Nugget: Connecting the World Cup

From a GSMA/Deloitte report on the Brazilian telecom market:

  • “The 2014 World Cup and the 2016 Olympic Games in Rio will further increase demand for mobile services, however this is likely to add significant congestion to mobile networks, as these events are widely expected to consume significant bandwidth. The World Cup is expected to bring over 1 million roaming connections, generating 300% of the normal data traffic for a period of 8 weeks. Analysts estimate that during the London 2012 games, 60GB of data crossed the network in the Olympic Park every second, and this figure is likely to grow significantly in four years’ time. Providing extra capacity in such a limited time window will be a key challenge for operators.”

    – Brazil Mobile Observatory 2012

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Mental Model: The Profitability Factor

In 2012 Robert Novy-Marx wrote the paper The Other Side of Value:The Gross Profitability Premium. You could say that it is an attempt to test the hypothesis of Charles Munger and Warren Buffett that it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price. Novy-Marx measures profitability by using a ratio of gross profit to assets. Efficiency ratios such as the Du Pont analysis (asset turnover x profit) have been used for a long time in finance and accounting, but the unconventionality of his approach is by only using the cost of goods sold and disregarding other costs.

Looking at NYSE firms between 1963 and 2010 and international firms between 1990 and 2009 (ex-financials), Novy-Marx discovered that a company’s gross profitability did as good a job at predicting its future returns as conventional value metrics like book-to-market. More profitable companies today tend to be more profitable companies tomorrow.  Although it gets reflected in their future stock prices, the market systematically underestimates this today, making their shares a relative bargain – diamonds in the rough.

– The Mysterious Factor ‘P’: Charlie Munger, Robert Novy-Marx And The Profitability Factor from Forbes (June, 2013)


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How Fast is Exponential Growth? (Or, Yao Ming Confronts the Vastness of the Universe)


via How Fast is Exponential Growth? (Or, Yao Ming Confronts the Vastness of the Universe).

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Nugget: J. M. Keynes the Stock Market Investor (research)

A paper found at the Social Science Research Network by D. Chambers and E. Dimson:

Abstract: Keynes made a major contribution to the development of professional asset management. Combining archival research with modern investment analysis, we evaluate John Maynard Keynes’ investment philosophy, strategies, and trading record, principally in the context of the King’s College, Cambridge, endowment. His portfolios were idiosyncratic and his approach unconventional. He was a leader among institutional investors in making a substantial allocation to the new asset class, equities. Furthermore, we document a radical change in Keynes’ approach to investment which was to the considerable benefit of subsequent performance. Keynes’ experiences in managing the endowment remain of great relevance to investors today.

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Nugget: A Billabong write-up on Seeking Alpha

From the article: Billabong: A Cigar Butt With Upside? by Mike Arnold


Things look terrible at Billabong. However, as management sells off assets (West 49, etc), closes retail locations and refocuses on its distribution channels and brands, in my opinion, the company will survive, in one way or another.

The question is, will equity shareholders retain ownership in the future operations?

With a net debt position of only $152 million (not including some $350 million in off balance sheet lease commitments), it does not appear like an insurmountable hurdle to sell assets and/or issue a bond to protect shareholders and bank lenders.

In addition, I wouldn’t be surprised if a white knight came in to pick up the assets on the cheap and/or for strategic purposes. Nike (NKE), Adidas (ADDYY.PK), Columbia Sportswear (COLM), and Under Armour (UA) come to mind. VF Corp has already expressed interest in the assets.


In the comments section there is also a referance to an old NY Times article from 2003 on the purchase of Converse by Nike.

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Nugget: PPR changes name to Keurig and starts Puma restructuring

From a Reuters article on June 18, 2013:

But beyond the name change and new logo featuring an owl, Pinault gave few answers to shareholders about the future of Puma or Fnac, the group’s CD and book business, which will list on the stock market on Thursday.

Pinault called on shareholders to hold on to Fnac shares they will receive when the business floats, valuing Fnac at 400 million euros ($533.90 million), significantly below the 1 billion euro mark some analysts had forecast two years ago.


Puma has lost its competitive edge and credibility in key areas such as the running shoe segment, allowing rivals such as Asics and New Balance to gain market share and bigger competitors such as Adidas and Nike to consolidate their lead.

Puma has made a number of mis-steps, including opening shops in the wrong places, poorly integrating licence businesses and back-office operations and spending money on sponsorships in sailing and rugby not closely linked to the brand. It suffered a 70 percent drop in net profit last year.

“I have the feeling that PPR took a long time to get into the business of Puma and really understand what was going on,” said Thomas Chauvet, luxury goods analyst at Citi.

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Profile: Global Automobile Industry

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Nugget: Goodwill and its Amortization: The Rules and The Realities

Masterpiece from Warren Buffett in 1983.

Outlier Allocators

The following entry is borrowed from Warren Buffett’s Berkshire Hathaway 1983 Chairman’s Letter as it was very informative and opened my eyes more clearly to the economic realities of goodwill. Amortization and goodwill are keys to understanding the intangible side of the financial statements.

“During inflation, Goodwill is the gift that keeps giving.”

(This appendix deals only with economic and accounting Goodwill – not the goodwill of everyday usage. For example, a business may be well liked, even loved, by most of its customers but possess no economic goodwill. (AT&T, before the breakup, was generally well thought of, but possessed not a dime of economic Goodwill.) And, regrettably, a business may be disliked by its customers but possess substantial, and growing, economic Goodwill. So, just for the moment, forget emotions and focus only on economics and accounting.)

When a business is purchased, accounting principles require that the purchase price first…

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Profile: Jarden Corp.

From Horizon Kinetics:

Jarden Corp. (“Jarden” or “JAH”) is a holding company whose brands include the household names Coleman, Oster, Marmot, First Alert, Mr. Coffee, Bicycle and also Bee playing cards, and Crock-Pot, among others. Many of these brands have been prominent for generations; 14 have been in continuous use for over a century. Jarden has made investments in the brands but is able to benefit from the fact that they are long-standing, easily recognized brand names— efforts to increase visibility for an existing, trusted brand are frequently less costly than those to establish a new one. Furthermore, while some portfolio components (K2 skis and snowboards, for example) may be sensitive to economic conditions, many are not. For instance, many people consider their morning coffee to be a key part of their morning routine—if a household’s coffeemaker breaks, it will most likely be replaced even in a weak economy. As a measure of the value the company places on its brands, it acquires almost exclusively products that occupy the #1 market share in their category. It is very difficult to competitively displace this type of consumer brand. Jarden’s brands represent #1 market positions in 23 categories, including fishing, coffee makers, blenders, smoke alarms, and playing cards.

In addition to adding new product lines to the portfolio and making the necessary investments to maintain or expand the market share of their brands and the long-term profitability of the company, Jarden management’s assertive advocacy for shareholder (as opposed to executive officer) returns predates their own tenure. The current management team, headed by Martin Franklin (Executive Chairman) and Ian Ashken (Vice Chairman and Chief Financial Officer) has been in place since June 2001. Immediately preceding that date, as outside private equity investors, they had proposed, in a letter to the Board of Directors, to take the company private. Their letter of criticism and proposed action so impressed the Board that they invited Mr. Franklin and Mr. Ashken to join rather than acquire the company, and to manage it. Which they did. Aside from divesting poorer products, they undertook a series of leveraged acquisitions of the class of consumer products companies that now characterize the portfolio, deploying the cash flows generated by mature brands to pay down the debt. The company has also actively repurchased shares. These actions have contributed to the annualized book value per share increase of 30% witnessed since 2001. 

Horizon Kinetics Commentary: Long Product Life Cycles

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Nugget: The Sneaker Wars and the Pele Pact

From the article Was Pele paid to tie his shoes during the 1970 World Cup final? – Los Angeles Times (October, 2012)

“This was especially evident during the 1968 Summer Olympics in Mexico City where Adidas actually had Puma sneakers confiscated by custom officials! Things had gotten so crazy that in the lead up to the 1970 World Cup in Mexico, the two companies actually decided to come to a sort of “peace treaty” and to avoid the dealings that had marked their relationship for most of the 1960s.

The most notable result of their interactions was the so-called “Pele Pact,” where both companies agreed NOT to sign a deal with Pele, the greatest football player in the world at the time. Their feeling was that they would both end up spending so much money on a bidding war that it would not be worth it in the end.

Led by Pele, Brazil’s 1970 national team was one of the greatest World Cup teams in the history of the tournament. They played Italy in the final match of the tournament. It was one of the most highly anticipated football matches in years. Right before the opening whistle, Pele asked the referee for a moment to tie his sneakers. All eyes were on Pele as he bent over to tie his sneakers….Puma sneakers. What happened to the “Pele Pact”?”

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