The Investor's Consigliere

Interview with Sunjay Gorawara, Winner of the 2011 Ira Sohn Idea Contest

At Santangel's Review.

Warren Buffett Financial Crisis Inquiry Commission (FCIC) Transcript

http://www.santangelsreview.com/2011/03/14/transcript-of-warren-buffetts-interview-with-the-fcic/

 

Introducing Santangel's Review

I haven't been posting here for the last few months because I have been very busy working on a new project. It's a publication called Santangel's Review, which publishes quarterly reviews of undiscovered investors.

Our new website went live this morning. Check it out if you'd like to learn more. We'll have a blog on the new site too, so going forward I'll be doing most of my posting there.

Santangel's Review

 

 

 

Asperger Arbitrage

This long profile of Mark Zuckerberg in the New Yorker includes a litany of descriptions that bothered me. Consider the following:

• Zuckerberg is described as "a strange mixture of shy and cocky"
• Zuckerberg is described as "wary and private," someone who doesn't enjoy speaking to the press or speaking in public.
• People complain that Zuckerberg is "a robot"
• Zuckerberg "sometimes talks like an Instant Message--brusque, flat as a dial tone"
• Zuckerberg is called "the poorest rich person I've ever met in my life" by Tyler Winklevoss, because he does not spend money on consumption.

Then, the author contrasts Zuckerberg's insufficiently social and outgoing personality with his status as the creator of a social networking website that is apparently hell-bent on forcing people to divulge private details about their lives. That's called irony I guess.

It seems to me that when someone has traits we sometimes associate with Asperger's (I define that term somewhat more loosely than the clinical definition, in the spirit of Tyler Cowen), and that person is in a position of vulnerability (e.g. a child, or the person you ignore in high school), then those traits are dealt with in a sympathetic way. But when that same cognitive profile produces a billionaire, then those traits are turned on their head: They become unsympathetic, sinister, even evidence of some kind of hypocrisy. 

You often see the same cognitive profile in the world of money management. In fact, there is plenty of evidence to suggest that Asperger traits are found in many of the world's best stockpickers. And truth be told, you often see the same kind of subtle discrimination, especially as the world of hedge funds becomes more institutionalized. I don't think I exaggerate when I say that simple social polish can sometimes mean the difference between managing a $2 billion fund and a $200 million fund, even when the latter is a much better investor.

I think the best venture capitalists and hedge fund manager selectors practice a kind of Asperger arbitrage. Like the kid in high school who was friends with both the jocks and the nerds, he/she can navigate both the world of institutional investors who allocate to VC funds and hedge funds of funds, and also the much different social world of the tech founders and hedge fund managers themselves. The author of the Zuckerberg profile is not one of those people.

Soros: "Go for the Jugular"

The Atlantic recounts how the Quantum Fund forced the devaluation of the British Pound.

Marc Dreier Profile on 60 Minutes

Watch it here.

Barry Sternlicht New York Times Profile

Read it here.

Google and the (Bright) Future of News

Very interesting Atlantic article by James Fallows.

Newsweek is for Sale; The Economist and The Week are Not

The Washington Post Company has announced it will sell Newsweek. CEO Donald Graham, who did not go to auctioneer school, said "we don't see a sustained path to profitability for Newsweek." The destruction of Newsweek's profitability, notes the article, is part of a larger trend: TV Guide, Businessweek, and Reader's Digest all met a similar fate.

Meanwhile, the article implies, The Economist and The Week, the latter founded by Felix Dennis (if I remember correctly, it was the only title he kept when he sold off his publishing empire), are profitable, as are popular titles like US Weekly and People. Obvious question: why?

The article gives the standard qualitative answers for the decline of publications like Newsweek: the fragmentation of audiences, the rise of cable and internet news and the speeding up of the news cycle, increasing political polarization, loss of advertising rate base, etc.

My project for myself, however, is to try to answer these questions more quantitatively, the way our BMMT Dream Team would do it. I would construct historical income statements for each of the magazines mentioned, both the failures and the successes, and figure out why specific line items went south and how. The name of the game in evaluating magazines is predicting operating margins (leverage and asset turnover don't mean that much), which means predicting the return on investment of a given investment in expenses. In other words, don't think of income statement expenses as expenses; think of them as capital expenditures, as investments undertaken to produce a return, in the form of revenues. The higher the gap between operating expenses and the revenues they produce, the higher your return on investment.

As always, figuring our the right metrics would be key. My gut feeling is that, for all the talk about dead trees and trucks, printing and distribution costs do not play a huge role in determining which magazines succeed and which ones fail. In fact, I would speculate that the general interest publications--the ones that are failing--pay less per unit to print and distribute because of economies of scale. My sense is that the main cost differentiator is the labor involved in putting the thing together in the first place.

Therefore, my sense is that the relevant metrics for these publications is:

a) circulation revenue per journalist/editor man-hour, and

b) advertising revenue per journalist/editor man-hour.

Figuring out which magazines do well on those two metrics and why is the key to evaluating magazines. Remember, Newsweek is not failing because of lack of revenue: $165.5 million is a lot of money. It's failing because its cost structure is too high for its revenue.

In this framework, a magazine can succeed either by keeping the numerator high or the denominator low. Some educated guesses:

The Week does not gross anywhere near Newsweek's $165.5 million; its subscription price is not high and its advertising pages don't command a premium. But it is so inexpensive to produce that its revenue per man-hour is high enough to produce profitability.

The Economist probably pays its editors and journalists a premium (not a huge one though;  remember they are not allowed to have bylines, so they never acquire brand value of their own. They can't influence policy at their organizations the way, say, Thomas Friedman and Maureen Dowd did when they complained about their op-eds being put behind a paywall), but because of its enviable demographics and its niche audience of business subscribers, those journalists and editors are extremely productive: they combine to produce more revenue per man-hour than any other magazine.

People Magazine and US Weekly are like The Week: they are just extremely cheap to produce relative to the revenue they earn. The labor involved in putting them together is just very productive.

Newsweek is failing because it's stuck in the middle: its subscription price is comparable to that of US Weekly or People, its advertising rates are comparable--but it just costs way more to produce than US Weekly and People. It probably costs about as much per unit to produce as The Economist, but cannot command the same per-unit subscription and advertising revenues as The Economist. Stuck in the middle.

All of this begs two questions:

1) Before the general interest weeklies got stuck in the middle, they were extremely profitable. Why was that? Maybe a topic for another post.

2) Taking Richard Stengel at his word, why has Time Magazine managed to remain profitable even as it's subject to the same forces affecting Newsweek. Maybe there is only enough circulation and ad revenue to go around for one general interest weekly magazine to prosper, and Time is slowly draining it away from Newsweek.

The only problem with my little project is that it's extremely difficult to create an income statement for an individual magazine. The information is very hard to come by. If anyone has any insight into getting this information, please let me know.

2010 Berkshire Hathaway Annual Meeting Transcript

You won't find better notes from Warren Buffett and Charlie Munger's 2010 annual meeting than these, from Ben C. of the Inoculated Investor.