Jack Welch vs Jeff Bezos

Jack Welch vs Jeff Bezos

I am going to be in South Florida February 21-25 (Wednesday-Sunday). I will spend a few hours in Fort Lauderdale on Wednesday afternoon. I am attending a conference in South Beach Wednesday-Friday and then will spend Friday-Sunday in the Delray Beach area.

Get The Timeless Reading eBook in PDF

Get the entire 10-part series on Timeless Reading in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.


Seth Klarman Describes His Approach In Rare Harvard Interview

Seth KlarmanIn a rare interview with Harvard Business School that was published online earlier this month, (it has since been taken down) value investor Seth Klarman spoke at length about his investment process, philosophy and the changes value investors have had to overcome during the past decade. Klarman’s hedge fund, the Boston-based Baupost has one of Read More

I’ll try to organize reader get togethers while I’m in Florida, but I’m not sure when and where yet. (We may do a few in different locations depending on interest.) I’ve done these three times over the last four months in Los Angeles, Fort Lauderdale, and San Francisco, and I’ve really enjoyed meeting my readers. If you’re interested, please drop a line to my wonderful assistant Barbara at pa@imausa.com.

I created my article repository site (also known to some as a blog), ContrarianEdge.com, in 2004. When I was trying to pick its name I did a lot of soul searching. I was thinking, what’s the common thread among all of my articles? I realized that it’s my willingness to disagree with a popular opinion if my research leads me to a contrary conclusion. Thus Contrarian Edge.

That doesn’t mean I disagree with the common opinion all the time, not at all. It’s just that when I agree with one – which happens often, actually –there is little value in it: Love, hate, or indifference is already priced into the stock.

A lot of times I won’t have an insight into a business because I don’t understand it or because it’s too complex. GE is a great example today. I’m a value investor; I should be all over this stock that is making a generational low. Not at all. I looked at GE a half a dozen times over the years, and every single time I walked away without understanding the business or what it is worth.

To make things worse, despite GE’s being one of the most-admired companies in the US, I have always hated its culture. Jack Welch went into the corporate history books as the best American CEO ever. I’d argue that this history needs some serious rewriting. Welch built a company with a “beat this quarter” culture. Jack’s GE was not in the business of building moats and investing for the long run; he was in the business of beating quarters. In his book, Welch raved that from the early 2000s GE always beat Wall Street estimates. He was proud of how managers of one division were able to “come up with” a few more cents of earnings if another division fell short of its forecast. I kid you not – reread that sentence, three times. If I was at the SEC I’d investigating GE’s accounting.

GE played games with their earnings for a long time, but the reality that its cash flows couldn’t cover its dividend, which was supposedly half of its earnings, is what triggered a wake-up call for investors. GE is another reminder that it is incredibly dangerous to own a stock just because you like the dividend. Consistency of recurrence of dividend payments creates an optical illusion that the dividend will always will be there. Just think about it: GE’s dividend of 96 cents was half of what the company was expected to earn and it still couldn’t afford to pay it.

I’d argue that Welch is on the opposite end of the spectrum from Jeff Bezos. Bezos doesn’t even know how to spell quarterly earnings. In one of his interviews Bezos explained that Amazon makes decision years out. So the current quarter’s report reflects decisions Amazon made several years ago. I don’t want to own companies that are run by the likes of Welch, but we own a few that are run by the likes of Bezos. When I hear management praise their ability to beat last quarter’s earnings, I run.

GE was ultimately destroyed by enormous capital misallocation. They assumed anything they touched with Six Sigma, independent of the price they paid, would turn to gold. So they didn’t care how much they paid for acquisitions. (I’ll discuss the topic “death by acquisition”  next week in part two of this article.)

There is another lesson for me here. We always look for simplicity and transparency. If a company’s business is complex and opaque, we move on. One of the most important things in investing is what you do in between buying or selling a stock. After you buy it is just a matter of time before your initial assumptions come under fire. Maintaining rationality throughout your ownership of the company is paramount, and to do that you need to understand the business well. Thus (at least for us) the business cannot be opaque or overly complex. (We set an upper limit to the IQ required of us to understand the business.) So that’s why I have no opinion on GE shares today.

Once in a while, after we’ve done extensive research on a business we understand, I may have an opinion that is contrary to the market’s. In those few situations you can drive a truck between the stock price and what we believe the company’s value is, and this is when we dig in and become contrarians. Today’s article is about one of those instances.

Finally, I implore you, don’t let this article be the end point of your research. I talk to a lot of perspective clients whose portfolios are assembled based on “compelling” articles they’ve read on MarketWatch, Yahoo Finance, Motley Fool, or even in my emails (articles). This article represents our thinking today, not forever. If facts change, I’ll change my mind, and you may or may not find me writing about it (unless you are IMA client, then for better or worse you’ll get a fifteen-page quarterly letter).

This may sound harsh – I’m sorry – but I rarely reply to emails that ask, “What do you think about this company now?”  There is only so much time in a day, and I’d be answering these emails all day long. We never make a decision based solely on someone else’s research; that is always just a starting point for our own research. You should do the same. (You can read about that in this article.)

Article by Vitaliy N. Katsenelson, CFA - Contrarian Edge

Vitaliy N. Katsenelson, CFA, is Chief Investment Officer at Investment Management Associates in Denver, Colo. He is the author of Active Value Investing (Wiley) and The Little Book of Sideways Markets (Wiley).

His books were translated into eight languages. Forbes Magazine called him "The new Benjamin Graham". To receive Vitaliy’s future articles by email or read his articles click here.

Updated on

I was born and raised in Murmansk, Russia (the home for Russia’s northern navy fleet, think Tom Clancy’s Red October). I immigrated to the US from Russia in 1991 with all my family – my three brothers, my father, and my stepmother. (Here is a link to a more detailed story of how my family emigrated from Russia.) My professional career is easily described in one sentence: I invest, I educate, I write, and I could not dream of doing anything else. Here is a slightly more detailed curriculum vitae: I am Chief Investment Officer at Investment Management Associates, Inc (IMA), a value investment firm based in Denver, Colorado. After I received my graduate and undergraduate degrees in finance (cum laude, but who cares) from the University of Colorado at Denver, and finished my CFA designation (three years of my life that are a vague recollection at this point), I wanted to keep learning. I figured the best way to learn is to teach. At first I taught an undergraduate class at the University of Colorado at Denver and later a graduate investment class at the same university that I designed based on my day job. Currently I am on sabbatical from teaching for a while. I found that the university classroom was not big enough for me, so I started writing and, let’s be honest, I needed to let my genetically embedded Russian sarcasm out. I’ve written articles for the Financial Times, Barron’s, BusinessWeek, Christian Science Monitor, New York Post, Institutional Investor … and the list goes on. I was profiled in Barron’s, and have been interviewed by Value Investor Insight, Welling@Weeden, BusinessWeek, BNN, CNBC, and countless radio shows. Finally, my biggest achievement – well actually second biggest; I count quitting smoking in 1992 as the biggest – I’ve authored the Little Book of Sideways Markets (Wiley, 2010) and Active Value Investing (Wiley, 2007).
Previous article Mars Reconnaissance Orbiter In Standby Because Of A Battery Problem
Next article iOS 11.2.6 Jailbreak: Everything You Need To Know

No posts to display