Dick Kovacevich - Value Manager

"The only way to grow profits is to grow organic risk adjusted revenue."

There are so many great presentations from Stanford Business school. This is a lecture from Dick Kovacevich the former CEO of Wells Fargo. If you who follow Buffett this is a bank that Berkshire Hathaway invests in and indeed recently increased its investment.

The actual presentation is a little on the dry side - but the fact that there are no clowns or snappy one-liners does not stop it from being interesting. If your attention flags a little keep with it.

I was particularly interested in his take on M&A. It is pure value investing. M&A is by an large a great destroyer of shareholder value. Dick's take is that you have to buy at a good price, something only makes strategic sense if it contributes revenue and it should be able to contribute revenue at the rate that the rest of the bank does once it is integrated. He, generally allows three years for a new acquisition to get up to speed. Another interesting point is that he is not interested in acquiring a business simply for cost savings - cost savings are a one-off boost, what he is looking for is continuing revenue.

"You should never make an acquisition unless the revenue growth of the combined entity is not greater than the revenue growth of the parts."

"A good business model that is hard to do gives you a superior competitive advantage."

"Almost all businesses are cyclical"

Terry Smith - Value Investor (?)

I heard Terry Smith talk at the Master Investor show in Islington today. Living in Oxford I was fortunate that Islington is no more than a couple of hours away in a great bus+tube combo.

Terry smith has been a broker for many years and is probably best known for publishing a book exposing how very large companies have massaged their accounts. He is a man who has worked in the financial sector for a very long time and has a gift for talking about things in a no-nonsense logical way.

Terry was speaking at the master investor show really as a pitch for his new fund called Fundsmith. The key ideas behind Fundsmith are to invest in large stable companies with good cash-flow (yep real money is being made) and not to change tack. A simple strategy keeps costs down. A modest diversification 20-30 companies gives you the effect of almost total diversification. This also has the additional advantage that a concentrated portfolio allows you to avoid the worst companies that you get in an index. The cost of the fund is 1% a year which strangely is what Virgin (my pension provider) charge for something that is basically a tracker.

I really liked Terry's presentation - and there is a lot of sense in it. There is a fair amount of buffet - the only thing missing is the bit about "margin of safety" and the fact that he is, according to what he says, totally invested rather than with a war chest to spend on the next great idea.

Anyhow as it is much my custom to add videos to the post here is a video of Terry Smith - this is not giving the presentation I heard but being interviewed on Sky news about Fundsmith.

A link to an earlier interview in the Guardian, nothing to do with Fundsmith but very good) can be found here.

Cale Smith - Value investor

This is the first in a set of videos where Cale Smith explains value investing and his approach to investing. He runs his own investment company Islamorada Investment Management.

If you are interested in value investing this series of videos are a particularly good introduction. I very much like Cale's style. It is all long, no short and sees a lot of value in small caps. He manages two funds, which looking at his web-site have a management fee of 1.5% annually. This is low for a managed fund (I currently pay 1.0% for my pension that is little more than a blind tracker). Another interesting thing is at the moment the fund is tiny 15 million under management that gives Cale complete freedom. He can invest wherever he sees value without having to worry about the impact of his investment.

I particularly liked the last half of the last video in the set - here Cale goes through the various metrics ROE, ROC, P/E and gives insight into what they mean to him in terms of usefulness.

Here is the first part - you can find the rest on youtube.

Simon Johnson - Bloomberg Interview

Here is an excellent analysis by Simon Johnson from MIT of the banking crisis and the problems of big banks. Published by Bloomberg you will need to follow the link here (I am not able to embed it). The interview is 15 mins - here are a few points from the interview.

• UK banks are currently 5-6 times GDP. Iceland's banks where 11-13 times GDP when their banks collapsed.
• The UK and the swiss are getting worried about having such big highly leveraged financial sectors.
• Big banks tend to peruse the same assets. Previously it was real estate now it is emerging markets. This opens the possibility of them all failing at more-or-less the same time.
• UK Banks need to raise the levels of equity - this will reduce the implicitly subsidy of a highly leveraged operation. When things go well the banks get the benefit of the leverage when it goes badly the government picks up the tab. In the US debt went up 40% after the crisis as a result of bailing out the banks.
• Spanish banks are lucky - they escaped due to their heavy investment in Latin America - which with stability of commodity prices meant that they squeaked buy. They are still, however, under capitalized.
• German Banks are also under capitalized.
• American banks now want to "go crazy" in emerging markets e.g. City Group, JP Morgan. Emerging markets are, however, inherently unstable and will have financial crisis.

Bret Clayton (Rio Tinto) Stanford Interview

This is another interview that has been published on youtube from Stanford University. Bret Clayton is an executive director of Rio Tinto.

This interview gives an interesting insight into the world of mining. Projects are huge, budgets are massive and timescales are of a completely different order to what most businesses consider. The time from inception to operation of a mine could well be 15 years. Again this echos with the excellent talk I attended from David Mayhew.

There are also insights into his view of what will happen to commodities like copper over the next many years.

AB InBev's Brito: 'Hire the Right People'

Another interview from Stanford university. Brito covers many things but gives real insight into the value of leadership, good management and corporate culture. You also get a hint of the value of brands. He also mention something I first heard from Guy Kawasaki - "B players don't hire A players" (or something like that) - he puts it as mediocre people don't hire good people.

The interview and subsequent questions are well worth watching.