Interesting Reading – October 31, 2016

Published on October 31, 2016

Note to readers:  In this series, we suggest worthwhile reading material on a variety of topics, not all of which are directly related to investing.  Some of the articles are behind pay walls.  However, it is often possible to read such articles by going to Google News and searching for the article’s title.  

Gotham’s New Fund — The Brooklyn Investor, October 29, 2016.  The Brooklyn Investor only posts new content every few months but remains one of the best value investing blogs to follow.  The primary topic of this post involves Joel Greenblatt’s new fund:  Gotham Index Plus.  Brooklyn Investor also provides some thoughts on Chipotle Mexican Grill (recently discussed on The Rational Walk as well) and various other fast food concepts.

My Chipotle Nightmare — CNN Money, October 28, 2016.  Sometimes elements of the “cure” pursued by companies in order to address a “disease” can just make matters worse.  Chipotle has suffered a significant decline in business since the E. coli story broke in late 2015 and has been suffering from diseconomies of scale as a result. In order to contain margin compression, management has attempted to contain costs.  There is nothing wrong with doing so but cost control must be done in a way that does not harm the company’s culture.  This article provides some disturbing evidence that the incentive structure at Chipotle might be having consequences that top executives did not intend.

What the AT&T Merger Can Learn from AOL-Time Warner — The Wall Street Journal, October 25, 2016.  In this opinion piece, Steve Case provides his thoughts on the proposed merger of AT&T and Time Warner stating that it feels like “déjà vu” given how similar the story line is to the ill fated AOL Time Warner transaction sixteen years ago.  This is obviously a topic that Mr. Case knows well given his role as CEO of AOL at the time of the AOL-Time Warner merger in 2000.  What lessons can today’s executives learn?  (1) Having the right idea isn’t enough;  (2) Culture is more than a buzzword;  (3) A “one company” strategy is key.

Tapped Out at Sam Adams — Bloomberg, October 21, 2016.  James Koch founded the Boston Beer Company in 1984 and played the leading role in the rise of craft beer in the United States.  At a time of rapid consolidation for the beer industry as a whole, there has been a proliferation of craft breweries in the United States in recent years.  Despite a long term track record of growth, Boston Beer has hit some serious headwinds as newer craft beers compete for shelf space and consumer attention.  Mr. Koch has retained control of Boston Beer and many assume that he is not willing to consider a sale.  However, this Bloomberg article suggests that Boston Beer could be an acquisition target and posits that Constellation might be a logical buyer.

Bill Miller Thinks We’re in a Secular Bull Market — Market Folly, October 24, 2016.  Bill Miller is known as a value investor and had one of the most enduring track records in the business until the 2008 financial crisis.  He is fully invested today stating that “cash earns zero, why do I want something that earns zero?”  This article lists some of the stocks he likes including which he has owned since the IPO and is his largest position.  He states that “as long as stocks yield more than bonds, stocks are attractive.”  Many investors might question how actionable this advice really is given that there is no way to know when bond yields will rise or whether a normalization of yields will be gradual or sudden.

SEC Probes Whether Companies Are Misusing Adjusted Earnings Metrics — The Wall Street Journal, October 27, 2016.  GAAP accounting has well known limitations but lately the gap between GAAP and non-GAAP presentations has seemed to grow into a Grand Canyon sized chasm for certain companies (Twitter is an excellent example).  The SEC is now probing whether additional rules are required to prevent companies from directing investor attention toward non-GAAP presentations without making clear the underlying adjustments.  Companies have long been required to provide non-GAAP reconciliations so this seems to be more a matter of presentation rather than real substance.  As is always the case in the minefield of investing, caveat emptor.

The Rule of 72 —, October 28, 2016.  Well known value investor Mohnish Pabrai has started a blog and is also now on Twitter (@MohnishPabrai).  The name of the blog as well as the topic of this article is the well known “rule of 72” that is used as a simple mental shortcut to determine how long it takes for an investment to double at various expected rates of return.

Moving the Finish Line:  The Goal Gradient Hypothesis — Farnam Street, October 24, 2016.  Any runner knows that as the finish line appears, it is normal to try as hard as possible to speed up which results in a “mad dash” to the finish.  The principle of the goal gradient effect is equally applicable in many other contexts which are discussed in this article.  In particular, it is interesting to read the thoughts on how to best set up incentive systems based on the idea of keeping the “finish line” in sight.

Notes on Giving Away my First $100,000 — Mr. Money Mustache, October 26, 2016.  In this article, Mr. Money Mustache describes how he recently went through the process of giving away $100,000.  As Warren Buffett has often stated, the task of giving away money is arguably just as difficult or even more difficult than earning the money to begin with.  At the very least, it requires a different skill set.  Whether one agrees with the author’s choice of charities (see the comments section) or not is really beside the point; what seems more relevant is the question of how much money to give away relative to your net worth and how to ensure that it is well deployed.

The Purpose of Life Is Not Happiness:  It’s Usefulness — Medium, October 3, 2016.  Medium is an online publishing platform developed by Twitter co-founder Evan Williams.  One of the interesting things about this platform is that it exposes the thoughts of writers one would not normally be familiar with.  It is kind of a “long form” version of Twitter and well integrated with the Twitter platform.  In this article, Darius Foroux argues that the concept of “always being useful” is the right mindset and focusing on happiness exclusively might lead people down the wrong path.  (The Rational Walk is also now on Medium, although for now the limited content that has been posted only duplicates what is on the website. That might change in the future.)

Interesting Reading – October 31, 2016