Guru Commentary – 2005

April 5, 2006

A summary of what some of my favorite investment gurus said in their 2005 Quarterly reports.

2005 Q1 Q2 Q3 Q4
Cash balances /Opportunities / Valuations Some high (Clipper, LongLeaf and Wietz);others retain their usual low cash(Bill Miller says, “No point holding cash @ 2%) Dodge & Cox has only 6% in cashValuations are not demanding; just about right. Slightly more opportunities than Q1. But, not much excitment and notthing bad either. “For the first time in two-and-a-half years all three Funds have cash below 10%…” and “…we are more optimistic about our portfolios than we have been in over two years…”
[Longleaf]finding things to invest in. [Dodge & Cox]”…now we are getting excited” [Weitz]
still finding things to invest in. Opportunities from globalization. Cash balance is about 5% [Dodge & Cox]2005 was stable and 2006 appears to be a generally positive environment as well. Real-estate might cool, and there’ll be scary headline, but on balance things look fine. Fund underperformed the S&P for 2005, but underlying values increased.
Other Hurricane Katrina in New Orleans affected Q2 for some firms; but the market seems to have shrugged it off even though 400,000 job losses are expected and a loss of over $30 billion. xxxx xxxx
Market Despair amidst good profitability xxx xxxx xxxx
Misc predictions Long rates will go up at some point, pushed by short rates (Wietz)Miller thinks the Euro is overvalued xxx “Three long-term trends appear to be pushing the world economy into a fertile and productive period” (Tech, Globalization, & strong U.S. economy)
[Dodge & Cox]
“Real-estate might cool, and there’ll be scary headline, but on balance things look fine ” [Weitz]
CPI (Yr/Yr) 3.1% 2.5% 4.6% 3.4%
Unemployment 5.2% 5.0% 5.0% 4.9%
Gold $420 $440 $495 $500
Fed Funds 2.63% 3.04% 3.62% 4.16%
S&P (Qtr) -2.2% +1.4% +3.6%
S&P Yr/Yr 6.7% 6.3% 12.2% 4.9%

Bill Miller [Q1 report], quotes Sir John Templeton (though he isn’t sure if he’s really the source), speaking of bull markets. They are: born in Pessimism (2001-2002)grow in Skepticism (2002- ???)mature in Optimism die of Euphoria.

Why is Microsoft failing?

April 1, 2006

The title is supposed to be tongue-in-cheek. Gates is the richest guy in the world. His partners are among the richest. Microsoft (MSFT) created thousands of employee-millionaires. MSFT produces a net profit, of about $150,000 per employee per year. Over the last five years revenue and income have grown about 10%, which is twice the growth of US GDP. If only we could all fail like this!

The kernel of truth is that MSFT is growing slower than it once did. Instead of today’s 10%, the late 90’s saw it grow 20-25%. Net profit per employee was once more than double today’s figure. [The stock has been flat for a while, but that’s “Mr. Market”.]

MSFT’s has three profitable businesses that have long been central to MSFT:
Operating systems for PCsOffice s/w [Word/Excel/etc.]Servers and Tools [Visual Studio etc.]The first two dominate their market, with little market share left to be grabbed from others. In the hands of an ordinary company, these might have declined, being eaten by Linux and Open-Office, respectively. Yet, MSFT grows them around 5% a year. Servers and Tools got hit for a while by the Java wave, but are growing vigorously again.

However, the criticism is not levelled at these mature business-lines. The real criticism is: why aren’t they doing something new? Why did AOL take a huge chunk of market-share, with MSN playing catch-up and losing money? Why did Yahoo bring out the first good Web-directory? Why did Google bring out the first good Web-search?

In other words: why isn’t Gates the guy with all the ideas? how come someone else gets good ideas now and then?

To be continued…

[Given the title of the blog, I figured I needed a software-related post. So there.]