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.
Warren Buffett Loves This Business — Maybe a Little Too Much — Bloomberg, October 20, 2016. Reinsurance has long been among the most important businesses for Berkshire Hathaway. Years of ultra-low interest rates on bonds coupled with capital flowing into the industry have combined to create a difficult competitive landscape. We should note that Berkshire Hathaway has been through many insurance industry cycles and has demonstrated a willingness to constraint premium volume when faced with inadequate pricing. The article suggests that Ajit Jain is trying to deal with a “cost problem” at General Re and will be overhauling the company’s compensation strategy. It will be interesting to observe the balance that is struck between cost containment and ensuring that incentives to reject poorly priced policies are retained.
Buffett’s Three Categories of Returns on Capital — Base Hit Investing, October 18, 2016. John Huber makes interesting observations regarding how Warren Buffett thinks about businesses in terms of their return on capital profile. He then provides some thoughts on Chipotle Mexican Grill and Markel Corporation. Also see The Rational Walk’s recent discussion of Chipotle and earlier coverage of Markel.
Why The Prophets of Buffett Get it Wrong — Financial Times, October 16, 2016. Countless investors talk about following Warren Buffett’s example but how many actually implement his process in reality? “There are plenty of people out there who call themselves Buffett acolytes — and as far as I can see they are all phoneys,” says John Hempton, an Australian fund manager.
Wells Fargo’s Former CEO May Have Been Warned of Phony Account Fraud As Early As 2007 — Fortune, October 18, 2016. John Stumpf’s resignation and daily full page advertisements in The Wall Street Journal have not been enough to contain the crisis at Wells Fargo. There is increasing evidence to suggest that bank executives knew, or should have known, about fraudulent sales activities well before 2013. It seems like executives must either confess to being complicit or to being incompetent. The latter might be a more attractive option from a legal perspective.
Is Bill Ackman Toast? — Vanity Fair, October 17, 2016. The setbacks experienced by Bill Ackman in recent months have been well documented. As is the case when a fund manager experiences hard times, people seem to come out of the woodwork to offer critiques and analyses of past mistakes. An unnamed hedge fund manager is reported to claim that Mr. Ackman’s fund has “returned zero”, which is at odds with others familiar with his record. But is Bill Ackman Toast? The article concludes by pointing out that the fund has more than $6.5 billion in permanent capital which perhaps answers the question posed by the title.
The Patients Hurt by Theranos — The Wall Street Journal, October 20, 2016. This article goes into quite a bit of detail regarding patients who were misdiagnosed by Theranos and the consequences that they faced due to the errors. These stories are disturbing, to say the least, and highlight the level of ethics required for companies to operate within the health care industry. Wells Fargo’s scandal is serious but only involves money whereas the Theranos situation is a matter of life and death.
Will Apple Kill Its Own Driverless Car? — Vanity Fair, October 17, 2016. Rumors have been swirling for quite a while regarding Apple’s ambitions to build an automated vehicle. Apple seems to have more leaks these days compared to the level of control imposed by the late Steve Jobs when he ran the company. While perhaps bad for shareholders, these leaks make for interesting reading as we can see from Vanity Fair’s reporting based on “sources within the company”. Shareholders should continue to question whether these types of initiatives represent a good use of the company’s formidable cash balance and ongoing free cash flow.
Elon Musk’s Empire: The entrepreneur’s finances are as jaw-dropping, inventive and combustible as his space rockets — The Economist, October 22, 2016. Elon Musk is widely admired for his propensity to take innovative risks while also often criticized for the financial maneuvering required to fund those risks. Despite a multi-billion dollar net worth, Mr. Musk has little personal liquidity and his companies require ongoing funding from the investment community. The Economist explores the financial aspects of Elon Musk’s empire in this article. Also see Elon Musk’s Wild Ride published by Bloomberg on October 12.
Peter Bevelin on Seeking Wisdom, Mental Models, and Learning — Farnam Street, October 17, 2016. Peter Bevelin is the author of Seeking Wisdom: From Darwin to Munger and All I Want to Know is Where I’m Going to Die So I Never Go There (purchase these books from the links provided in the Farnam Street article). In a wide ranging interview, Mr. Bevelin explains his motivation behind publishing these books and provides more information regarding his background.