2014
Forbes Compilation on Warren Buffett
Link to: Forbes: On Warren Buffett
[H/T Lincoln]
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Friday, February 7, 2014
Jim Grant: The world Has Never Seen The likes of China’s Credit Frenzy
Via ValueWalk:
HERETOFORE UNIMAGINED The world has never seen the likes of China’s credit frenzy. From year-end 2008 through the third quarter of 2013, assets on the balance sheets of Chinese banks grew by $15.1 trillion to $24.3 trillion. That growth in assets is greater than today’s $14.6 trillion stock of assets at American commercial banks. For further perspective, China’s GDP is reported to sum to $8.9 trillion, America’s to $16.7 trillion. (U.S. national income data should be taken with a grain of salt; for China’s, empty the cellar.) China’s bank footings represent 33.1% of world GDP, though China’s economic output amounts to just 12.2% of world GDP. In 1994, when Japan had the world on a string, Japanese output peaked at 17.9% of global production; in the same year, Japanese banking assets topped out at 27.3% of world GDP. Nineteen years later, Japan’s share of earthly GDP has shrunk to 6.8%, its banking assets to 11.8% of that all-in figure.
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Friday, February 7, 2014
Talent...
My friend Shane over at Farnam Street posted
an interesting interview excerpt with a quote by Kirby Ferguson about
talent that I thought was interesting, and that matched well with a
Malcolm Gladwell quote I had posted previously. Both quotes are below.
Kirby Ferguson:
I wish the earlier me understood work and practice more. Just the repeated concerted effort to get better at things. I wish I didn’t have the notions of talent and genius I had back then. I thought, “Oh, these other people, they just have something that I don’t have.” When really, they are just people who work more.
I wish I understood work. Work is the key to anything you want to do. If you want to play the guitar—anybody can learn to play the fucking guitar—you can be good at it. Maybe you won’t get to be a genius but you could be good.
You can be good enough to write good songs or make a good film or whatever. There’s no such thing as not having enough talent to get to that level. I mean, persistence is talent, really. Just sticking with it. Talent is not stopping.
Malcolm Gladwell:
Talent is the desire to practice. Right? It is that you love something so much that you are willing to make an enormous sacrifice and an enormous commitment to that, whatever it is -- task, game, sport, what have you.
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Friday, February 7, 2014
Seth Klarman on EBITDA
From Margin of
Safety:
It is not clear why investors suddenly came to accept EBITDA as a measure of corporate cash flow. EBIT did not accurately measure the cash flow from a company’s ongoing income stream. Adding back 100% of depreciation and amortization to arrive at EBITDA rendered it even less meaningful. Those who used EBITDA as a cash-flow proxy, for example, either ignored capital expenditures or assumed that businesses would not make any, perhaps believing that plant and equipment do not wear out. In fact, many leveraged takeovers of the 1980s forecast steadily rising cash flows resulting partly from anticipated sharp reductions in capital expenditures. Yet the reality is that if adequate capital expenditures are not made, a corporation is extremely unlikely to enjoy a steadily increasing cash flow and will instead almost certainly face declining results.
It is not easy to determine the required level of capital expenditures for a given business. Businesses invest in physical plant and equipment for many reasons: to remain in business, to compete, to grow, and to diversify. Expenditures to stay in business and to compete are absolutely necessary. Capital expenditures required for growth are important but not usually essential, while expenditures made for diversification are often not necessary at all. Identifying the necessary expenditures requires intimate knowledge of a company, information typically available only to insiders. Since detailed capital-spending information was not readily available to investors, perhaps they simply chose to disregard it.
Some analysts and investors adopted the view that it was not necessary to subtract capital expenditures from EBITDA because all the capital expenditures of a business could be financed externally (through lease financing, equipment trusts, nonrecourse debt, etc.). One hundred percent of EBITDA would thus be free pretax cash flow available to service debt; no money would be required for reinvestment in the business. This view was flawed, of course. Leasehold improvements and parts of a machine are not typically financeable for any company. Companies experiencing financial distress, moreover, will have limited access to external financing for any purpose. An over-leveraged company that has spent its depreciation allowances on debt service may be unable to replace worn-out plant and equipment and eventually be forced into bankruptcy or liquidation.
EBITDA may have been used as a valuation tool because no other valuation method could have justified the high takeover prices prevalent at the time. This would be a clear case of circular reasoning. Without high-priced takeovers there were no upfront investment banking fees, no underwriting fees on new junk-bond issues, and no management fees on junk-bond portfolios. This would not be the first time on Wall Street that the means were adapted to justify an end. If a historically accepted investment yardstick proves to be overly restrictive, the path of least resistance is to invent a new standard.
