In light of Exxon Mobil’s earnings announcement and continued capital expenditure cuts due to the sinking price of crude oil, I thought it would be a good time to revisit the subject of capex.
Warren Buffett in his 1989 Chairman’s Letter, stated the importance of ongoing re-investment in a business in order for it to continue to grow and remain competitive.
Capital outlays at a business can be skipped, of course, in
any given month, just as a human can skip a day or even a week of
eating. But if the skipping becomes routine and is not made up,
the body weakens and eventually dies. Furthermore, a start-and-
stop feeding policy will over time produce a less healthy
organism, human or corporate, than that produced by a steady
diet. As businessmen, Charlie and I relish having competitors who
are unable to fund capital expenditures.
I’ve heard capital expenditures referred to as the seed corn of future profits and the importance of investing an amount roughly equal to a company’s depreciation on an ongoing basis is vital to the long-term health of that enterprise.
Earnings this year for the S&P 500 are expected to decline approximately 8%, but one way to earn more in a flat or declining revenue year is to curtail the amount of spending necessary to maintain and replace plant and equipment. Short-term decision making that helps the company meet quarterly expectations can ultimately hurt shareholders the long-run.
Barry Ritholtz haas a great piece on Bloomberg.com about how active management is failing to keep up, much less beat passive management. I’ve often wondered having spent about 20 years trying to produce as much alpha as possible in a short amount of time (AKA trading) if there is less alpha to be created now that everyone has instantaneous access to the same information.
There was a time when having a Bloomberg terminal presented opportunities to make very easy profits just by receiving news before other traders, but since Regulation FD and Yahoo Finance those opportunities no longer exist.
Internet has leveled the playing field: How much information that once was the province of a select few is now in the hands of all?It was a huge game-changer when Yahoo message boards begin to fill up with posts from people doing legwork on individual companies. When someone reported that XYZ Tech’s employee parking lots were filled with cars 24/7 — including weekends — anyone paying attention understood that business was booming and that sales were going to beat investor expectations. For the few who grasped that, this was a period of large trading profits.This advantage exists only when a small number of people know what a large number of people are going to find out too late to act on. When everyone knows, the advantage disappears.
For his take on the reasons why active money management is failing to beat their benchmarks follow the link.
Source: Why Active Management Comes Up Short – Bloomberg View
The holders of the Sequoia Fund are adding insult to injury. The large Valeant Pharmaceuticals position held by the fund can’t be liquidated in an orderly manner so the fund holders who would like to exit are receiving shares of other holdings instead of cash.
Valeant Pharmaceuticals has gone from darling to pariah in less than a year. They’ve finally jettisoned the CEO, but are now facing off with bondholders over a technical default for not filing timely financials.
Investors can learn a great deal from the lesson. Financial engineering, serial acquisitions, and an aggressive management leads to disaster. Throw in a healthy dose of debt to pay for the growth and you have a powder keg ready to explode at the first sign of downturn.
Source: Sequoia fund gives departing shareholders stock instead of cash
If you’re even a slightly above average investor who spends less than they earn, over a lifetime you cannot help but get rich, if you are patient.
Yale made 93% a year on venture capital in the past two decades. Warren Buffett is buying entire companies instead of investing in common shares. Are two of the world’s best investors saying something with their actions?