four Investment Filters

Filter #1 – Can we understand the business? What will it look like in 10-20 years? Take Intel vs. chewing gum or toilet paper. We invest within our circle of competence. Jacob’s Pharmacy created Coke in 1886. Coke has increased per capita consumption every year it has been in existence. It’s because there is no taste memory with soda. You don’t get sick of it. It’s just as good the 5th time of the day as it was the 1st time of the day.

Filter #2 – Does the business have a durable competitive advantage? This is why I won’t buy into a hula-hoop, pet rock, or a Rubik’s cube company. I will buy soft drinks and chewing gum. This is why I bought Gillette and Coke.

Filter #3 – Does it have management I can trust?

Filter #4 – Does the price make sense?

Finding Bargains

The world isn’t going to tell you about great deals. You have to find them yourself. And that takes a fair amount of time. So if you are not going to do that, if you are just going to be a passive investor, then I just advise an index fund more consistently over a long period of time. The one thing I will tell you is the worst investment you can have is cash. Everybody is talking about cash being king and all that sort of thing. Most of you don’t look like you are overburdened with cash anyway. Cash is going to become worth less over time. But good businesses are going to become worth more over time. And you don’t want to pay too much for them so you have to have some discipline about what you pay. But the thing to do is find a good business and stick with it.

Don’t pass up something that’s attractive today because you think you will find something way more attractive tomorrow.

Defining Risk

We think first in terms of business risk. The key to Graham’s approach to investing is not thinking of stocks as stocks or part of the stock market. Stocks are part of a business. People in this room own a piece of a business. If the business does well, they’re going to do all right as long as long as they don’t pay way too much to join in to that business. So we’re thinking about business risk. Business risk can arise in various ways. It can arise from the capital structure. When somebody sticks a ton of debt into a business, if there’s a hiccup in the business, then the lenders foreclose. It can come about by their nature–there are just certain businesses that are very risky. Back when there were more commercial aircraft manufacturers, Charlie and I would think of making a commercial  airplane as a sort of bet-your-company risk because you would shell out hundreds and hundreds of millions of dollars before you really had customers, and then if you had a problem with the plane, the company could go. There are certain businesses that inherently, because of long lead time, because of heavy capital investment, basically have a lot of risk. Commodity businesses have a lot of risk unless you’re a low-cost producer, because the low-cost producer can put you out of business. Our textile business was not the low-cost producer. We had fine management, everybody worked hard, we had cooperative unions, all kinds of things. But we weren’t the low-cost producers so it was a risky business. The guy who could sell it cheaper than we could made it risky for us. We tend to go into businesses that are inherently low risk and are capitalized in a way that that low risk of the business is transformed into a low risk for the enterprise. The risk beyond that is that even though you identify such businesses, you pay too much for them. That risk is usually a risk of time rather than principal, unless you get into a really extravagant situation. Then the risk becomes the risk of you yourself–whether you can retain your belief in the real fundamentals of the business and not get too concerned about the stock market. The stock market is there to serve you and not to instruct you. That’s a key to owning a good business and getting rid of the risk that would otherwise exist in the market.

Valuation Metrics

The appropriate multiple for a business compared to the S&P 500 depends on its return on equity and return on incremental invested capital. I wouldn’t look at a single valuation metric like relative P/E ratio. I don’t think price-to-earnings, price-to-book or price-to-sales ratios tell you very much. People want a formula, but it’s not that easy. To value something, you simply have to take its free cash flows from now until kingdom come and then discount them back to the present using an appropriate discount rate. All cash is equal. You just need to evaluate a business’s economic characteristics.

[Highly qualitative, descriptive and verbal, has little to do with the numbers in justifying an investment]

The Ideal Business

WB: The ideal business is one that generates very high returns on capital and can invest that capital back into the business at equally high rates. Imagine a $100 million business that earns 20% in one year, reinvests the $20 million profit and in the next year earns 20% of $120 million and so forth. But there are very very few businesses like this. Coke has high returns on capital, but incremental capital doesn’t earn anything like its current returns. We love businesses that can earn high rates on even more capital than it earns. Most of our businesses generate lots of money, but can’t generate high returns on incremental capital — for example, See’s and Buffalo News. We look for them [areas to wisely reinvest capital], but they don’t exist.

So, what we do is take money and move it around into other businesses. The newspaper business earned great returns but not on incremental capital. But the people in the industry only knew how to reinvest it [so they squandered a lot of capital]. But our structure allows us to take excess capital and invest it elsewhere, wherever it makes the most sense. It’s an enormous advantage.

See’s has produced $1 billion pre-tax for us over time. If we’d deployed that in the candy business, the returns would have been terrible, but instead we took the money out of the business and redeployed it elsewhere. Look at the results!

CM: There are two kinds of businesses: The first earns 12%, and you can take it out at the end of the year. The second earns 12%, but all the excess cash must be reinvested — there’s never any cash. It reminds me of the guy who looks at all of his equipment and says, “There’s all of my profit.” We hate that kind of business.

Making Mistakes In Investments

We bought it because it was an attractive security. But it was not in an attractive industry. I did the same thing in Salomon. I bought an attractive security in a business I wouldn’t have bought the equity in. So you could say that is one form of mistake. Buying something because you like the terms, but you don’t like the business that well.

The Market and Its Price

The NYSE is one big supermarket of companies. And you are going to be buying stocks, what you want to have happen? You want to have those stocks go down, way down; you will make better buys then. Later on twenty or thirty years from now when you are in a period when you are dis-saving, or when your heirs dis-save for you, then you may care about higher prices. There is Chapter 8 in Graham’s Intelligent Investor about the attitude toward stock market fluctuations, that and Chapter 20 on the Margin of Safety are the two most important essays ever written on investing as far as I am concerned. Because when I read Chapter 8 when I was 19, I figured out what I just said but it is obvious, but I didn’t figure it out myself. It was explained to me. I probably would have gone another 100 years and still thought it was good when my stocks were going up. We want things to go down, but I have no idea what the stock market is going to do. I never do and I never will. It is not something I think about at all.

Forecasting

People have always had this craving to have someone tell them the future. Long ago, kings would hire people to read sheep guts. There’s always been a market for people who pretend to know the future. Listening to today’s forecasters is just as crazy as when the king hired the guy to look at the sheep guts. It happens over and over and over.

What’s going to happen tomorrow, huh? Let me give you an illustration. I bought my first stock in 1942. I was 11. I had been dillydallying up until then. I got serious. What do you think the best year for the market has been since 1942? Best calendar year from 1942 to the present time. Well, there’s no reason for you to know the answer. The answer is 1954. In 1954, the Dow … dividends was up 50%. Now if you look at 1954, we were in a recession a good bit of that time. The recession started in July of ’53. Unemployment peaked in September of ’54. So until November of ’54 you hadn’t seen an uptick in the employment figure. And the unemployment figure more than doubled during that period. It was the best year there was for the market. So it’s a terrible mistake to look at what’s going on in the economy today and then decide whether to buy or sell stocks based on it. You should decide whether to buy or sell stocks based on how much you’re getting for your money, long-term value you’re getting for your money at any given time. And next week doesn’t make any difference because next week, next week is going to be a week further away. And the important thing is to have the right long-term outlook, evaluate the businesses you are buying. And then a terrible market or a terrible economy is your friend. I don’t care, in making a purchase of the Burlington Northern, I don’t care whether next week, or next month or even next year there is a big revival in car loadings or any of that sort of thing. A period like this gives me a chance to do things. It’s silly to wait. I wrote an article. If you wait until you see the robin, spring will be over.

Managers Should Be Investors

Charlie makes a good point. Managers should learn about investing. I have friends who are CEOs and they outsource their investing to a financial advisor because they don’t feel comfortable analyzing Coke and Gillette and picking one stock vs. the other. Yet when an investment banker shows up with fancy slides and a slick presentation, an hour later the CEO is willing to do a $3 billion acquisition. It’s extraordinary the willingness of corporate CEOs to make decisions about buying companies for billions of dollars when they aren’t willing to make an investment for $10,000 in their personal account. It’s basically the same thing.

The Value of Accounting

I had a great experience at Nebraska. Probably the best teacher I had was Ray Dein in accounting. I think everybody in business school should really know accounting; it is the language of business. If you are not comfortable with the lan- guage, you can’ t be comfortable in the country. You just have to get it into your spinal cord. It is so valuable in business.

Staying Rational

One thing that could help would be to write down the reason you are buying a stock before your purchase. Write down “I am buying Microsoft @ $300B because…” Force yourself to write this down. It clarifies your mind and discipline. This exercise makes you more rational.

Review – The Big Picture: Money And Power In Hollywood (#hollywood, #filmindustry)

The Big Picture: Money and Power in Hollywood

by Edward Jay Epstein, published 2005

What the movie business was like in 1947

The central theme of “The Big Picture” is that the economics of the film industry and the profitability of Hollywood (both mechanistically and proportionally) have changed significantly from 1947 to the present day. By way of comparison, consider a few of the following starting statistics:

  • In 1947, the major film studios produced 500 films; in 2003, the six major studios produced 80 films
  • In 1947, 90M people out of a total population of 151M went to a theater each week in America at a cost of about $.40/ticket; in 2003, less than 12% of the population saw a movie in a given week
  • In 1947, 4.7B movie tickets were sold in America; in 2003, 1.57B were sold
  • In 1947, “feature films could be shot in less than a month, and some B films were shot in a week”; today, the average live action film takes over a year to produce and the average animated film takes 2-3 years to produce
  • In 1947, “virtually all [studio] films” made money, with the average cost of making a film at $732,000, and average net receipts of around $1.6M; in 2003, “a relatively good year, the six studios lost money on the worldwide theatrical release of most of their titles”

By 2003, the cost of producing the average film had risen to $63.8M. Although the dollar fell 7x from 1947-2003, the cost of producing a film rose 16x! Clearly, when the trend in film production is studied over time it is obvious that film production has become a substantially more capital-intensive business, it is a higher risk business (in terms of the chance and cost of failure) and it is substantially less profitable, at least in terms of theatrical release.

How and why did the economics of the film industry change, and how have film studios managed to stay in business today if their main product (theatrical film releases) are money losers on average? The answer consists of two elements: changing government regulations, and changing strategic dynamics.

Government intervention

The new studio system is the product of three government interventions. (The old one was a product of one– patents and intellectual property laws that caused movie studios to flee the Edison Trust on the East Coast, where the ET’s lawyers had a harder time pursuing patent infringement claims.)

  1. In 1948, the Justice Department issued a consent decree to the major film studios, “give up control over major retail outlets [the theater distribution system] or face the consequences of a criminal antitrust investigation”
  2. In 1970, the FCC passed the fin-syn rule on studios’ behalf, giving Hollywood an advantage over the networks in the syndication business, laying the seeds for and eventual studio takeover of the television network industry and the rise of the international, corporate media conglomerate business model
  3. In the 1990s, fin-syn was weakened and in 1995, abolished altogether by the FCC, allowing studios and networks to become part of vertically integrated conglomerates controlling production, distribution, stations, networks, cables, satellites and other means of TV transmission

A few other intervention-related items of note: the Nixon administration asked studios to portray drug users as menaces to society rather than victims of addiction, resulting in the start of perpetrators of crime frequently being depicted as drug users in film and television productions. Additionally, in 1997 Congress passed a law allowing studios to be paid through a formula for integrating antidrug messages into the plots of television series that were approved by White House Office of National Drug Control Policy.

Your tax dollars at work!

Disney changes the game

The second major change to the old studio production and profitability model was Walt Disney’s decision to focus on young children and families as the primary audience for his film and television productions. This strategy began with development of Snow White and the Seven Dwarfs, which began in 1934. Between 1937 and 1948, 400 million children’s tickets at an average cost of $.25 had been sold. The film was the first to gross over $100 million. It was also the first film to have a commercial soundtrack, the first film to have merchandising tie-ins and the first film with multiple licensable characters.

Disney’s strategic decision was brilliant– he created a niche market (children’s entertainment) that the other studios refused to enter. He had this new and growing market all to himself for a long period of time, during which he established his brand as essential and synonymous with family entertainment. He  and his successors pioneered the idea of film releases as simply the starting point in establishing a long-lived exploitable IP asset which could generate additional cash flows outside the box office through merchandising and licensing arrangements.

The way Hollywood works today

Today, the major movie studios have either been subsumed into massive, international corporate conglomerates, or else they’ve become one (like Disney). Movies are just one of their many businesses, and the role of the box office has dwindled. Many movies lose money at the box office. But this is okay because the corporate studios issue their content and IP across their other media (TV, merchandising, music, home entertainment products, etc.) to make back their money, and then some.

As one example of new studio economics, consider the film Gone in 60 Seconds— worldwide box office gross of $242M, $103.3M paid by Disney to produce the film, $23.2 for physical distribution into theaters (prints and insurance), $67.4M on worldwide advertising, $12.6M in residual fees, all in costs of $206.5M to get the film into the theater and to generate an audience to see the film. The theaters then kept $139.8M of the box office gross. Disney’s distribution arm (Buena Vista) collected $102.2M. Disney’s overhead of $17.2M for employee salaries in production, distribution and marketing and interest payments of $41.8M mean the film lost over $160M by 2003.

But that isn’t the end of the story for a film like Gone in 60 Seconds, as the film IP takes on a new life once it leaves the theatrical market and enters the world of home entertainment, where it is sold as a personal home library title, rented and licensed for syndication through major domestic and foreign TV and other media networks. For animated films (and some live action titles), there is also the opportunity to merchandise relevant IP and license the film’s IP as a movie tie-in for the products of other companies.

As can be seen from the numbers above, the two primary drivers of increased film production costs are related to the competitive aspects of film advertising and distribution and the end of the “chattel talent” system whereby studios essentially owned their stars and laborers (producers, directors and film crews), compared with the “star power” arrangements of today. According to the author,

In this new era, stars, not studios, reap the profit their brand names bring to a film.

One reason that advertising costs have risen is due to the fact that in the previous era, one admission got you in for multiple screenings and every moviegoer essentially watched every screening shown during their admission. Today, movie audiences are highly segmented. This means that studios have to “create” a new audience for each and every film, they can not count on a moviegoer purchasing a general admission ticket which will result in them watching all of their films. As one Sony marketing executive put it:

If we release twenty-eight films, we need to create twenty-eight different audiences which necessitates twenty-eight different marketing campaigns.

Additionally, the transformation of the film industry into a global market with simultaneous releases means higher advertising costs (no way to reuse promotional prints and media as films no longer have “rolling releases” across the country) and higher physical film production and distribution costs (every theater needs its own copy of the film which must be shipped there and back). And because the studios no longer “control” their talent and labor, they must be willing to pay top dollar for the name-brand stars that draw the biggest crowds.

However, the studios have also gotten savvier at advertising and cross-marketing in the age of ownership by global, corporate media conglomerates. Major Hollywood studios cross-promotionalize across their various media. A studio can get actors, directors, etc. to be interviewed on the corporate parent’s TV networks to promote an upcoming film. Corporate sponsors with TV rights for certain sports and national events can get additional advertising and exposure for the corp parents film studios as well.

Film studios have also learned how to leverage their promotional efforts through tie-in marketing and merchandising partnerships. In these relationships, a leveraged marketing and advertising budget results because your partners pay to promote your characters and content for you. For example,

[McDonald’s] invested more than $100M — four times Disney’s own advertising budget– in just one film, Monsters, Inc.

The clearinghouse system

Another essential element of the modern film business that must be understood is the “clearinghouse system.”

Studios now outsource the making and financing of most of their movies and television series to off-the-book corporations

Movies used to return almost all of their money in a year; now, revenue flows in over the lifetime of licensable rights, often lasting many decades.

When revenue flows in, it is the studio that decides (initially at least) who is entitled to what part of it, and when, and under what conditions

which works to the studios advantage because

the studios usually control the information on which the payments are based

Theaters, distribution and merchandising

Today’s theaters have three primary businesses: concessions vending, movie-exhibition, and corporate advertising. However, contrary to popular belief and news headlines, the box office is not the primary source of profits for theaters– the selling of refreshments is.

Theaters want a film with broad appeal so there are more people attending who will buy more refreshments. Additionally, they want films no longer than 128 minutes in length because every film which exceeds that limit causes them to lose a potential evening showing.

Film studios, meanwhile, simply want their films to succeed at the box office because there has historically been a connection between success at the box office and later success in the home entertainment market, which is much more profitable for them as studios end up with only 45-60% of the box office revenues on average.

Non-domestic box office and non-theatrical release have long been critical to the Hollywood model. As early as 1926, Hollywood studios represented 3/4 of European box office and 1/3 of Hollywood revenues came from Europe. In the 1950s, Hollywood film studios had a 30% share of European and Japanese box office which grew to 80% by 1990. American film studios seem to flagrantly violate the Greenwaldian strategic mantra of “compete locally”!

Paramount and Universal jointly control the largest overseas distributor, United International Pictures (UIP). Pay-per-view TV earned the six major studies $367M in 2003, a relatively modest sum of money despite the hype of the model. Other major sources of revenues in nontheatrical release are airline in-flight entertainment, hotel pay-per-view and US military theaters overseas. One of the benefits of television syndication of studio content is that almost all marketing expenses are paid by the broadcaster and the network.

Merchandising is another critical element of film studio profitability. For example, merchandising alone adds an estimated $500M profit to Disney’s bottom line each year.And The Lion King produced $1B in retail sales by itself. Streams of licensing revenues can enrich a studio’s clearinghouse for many decades.

Critical competitive dynamics of the film industry

It’s a well-known fact within the industry that “the date on which a film will open can make or break a movie.” Traditionally, the 9 months between September and May when school is in session promises only a fraction of the audience possible during the three months in the summer season. Studios must compete for a limited number of big-release slots and face a distinct “prisoner’s dilemma” strategic framework in which the refusal to cooperate in selecting movie release dates can result in massively diminished box office performance for each studio.

The studio whose film has the weaker appeal to the target audience has a strong incentive to change its slot, since if the NRG numbers prove correct, it stands to get a smaller share of a confused and cross-pressured audience and will probably fail.

A key competitive strategy for film studios is the creation of franchise films. Franchise films are more stable sources of revenue, because they’re more consistent performers at the box office and in the sell-through of the home entertainment market. Additionally, they ostensibly help to lower the costs of advertising and marketing because there is already a fan-base/audience in place which does not need convincing anew to see a franchise sequel film or buy related merchandise. Additionally, television and other syndication networks are willing to bid higher for franchise films because of their consistency and predictability.

One key to creating franchise films is close adherence to the “Midas formula.”

The Midas formula

Only a very few films account for the lion’s share of a studio’s earnings. The film’s that succeed most often and most extremely typically follow the “Midas formula”. Films which follow this lucrative formula have the following features:

  1. based on children’s stories, comic books, serials, cartoons or a theme-park ride
  2. child or adolescent protagonist
  3. fairy-tale like plot
  4. strictly platonic relationships
  5. appropriate for toy and game licensing
  6. a rating no more restrictive than PG-13
  7. end happily
  8. use digital animation
  9. cast actors who are not ranking stars (do not command gross-revenue shares)

The Disney empire is largely the result of Disney’s successors closely hewing to this formula. R-rated and live action films have far less chance to reach their break-even compared to films adhering to the Midas formula. In act, non-formula films have little, if any, possibility of becoming billion-dollar-club members.

Other facts and figures and final comments

First, a few stray facts and figures:

  • the average cost of American distribution in 2003 was $4.2M per film for the major studios, while independent films averaged $1.87M per film
  • the six major studios spent more than $1B in 2003 on film prints
  • in 2003, the average advertising expense per film was $34.8M, compared to 1947 when $60M was spent on distribution and advertising by ALL major film studios combined
  • in 1947, movies were America’s third largest retail business and the six major studios collectively earned $1.1B, or 95%, of all film “rentals” at the domestic box office
  • in 1947, there were 18,000 neighborhood theaters
  • in 1947, Clark Gable made less than $100,000 per film

Studios are moving away from physical film in favor of digital projections. This could save millions in distribution costs as there will be no more cost of producing, shipping, storing and retrieving prints from film exchanges all over the world.

A critical summary of the film studio business model from Richard Fox, a vice president at Warner Bros.:

The studios are basically distributors, banks and owners of intellectual copyrights.

3/5