Tag Archives: investing

Seeking The Asian See’s Candies

Buffett’s Investment In See’s Candies See’s Candies, a manufacturer and distributor of candy, in particular, boxed chocolates, was cited by Warren Buffett in his response to the first question asked at this year’s Berkshire Hathaway (NYSE: BRK.A ) annual meeting. Buffett said that “The ideal business is one that takes no capital, and yet grows. And there are a few businesses like that, and we own some.” See’s is one of them.” Buffett purchased See’s Candies in January 1972 for $25 million, equivalent to 10 times and 6.2 times its after-tax earnings of $2.5 million and pre-tax earnings of $4.2 million respectively. See’s Candies’ Wide Moat At Berkshire Hathaway’s 1997 annual meeting, Charlie Munger made reference to the purchase of See’s Candies as “the first time we paid for quality,” according to Robert G. Hagstrom’s book “The Warren Buffett Way.” In Berkshire Hathaway’s 2007 letter, Buffett called See’s Candies the “prototype of a dream business.” See’s Candies’ wide moat is derived from several factors, including an enduring brand, strong pricing power, low capital intensity and local dominance. A 71-year old lady named Mary See started See’s Candies as a small candy shop in Los Angeles in 1921. In the domain of enduring consumer brands, where histories are measured in decades, instead of years, See’s Candies benefits from significant customer loyalty driven by habitual purchases and affiliation with the brand. The best illustration of See’s Candies’ brand power comes from none other than Buffett himself: When you were a 16-year-old, you took a box of candy on your first date with a girl and gave it either to her parents or to her. In California the girls slap you when you bring Russell Stover, and kiss you when you bring See’s. See’s Candies’ pricing power is validated by the fact that its pre-tax earnings per pound of chocolate sold grew by a 8.3% CAGR from 25 cents in 1972 to $2 in 1998, which were largely attributed to annual price increases which can be as much as 5% . It had the power to raise prices due to its brand equity and customer price sensitivity. While See’s Candies derived tremendous profit from the sale of boxed chocolate, the money spent on a small-ticket item like chocolates was only a small proportion of household expenditure (and were occasion-driven purchases), and buying more modestly-priced chocolate generated limited cost savings. According to Berkshire Hathaway’s 2007 shareholder letter, See’s Candies was a capital-efficient business which generated a 60% pre-tax return on invested capital at the time of Buffett’s purchase, helped by the fact that sales were transacted in cash (receivable days close to zero) and the production and distribution cycle was short (low inventory days). Regarding local dominance, it was noted in Buffett’s letters that See’s “obtains the bulk of its revenues from only a few states,” “our candy is preferred by an enormous margin to that of any competitor, and “most lovers of chocolate prefer it to candy costing two or three times as much” in the company’s primary marketing area on the West Coast. On the demand side, it is impossible to be everything to everyone given local tastes and heritage; See’s Candies clearly cemented its reputation in California and on the West Coast. See’s also benefited from local economies of scale by dominating the few states and benefiting from fixed cost leverage for logistics and advertising. In a nutshell, See’s Candies enjoyed the widest moat possibly by combining high customer captivity with scale economies. Asia’s See’s Candies Thailand-listed Taokaenoi Food & Marketing, a manufacturer of seaweed snacks, is potentially Asia’s See’s Candies and a wide moat investment candidate at the right price. Taokaenoi was founded by Mr. Itthipat “Tob” Peeradechapan in 2004 (he was 23 years old then), who is currently in his early-thirties. Mr. Itthipat had an entrepreneurial bent since his high school days, when he made money selling virtual weapons for cash on the online role-playing game EverQuest, according to a December 2015 Wall Street Journal article titled “Thai Fried Seaweed King Is on a Roll.” Tao Kae Noi was started as a roasted-chestnut stall business, before he discovered the huge demand and potential for seaweed snacks. Seaweed snacks can be perceived as the Asian equivalent of potato chip and snacks in the West. The brand Tao Kae Noi is synonymous with seaweed snacks in Thailand and many parts of Asia. Taokaenoi passes the local dominance test, boasting a 61.5% market share of Thailand’s 2.5 billion baht packaged seaweed snack market in 2015, according to AC Nielsen research. In other words, Taokaenoi has more than three times the market share of its closest competing brand Masita (17.5% market share) owned by Singha Corporation. The Company’s gross margin, a proxy for pricing power, increased by 610 basis points from 29.3% in 2011 to 35.4% in 2015. I estimate Taokaenoi’s 2015 return on invested capital to be approximately 80% in 2015, comparable with See’s Candies’ 60% pre-tax return on invested capital at the time of Buffett’s investment. Taokaenoi’s inventory days are decent at slightly over a month. Taokaenoi has set an ambitious target of becoming the top Asian seaweed snack brand with annual revenues of 5 billion baht by 2018 and transforming into a global (Taokaenoi derived 52% of its 2015 sales outside of its home market Thailand via export to 34 countries) seaweed snack powerhouse with yearly sales of 10 billion baht by 2024. This implies three-year and nine-year revenue CAGRs of 12.6% and 12.4% respectively compared with Taokaenoi’s 2015 sales of 3.5 billion baht. Taokaenoi was first highlighted to my premium research service subscribers on December 5, 2015 in a subscribers-only article listing five Asian hidden champions. Since Taokaenoi’s listing and trading debut in December 2015, its share price has surged by over 70%. Please refer to my article “Hidden Champions As A Source Of Wide Moat Investment Opportunities” for more information on hidden champions. As a bonus for my subscribers of my premium research service , they will get access to a profile of another Asia-listed hidden champion/See’s Candies in the food business and a list of five “new” Asian hidden champions. Asia/U.S. Deep-Value Wide-Moat Stocks Premium Research Subscribers to my Asia/U.S. Deep-Value Wide-Moat Stocks exclusive research service get full access to the list of deep-value & wide moat investment candidates and value traps, including “Magic Formula” stocks, wide moat compounders, hidden champions, high quality businesses, net-nets, net cash stocks, low P/B stocks and sum-of-the-parts discounts. The potential investment candidates I profiled for my subscribers in May 2015 include: (1) a U.S.-listed market leader in a niche consumer lifestyle space which is trading at 0.80 times P/NCAV and 0.70 times P/B, but remains debt-free and profitable; (2) a U.S.-listed Net Operating Losses-rich deep value play valued by the market at 2.6 times EV/EBITDA net of the present value of its NOLs; (3) an Asian-listed manufacturer of wireless communication products which is the market leader in its home market and the first to export such products to the U.S.; it is a net-net trading at 0.75 times P/NCAV with net cash equivalent to its market capitalization; (4) a U.S.-listed Magic Formula stock trading at 3 times trailing EV/EBIT and Acquirer’s Multiple, sporting a 10% dividend yield net of withholding tax; (5) a U.S.-listed Munger Cannibal trading at 7 times trailing EV/EBIT and Acquirer’s Multiple; (6) an Asian-listed company which is a global leader in a certain medical device niche trading at 3.5 times trailing EV/EBIT and 3.5 times Acquirer’s Multiple, versus a trailing ROIC of 27%. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

New 50-Year Bull Market For Precious Metals? (Podcast With Avi Gilburt)

Click to enlarge Avi Gilburt is a student of Elliott Wave analysis and has been following gold (NYSEARCA: GLD ), silver (NYSEARCA: SLV ), and other precious metals for years. In this interview, he takes us behind the scenes to better understand Elliott Wave. In addition, Avi gives his argument for why he believes we are near the beginning of a 50-year bull market in precious metals. That means both the metals and miners (NYSEARCA: GDX ). (Click the play button above to hear the podcast.) When I pressed Avi for more details about what he expects a 50-year bull market in the metals to look like, he compared it to the Dow going from ~100 in 1941 to 18,000+ in the past year. Click to enlarge This chart just shows the last 30 years for the Dow, but still helps put Avi’s point in perspective a bit. I hope you enjoy the interview as much as I did. I look forward to your thoughts and comments below. – Brian Disclosure : This article is for information purposes only. Comments made my guests do not necessarily represent the views of Brian or Investor in the Family. There are risks involved with investing including loss of principal. Brian and Investor in the Family makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed by Brian and Investor in the Family will be met. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Robo Advisors Won’t Die As Fast As High Fee Human Advisors

Michael Kitces has a very good post up discussing some of the big trends in the Robo Advisor space. Michael notes that the robo growth is falling off fast and that this could be a sign that the trend here is beginning to dry up. He ultimately concludes that the biggest winners here are the companies augmenting human advisory services with the benefits of the robo technology: “advisor platforms are quickly seeking to build or acquire it to provide it to them, and the tech-augmented humans are increasingly pulling ahead of both their robo and human counterparts.” I think this is pretty much dead on. When I wrote my original piece on the Robo Advisors I said that the endgame here was clearly some combination of human advisors and technology.¹ After all, a robo “advisor” isn’t really an advisor at all. It can’t risk profile you correctly, it can’t know your intricate financial details, it won’t help you stick with a plan when it looks like the world is falling apart, it can’t provide the appropriate financial planning needs, etc. As I’ve stated before, these services are just Robo Allocators. And if you ask me, they aren’t doing anything all that sophisticated so the value proposition is limited from the start. Let me explain why I believe this realization is driving the slowdown in growth we’ve seen. 1 – Robos Build Fancy Looking and Expensive Versions of the Vanguard Three Fund Portfolio. One of the points I highlighted last year was the fact that the Robo portfolios all mimic some version of the Vanguard Three Fund Portfolio . That is, they take 6-20 positions and build something that almost perfectly resembles the specific allocation of the much cheaper Vanguard portfolio. The result is that you’re adding the management fees of the Robo on top of the expense ratios of the underlying funds, resulting in a high fee version of something very simple: (WealthFront Moderate Profile vs. Vanguard 3 Fund Portfolio) (Betterment Moderate Profile vs. Vanguard 3 Fund Portfolio)¹ As you can see, the performance is nearly identical. And if you can rebalance once a year and harvest some losses on your own it becomes difficult justifying a management fee for this. This is ultimately the biggest impediment to Robo Advisor growth. As more people use these services they’re realizing that what they’re getting is little more than a really simple passive portfolio that they can easily build on their own without the Robo middleman. There are some side benefits like tax loss harvesting and the automation of the rebalancing/reinvestment, but it’s not going to be worth it for anyone who has the time to look at their portfolio a few times a year (which is everyone). 2 – The Stock Market Scare Exposed the Same Old Flaws in Traditional Portfolio Theory. The Robo advisors all pride themselves on using “Nobel Prize winning” approaches to investing. But this approach has also exposed the same old flaws we saw during the financial crisis – most portfolios constructed using Modern Portfolio Theory will have highly correlated equity heavy allocations. Even more “balanced portfolios” constructed using Modern Portfolio Theory are not really very “Balanced” at all from the perspective of drawdown risk. One of the key points I highlight in my new paper on portfolio construction is the need for balanced risk in a portfolio. And when you measure risk by the academic notion of volatility, you tend to arrive at portfolios that are always equity heavy which is the case with the Robos. This creates a temporal conundrum and behavioral problem for most asset allocators – are you willing to go through potential periods of substantial unrealized losses in exchange for the potential that you will make it all back “in the long-run”? The cause of this is the fact that stock heavy portfolios are always overweight purchasing power protection (reaching for gains) at the expense of permanent loss protection (protecting against downside exposure). This is because bear markets will expose a traditionally “balanced” portfolio like a 50/50 stock/bond portfolio to excessive permanent loss risk since 85%+ of the downside comes from the stock component. That is, even a 50/50 stock/bond portfolio is not balanced at all as the majority of the negative volatility comes from the 50% stock piece. The two portfolios mentioned above are the moderate profile portfolios for two of the dominant Robo firms and these portfolios will undergo 40%+ declines in a bear market like the 2008 crisis. (Betterment Moderate Portfolio Drawdowns) These are extraordinary drawdowns for a moderate risk profile. To put this in context, a moderate Robo portfolio is designed in such a way that it will take on almost 85% of the downside risk of the S&P 500 during bear markets. That’s quite the rollercoaster ride for most people and not the level of certainty they want from their savings. I’ve referred to this as a major flaw in Modern Portfolio Theory, but I suspect that the deficient risk profiling process in the Robos is compounding the problem by placing the vast majority of their clients in portfolios that are exposed to substantial negative volatility. The cause of this is simple – they’re trying to be fiduciaries who serve the best interests of their clients when the reality is that they are asking 4-5 insufficient questions in the process of risk profiling and then placing you in a very general allocation that could be wildly incorrect because they don’t actually know their clients. The result in many cases is an overly aggressive and insufficiently customized portfolio. I suspect that these are the two primary drivers of the slowdown in Robo growth. But despite the flaws in these approaches, I have to disagree with Michael to some degree. I don’t think the recent weakness in asset flows are the death of the Robos. I suspect something bigger is happening and these firms are merely pushing the human advisory space in its logical direction – towards a much lower fee platform. After all, while I am here criticizing a portfolio that costs 0.28%-0.38% (Betterment’s and Wealthfront’s all-in costs on portfolios over $100K) I would be remiss if I didn’t also clarify that I think it’s absurd that most advisors still charge 1% for constructing something that is usually the same. So no, this isn’t the end of the line for the Robos. In fact, it’s all just the beginning of a long-term decline in human advisory fees. And the combination of these new technologies with lower human advisory fees will create a nice blend of real advisory services with low-cost investing. But we’re not there yet. Human advisory fees have a long way to fall and I suspect that the human advisory space will contract substantially more (in relative size to the Robo space) before all is said and done. ¹ – See, Should You Use an Automated Investment Service? ² – In order to perform these longer backtests I used the JPM GBI for the global bond piece that Betterment uses.