Well that was quick!! See here April 19th 2017 piece Whitney Tilson Goes Long Staples
Excerpted from Whitney Tilson’s latest email
1) There are many downsides so openly revealing and discussing many of the stocks I own or am short (as I did last fall with my new short in Wingstop and again last week with my new long in Staples), the biggest two being commitment bias (defined here) and embarrassment when I’m wrong. I nevertheless do it for one HUGE (bigly!) reason: it can often lead to valuable additional information, insights and perspectives. Some investors eschew this – they think it can lead to mental mistakes like herd behavior and anchoring on recent, vivid data – but I embrace it because I think the benefits outweigh the downsides. Here are two recent examples:
- a) After sending around my updated slides recently on why I’m short Wingstop (see here), a Wall St. analyst who has WING as one of his top picks, emailed me last week and we had a nice conversation yesterday. Neither of us changed the other’s mind, but I found it illuminating to hear the bull case on a stock that strikes me as a no-brainer short.
- b) After my email last week in which I disclosed I’d established a new long position in Staples, my friend Kian Ghazi, who runs an outstanding research service called the Hawkshaw Specials Situations Report, sent me a copy of his report on SPLS, which he published last October. (If you want to learn more about his service, you can email him at [email protected].)
In it, he argues, based on extensive interviews (the “scuttlebutt research” that he’s known for), that Staples’ commercial business, a much better business than its retail stores and the main reason to own the stock, is going to come under immense competitive pressure due primarily to Amazon investing heavily in and ramping up Amazon Business and, secondarily, to a stabilization of Office Depot’s commercial unit. As a result, he sees “20-40% downside to 2018 EPS and 25-45% downside in the shares.” Here’s the first page of Kian’s report (shared with permission):
Kian’s report led me to do additional research, which largely confirmed his findings, so I sold the position. Such a quick turnaround is almost unprecedented for me, but it was actually an easy decision: if I couldn’t definitively prove that Kian’s thesis was incorrect, then I certainly didn’t want to own the stock.
It’s embarrassing to admit that my initial research was inadequate, but mistakes happen – or new information becomes available – all the time. The key, to be a successful investor, is to correctly incorporate the new information and make the right decision, even if it means reversing a decision you made only a short time before.
2) Speaking of decision making, I just finished the new book by my friend Cheryl Einhorn, Problem Solved: A Powerful System for Making Complex Decisions with Confidence & Conviction, and really enjoyed it. Here’s an excerpt from the review below:
The book presents a smart system — the AREA Method — for making decisions when the stakes are high.
Einhorn is an award-winning investigative journalist. She first developed the AREA Method during her work as a reporter, and now teaches it to her students at Columbia University as well as her consulting clients. AREA stands for Absolute, Relative, Exploration/Exploitation, and Analysis. Each takes its own approach to mine the insights and incentives of others, and prevent any mental shortcuts.
One step builds to another, breaking the research process into a series of easy-to-follow activities that are recorded in a journal. Your research stays focused, and you never lose sight of the driving purpose behind your decision.
3) Roger Lowenstein with a good article on CEO pay:
CEOs don’t need this much for motivation. Iger is a competent, responsible executive. He would get out of bed, put on his tie, and go to work for less. Directors ratify such arrangements because everybody else does it. At least in theory, boards monitor each individual category of pay, but they never challenge the structure of the pay machine itself. Directors follow self-interest (with director fees running well into six figures, who wants to rock the boat?). They are reinforced by consultants who know that complex packages justify their existence.
The outcome is that directors subscribe to a collective delusion that such arrangements are necessary. Compensation is determined in an echo chamber in which gargantuan pay is considered normal.
It wasn’t always this way. In 1978, CEOs earned 30 times the take of the average employee; now, according to the Economic Policy Institute, they get 276 times as much. These numbers betray an attitudinal upheaval. Time past, a CEO’s pay was set on a scale with others in the same organization. This was dubbed “internal equity.” But in the 1980s, a consultant named Milton Rock sold the idea of “external equity.” Now, as if CEOs belong to a tribe of superhumans, they are paid on a scale with only their “peer CEOs.”
4) A very interesting article on online pricing:
As Christmas approached in 2015, the price of pumpkin-pie spice went wild. It didn’t soar, as an economics textbook might suggest. Nor did it crash. It just started vibrating between two quantum states. Amazon’s price for a one-ounce jar was either $4.49 or $8.99, depending on when you looked. Nearly a year later, as Thanksgiving 2016 approached, the price again began whipsawing between two different points, this time $3.36 and $4.69.
We live in the age of the variable airfare, the surge-priced ride, the pay-what-you-want Radiohead album, and other novel price developments. But what was this? Some weird computer glitch? More like a deliberate glitch, it seems. “It’s most likely a strategy to get more data and test the right price,” Guru Hariharan explained, after I had sketched the pattern on a whiteboard.
The right price—the one that will extract the most profit from consumers’ wallets—has become the fixation of a large and growing number of quantitative types, many of them economists who have left academia for Silicon Valley. It’s also the preoccupation of Boomerang Commerce, a five-year-old start-up founded by Hariharan, an Amazon alum. He says these sorts of price experiments have become a routine part of finding that right price—and refinding it, because the right price can change by the day or even by the hour. (Amazon says its price changes are not attempts to gather data on customers’ spending habits, but rather to give shoppers the lowest price out there.)
It may come as a surprise that, in buying a seasonal pie ingredient, you might be participating in a carefully designed social-science experiment. But this is what online comparison shopping hath wrought. Simply put: Our ability to know the price of anything, anytime, anywhere, has given us, the consumers, so much power that retailers—in a desperate effort to regain the upper hand, or at least avoid extinction—are now staring back through the screen. They are comparison shopping us.
They have ample means to do so: the immense data trail you leave behind whenever you place something in your online shopping cart or swipe your rewards card at a store register, top economists and data scientists capable of turning this information into useful price strategies, and what one tech economist calls “the ability to experiment on a scale that’s unparalleled in the history of economics.” In mid-March, Amazon alone had 59 listings for economists on its job site, and a website dedicated to recruiting them.
Not coincidentally, quaint pricing practices—an advertised discount off the “list price,” two for the price of one, or simply “everyday low prices”—are yielding to far more exotic strategies.
5) An article in the Harvard Business Review on the four traits that set successful CEOs apart:
In the more than two decades we’ve spent advising boards, investors, and chief executives themselves on CEO transitions, we have seen a fundamental disconnect between what boards think makes for an ideal CEO and what actually leads to high performance. That disconnect starts with an unrealistic yet pervasive stereotype, which is shaped in large part by the official bios of Fortune 500 leaders. It holds that a successful CEO is a charismatic six-foot-tall white man with a degree from a top university, who is a strategic visionary with a seemingly direct-to-the-top career path and the ability to make perfect decisions under pressure.
…Our findings challenged many widely held assumptions. For example, our analysis revealed that while boards often gravitate toward charismatic extroverts, introverts are slightly more likely to surpass the expectations of their boards and investors. We were also surprised to learn that virtually all CEO candidates had made material mistakes in the past, and 45% of them had had at least one major career blowup that ended a job or was extremely costly to the business. Yet more than 78% of that subgroup of candidates ultimately won the top job. In addition, we found that educational pedigree (or lack thereof) in no way correlated to performance: Only 7% of the high-performing CEOs we studied had an undergraduate Ivy League education, and 8% of them didn’t graduate from college at all.
And when we compared the qualities that boards respond well to in candidate interviews with those that help leaders perform better, the overlap was vanishingly small. For example, high confidence more than doubles a candidate’s chances of being chosen as CEO but provides no advantage in performance on the job. In other words, what makes candidates look good to boards has little connection to what makes them succeed in the role.
But our most important discovery was that successful chief executives tend to demonstrate four specific behaviors that prove critical to their performance. We also found that when boards focus on those behaviors in their selection and development processes, they significantly increase their chances of hiring the right CEO. And our research and experience suggest that when leaders who aspire to the CEO’s office—87% of executives, according to a 2014 survey from Korn Ferry—deliberately develop those behaviors, they dramatically raise the odds that they’ll become high-performing chief executives.
The Four Behaviors
It’s rare for successful leaders to excel at all four behaviors. However, when we dug through our data, looking at the ratings our consultants had given candidates when evaluating them on fit for a CEO job and performance on 30 management competencies (for example, holding people accountable and the ability to motivate a team), we found an interesting connection. Roughly half the strong candidates (who had earned an A overall on a scale of A, B, or C) had distinguished themselves in more than one of the four essential behaviors, while only 5% of the weak candidates (who earned a B or C) had.
The behaviors we’re about to describe sound deceptively simple. But the key is to practice them with maniacal consistency, which our work reveals is a great challenge for many leaders.
1. Deciding with speed and conviction.
2. Engaging for impact.
3. Adapting proactively.
4. Delivering reliably.
6) In the same issue of HBR is a challenge to the idea that “management’s objective is, or should be, maximizing value for shareholders”:
These events illustrate a way of thinking about the governance and management of companies that is now pervasive in the financial community and much of the business world. It centers on the idea that management’s objective is, or should be, maximizing value for shareholders, but it addresses a wide range of topics—from performance measurement and executive compensation to shareholder rights, the role of directors, and corporate responsibility. This thought system has been embraced not only by hedge fund activists like Ackman but also by institutional investors more generally, along with many boards, managers, lawyers, academics, and even some regulators and lawmakers. Indeed, its precepts have come to be widely regarded as a model for “good governance” and for the brand of investor activism illustrated by the Allergan story.
Yet the idea that corporate managers should make maximizing shareholder value their goal—and that boards should ensure that they do—is relatively recent. It is rooted in what’s known as agency theory, which was put forth by academic economists in the 1970s. At the theory’s core is the assertion that shareholders own the corporation and, by virtue of their status as owners, have ultimate authority over its business and may legitimately demand that its activities be conducted in accordance with their wishes.
Attributing ownership of the corporation to shareholders sounds natural enough, but a closer look reveals that it is legally confused and, perhaps more important, involves a challenging problem of accountability. Keep in mind that shareholders have no legal duty to protect or serve the companies whose shares they own and are shielded by the doctrine of limited liability from legal responsibility for those companies’ debts and misdeeds. Moreover, they may generally buy and sell shares without restriction and are required to disclose their identities only in certain circumstances. In addition, they tend to be physically and psychologically distant from the activities of the companies they invest in. That is to say, public company shareholders have few incentives to consider, and are not generally viewed as responsible for, the effects of the actions they favor on the corporation, other parties, or society more broadly. Agency theory has yet to grapple with the implications of the accountability vacuum that results from accepting its central—and in our view, faulty—premise that shareholders own the corporation.
The effects of this omission are troubling. We are concerned that the agency-based model of governance and management is being practiced in ways that are weakening companies and—if applied even more widely, as experts predict—could be damaging to the broader economy. In particular we are concerned about the effects on corporate strategy and resource allocation. Over the past few decades the agency model has provided the rationale for a variety of changes in governance and management practices that, taken together, have increased the power and influence of certain types of shareholders over other types and further elevated the claims of shareholders over those of other important constituencies—without establishing any corresponding responsibility or accountability on the part of shareholders who exercise that power. As a result, managers are under increasing pressure to deliver ever faster and more predictable returns and to curtail riskier investments aimed at meeting future needs and finding creative solutions to the problems facing people around the world.
Don’t misunderstand: We are capitalists to the core. We believe that widespread participation in the economy through the ownership of stock in publicly traded companies is important to the social fabric, and that strong protections for shareholders are essential. But the health of the economic system depends on getting the role of shareholders right. The agency model’s extreme version of shareholder centricity is flawed in its assumptions, confused as a matter of law, and damaging in practice. A better model would recognize the critical role of shareholders but also take seriously the idea that corporations are independent entities serving multiple purposes and endowed by law with the potential to endure over time. And it would acknowledge accepted legal principles holding that directors and managers have duties to the corporation as well as to shareholders. In other words, a better model would be more company centered.
7) Check out the trailers for the new HBO series on Madoff, Wizard of Lies, starring Robert De Niro and Michelle Pfeiffer: here’s one and here’s another. It looks awesome!
