Sold a part of my Roche position

Today I sold 10 shares of Roche at Sfr 231 each – reducing my position from 25 to 15 stocks.

Roche has become too expensive in my opinion. It is a fantastic company to hold but I am getting uncomfortable with the overvaluation.

Roche has Sfr 24.5 bn in debt, Sfr 7.2bn in pension liabilities, and Sfr 4.5 bn in cash. The current market cap is Sfr 196 bn. This puts the EV to sfr 224 bn. At FCF of sfr 4.6 bn, and net income of sfr 9.7 bn the EV/Earning > 22 and EV/FCF > 48 ! The dividend has been growing nicely but at sfr 7.35 per share (which after witholding tax is sfr 4.77); the yield is only 2%.

I am looking into some stocks and will redeploy the cash.

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Straight from the gut by Jack Welch

This was one of the hardest book for me to finish. If I did not have this weakness for finishing what I started – I would have stopped after reading 200 or so pages.

The book is divided into five sections: early years, building a philosophy, ups and downs, game changers and looking back-looking forward.

Mr. Jack Welch does not waste any time coming to the point. By page 19 he has already joined GE, after finishing his PhD. Then the pages turn into chapters and chapters turn into a section. He introduces people after people, employees, bosses, competitors, clients – none of them stick in your mind. He leapfrogs from one person to another, not spending time on any of them. He is already the CEO of GE by Section 2, but the introductions continue. Now he is describing awesome people he found to spearhead his projects. He himself observes at the beginning of the book.

Nearly everything I have done in my life has been accomplished with other people.

For nearly the entire book the presentation and his story suffers because of the endless changing characters. Some people pop up quite surprisingly at the end. Like Jeff Immelt. The new CEO makes an appearance only at the end and you find out that he and Jack go way back. Being an important character in the story I would have expected to hear about him sooner.

You also get the feeling that he is this “over the top guy”. Does not really care much about things other than his job. You find that his first wife was a big supporter and raised his children well … until all of a sudden they divorce, he starts seeing a different girl Jane and ends up marrying her — all of this in under one page.

There are some places where he argues in support of some of the methods he used. The arguments are incredibly weak. For example – rating people and firing the bottom 10%. If this worked Enron would have been the best company on the planet. Malcolm Gladwell describes this quite well in his essay on talent.

The very best companies, they concluded, had leaders who were obsessed with the talent issue. They recruited ceaselessly, finding and hiring as many top performers as possible. They singled out and segregated their stars, rewarding them disproportionately, and pushing them into ever more senior positions.

This is what the CEO of Enron had to say about Enron’s system.

… at Enron, the top performers were rewarded inordinately, and promoted without regard for seniority or experience. Enron was a star system. “The only thing that differentiates Enron from our competitors is our people, our talent,” Lay, Enron’s former chairman and C.E.O., told the McKinsey consultants … (Malcolm Gladwell)

Did the star system work for GE ? Probably yes. Does that prove that it will work everywhere ? Probably no. Jack Welch fails to understand it when he generalizes his experience to everything and tells a clothing store manager to fire his bottom 10% people.

There is another very weak argument about corporations being people and healthy corporations willing to help the society.

He uses terms introducing them much later. For example – six sigma was described much later but was used during the entire book.

The book could have been shortened to half of what it is — improving the readability and reducing the fat which it carries at the moment. The message would also have been clearer. The last 2 sections have flashes of brilliance, in terms of topics he chose to write on. An example was the Honeywell acquisition – which failed.

I would recommend this book – if only to understand what a CEO of a major company thinks about how he should present himself to the readers of his autobiography.

My thoughts on savings

I have $100,000 in my equity portfolio. A conservative estimate for my savings each year is around $30,000 a year. Given these figures I can calculate how much I will have in 10 years, depending on my return.

YoY Return Expected saving per year value of portfolio in 10 years
5% $30,000 $540k
10% $30,000 $737k
15% $30,000 $1mn
20% $30,000 $1.4mn
25% $30,000 $1.9mn

Even the lowest estimate is enough for me to retire in India; if I aim for $12,000 in yearly spending (2.2% return suffices). The high estimate is probably going to be very difficult to achieve. I am targeting 30% return — which will be very difficult. But a high target is going to help me weed out low margin of safety investments. I want the undervaluation to be enough to warrant 30% return.

A conservative estimate is around $40,000 saving every year and a 15% return. With a starting portfolio of $100,000 today; this gets me to: $1.2mn.

My goal for 2013 are:

  • Save $40,000.
  • Target 30% return.
  • Never go below 20% cash.

I will see if I achieve these this year or not.

Interview with Steve Forbes: Jim Oberweis

I am watching the interview of Jim Oberweis, the President of Oberweis Asset Management. Some of the things Oberweis says run counter to my investment philosophy. I was also struck by some of his stock picks which were “unfaithful” to his investment philosophy.

While talking about how he finds investments, Oberweis talks about what he looks for in a stock.

We look for companies that are growing faster than 30%. We look for sustainable barriers to entry, and we look for stocks that are reasonably priced.

Soon Forbes mentions that Oberweis is invested in Opentable (OPEN). Opentable is a  company that offers real-time restaurant reservation service. Does Oberweis think that Opentable has sustainable barriers to entry ?

As you probably know, Google bought Zagat, and that has kind of, I think, made everyone on edge – that maybe Google’s planning to give away the system. You know, it could happen. I haven’t seen a lot of evidence to it right now.  So far, Google’s just talking about continuing on the partnership with OpenTable and helping expand that relationship.

That could change, we’ll certainly watch that. What has happened in OpenTable, and the only tangible data is that lots of restaurants went out of business during the last few years. And as restaurants go out of business, as you can imagine, there’s a cost to OpenTable in terms of hardware and software.

That I would assume means “no”. Oberweis thinks that Google can easily change the dynamics of the industry. I would not say that this qualifies as “sustainable” barrier to entry.

The conversation soon turns quite interesting. It seems that Oberweis stays fully invested. These are his reasons.

You know, it would be great to be able to time the market and to know what the cycles will bring. It’s really hard.

But if you take a much more realistic viewpoint that the market fluctuations are very, very hard to predict and that we won’t be successful in predicting overall market fluctuation – so many people looking at all the same data. Then the natural conclusion is that you should stay fully invested all the time because over long periods of time, we do know that corporate earnings increase over time and that stocks do go up over time.

The people who are really successful, the Warren Buffetts of the world, have done so by buying businesses and doing it at an appropriate time. We’re trying to do the same thing in our portfolio.

Being fully invested is not a “natural conclusion” of the fact that corporate earnings increase over time and the stocks go up and it is almost impossible to time the market. It is good that Oberwies mentions Buffett and the fact that he is doing the “same thing” because Buffett disagrees with his viewpoint.

The stock market is a no-called-strike game. You don’t have to swing at everything–you can wait for your pitch. The problem when you’re a money manager is that your fans keep yelling, ‘Swing, you bum!’ – Warren Buffett

To make the strike at the right pitch, you will need to have the capital lying around. If you are always fully invested then you will have to sell something to buy something else. When the market tanks – selling something to buy something else is not a great strategy. And it is obvious that the best deals are found when there is panic all around.

Pabrai’s Interview on Forbes

I was watching the interview of Mohnish Pabrai on Forbes and was struck by the clear exposition and was struck by some of the things he said. He also reminded me of some of the great quotes from Munger and Buffett. I want to mention here a few.

You don’t make money when you buy a business or when you sell a business. You make money by waiting. – Munger

All man’s miseries derive from not being able to sit in a quite room alone. – Blaise Pascal

Mohnish has had a varied career. He started a company which worked and then he started one which failed. Pabrai funds is his third venture.

The first company took no capital and generated enormous amount of capital for me. Then I got fat dumb and happy and in the second company I put in a lot of capital … and I violated the low risk high uncertainty principle. The third business [the Pabrai funds] took no capital. There is no downside, it is low risk high uncertainty business.

He talks about what he looks for in a company. He first figures out how he can lose money on this equity. Can he minimize the downside ? Because the upside will take care of itself. He moves on to the importance of checklists.

It is very important to have a good checklist. Checklists force you to ask questions which are uncomfortable to your buy thesis. Most of us start looking at a company predisposed to either like it or hate it. Most often we look at an idea because we find them interesting. In this sense, we are predisposed to behavioural biases like Confirmation Bias, Survivorship Bias, Jumping-to-Conclusions etc.

A significant way in which our predisposition effect the result of the research is as follows. If we hate the company then we ask pointed questions and when they are answered in a positive way (opposite our preconception) we try to dig deeper to find the source of the anomaly. On the other hand, if we are predisposed toward liking the idea then we are satisfied by superficial agreements.

Some of the examples of questions on his checklists are.

Can this business be decimated by low cost competition from say China?
Is this a win-win business for the entire ecosystem ? Gambling, tobacco, high interest credit cards etc are pass.
Unions, collective bargaining.
Are you looking at normalised earnings or boom earnings ?

The last question was the reason why I passed on Caterpillar (CAT) a few months back when it was trading around $80.

Mohnish is also against talking to the CEOs. He says that CEOs are charismatic and great at sales. One cannot be a leader unless one is optimistic. One is better off not talking to the CEO but looking at what he has done.

All in all, a very enjoyable interview.

Why I have decided to get out of Alcoa (AA)

I hold both Alcoa (AA) and ArcelorMittal (MT).

Both of them sell a commodity product and are effected by the vagaries of the world economy. There is not much pricing power and the only difference a great management makes is surviving when things are really bad and performing well when they are better.

I admire both Klaus Kleinfeld (the CEO of Alcoa) and Laxmi Niwas Mittal (the CEO of ArcelorMittal).

I do not see why I should hold both these companies. So, I have decided to cut Alcoa loose. Mr. Mittal has built his business from scratch and has seen a lot worse than the current situation. There was a time in the 2000s when the stock price of Mittal Steel touched $1.

I do not doubt the ability of Mr. Kleinfeld. I admire the work he did at Siemens (SIE) and the integrity he showed there. But I will choose Mr. Mittal over him. In this kind of businesses – where history and knowledge of cycles play a major role – experience can mean a difference between success and bankruptcy.

I have hence decided to sell Alcoa and add the proceeds of the sale to ArcelorMittal. This will reduce my work load a bit by removing Alcoa from the list of companies I keep track of.