Sam Walton: Made in America (Walmart)

Walmart is one of the best performing stocks of all time.  Sam Walton’s stake in the company made him the world’s richest person.  I enjoyed his book as it gives a good historical perspective on the sector and has some useful business insights.

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Books from Starbucks’ CEO

Howard Schultz (Starbucks’ CEO) has written two books: Pour Your Heart Into It and Onward.

From reading/skimming through the books, here’s my take on why Starbucks is successful.

Starbucks’ competitive advantage

It is clear that Schultz is downright obsessive about quality.  Schultz has traveled the world and knew that other countries were doing coffee far better than the US when he got into the business.

  1. The product.  Schultz has always insisted on using the highest quality beans and never sacrificing quality by using slightly inferior beans.  Starbucks invests a lot of money into figuring out how to deliver the best product.  They have in-house employees to source the best beans from around the world, develop the best roasting methods, and to develop the best blends.
  2. Theatre.  Preparing the coffee is like a sacred ritual.  The care and craftsmanship in producing each cup of coffee adds to the experience.
  3. People.  Starbucks pays attention to the human interaction between the barista and the customer.  Schultz hated espresso machines that were too tall since the barista couldn’t make eye contact with the customer while preparing the drink.  He also works towards having baristas that know their customers.

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Oil and Gas 101

Here’s what I know about the sector so far:

  1. The independent oil & gas sector as a whole has a poor track record of profitability.
  2. Reserve estimation is an educated guess.  Small changes in assumptions can have a massive effect on the economics of a reservoir.
  3. One common pattern in the oil & gas sector is for a company to overstate its reserves and to continually raise capital.  See #1.
  4. PUD (proven undeveloped) reserves are especially prone to abuse (overstatement of reserves).
  5. Most of the value creation in the industry comes from exploration.  Exploration is the most open-ended and uncertain aspect of E&P (exploration and production).
  6. Technology is another area of value creation.
  7. Historically, debt has often been dangerous to the companies which use it.
  8. Opportunities are the greatest when overly leveraged companies are forced to sell.

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Leveraged ETFs- a market inefficiency

Here’s how the inefficiency works.  Every day, leveraged ETFs have to trade to maintain a constant level of leverage.  The transaction costs of trading every day is very high since they often trade illiquid derivatives or swaps.  It’s not like they trade liquid products such as S&P 500 futures.  In a year with high volatility, a leveraged ETF could lose 20% of its net asset value to transaction costs.

One way to play this inefficiency is to short both the bull and bear versions of a leveraged ETF.  If you want, you could also rebalance the ETFs frequently so that you have no risk from a trending market.  (In a trending market, one ETF might go up several times while the other goes down close to 0.)  Unfortunately, many people seem to have caught on to this trade as leveraged ETFs frequently have borrow costs in the mid single digits.

I personally do not recommend this arbitrage trade… the risk/reward does not seem compelling to me considering the borrow costs.

Advant-e Corporation (ADVC) / Arbitrage opportunity

From the press release, Advant-e has announced that it is essentially doing a tender offer for odd lots (anything not divisible by 10,000 shares) for $0.27 a share.  As of today, ADVC was trading between 23 and 27 cents a share.  I actually got filled today at 23 cents with Interactive Brokers (I placed my order on the weekend before I knew about the press release).

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Book Review: Only the Paranoid Survive (by Andy Grove, former Intel CEO)

Key ideas in the book are:

  1. Sometimes there are inflection points in an industry that changes everything, e.g. containerization of the shipping industry and the rise of the personal computer.  The trick is to (A) correctly identify what things are and aren’t inflection points and (B) re-invent the business if you are on the wrong end of an inflection point.
  2. It is difficult for CEOs to make decisions that may be obvious to outsiders and to a company’s customers.

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