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"

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.

James Pan - Value Investor

Here is a series of videos of a lecture given by James Pan. I came across them trawling YouTube last year. Here is the first - you can get the rest from YouTube quite easily.

I very much enjoyed the videos there are a couple things that stick in my mind even though it is, now, quite a while since I listened to them.

1. There is nothing quite like the feeling of a successful short.
2. Who can understand the company report of a bank?

The second point is quite interesting - if you can not understand the company report what hope do you have of figuring out for yourself if the company is good or bad or mediocre. You can, of course, rely on other peoples advice. I have got burnt that way once and almost burnt another time. Almost burnt is probably the more interesting. I am an on and off reader of the Investors Chronicle (which is excellent) I remember a recommendation for the Anglo Irish Bank.

Warren Buffet and Charlie Munger are adamant about investing in things that they understand. The more I think about this the more it makes sense.

David Mayhew - Chairman of JP Morgan Cazenove

On Friday I was fortunate enough to attend a lecture given by David Mayhew the chairman of JP Morgan Cazenove. It was a good lecture - David covered his early life - how he got stared in banking through to where he is today. Like many successful men he rests a lot in the value of hard work and is wise enough to have stressed a few times the role of luck in his career.

I won't attempt to cover what David covered in his lecture in any way - what I will enumerate is a few points that he covered that I found particularly interesting and have thought about afterwards. Because a blog is not a fixed thing I may well add to this later as I think about what he said.

• Monopolies are hard to break. He mentioned this in the context of the 15 years it took to replace the old system of Jobbers and Brokers - wikipedia covers the "Big Bang" here.
• Reputation is very important. This is something I have thought about a fair bit over the years.
• The next decade will not be as good as the past one.
• If you loose control of costs you loose control of decision making.
• Quantative easing will inevitably produce inflation.
• Quantitive easing was necessary to provide liquidity to the banks.
• Qualitative easing has helped to provoke the bubble in the emerging markets. This is because it has provoked a rush of money into these markets.
• Politicians are not being straight when they fail to tell us that basically we will be worse off.
• It takes 10 years for a mine to be developed and be productive - if you are interested in mining stocks this is worth thinking about.
• There is plenty of iron ore in the world - the problem is mining capacity.
• Transparency is important. If I understand things correctly then he believes that a key role of regulation is to introduce transparency. Transparency leads to confidence which is important for investment.

I guess that low interest rates are a part of what is pushing money into emerging markets.

Updated 20-feb-2010