Monthly Archives: May 2011

Charlie Munger on Google’s moat – it’s huge … probably widest he’s ever seen

Buffett has famously said that one useful way to think about a business’s moat – its durable competitive advantage – is to imagine that you had unlimited resources to attack it.  If you still could not topple it, you would have found a business with a solid moat.

In Google’s case, this isn’t a hypothetical.  Microsoft has spent billions of dollars in a determined effort to put a dent in Google’s moat.  So far, all they have to show for it is heavy losses and only modest market share.  It is believed that a large part of Bing’s market share has come at the expense of search engines other than Google. Microsoft was recently embarrassed when Google discovered that it was copying Google’s search results.

Charlie Munger had this to say about Google’s moat. “Google has a huge new moat. In fact I’ve probably never seen such a wide moat.”


It’s useful to think about Google’s moat the way you would think about the moat of a dominant city newspaper in the pre-Internet era.


For readers, the newspaper was the only game in town for keeping up with local news and an essential tool for buying a car, getting a job, learning about retail sales events, and an almost limitless number of niche activities.  Reading the paper was also quintessentially habit forming: pleasurable, repeated daily and low cost.

If you use the Internet, Google is a basic essential tool.  Its value lies in letting you navigate the Internet in a rational fashion, whether you’re looking to buy a new camera or need to know the capital of Uzbekistan.  This value grows as more information is placed on line – something that is happening at a dizzying pace – and as Google’s search algorithm improves.  Google is maniacally focused on improving its search engine and it benefits from having by far the largest number of searches to analyze and learn from.

It tells you something about a company when the company’s name becomes a verb that is synonymous with the underlying function it performs. Could you “xerox” that for me?  Google has this kind of mind share.

If you’re Bing, you can’t attack by lowering the price to customers. Google is free. At one point, Bing even tried paying people to search. There is no easy lever to disrupt the habit of going to Google each day to navigate the web.


If you were an advertiser – auto dealer, employer, department store, furniture store, pretty much any local business – you needed to advertise in the newspaper because you had to be in front of your customers and that was the only cost effective way to do it.  The newspaper set the rate and you paid it.  Period.

Google is a must-have outlet for advertisers given its 65% share of U.S. search.  Its share is much higher in many international markets.  Advertisers not only pay for advertising but also work hard to optimize their sites so they show up at the top of searches on important key words.  A recent tweak in Google’s search algorithm showed the lengths that companies will go to rise in the search rankings.  A company can see it’s sales materially reduced if it falls in the rankings.

Google’s advertising is superior to that of traditional media because it is targeted and the results can be quantified.  More value means happier advertisers.  That rates are set by auction helps mitigate accusations of monopolistic price gauging which were frequently heard in the “old days” from newspaper advertisers.

A dominant daily newspaper’s growth was constrained by the development of the local economy.  Google is not constrained by local geography and is riding two huge secular waves: the transfer of advertising dollars to the Internet and the ever increasing adoption and usage of the Internet.

Regulatory risks swirl around Google but the threat to its core search business seems remote. Because Google’s business is based on technology, there is a some risk of disruption from creative destruction.  However, Google is determined to stay ahead in search and it has plenty of cash to purchase start-ups with a better idea.

Recent price: 524.20

Cash per share: 113.00

Cash adjusted price: 411.20

2012 consensus EPS estimate: 39.91

2012 cash adjusted earnings yield: 9.7%


New Audio: Ten Ways to Improve Your Investment Process – #2. Define Your Process

If you want to be a successful investor, you need a great investing process.

This is part three of an eleven-part audio series on improving your investment process. It is based on a presentation I gave to the CFA Society of Columbus on May 19, 2011 at The Ohio State University.

#2. Define Your Investment Process (audio)

PDF of presentation slides


Previous audio recordings in this series:

Ten Ways to Improve Your Investment Process – Introduction

#1. Know Your Outcome


Links of Interest – May 27, 2011

Michael Burry’s 4 must read investing books | James Cox finance blog

Robert Rodriguez: We will have another crisis… – May 17, 2011

Bruce Berkowitz in Outstanding Investor Digest – March 17, 2009

Prem Watsa on how a great book can change your life

On Investing: The many hats of great investors – The Washington Post

A complete archive of Michael Price’s investing philosophy |

Why We Own Bank of America – Thomas Brown,

Buying Mastercard | Alice Schroeder: The Official Website

Chart of Interest: Cisco (CSCO)

New Audio: Ten Ways to Improve Your Investment Process – #1. Know Your Outcome

If you want to be a successful investor, you need a great investing process.

This is part two of an eleven-part audio series on improving your investment process. It is based on a presentation I gave to the CFA Society of Columbus on May 19, 2011 at The Ohio State University.

Here is part 2:

#1. Know Your Outcome (audio)

PDF of presentation slides


Previous audio presentations in this series:

Ten Ways to Improve Your Investment Process – Introduction (Audio File)

Notes on David Herro: Global, Disciplined and Loves Diageo

On May 20, 2011, David Herro, Morningstar’s International Stock-Fund Manager of the Decade and value investor, appeared on Consuelo Mack’s WealthTrack. Herro manages the Oakmark International fund.

Here are my notes from the interview:

  • David Herro’s fund earned 9%+ 10 yr annualized returns.
  • Investing in the U.S. is no longer enough.
  • What does it take to be successful?
    • A sound philosophy
    • Discipline – you can’t get rattled. You need patience to make it work. You will be tempted to abandon it at the wrong time.
  • Value is something that is cheap based on free cash flow to enterprise value. Value also means a quality business that can generate good long-term results and a management team that can make sound capital allocation decisions.
  • People abandon common sense when macro trends disrupt them. In late 2008 everyone knew that the economy was soft, that the consumer was fearful and wasn’t spending. Mr. Market acted as if this was a permanent condition but this was already priced into stocks. Herro bought stocks with a balance sheet strong enough to make it though the recession and business model that would continue making money. The crowd saw a recession and dumped all stocks that were based on consumer spending [Greg Speicher: this is a great example of time arbitrage].
  • The value of a business is not based on what it will do over the next few quarters but over the next ten years.
  • He is known as a contrarian because often the stocks that meet his criteria have been abandoned. He cautions investors not to conclude that all abandoned stocks are good investments.
  • He is finding value in Japan. Even before the earthquake it was trading below book value and 8x cash flow. No one wants anything to do with it. It’s gone from being totally in fashion in the 80’s to totally out of fashion. The corporate behavior of Japanese corporations is improving.
  • In Japan, he likes Daiwa Securities. They have brokerage offices all over Japan and they serve as a conduit to invest Japanese savings.
  • People make a mistake in not investing in Europe because they treat it monolithically. The individual countries are very different. There is no “one Europe”. Germany is growing strongly. Scandinavia was almost unscathed by the crisis.
  • When evaluating a business, you shouldn’t just look at the country where it is based but the countries where the business makes money.
  • He only has 2-3% in emerging markets because they are too expensive. People are not looking at what they are buying. The corporate governance in emerging markets is often opaque and sometimes bad.
  • Approximately 20% of portfolio company revenues comes from emerging markets and probably a higher percentage of growth. The revenue percentage from these markets will grow over the next five years.
  • During the recession, he was optimistic because he felt that emerging markets would ultimately drive global economic growth
  • Small caps U.S. stocks are more expensive than U.S. large caps. This is not true internationally. These are more volatile and you need a thick skin if there is an earnings miss. There are opportunities here and small caps should outperform by a few percentage points over time.
  • The one stock everyone should look at is Diageo, the world’s largest drink company with a great stable of brands. A lot of people consume alcohol and as people age they go from beer to spirits. There are growth opportunities in emerging markets. The profit dynamics are great and the company is well managed – good at allocating capital – and you can buy it a relatively good valuation of 10x gross cash flow. Unless you think there will be global prohibition, the stock should do well. It’s a good company with moderate long-term growth prospects and minimal financial risk.

Additional info from David Herro/Oakmark International Fund:

Why Japan and Why Now? – 12/16/2010

Oakmark International Fund Letter to Shareholders – 3/31/2011

Commentary on The Oakmark International and International Small Cap Funds – 3/31/2011

Oakmark International Fund – Holdings – 3/31/2011

More on Saban’s World-Class Football Process: Many Lessons for Investors

For those following my audio series on how to improve your investment process, I’m posting the following articles on Nick Saban’s football process. I think they contain numerous lessons on how to think about and construct a great investment process and this will let you do a deeper dive, if interested.

For Nick Saban, The Process Finally Has an End in Sight | Bleacher Report

Archibald: Saban ‘process’ could change Birmingham |

The Process: Saban’s blueprint has a name, but what exactly is it? |

The Nick Saban method of recruiting – ESPN



Stages to Achieve Poker Mastery – Similar to Investing

Howard Lederer is a co-founder and co-owner of Full Tilt Poker and a successful professional poker player. Per Wikipedia, he is, “Known as “the Poker Professor” because of his demeanor, analytical style and long history of wins.”

Lederer wrote an article where he explains the four stages of achieving poker mastery.

1.  Beginner’s Passion – “In the beginner’s mind there are many possibilities, in the expert’s there are few.” Shunryu Suzuki

He played 70 hours a week. He had no fear primarily because he was naive and did not realize the amount of skill his competitors had.

2.  The Student Emerges – “He is now forced to admit that he is at the mercy of everyone who is stronger, more nimble and more practiced than he.” Eugen Herrigel

He began a disciplined effort to study the game. At first, he was almost overwhelmed by the massive amount of technical knowledge that had to be absorbed and mastered.

3.  Expert Level is Achieved – “He who has a hundred miles to walk should reckon ninety as half the journey” Japanese Proverb

He had become an expert poker player but still found it difficult to deal with the high stress of tournament play.

4.  Poker, One Hand at a Time  – “If one really wishes to be master of an art, technical knowledge of it is not enough. One has to transcend technique so that the art becomes an ‘artless art’ growing out of the Unconscious” Daisetz T. Suzuki

This is Lederer’s current stage. He works hard to stay in the moment and trust his preparation.



New Audio: Ten Ways to Improve Your Investment Process – Introduction

Having a great investment process may be the most critical factor in becoming a successful investor.

This is part one of an eleven-part audio series on improving your investment process. It is based on a presentation I gave to the CFA Society of Columbus on May 19, 2011. The event was held at the Blackwell Center at The Ohio State University.

Here is the first audio recording:

Ten Ways to Improve Your Investment Process – Introduction

PDF of Presentation slides

Audio programs to follow on Ten Ways To Improve Your Investment Process:

  1. Know Your Outcome
  2. Define Your Process
  3. Don’t Focus on the Outcome
  4. Use Checklists
  5. Improve Your Search Strategy
  6. Manage Risk
  7. Manage Yourself
  8. Pay Attention to the Details
  9. Be Patient
  10. Continuously Improve

This is an experiment with using an audio format. Please provide feedback on what you think of both the format and the content.

If you want to follow along with the slides, they are available here. If you want to follow along by page number, please download the file into Adobe Reader and use its page numbers since numbers are not embedded in the slides.

CFA Society of Columbus Presentation

Yesterday, I had the honor of giving a presentation at the CFA Society of Columbus’ Professional Development Event. It was held at the Blackwell Center at The Ohio State University. It was a great opportunity to discuss investing and exchange ideas. I am attaching my slides in PDF form.

My topic was The Investment Process and I gave ten ideas on how to improve your investment process. There is not much detail in my slides but you can get the outline of my talk. I plan to give the details in coming weeks. I am convinced that improving your investment process is one the best ways to attain sustained good results.

Links of Interest – May 20, 2011

Investing rules of William Ruane | Adib Motiwala’s Blog

How to Value a Stock with Reverse DCF

The Latest from Richard Koo

Smart People, Dumb Decisions – Michael J. Mauboussin

Wait and Hope – Steve Romick’s presentation at the Value Investing Congress, May 3, 2011 – Includes a detailed write-up on CVS.

Annual Dalbar Study Shows Investors Are Still Behaving Badly » The 401(k) Fiduciary Advice Blog – On the average investor’s mind-boggling inability to capture market returns.