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Am a huge follower of Charlie Munger, and I re-read his writings every so often ( http://www.tilsonfunds.com/motley_berkshire_charlie_speeches.php http://www.ti

by dxbydt 14y ago

Am a huge follower of Charlie Munger, and I re-read his writings every so often ( http://www.tilsonfunds.com/motley_berkshire_charlie_speeches.php http://www.tilsonfunds.com/motley_berkshire_charlie_speeches... ). What the two of them do is so much of a one-trick pony. They always seek massive rent capture via outright purchase of a corp with a very large moat. Then reduce the fiat risk by converting the cash into non-fiat income producing assets. This way they lock in wealth preservation regardless of what happens to the fiat. When I lived in New Mexico for a bunch of years, there was one constant - the incessant back and forth of the trains carrying coal containers from one end of the country to the other, and on the return trip carrying giant walmart containers shipped from China to the US ports, to their destinations in the rest of the mainland US. Everybody knew BNSF was the coronary artery of the US. One day I remarked to my wife - just you watch, Buffett is going to own BNSF. And then when it happened, she was like - how did you know ?! Its just so obvious. This SunPower thing was on the cards too. Prediction: He'll buy Vestas. Or Nordex. Just you watch...ofcourse you can't time these trades. Nobody knows the when, but the what is fairly well known at this point.

Tycho 14y ago
Could you explain what this means? I don't understand your terminology They always seek massive rent capture via outright purchase of a corp with a very large moat.
- criley 14y ago
  Pretty sure "moat" is a term popularized by Warren Buffet himself to describe a company with some kind of inherent advantage over it's competitors. As in, when a company with a moat succeeds, his competitors have a hard time entering that market and replicating that success because of the moat. A moat protects your marketshare. A very large moat then would be, I guess (I'm not an investor or anything), a company with a large competitive advantage and a market share that would be very difficult to steal.
  - txttran 14y ago
    what about "rent capture" and "fiat risk"?
    - pjschlic 14y ago
      Rent capture: landlords collect rent on the house they own the right to. Similarly, lets say the government or any contracts grants some body special privileges, the money they earn on those privileges in excess of what they would have otherwise is a rent capture. EG: lawyers get more money because only they are allowed to do certain legal work. The rate they collect in excess of what someone unlicensed but qualified would charge is a rent capture (rent seeking activity?[0]). Fiat risk: inflation. [0] http://en.wikipedia.org/wiki/Rent-seeking http://en.wikipedia.org/wiki/Rent-seeking
    - wintersFright 14y ago
      fiat (govt currency) risk is if you are keeping 100 million in a bank account and Bernanke keeps running the printer, then one day you will wake up and it will buy approx three eggs. So best to ensure you have physical wealth assets on hand that can't be conjured out of thin air. What about FDIC bank guarantees? Well sure the 100 million is guaranteed. It's purchasing power is not.
      - chii 14y ago
        it sucks that purchasing power is lost for people without lots of money. It seems inherently an unfair system - if you stop producing value, your existing store of value diminishes thru no fault of your own.
        wintersFright 14y ago
        the trick is to realise that currency was not designed to be a store of value so don't use it as such. To paraphrase Silvio Gesell, an economist in favor of symbolic currency almost a century ago, "All the physical assets of the world are at the disposal of those who wish to save, so why should they make their savings in the form of money? Money was not made to be saved!" ie: you don't need to buy whole companies outright to avoid saving in currency.
- dxbydt 14y ago
  > I don't understand your terminology I think you do :) Probably you disagree with the characterization. I don't see why rent capture generally has such a negative connotation outside of finance circles. Its a perfectly legitimate strategy. And who has a larger moat than BNSF or Vestas or SunPower ? Even if you were a Zuckerberg you couldn't build these things in decades. Takes forever just to buy the land, spec out these things & get the specs approved by regulatory bodies. So if you could buy these concerns outright, you would. You would buy, whether it was making solar power or your underwear. ( He owns the largest underwear maker Fruit of the Loom ). Given the asymmetric info advantage he has, he's sold millions of puts expiring in 2019 & is sitting on top of billions in premium ( while simultaneously telling the American public that derivatives are instruments of the devil :) Got to park those assets someplace, otherwise fiat risks accumulate. His stock purchases for 2012 are quite ho-hum...utilities, banks, big media ( http://static.cdn-seekingalpha.com/uploads/2012/12/4/saupload_Berkshire-13F-Q3-2012-Update_1.jpg http://static.cdn-seekingalpha.com/uploads/2012/12/4/sauploa... )
  - rauljara 14y ago
    Whether or not Tycho understands your terminology or not, I don't, and I bet a whole bunch of people don't. You use a lot of jargon (not in the negative sense of the word, but in the sense meaning highly specialized vocabulary). Could you actually answer tycho's request?
    - dxbydt 14y ago
      I hate to dumb down stuff that even wikipedia takes 2000+ words to summarize. But simplistically, Buffet is sitting on a mountain of cash. If interest rates go the wrong way, he is exposed to fiat risk. So his best bet is to trade that fiat risk for non-fiat income producing assets. He does that by outright purchases of very large companies whose competitive advantage is so huge they'd be impossible to defeat, and yet you can't get by without them. I mean, what are you going to do if you want 1000s of giant walmart containers sitting in LA moved to the midwest, and you don't like BNSF's pricing ? You are essentially fucked. So you play ball with BNSF. That's your moat right there. You can't build a railroad, not in today's climate. Its not like a gmail or an oracle in that you think those companies suck, so you switch to hushmail and mongodb. You basically have an out, so there's arguably no real moat in technology. But with large scale infrastructure projects, once you own a piece of them, you can just sit back & collect rent & everybody has no recourse other than to pay up.
- bgilroy26 14y ago
  The way I understand what dxbydy has been writing, he or she is explaining how Warren Buffett often plays the opposite of a venture capitalist, risk-wise. He isn't a futurist, he picks off clear winners who are firmly entrenched in their markets. While this is always a tough strategy -- because the easier they are to find, the more likely these companies are to become overrated -- it gets a little easier when you have a massive amount of capital. It's still tough to do consistently though. The term "Rent Capture" calls out the distinction between entrepreneurs and landlords. The worth of land is obvious and so it takes other competitive advantages besides ingenuity to close a big deal. Pejoratively, as dxbydy mentioned, "rent capture" implies that the owners don't have to work very hard for their money. "a very large moat" refers to the barriers to entry. Imagine you have 4 or five companies who built power plants 40 years ago. It was expensive for them at the time, but they made back their initial investment years ago and now the only thing they care about is market share. The size of their moat is proportional to how much it would cost for some new company to build their own power plant.
- richardw 14y ago
  With respect to "rent capture", they're referring to economic rent. Basically, a situation where competition cannot affect the price of a good. Great if you receive payment for that good, less so if you're paying it. http://en.wikipedia.org/wiki/Economic_rent http://en.wikipedia.org/wiki/Economic_rent
brc 14y ago
I am presuming that the moat being in this case the high locked in prices paid for solar power at the peak of the 'we must create renewable energy' frenzy. It is unlikely that new solar plants would be able to get the same types of long-term power supply contracts that an existing plant might have got 5 years ago. At the residential level, most solar FIT have been slashed as government programs ran out of money and public enthusiasm waned as the non-participants bills went up. But yes, a solar power plant is a utility, and if it has locked in contracts (I admit I have no idea if it does) it would be a good buy, if nothing else but for the inflation hedging as power always follows inflation but many other revenue streams do not.
- orangethirty 14y ago
  They might also enjoy from tax breaks (future or present). I'm not clear on how, but with Buffetts talent to bend tax laws, you can be sure that is taken into account.
gadders 14y ago
I always wondered if it would be possible to create a fund or something that invested/bought up bankrupt but useful infrastructure projects. The two that spring to mind our Iridium Satellite Phone and the UK-France Channel Tunnel. Both excellent ideas that were unlikely to earn back the cost to produce them, but if bought after bankruptcy and sunk costs have been written off they could be profitable.

by dxbydt 14y ago

Tycho 14y ago

Could you explain what this means? I don't understand your terminology They always seek massive rent capture via outright purchase of a corp with a very large moat.

criley 14y ago
Pretty sure "moat" is a term popularized by Warren Buffet himself to describe a company with some kind of inherent advantage over it's competitors. As in, when a company with a moat succeeds, his competitors have a hard time entering that market and replicating that success because of the moat. A moat protects your marketshare. A very large moat then would be, I guess (I'm not an investor or anything), a company with a large competitive advantage and a market share that would be very difficult to steal.
- txttran 14y ago
  what about "rent capture" and "fiat risk"?
  - pjschlic 14y ago
    Rent capture: landlords collect rent on the house they own the right to. Similarly, lets say the government or any contracts grants some body special privileges, the money they earn on those privileges in excess of what they would have otherwise is a rent capture. EG: lawyers get more money because only they are allowed to do certain legal work. The rate they collect in excess of what someone unlicensed but qualified would charge is a rent capture (rent seeking activity?[0]). Fiat risk: inflation. [0] http://en.wikipedia.org/wiki/Rent-seeking http://en.wikipedia.org/wiki/Rent-seeking
  - wintersFright 14y ago
    fiat (govt currency) risk is if you are keeping 100 million in a bank account and Bernanke keeps running the printer, then one day you will wake up and it will buy approx three eggs. So best to ensure you have physical wealth assets on hand that can't be conjured out of thin air. What about FDIC bank guarantees? Well sure the 100 million is guaranteed. It's purchasing power is not.
    - chii 14y ago
      it sucks that purchasing power is lost for people without lots of money. It seems inherently an unfair system - if you stop producing value, your existing store of value diminishes thru no fault of your own.
      - wintersFright 14y ago
        the trick is to realise that currency was not designed to be a store of value so don't use it as such. To paraphrase Silvio Gesell, an economist in favor of symbolic currency almost a century ago, "All the physical assets of the world are at the disposal of those who wish to save, so why should they make their savings in the form of money? Money was not made to be saved!" ie: you don't need to buy whole companies outright to avoid saving in currency.
dxbydt 14y ago
> I don't understand your terminology I think you do :) Probably you disagree with the characterization. I don't see why rent capture generally has such a negative connotation outside of finance circles. Its a perfectly legitimate strategy. And who has a larger moat than BNSF or Vestas or SunPower ? Even if you were a Zuckerberg you couldn't build these things in decades. Takes forever just to buy the land, spec out these things & get the specs approved by regulatory bodies. So if you could buy these concerns outright, you would. You would buy, whether it was making solar power or your underwear. ( He owns the largest underwear maker Fruit of the Loom ). Given the asymmetric info advantage he has, he's sold millions of puts expiring in 2019 & is sitting on top of billions in premium ( while simultaneously telling the American public that derivatives are instruments of the devil :) Got to park those assets someplace, otherwise fiat risks accumulate. His stock purchases for 2012 are quite ho-hum...utilities, banks, big media ( http://static.cdn-seekingalpha.com/uploads/2012/12/4/saupload_Berkshire-13F-Q3-2012-Update_1.jpg http://static.cdn-seekingalpha.com/uploads/2012/12/4/sauploa... )
- rauljara 14y ago
  Whether or not Tycho understands your terminology or not, I don't, and I bet a whole bunch of people don't. You use a lot of jargon (not in the negative sense of the word, but in the sense meaning highly specialized vocabulary). Could you actually answer tycho's request?
  - dxbydt 14y ago
    I hate to dumb down stuff that even wikipedia takes 2000+ words to summarize. But simplistically, Buffet is sitting on a mountain of cash. If interest rates go the wrong way, he is exposed to fiat risk. So his best bet is to trade that fiat risk for non-fiat income producing assets. He does that by outright purchases of very large companies whose competitive advantage is so huge they'd be impossible to defeat, and yet you can't get by without them. I mean, what are you going to do if you want 1000s of giant walmart containers sitting in LA moved to the midwest, and you don't like BNSF's pricing ? You are essentially fucked. So you play ball with BNSF. That's your moat right there. You can't build a railroad, not in today's climate. Its not like a gmail or an oracle in that you think those companies suck, so you switch to hushmail and mongodb. You basically have an out, so there's arguably no real moat in technology. But with large scale infrastructure projects, once you own a piece of them, you can just sit back & collect rent & everybody has no recourse other than to pay up.
bgilroy26 14y ago
The way I understand what dxbydy has been writing, he or she is explaining how Warren Buffett often plays the opposite of a venture capitalist, risk-wise. He isn't a futurist, he picks off clear winners who are firmly entrenched in their markets. While this is always a tough strategy -- because the easier they are to find, the more likely these companies are to become overrated -- it gets a little easier when you have a massive amount of capital. It's still tough to do consistently though. The term "Rent Capture" calls out the distinction between entrepreneurs and landlords. The worth of land is obvious and so it takes other competitive advantages besides ingenuity to close a big deal. Pejoratively, as dxbydy mentioned, "rent capture" implies that the owners don't have to work very hard for their money. "a very large moat" refers to the barriers to entry. Imagine you have 4 or five companies who built power plants 40 years ago. It was expensive for them at the time, but they made back their initial investment years ago and now the only thing they care about is market share. The size of their moat is proportional to how much it would cost for some new company to build their own power plant.
richardw 14y ago
With respect to "rent capture", they're referring to economic rent. Basically, a situation where competition cannot affect the price of a good. Great if you receive payment for that good, less so if you're paying it. http://en.wikipedia.org/wiki/Economic_rent http://en.wikipedia.org/wiki/Economic_rent

brc 14y ago

I am presuming that the moat being in this case the high locked in prices paid for solar power at the peak of the 'we must create renewable energy' frenzy. It is unlikely that new solar plants would be able to get the same types of long-term power supply contracts that an existing plant might have got 5 years ago. At the residential level, most solar FIT have been slashed as government programs ran out of money and public enthusiasm waned as the non-participants bills went up. But yes, a solar power plant is a utility, and if it has locked in contracts (I admit I have no idea if it does) it would be a good buy, if nothing else but for the inflation hedging as power always follows inflation but many other revenue streams do not.

orangethirty 14y ago
They might also enjoy from tax breaks (future or present). I'm not clear on how, but with Buffetts talent to bend tax laws, you can be sure that is taken into account.

gadders 14y ago

I always wondered if it would be possible to create a fund or something that invested/bought up bankrupt but useful infrastructure projects. The two that spring to mind our Iridium Satellite Phone and the UK-France Channel Tunnel. Both excellent ideas that were unlikely to earn back the cost to produce them, but if bought after bankruptcy and sunk costs have been written off they could be profitable.