Circle of Competence Issue #59
QUOTE OF THE WEEK
"The stock market is filled with individuals who know the price of everything but the value of nothing." - Phillip Fisher
FOOD FOR THOUGHT
John Hempton, a hedge fund manager at Bronte Capital, wrote a tough opinion piece on Mattel and their product deficiencies that have been the lead cause of many baby deaths. His opinion as to the ultimate cause of the product deficiency? Leverage used for buybacks and increased shareholder returns. In a dying business like the toy industry, what was the rationale behind levering up the company to buy back shares? This seems to me to be a very bad blunder on management's part and shows a complete lack of second order thinking. I completely understand a company like Apple doing this, but in a business declining year over year for 5 years? The situations change but the lesson remains the same: when companies employ leverage imprudently, you find out that 'decent' people can get put into tough situations and turn out not to be so decent after all, as seen in both the Valeant and Mattel examples above.
This is an oldie but a goodie. I've written about free trade here on the blog and will admit that I'm an ardent free trade supporter. Though I've never thought much about needing a solution to the trade deficit problem, Buffett proposes a novel market-based solution to the massive trade deficits we've been running for decades. I may have missed it, but has a market-based solution been floated in either liberal or conservative circles since this article was written? Seems like today's focus on trade is mired in protectionist tariffs vs. absolute free trade rhetoric, but I could be missing something. Regardless, this piece is worth reading and thinking about... it may just hold the key to bipartisanship on trade in the future.