Thursday, January 22, 2015

Older articles of interest

I spent this morning clearing out my bookmarks folder and found a bunch of old articles that are worth sharing. Here they are, organized by topic.


Airplane maintenance

Someone on Value Investors Club recommends Spirit Airlines and Whitney Tilson replies with an interesting comment about airplane maintenance costs:

I did a lot of work on JetBlue when they were starting out and went public (and the stock was flying high), and while I loved the company, I fortunately avoided the stock after an old industry veteran CEO warned me that a major reason for the high margins and returns on capital that JetBlue was showing were because it was a small, rapidly growing company.

Maintenance is a HUGE expense and every plane in the world is on a maintenance schedule that calls for certain (very expensive) things after a certain number of flight hours and/or takeoffs and landings: an engine "tune-up" after 500 hours, and engine overhaul after 2,500 hours, replace the tires after every 100 landings, etc. (I'm making up the numbers, but you get the idea).

For a small carrier that is getting deliveries of new planes every month, you can see how maintenance expense as a percentage of revenues will be very small -- I recall for JetBlue it was something like 1/3 the amount of mature carriers (2% of revenues vs. 6%) -- because when you buy a brand new plane, there's ZERO maintenance cost for a while, and then it ramps up over the first few years. But over time, as the airlines grows and new planes as a percentage of the carrier's fleet shrink, this advantage goes away and the upstart ends up with the SAME maintenance costs as everyone else (roughly speaking; carriers that have shorter segments and therefore more takeoffs and landings will have higher maintenance costs, all else being equal; carriers that fly only one type of plane (like Spirit) will have lower costs).

Tilson estimates that normalizing maintenance costs would reduce Spirit's earnings by 15-20%. It seems like this dynamic would contribute to airline overcapacity, although to what extent I don't know.


Australia

Matt Joass reviews Dragon’s Tail: The Lucky Country After the China Boom. His review discusses China's development model, its contribution to Australia's two decades of nearly-uninterrupted growth, and why neither is sustainable.


Banking

Peter Atwater offers his thoughts on the likely nature of the the next banking crisis:

The next banking crisis -- whenever it comes -- will arise from the parts that fared the best in the last crisis. On the lending front, the problems ahead will be in commercial credit, automobile lending, student lending, and private banking lending. Those are where credit standards have been stretched the most during this recovery...

[But] Where I'm most concerned about the banks today is in their funding... For as much as 90% of the industry's deposits, there are no structural barriers to leaving. Deposits are completely liquid. They don't have a six-month, a one-month, or a two-week maturity, let alone an overnight one. Contractually, they're available now.


Sardar Bigliar

A business professor describes how Sardar Bigliar has entrenched himself at Bigliar Holdings in order to transfer as much wealth as possible from the company's outside shareholders to himself.


The Chandler Brothers

Institutional Investor interviews Christopher and Richard Chandler, a pair of brothers from New Zealand who turned a $10mm family fortune into several billion dollars by investing in emerging markets. Notably, they accomplished this without earning any fees managing outside money. The interview describes their investing process and some of their most important investments.

In 2007, a year after the interview, the brothers split their assets and began investing separately. My sense is that their subsequent returns have been poor. The interview says they were lowering their standards prior to the financial crisis, and emerging markets have performed badly since it ended. Richard Chandler also lost money in Sino-Forest. Nonetheless, their earlier record is impressive.


China, Copper

Reuters describes how Chinese speculators are hoarding large amounts of copper, including "thousands of tonnes of copper cathode... turning green after years of exposure to the elements." According to one bank analyst, "All we know is that we are selling a tremendous amount of metal to China for reasons that don't appear to be logical."


Hedge funds

Credit Bubble Stocks reviews an academic paper about hedge funds and information networks. The paper divides funds into three groups: highly-connected funds, peripheral funds, and "isolates" that are cut off from the investing mainstream, and concludes:

While first-movers in the core should fully benefit from inflating asset bubbles, their imitators in the periphery should be left 'holding the bag' when the bubbles collapse. In contrast, isolates have no way of knowing about core managers' investment positions, and consequently no means of imitating these positions.

Peripheral funds seem to be an example of a little knowledge being a dangerous thing.


Israel

Phil Greenspun reviews Start-Up Nation: The Story of Israel's Economic Miracle, stating that "The book meets all of the rigorous standards of business bestsellers, which is to say that it is mostly anecdotes." Greenspun argues that Israel's success in producing tech start-ups is the result of several specific factors, including mass immigration of Russian Jews to Israel after the Soviet Union collapsed.


Norway

Researchers at the San Francisco Fed conclude that Norway's housing market is in the midst of a debt-fueled speculative bubble:



According to the researchers, "The U.S. ratio of household debt to disposable personal income peaked at about 130% in 2007. The leverage ratio in Norway has risen dramatically over the past decade and currently stands at around 210%."


James Tisch

James Tisch gives a speech at Columbia discussing several of his biggest investments. Tisch is like the anti-Buffett: his investment strategy is to buy mediocre assets at extremely depressed valuations.


Wealth and self-knowledge

Eric Falkenstein argues that successful people can't necessarily articulate the reasons for their success:

I think it's admirable for people to try to articulate their philosophy on life, but they should be aware that being very successful at business or politics in no way implies they can explain that success... I don't presume that having a redundant and trite Weltanschauung means these people aren't good investors or managers, merely, their ability to pontificate on a general life-strategy is not the core of their alpha.


Karl Wittgenstein 

A biography of Karl Wittgenstein, father of Ludwig and one of Europe's richest men at turn of the century. Starting with a small steel mill, he eventually monopolized steel production in Austra-Hungary. Wittgenstein was Europe's answer to America's robber barons: he introduced a lot of innovative business practices, but his big break came from cheating a business rival.

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