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On Money Managers

“Benjamin Graham was the rare academic who was both a theoretician and working practitioner. At a personal level, Graham was a caricature of the absent-minded professor, a devotee of the classics, a student of Latin and Greek, and a translator of Spanish poetry who could dress for work in mismatched shoes and who evidenced little interest in money. But intellectually his curiosity was unrivaled. When he graduated from Colombia in 1914, he was offered positions in English, Mathematics and Philosophy. He took the advice of the dean and went to Wall Street. He treated money management as a discipline as rigorous as the Euclidean theorems he had studied in college. Ultimately he became the father of a new investment movement.” As described by Roger Lowenstein.
Isn’t that your favorite financial nerd or what?

I find myself very lucky to be surrounded by money managers, to see them practice their craft and be able to learn from them.
I have worked with managers with different skills and different backgrounds, some using top-down strategies others bottom-up. Some working late, others preferring to start early. I found out that there is but one universal truth about money managers and it is that they all love to read.

As Warren Buffett said: “By the age of 10, I’d read every book in the Omaha Public Library with the word finance in the title – some twice.” Today, he still spends more than 6 hours a day reading.

There is no secret to becoming a great money manager; it takes hard work and a lot of curiosity. Curiosity, if not the most admirable trait in a person, one the most commendable characteristic a human being can have.

John Neff said money managers need, “Perseverance, sympathy for the woebegone, frugality, stubbornness and integrity, together with an inclination to flout convention and a penchant for rigorous analysis. “ He was maybe talking about money managers but this would be a good starting point for everyone.

In a nutshell, a PM job is to be curious about the world. From the impact of a new technology on an industry to the change of mood of the masses, they need to know it all, and nothing less than predict it.

PM need to have an unbiased view of the world. They need to understand geography, history as well as economics, politics, math, philosophy, and psychology. They continuously fight intellectual battles, battles against the market. Markets that are frenetic and unpredictable! Survival of the fittest is at its peak in portfolio management. One either performs or is dismissed.

To put it in perspective here is a little story about a well-known scientist. Newton lost all his savings, around one million and six hundred thousand British pounds (about $2 million) in the 1720 South Sea bubble.
Of his loss, Newton said: “I can calculate the movement of the stars, but not the madness of men”

The most famous of all, is of course Warren Buffett. Buffett’s job is to find companies with strong fundamentals, good management and easy to understand business model and invest in them. That’s it. That is all he does. Easy to understand yet so hard to replicate. $1000 invested with Buffett in 1965 would be worth 6 Million dollars today.

“I call investing the greatest business in the world because you never have to swing. You stand at the plate, the pitcher throws you General Motors at 47! U.S. Steel at 39! and nobody calls a strike on you. There’s no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it.” Warren Buffett

Others like Jim Rogers, Prem Watsa, Philip Fisher, Benjamin Graham, John Templeton, John Neff, Seth Klarman… are mostly unknown to the world. In their circles, they were/are not defined by their investment philosophy but by their consistency, patience, thoroughness and convictions.

I have certainly learned a lot from them all. From how to value a business to how to stay apart from the crowds. More importantly I have learned self-discipline, independent thinking and trying to overcome my own biases.

Finally, I have found in one of Martin’s Capital Management letters a very nice description of these exceptional people:

“I am particularly attracted to those who have the courage of their convictions, the willingness to stand apart from the crowd, and the chutzpah to question conventional thoughts championed by people in high places with minds that don’t match their elected or appointed position”.

So next time you meet a money manager don’t ask him/her what stocks to buy. Ask about the world! You’ll surely be surprised by what you learn.

Georges Boustany

PS: Here is an excerpt from The Snowball that explains Buffett’s success.

(His passion for money management) had led him to study a universe of thousands of stocks. It made him burrow into libraries and basements for records nobody else troubled to get. He sat up nights studying hundreds of thousands of numbers that would glaze anyone else’s eyes. He read every word of several newspapers each morning and sucked down the Wall Street Journal like his morning Pepsi, then Coke. He dropped in on companies, spending hours talking about barrels with the woman who ran an outpost of Greif Bros. Cooperage or auto insurance with Lorimer Davidson. He read magazines like the “Progressive Grocer” to learn how to stock a meat department. He stuffed the backseat of his car with Moody’s Manual and ledgers on his honeymoon. He spent months reading old newspaper dating back a century to learn the cycles of business, the history of Wall Street, the history of capitalism, the history of the modern corporation. He followed the world of politics intensely and recognized how it affected business. He analyzed economic statistics until he had a deep understanding of what they signified. Since childhood, he had read every biography he could find of people he admired, looking for the lessons he could learn from their lives. He attached himself to everyone who could help him and coattailed anyone he could find who was smart. He ruled out paying attention to almost anything but business- art, literature, science, travel, architecture – so that he could focus on his passion. He defined a circle of competence to avoid making mistakes. To limit risk he never used any significant amount of debt. He never stopped thinking about business: what made a good business, what made a bad business, how they competed, what made customers loyal to one versus another. He had an unusual way of turning problems around in his head, which gave him insights nobody else had.

Japan: The last 20 years

What is the first thing that comes to your mind when you hear “JAPAN”? Maybe you’re a gamer and you thought about Sony’s play station or is it you’re hungry and thought about sushi or did you think about a Samurai or a weird Japanese TV show?
I can tell you, economists think about deflation. And there is a good reason for that!

Japan has been in deflation for the past 20 years!


– Inefficient monetary policy
– Financial shocks from Asian crisis in the 1990s, tech bubble of 2000 and 2008 financial crisis
– Decrease in prices after the Japanese real estate bubble burst at the end of the 80’s
– Inflow of inexpensive goods from other Asian countries. To stay competitive Japanese businesses had to decrease their prices.

In a deflationary society, individual businesses cannot raise their prices. If they did their sales would suffer, as they wouldn’t be competitive anymore. Not being able to raise prices means profits will stall. And thus forecasting limited long-term profits, businesses will decrease their investments and keep hiring at a minimum.

In the same manner, households expecting no increase in wages and decreasing prices in the future, will decrease their consumption until prices are lower and lower. Thus limiting growth.

And that is what happened in Japan. Instead of investing, Japanese households and businesses saved their savings for future consumption. Furthermore, it is important to remember that household savings are banks’ liabilities. So banks not being able to lend and increase their assets, started buying safe Japanese government bonds. Meanwhile, a decrease in tax revenues and a growing spending that is needed to support an aging population, increased government debt substantially. In 2013, Japan government debt was 10 Trillion Yen with a GDP of 6 Trillion.

The whole economy was in a vicious cycle. Prices did not increase, sales and profits declined, wages stalled, consumers stopped spending, and prices continued to decrease.

This long-term deflationary trend had a psychological impact on the Japanese society. They got used to saving and investing in safe assets only. However for the country to get out of this deflationary spiral, Japanese people will need to spend and invest in riskier assets.

And that is why the Japanese central bank initiated a QE programs. By buying JGB, the government puts pressure on long-term nominal interest rates.
The goal is to keep interest rates low to stimulate spending. Which should increase inflation. But remember, it needs to be slow and stable inflation otherwise it would be devastating for the country.

If all goes according to plan everyone can live happily ever after. If not, inflation will eat savings, devalue the currency and send the stock and bond markets to perdition.

Georges Boustany

Energy, Food, Demographics and the Future of Humanity (Part 3)

Chapter 3- The role of natural gas

Like all commodities, oil has a limited supply. Oil is a mix of dead organisms, mud and sand. Add time and pressure and you get oil. In the 20th century, there was no shortage of theories as to when the world would run out of oil. What all these Phd people disregarded was human ingenuity and technological advancement. The 21st century brought new ways of extracting unconventional oil and supply now seems unlimited.

Natural gas is primarily made up of methane. It was usually a by-product of extracting oil. If no use was found for this gas it was re-injected into the well to increase pressure and facilitate extraction of more oil or liquefied and sold as Liquefied Natural Gas.

natural gas

Fossil fuels occur in the three states of matter: in solid form as coal; In liquid form as oil and in gaseous form as natural gas. Among the fossil fuels, natural gas emits the least CO2. However, some reports show that natural gas extraction creates small earthquakes and contaminates subterranean water. Natural gas should therefore be seen as a bridge between oil and clean energy. The ultimate step being solar and wind energy.

Due to its global availability, demand flexibility, low CO2 emission and relatively low extraction cost compared to other energy sources, natural gas will play a major role as an energy source in the next decades. Indeed, unlike oil, natural gas generally requires less processing for terminal use and therefore costs less than oil (In BTU terms, $1 of natural gas can obtain 200,000 units of energy (at a spot rate of $5/million BTU) compared to $1 of WTI oil which garners 60,000 units of energy (at a spot rate of $97/barrel))*. These favorable characteristics have enabled natural gas to penetrate many markets.

According to EIA the global sources of energy are:

Transportation: 94% comes from petroleum
Industrial: 40% from Petroleum and 40% from natural gas
Residential and commercial: 75% from Natural Gas
Electric Power: 50% from Coal, 20 % from Natural Gas, 20% from Nuclear

With my limited knowledge of power generation, I was able to find some future opportunities for natural gas: 1) In the industrial sector, through the conversion of coal-fired boilers to natural gas boilers.2) In the chemical industry as a growing source of hydrogen production for petroleum refining. 3) And a further transfer from coal based power generation to natural gas power generation in the power industry.

Due to its gaseous nature, natural gas is mostly delivered by pipeline. The implications is that different regions have different gas prices as gas is not easily transferable from one place to the other like crude oil. The price fluctuates around 4$ in the US, around 9$ in Europe and around 15$ in Asia.

Although there are large supplies of gas, outside the US the gas is concentrated mostly in three countries: Qatar, Iran and Russia. They are however still far from having the fracking technology to extract most of it.

Natural gas will without a doubt play an important role in the future of energy supply. It is one of the most economical ways of reducing CO2 emission and powering up the world. Surely, regulations will have to be implemented to ensure right practices. However, natural gas should be seen for what it really is: an economical way of reducing CO2 emission in the short term and switching to cleaner energy in the long term.

Georges Boustany


Energy, Food, Demographics and the Future of Humanity (Part 2)

Chapter 2- Life’s Recipe

All life on Earth is composed of the same basic ingredients: DNA, RNA, proteins and lipids. Proteins are made from amino acids. Lipids, which store energy, are made from carbon and hydrogen. DNA and RNA, the most basic building blocks of life contain phosphate. Unlike carbon and hydrogen that are abundant, phosphate is not infinite and cannot be substituted.

For thousands of years, farmers used organic fertilizers by spreading human and animal waste. With the exponential growth of the population, farmers had to switch to inorganic fertilizers to feed the growing number of people. Phosphorus which is mined from phosphate rocks became a vital ingredient to our survival. About 90 percent of the world’s known reserves are located in five countries: Morocco, Jordan, South Africa, the United States and China.
Inorganic fertilizers are often made of Nitrogen, phosphate and potassium. Inorganic fertilizer are one of the main reason the planet has been able to support the exponential population growth. Today it is estimated that almost half the population is fed by nitrogen synthetic fertilizers. We obtain nitrogen from the air, but we must mine phosphorus and potassium.

Nitrogen and Potassium are abundant throughout the earth. Phosphorus on the other hand is much scarcer. The vast majority of phosphorus compounds are consumed as fertilizers. This vital un-substitutable ingredient which is essential for life is rapidly being depleted.

uhavehumans pic

Morocco has the ultimate monopoly. They control 40% of world phosphate, one of the most important ingredients of life. Outside Morocco’s reserves, there is phosphate, estimated to sustain 100 years. However once those non-Moroccan’s reserves are depleted, Morocco will surely become one of the most sought of countries in the world. They will control everyone’s survival.

Thinking about a ‘‘phosphateless’’ world is certainly scary. Yet, whether estimates of reserves being depleted in 100 years are accurate or not, the real issue remains the same:
Is 10 Billion people too much of a burden for our blue planet?

Georges Boustany

Energy, Food, Demographics and the Future of Humanity (Part 1)

With earth getting close to inhabiting 8 Billion people – many of whom are demanding more food and energy than ever before – firms and governments are looking for new ways to manage the growth in demand. Yet, as some commodities like coal are replaceable by new energy techniques, others which are essential to all living mechanisms, are not. And while a revolution is happening in the energy sector, few technologies are really harmless.

Chapter 1- Demographics

Until the 19th century, our ancestors ate what they hunted; meat could not be stored so reproduction depended on the weather (a bad harvest meant fewer babies). Population growth was linear. The 19th century brought the industrial revolution which changed the way we saw food and energy. Food was now mass-produced, meat could be stored and wealth started to increase throughout the world. Life expectancy jumped from an average of 30yrs in the 18th century to 55yrs in the 1960s to 75yrs today. Population growth exploded from 500 Million people in the 16th century to 6 Billion in the 20th century.

Today 7 billion souls roam the earth (don’t try counting to 7 Billion it would take you 200 years). The world reached 1 billion by 1800, it reached 2 billions 130 years later and, it took it 30 years after that to reach 3 Billions. To go from 6 to 7 Billion it took only 12 years!


This extraordinary and maybe unnatural explosion in population supplemented with an increase in life expectancy has eaten into earth’s resources. The challenges of continually feeding and producing energy for such a large number of people have certainly put a strain on our planet.


Lately, fertility rates have been crumbling all over the world, women are having fewer babies, population growth is slowing and might even start to decrease by the end of the century. Developed countries like Germany and Japan (Japan sells more diapers for adults than for children; a testimony to how old Japan’s population is) are growing older and pressuring young generations to work more. The consequences of having an old population are economically and socially disastrous; health care costs become astronomical and innovation decreases with an older population. Should a reduced population be the norm or can earth feed us all at no cost?

Experts forecast that phosphorus, an essential element for life, used in fertilizers, is quickly being depleted with no substitute. Oil, which is more expensive and harder to find today than in the past, is set to be replaced within the next 100 years. Nuclear power is a cleaner alternative to oil until it is not. Solar farms face big challenges in terms of storage and costs that are still much higher than traditional energy sources. Natural gas is hailed as a saviour; however, the consequences of drilling it are still widely unknown. The world needs clean energy and it needs a lot of it!

Whether we end the century with 6 or 10 billion people, should not deter us from the righteous path: Clean and efficient excavation of food and energy constituents.

Georges Boustany

Thoughts on Apple

From being called the most valuable company in the world to being declared dead Apple is no ordinary company. Everyone has an opinion, but few differentiate between short-term and long-term expectations.
Without Jobs, Apple is just another tech company; albeit with an amalgam of great products from another time. However great products do not shield against technological evolvement, visionaries do. In the tech world the real cost of dwelling is extinction.


The timeline:

Phase 0: Apple with Steve Jobs is changing the world. Jobs is able to revolutionize how we listen to music, how we read online and how we use our phones. Like Jeff Bezos and Elon Musk, he is always in search of new realities.

Phase 1: After Job’s death, apple is still thriving. A year after Jobs’ death the stock reaches its all time high. Most think it is because Apple is this amazing company, but the truth is that it is because its competitors are so far behind that they are still trying to catch up to Job’s genius.
Meanwhile, expectations on Tim Cook and Apple continue to rise. Unsurprisingly with no genius at the realm, Apple is not able to deliver. No new life-changing products are introduced, mistakes are made and the stock starts to tumble. From September 2012 until April 2013, the price almost halves from 700 to 390.
Apple had failed to meet expectations and it got punished. Selling yields more selling until investors realize that: Ah Apple is actually still selling iPhones all over the world, there is no reason to sell and the stock rebounds a little. Investors are mixing short-term expectations with long-term expectations.

Phase 2: With no other company having a Steve Jobs, Apple still has the upper hand. The products that Jobs designed are still top-notch. The competition failed to surprise the world. They are just copying the genius’ work.
So we are in a phase where competition is playing catch up. It should be no surprise knowing that very few are able to do what Jobs did.
This is equilibrium; this is how statistically it should be. Steve Jobs was an anomaly. Most people are closer to monkeys than to Steve Jobs when it comes to bringing life to their visions.

Phase 3: Apple and its peers are copying each other trying to increase their share of the market with marginally better products. This is a return to equilibrium.

Phase 4: The tech world does not support equilibrium. A new Steve Jobs appears and does to Apple what Apple did to Blackberry. Sadly, prodigies are not abundant, they appear on rare occasions. In this buoyant world that craves for innovation the main cost to a tech firm is the opportunity cost: Having no visionary at the realm is more costly than having failed products.

Hopefully management will realize they are monkeys compared to Jobs. They should recognize that the most significant use of their cash is not to pay it as dividend or share buybacks as Carl Icahn requests but to spend it on finding a new anomaly, a young anomaly that will once again rejuvenate the company. There is no better use to their cash than to spend it on the only thing that can help Apple endure time: A Visionary.

Georges Boustany

Digging deeper into the Moat

The core of Buffett’s philosophy is buying companies with a strong competitive advantage or how he calls it: A moat.
Here’s a deeper look at moats, the different competitive advantages that companies can have and ways to confirm them.

Investing is about generating a sustainable rate of return over the long term: Being able to grow your savings at least at a higher rate than inflation. Gambling is never a good long-term strategy. You want to invest your savings in a well protected business, a business that will still exist when you decide to withdraw your funds. A moat is the wall that protects this business.

Some moats are easy to spot: Take for example Walmart. Due to decades of recurrent investments Walmart became one of the largest companies in the world. With its economy of scale, it is able to be the low price retail store. No competitor can offer what WALL-Mart has: this is its moat.

One of the best ways to determine companies with a competitive advantage is to examine their pricing power. A company that is able to increase its prices without sweating is sure to have a moat. Furthermore, being able to have a stable or growing market share is a clear example of a company with a moat. Examples of industries with stable market share are Pharmaceutical, Beverages, and Rating Agencies.

heritage stone wall

Let’s dig deeper into Walmart’s moat:

As I explained previously, a moat is a wall which protects a company. Walmart has built its moat over decades. It is now the low price retail king with more than 8500 stores. Due to its large size and economies of scale, this mega company can offer lower prices than its competitors. It can increase its prices and still have lower prices than any other retail store.
Few competitors will venture into a duel with the giant retailer. The fact is that due to its proximity, production scale and reputation for lowest prices, Walmart has an impenetrable moat. You can be sure that in 50 years it will still be the low price place to go.

Other types of competitive advantages include government contracts, licenses, patents and even sometimes extraordinary managers like Steve Jobs or Elon Musk (however this is only a temporary moat).

On another note, learning curves (the efficiency gained through experience), advertising Investments, and R&D/patents strategies—create high entry costs. As for reputation, limited pricing set by monopolies and excess capacity which leads to low prices— they influence the profitability of new entrants.

From a financial point of view, companies with strong competitive advantages have high ROIC, ROE and Return on tangible assets. They usually also have high margins due to their pricing power and efficiency. The lower their expenditure needs, the more free cash flow they have to allocate to dividends and share repurchase.

Here are strategies used by companies to achieve competitive advantage (Source: Gaining a sustainable competitive advantage by Jay Barney).

For a fragmented industry: consolidation by discovering new economies of scale or altering ownership structure.
For an emerging industry: first mover advantage, technological leadership, preemption of strategically valuable assets, and creation of customer switching costs
For a mature Industry: Product refinement, investment in service quality, process innovation.
In a declining industry: leadership strategy, niche strategy, harvest strategy, divestment strategy.
International industry: multinational opportunities, global opportunities, transnational opportunities.
Network industry: first mover advantage, winner takes all strategies.
Hypercompetitive Industry: flexibility, proactive disruption.

Finding companies with a moat is no easy task, it takes time and research. You must be willing to read anything and everything, pick up the phone, call companies, employees and visit the store… But if you’re willing to do the job, the rewards are as much educational as they are financial.

Georges Boustany