William Gross of PIMCO says they may need to reduce their famously high allocations to illiquid asset classes.
Long-time readers (Hi Mommy!) know I've written about the beer industry a few times in the past. The idea is that in order to evaluate investors, you have to be able to evaluate their investments, which means you have to know a little about business. One business that's fun to know about is the beer business. Check out the oeuvre so far, there's no quiz at the end:
Now check out this NYT article about Beer Lao, which enjoys 99% market share in its home market of Laos. Beer is not indigenous to Laos, so I don't think it's the main source of liquid nourishment, nor does the country have a history of German immigrants who started their own breweries (like Argentina for instance). It's basically for the tourists (the ones in the photo look Australian but my physiognomy is a little rusty). Nor, the claims of Mr. Cheung notwithstanding, does it taste any different than the many other rice-based lagers sold in hot countries--trust your consigliere on this.
Nonetheless, Beer Lao is embarking on an ambitious project to expand abroad, based mostly on its cool factor. As the above posts demonstrate, the beer market in any country tends towards dominance by a very few players. That does not mean that an upstart cannot make huge inroads, or even topple the leader--it happend in Thailand. I suspect that's not what Beer Lao is trying to do here though--I think it's going for a guerrilla strategy (is that a horribly insenstive pun given the country's history?) of stealing little bits of market share in those countries with huge beer markets (US, Germany, Britain, Japan) or countries whose citizens have, or are starting to have, an ethic of travel abroad (Israel, China). Even that's hard though--Ambev tried and failed to take Brahma beer from Brazil to the rest of the world. And Brazil, in my humble opinion, is even cooler than Laos (or if you prefer, Exhibit B. There is an Exhibit C but this is a professional blog . . .).
Anyway, it's an interesting natural experiment. Keep an eye on Beer Lao's progress, and also watch how its competitors react.
In the New Republic.
I don't want to write a long review of a very long review of a very, very long review of Buffett's life-that's too much reviewing. I will say two things though:
1) Lewis and Buffett have a weird history.
2) Lewis is a genius at narrative storytelling. This genius works best in fiction because in fiction you get to make up the facts, and you get to make it "life with the dull bits cut out" as Hitchcock said. In business non-fiction, however, you don't have those two luxuries. You have to get your facts straight, and you can't completely discard the dull bits--the counterarguments, the caveats, the things that are sort of true but not 100% true--just to burnish the luster of the story, the way a diamond cutter discards much of a rough diamond to create the perfect polished stone.
For instance, in his attempt to draw a distinction between Ben Graham and Buffett, and to make a larger point about the Great Depression, which produced Graham's worldview, and the post-WWII era, which produced Buffett's, Lewis writes the following:
None of the above excerpt is false, but there is one hole in it: When Buffett bought GEICO, which to Lewis represents the mythical break of the student from the master, its chairman and largest shareholder was . . . Ben Graham.
One more example: Trying to cast the present financial crisis as a kind of final commeuppance for Buffett in his old age, Lewis writes:
First of all, the excerpt is misleading and wrong on the facts:
Secondly, I don't know how anyone can agree with the impression Lewis wants to create, that the financial crisis plus Buffett's age means "there has never been a better time to bet against Warren Buffett." If you're the world's greatest value investor, and asset prices are way down all over the world, and you have bilions in cash and borrowing capacity to deploy, and Berkshire's stock is down, maybe it's actually a pretty good time to bet on Buffett.
Read it here. It quotes Greg Coules and Adam Herz of Hunter Advisors.
Coules and Herz make an excellent point (and a courageous one for a firm whose business is recruiting for hedge funds): In the past ten years or so, the talent followed the money, and the money was in hedge funds, but the majority of hedge funds are not an ideal vehicle for managing long-term money, as this blog has argued.
The ideal vehicle for managing money is long-term oriented, patient, and thinks like a principal, not an agent. In otherwise, something like a family office. Coules and Herz are betting that the market will move this way. Hunter Advisors, as far as I can tell, is the only recruiter shifting their thinking accordingly. I've been looking for a job for the better part of a year, with a specific focus on family offices, and all the other recruiters I spoke to have given me a litany of reasons why family offices are a terrible place to work. We'll see who has the last laugh.
I see only one countervailing trend: The goal of any money manager of great talent is to maximize both the quantity and the quality of the money he has under management. By starting your own hedge fund you can get the former, but often at the expense of the latter. At a family office it's vice versa, as most family offices are pretty small. Plus at a family office you're an employee. So there is a tension there. One way to resolve it is for family offices to pool their resources and create entirely in-house hedge funds and give autonomy to their managers. Another way is for hedge fund manager to do so well that they can fire their investors, as Soros has largely done. Another way is for hedge fund managers to convert their LPs into shareholders, a la Berkshire and Leucadia and (maybe) Steel Partners. Finally, we've started to see hedge fund managers like Value Act try to improve the quality of their investors by forcing them to behave more like family offices, with longer lock-ups. So I don't think hedge funds are completely going away.
Today I attended the annual meeting of Leucadia National Corporation, and again Ben Claremon produced awesome notes.
I was intrigued by how strongly Cumming and Steinberg rued their failed program of investing in outside managers, which they're currently working hard to undo. Their basic mistake, they said, was thinking other people were smarter than they were and giving them money.
It's amazing that the Leucadia guys, who've had success over the years identifying operating managers for their various ventures, and who are great investment managers themselves, nontheless failed at identifying outside investment managers. It's further evidence for the proposition that skill at investing and skill at investing in investors are two separate things.
Ironically, the best investors in investors in the room today were the old-time Leucadia shareholders (you could tell who they were), who long ago gave money to people they thought were smarter than themselves, and turned out to be very right, and very rich.
A story in Tuesday's FT quoted heavily from a letter sent by PE firm TPG to its investors:
"When debt is mispriced and inexpensive, as was the case before 2008, it makes sense to replace equity with debt, hence the abundance of LBOs," the letter said. "[Now] it makes sense to replace debt with equity, -leading to restructurings and recapitalisations."
Once upon a time I was young and a total Buffett-worshipper, and being a Buffett-worshipper to me meant YOU DON'T BORROW MONEY EVER. Like a a true Capricorn, however, I've loosened up with age and now look differently at investors who use debt. I now realize that there is debt and there is debt, and evaluting how an investor uses it, both qualitatively and quantitatively, is an important part of manager selection.
The best investors work both sides of the balance sheet, they're in the spread business. A dollar earned from the right side spends the same as a dollar earned from the right. Any stream of cash flows, whether going in or coming out the door, can be cheap, and value investors buy things cheap. If you can buy cheap AND maintain a margin of safety, you're well on your way. So you can scold the Masters of the Universe for what they did in the last few years, but many of them were smart: they recognized a cheap liability and "bought" it, and some of them did so with a margin of safety too.
Once I deprogrammed myself from the no-debt-ever cult, I began to see more clearly that Buffett has never been as strict with himself as his aphorisms imply. His primal urge to use Other People's Money is as strong as the most venal subprime packager, he's just done it more intelligently and always with a margin of safety. Not just insurance float, but also borrowing against utility earnings and to finance mobile home purchases, issuing debt for unspecified later use, even its derivatives bets. Take a look at the right side of Berkshire's balance sheet today--it's loaded with debt.
It's not just Buffett either. Baupost has drifted away from public market bets towards things like real estate, using non-recourse debt when the numbers make sense. Charlie Munger's first fortune came from a heavily leverage real estate development--again, non-recourse. John Malone has waged a decades-long war against the IRS, using levered cash flow growth, backed by what were essentially government-enforced monopolies, to shield earnings. Much of David Swensen's outperformance in the last decade comes from large allocations to real estate and PE funds, both of which took advantage of cheap debt.
It begs the question: Where are the debt arbitrages of today and tomorrow? If you're a creditworthy individual, and if you're worried about inflation to boot, now may be a great time to purchase a house in much of the country--the government is helping you out. I've in the past wondered whether Japan is the next great PE opportunity, as super-low borrowing costs on liabilities are starting to coincide with lower PE ratios (higher earnings yields) on assets. The same may be true for residential real estate too: according to the Economist, the price-to-rent ratio is lower in Japan than in any other OECD country. That implies higher cap rates, which in combination with lower borrowing costs means a fertile ground for dealmakers in the next few years.
So I'm keeping my eye on who is best using the liability side of the balance sheet.
Disclosure: Long Berkshire Hathaway.