MSFT - Revising my Misconceptions

I have been listening to an outstanding podcast that can be found at www.acquired.fm.

A recent episode focused on the history of MSFT which was riveting. The history caused me to take a look at my own personal history to better understand my motivations and reactions to the PC's evolution and MSFT's role. But I was also forced to revise long-held misconceptions (the generation of which my mind excels at - ugh). They are in chronological order:

1) that MSFT set out to control Operating Systems. This is not true. MSFT started out as an interface between the machine and BASIC computer language. The Operating System engagement - which ended up key - came along later as Gates and Allen were forced to develop in order to keep the interface as standard on IBM's first PCs,

2) that MSFT and AAPL had always been enemies. This is not true. Actually, MSFT had done so poorly in applications - with Multiplan being kicked by Lotus - that MSFT worked to create products for AAPL based on graphical user interface. Windows 1.0 was promoted jointly. The animosity developed when it turned out that graphical user interface technology had been granted not simply to Windows 1.0 forever, but Windows products forever,

3) that MSFT had used its Operating System dominance to obliterate Lotus and WordPerfect (as argued by Larry Ellison of Oracle). This is not true. Instead, Lotus and WordPerfect stayed on old technology while MSFT built its future around the emerging graphical user interface technology. Lotus simply allocated its huge profits in another direction (Notes, etc) that proved a dead end,

4) that MSFT had somehow tricked IBM into losing what was the best part of the PC - the software. This is not true. IBM was simply blinded by the power of its dominance and its emphasis on mainframes. There was many stupid moments, but the key moment was when IBM introduced its own operating system - the O/S 2 and then hobbled it by using Intel's old chip - the 286 - while the clones went on to victory with the 386. MSFT rode that train as hardware wars drove PC prices down and adoption rates up. 

I did leave the episode still thinking that MSFT made the same IBM-type mistake with the advent of smartphones. Just as IBM thought it was about the iron of hardware, so too did MSFT - especially Steve Ballmer - get obsessed with making the smartphones Window-centric. Had it not been for Satya Nadella replacing Ballmer, MSFT might have sailed off into the same sunset of irrelevancy that IBM inhabits.

Richemont is paying attention to its customers

Compagnie Financière Richemont SA (CFRHF) is a luxury goods company founded in 1988 by South African businessman Johann Rupert - someone worth lots of study. Among the brands carried, CFRHF carries Cartier as well as Peter Millar. Recently, as Kering-owned Gucci has struggled with the Chinese market, CFRHF, or Richemont as its called, has moved forward in concert with Hermes and LVMUY.

Interestingly, I have personally found similar adeptness in their US operations. For example, I have been a long-time Loro Piana (LP) shopper, preferring their high quality fabrics and simple design. However, their prices have seemed increasingly outlandish - somewhat on a Hermes-type scale. Suddenly I got a call from my favorite LP sales person and she shared that she had moved to Peter Millar.

At first glance, I was not impressed. Their clothing looked more like professional golfer's. Not a bad look, but not me. Then, on further study, I saw that they had similar designs to LP. In addition, Peter Millar had a wider range of fabrics - particularly helpful with the hot Texas weather that LP fabrics are largely ineffective on. Then I got to the best part - the price. On shoes, pants, jackets and shirts, the prices were consistently at least 2/3rds lower than LPs! Now I just walk by LP and check out Peter Millar. With their strong sales growth, I'm not alone.

Another example was Cartier. Recently I had a special birthday present need so I just decided to see what Cartier had available.  I got to the door and it said "appointment only." I thought "what a bunch of crap. COVID is long past." But I went in and put myself down for an appointment. About 15 minutes later, my phone rang and I went for my appointment. I had a session with a multi-decade Cartier veteran who gave me unlimited time and attention and I did make a purchase. I asked her about the appointment thing and she said that CFRHF had learned that tire-kickers dilute the personal educational shopping experience. She shared that most of the reason we had so much time together was because of that appointment policy. It seems like that is where more and more retail goes as "defund the police" and shrinkage issues affect retailers. CFRHF had made a "stepping stone" of a new selling approach from the "stumbling block" of COVID protocols.

Anheuser-Busch (BUD) Ad Debacle - Risk of AI Campaigns?

As a long-term holder of BUD stock, I was stunned by the recent furor over Dylan Mulvaney and Bud Light. BUD's original "local dominance" and "scale" advantage grew because BUD was able to leverage its size into more general TV spend into more size. It was a perfect brew for an advertising compounding cycle in the era of a scarcity of media outlets. 

As cable TV and then the internet developed, a splintering in beer markets occurred - there were simply more opportunities for smaller players like Sam Adams and then lots of microbreweries to gain market share. BUD appeared to adjust by having a few large brands with specific following - Corona for parties, Amstel for dinners and Bud for kicking back after work. These were basically a one size for as many as possible approaches. Then BUD had regional leaders and even niche products - totaling to nearly 500 over all. 

BUD had so many brands that could be brought to support Dylan Mulvaney's journey, why would they have used one of their plain, vanilla "one-size fits all" brands? While it may be an attempt to make Bud Light more appealing, I simply can't see that passing the risk test to a major brand. It seems to me that some consultant armed with a statistical analysis made a compelling argument. If true, it does show the likely risks of future AI generated ad campaigns.

Balance Sheet Analysis: First or Worst?

In the old days of 30 years ago, the best starting point for financial analysis was the balance sheet. From the balance sheet it was fairly clear what the liquidation value was as a starting point. For example, when I initially looked at Home Depot in the 90s, I could figure out their property values and know that in a worst case scenario these properties could be liquidated as a basis for a "margin of safety." Further, the balance sheet would also provide an indication of what replacement costs might look like and the structural investment required to be in a business. Of course, famously the textile mills of Berkshire Hathaway demonstrated the fallacy of relying on balance sheets. Those huge asset values with high replacement costs simple ate capital.

Over time as the economy has morphed from "real" assets to "digital" assets, the balance sheet analysis has delivered less and less value. The software writing which is critical to creating the assets is often expensed. Further, when digital assets are capitalized, they are exceptionally difficult to amortize correctly. While manufacturing equipment was not easy, computing equipment with the rapidity of change is even more challenging. Instead, I think the first step is to establish is a company best analyzed with a balance sheet approach or a cash flow approach. Clearly, banks, mineral companies and insurance companies are balance sheet companies. All the others should likely follow the example of Jeff Bezos with an emphasis on cash flow.

Certainty vs Likelihood

Anxiety is a permanent condition that drives stress. Without anxiety, we might make significant errors of excess and with too much anxiety, we might make significant errors or caution. While these issues are challenging, they are not nearly as difficult as the related unconscious behaviors.

In the investing arena there are many uncertainties. I discovered during the Great Tech Bubble of 1999-2000 that clients wanted certainty. When my clients who were business savvy asked about stock market conditions, I provided the pros and cons of why I thought it was a dangerous environment but declared that it was not certain. Almost to a person, these people fired me. When my clients whom I did not perceive to be savvy asked about conditions, I told them to go back to their lives, that it was dangerous and we were taking care of their funds. Almost to a person, these people stayed.

As a reflected on this divergence, I thought about being a passenger on an airplane. If the pilot came on the intercom and told us that we were entering a storm system, that it was likely that we would emerge alive but yet there remained a small chance that the plane would crash, I would be panic stricken. I'm actually looking for the pilot to lie to me - to make that high likelihood of safety into a certainty of safety in order to calm my anxiety over flying 32,000 feet in the air in a small metal tube. I discovered that clients wanted me to make a likelihood into certainty. That's actually part of what they pay for.

The problem is that when you begin by lying to others, you end by lying to yourself. By indicating certainty to others, that behavior can gradually lead to a sense that certainty is achievable instead of degrees of likelihood. There is no certainty in any markets. However, this knowledge is only relevant as far as the research process allows. If the certainty bias against anxiety runs rampant, it will then create additional delusions of overconfidence and confirmation biases.

Reasoning is critical, but rationality is limited in markets where empiricism is a careful constraint.

Relying On The Kindness of Strangers? QT's fickle ways

As the famous play conveys, relying on the kindness of strangers is not a good strategy for living. However, during good times, such as Fed monetary easing coupled with Quantitative Easing, the kindness of strangers becomes almost compelling in its success. At times, borrowing or gambling yourself rich becomes a reality and "monkey see, monkey do" sets in.

As tightening becomes a reality, any strategy that relies on the kindness of strangers - such as the greater Fool approach or borrowed money - becomes dangerous. As a result, significant downturns have occurred in the housing and auto industry. At the same time, crypto and SPACs have taken significant hits. As the phase 1 of tightening turns to phase 2 of pausing, more problems in these kindnesses are likely to surface.

Who's gigging whom?

In Texas, the fans of Texas A&M are well-known for their sports yell of "Gig 'em Aggies!" The term is borrowed from the world of hunting frogs or fish as a form of spearing the prey with a "gig." But the term's usage is increasingly heard as we discuss the "gig economy," meaning a series of short-term jobs or engagements.

When I first learned about Uber and noticed the price and experience advantage over taxicabs, I went home and began the process of selling my cars. The economics made sense. Since I drove my car less than 5% of the time, ride share made sense. Further, there was labor as people between jobs or who needed additional income or flexibility could earn money. It all confirmed the beauty of capitalism's decentralized usage of excess capacity.

Recognizing that no clear competitive moats existed, I avoided any investments in Uber or its competitor Lyft. Then, as usual, the California government entered the space to save the poor labor market. Rather than address the bad business behaviors (such as not forwarding tips to the drivers - which was a major issue), California's legislators focused on creating full-time jobs. Another example of needed governance being misapplied. 

The result is chaotic. Without going into all of the details, the companies are now forced to some bizarre pricing models. When I looked at pricing to ride to DFW this morning, Uber was at $35 and Lyft was over $80. Two weeks again, it was the exact opposite. Of course, if the prices were similar, these companies would be accused of price fixing. Worse yet unsustainable losses at the parent level are occurring

Uber posted a $1.3 billion loss over the first nine months of the year, bringing the firm’s loss to $30.3 billion going back to 2015. Though Uber shares are down 40% since their spring 2019 IPO, the company remains valued at $54 billion. Lyft has similarly ugly results. The markets are pricing that a way to allow rational platform and labor competition will develop. Short of smart regulation or Lyft collapsing, I don't see it.