May 4-10 2012
Pacific Coast Business Times lists Lance Helfert in their elite Who's Who in Banking & Finance Publication.

Janurary 21, 2012
Lance Helfert gives his picks for the M&A market
 

December 1st, 2011
Dining out on restaurant stocks in December
 

November 20th, 2011
WCAM's President Lance Helfert, participates on a panel for The MIT Enterprise Forum and UCSB Technology Management Program.

November 18th, 2011
Lance offers his investment recommendations in the resturant sector.

September 2011

“Think what you do when you run into debt; you give to another power over your liberty.”

– Benjamin Franklin

The US debt ceiling crisis unfolded this summer like a bad telenovela. Each day Americans tuned-in to watch the villains, the posturing, the fighting, and the bad acting, and like any good soap opera, we loved to hate the drama. It was like gaping at a train strapped with 14 trillion pounds of debt heading toward the town square. Could it be stopped? Should it be stopped? Who is to blame?

And though the colossal wreck was avoided in the nick of time on August 2^nd, the 14 trillion pound train was not derailed and even continues to gain momentum. So we are left with the question;

How will the Runaway train be stopped?

Although we came together as a nation this summer to collectively hold our breath as the melodrama played out in Washington, we remain very far apart on solutions to resolve the debt problem. While any lasting resolution will have to commit to earnest reform in both government spending and tax collection, the idea of extracting new revenue from the rich “corporate jet owner” class in particular has been ruffling feathers following Warren Buffett’s op-ed in the New York Times in August. Mr. Buffett argues that the top priority for lawmakers “is to pare down some future promises,” but he then states that job number two is to “Stop Coddling the Super-Rich” through preferential tax rates. He says legislators “feel compelled to protect us, much as if we were spotted owls or some other endangered species” and urges higher taxes for the super-rich.

“There is no such thing as a good tax.” – Winston Churchill

West Coast Asset Management greatly admires Buffett’s investment philosophy and we value his perspective, so we read his opinion on increasing taxes for the rich with reflective interest. Public reactions to his op-ed have ranged from those applauding his courage and frankness, to accusations of self-serving motives, hypocrisy, senility, and even socialism. Yes, some have accused perhaps the most successful capitalist in our country of being a socialist. The unspoken agreement among citizens of all civilized societies is that taxes are flawed, unpleasant and unfair; no matter the race, social status, or point in history. So when one of the world’s wealthiest individuals and most successful investors argued that he and his $50 billion net worth are not taxed enough, it was received like a broken promise.

“A tax loophole is something that benefits the other guy. If it benefits you, it is tax reform.”

 – Russell B. Long, US Senator

Efforts to resolve the nation’s deficit problems have positioned “the rich” as a lightning rod in the political discourse on tax reform. Tax reform sounds like a good idea to everyone; the obstacle is that it means different things to different people. For conservatives, tax reform means rate reductions which incentivize investment and economic growth, while liberals define tax reform as expanding rates for the top income earners. When it comes to taxes, perhaps the only point of agreement is that when assessing what is “fair,” there can be no agreement.

“Be thankful we’re not getting all the government we’re paying for.” – Will Rogers

The point that Buffett made in his op-ed that had the most resonance with us was this: “people invest to make money, and potential taxes have never scared them off.” As entrepreneurial investors, we have long sung the refrain of investing in simple businesses with strong competitive advantage that trade at a discount to intrinsic value. We cling to this philosophy in good times and bad and have confidence that the long-term results will be rewarding. A smart investment is a smart investment.

If Buffett feels as though he is treated like an endangered species as one of the “super-rich,” it might be for good reason. A study by University of California Santa Cruz shows that the wealthiest 20% of Americans enjoy 85% of the nation’s wealth. That figure rises to 93% when home values are excluded from net worth calculations. In other words, 80% of the population is sharing just 7% of the nation’s privately held wealth. Therefore, those at the top become easy targets when the government looks for more money. Many argue that the wealthiest already assume an unfair burden of the nation’s taxes and point to a Congressional Budget Office report which shows that the top 20% of income earners pay roughly 87% of income taxes.

As previously stated, and as Buffett himself points out, taxing the ultra-rich (Buffett suggests raising taxes for only the top 0.3% of tax payers) can not solve the deficit trouble without also tackling the irresponsible spending. Buffett sites that the 400 wealthiest individuals had a combined income of $90.9 billion in 2008. If the federal government swallowed all of that income, every penny, this would cover less than 3% of its costs, or keep the government running at current spending levels for roughly 11 days. Just like teenager who gets into trouble with credit card debt, America too must learn to spend within its means instead of looking to rich moms and dads for rescue.

“This is a question too difficult for a mathematician. It should be asked of a philosopher.”

– Albert Einstein, on income taxes

Tax Old Dogs with New Tricks

Scott Adams, creator of the Dilbert Cartoon, wrote “How to Tax the Rich” in a January Wall Street Journal article and offered some refreshing ideas on how to generate new income from the upper class. He says “fairness is not so much about the actual distribution of loot as it is about the psychology of how you feel about it.” He then suggests exchanging with the rich increased tax revenue for various forms of “time, gratitude, incentives, shared pain and power.” For example, individuals in top tax brackets could get their own car pool lane, skip lines at the DMV, get an extra vote, or could direct a portion of their taxes to specified social services.

He describes these suggestions as “really bad ideas” intended only to get more creative and intellectual minds on the path to solving our problems in new ways. He says “the people who oppose taxing the rich are either rich or want to be someday…and the people who want to tax the rich are mostly the people who think Bernie Madoff is a good example of a rich person. I like any notion of adding some sense of choice to paying taxes.” We applaud this outside-the-box thinking. What if the rich had the same feeling of personal gratification paying income taxes as when giving to their favorite charity? What if they had the confidence that government institutions were managed as efficiently as their local food bank? There are many government services that we all revere and enjoy; the military, the judicial system, education, infrastructure, product safety, yet tragically paying taxes has the same level of satisfaction as giving to the bum on the corner.

“To tax and to please, no more than to love and to be wise, is not given to men.”

– Edmund Burke, 18^th Century

Warren Buffett closes his op-ed with “it’s time for our government to get serious about shared sacrifice.” We take this sentiment at face value and appreciate his commitment to seeking solutions for the country’s problems. Americans are entrepreneurial, generous, and patriotic but are left with a lingering sense of injustice at tax time. However, if the sacrifice returned some level of psychological compensation in the form of fairness or efficiency, taxation would be a much less bitter pill to swallow. This newsletter is peppered with three hundred years of aggravated comments on taxation. It is unlikely the tax fairness impasse will be resolved anytime soon. However, Americans are also known for their ingenuity and creativity and it is time to apply it to fixing problems and leave the drama for the soap operas.

August 2011

In the Facebook movie, The Social Network, one of the original investors asks the question, “A million dollars isn’t cool, you know what’s cool? … A billion dollars.” Now, less than a decade after inception, Facebook is looking very cool indeed with a projected public offering in the neighborhood of $100 billion and perhaps the most anticipated IPO since Google.

The internet music company Pandora and the professional networking site LinkedIn each had IPOs this spring at nearly $3 billion and $9 billion valuations respectively. In addition to Facebook’s expected IPO in 2012, Groupon, Living Social, and Zynga have all filed paperwork declaring their intentions to make a public offering in the near future. Despite high national unemployment and a ubiquitous sense of economic gloom, the prospect of public investment in the internet social media movement has resulted in a frenzy of excitement not seen since, well, the last internet bubble.

While bubble speculators debate whether or not there is a bubble, entrepreneurial investors let the logic of fundamental analysis guide them to temper hysteria and identify sound investment opportunities. Each new internet company must be evaluated in the same way any potential investment is evaluated; on its own merits. In that way, the current frenzy looks less like a bubble, and more like a handful of potentially over valued companies. Rather than one giant industry-wide bubble, like we have experienced in the past with housing or the internet, this social media phenomenon appears to be closer to what one might witness when watching children play with bubbles on the playground; many individual bubbles will pop on their own with little or no economic reverberations, while a few float away.

“Like” This

As Yogi Berra once wisely observed, “the future isn’t what it used to be,” and, right now, the future is internet technology; effortlessly connecting users to friends, colleagues, commerce, discounts, food, music, news and entertainment. Lending further credence to the movement, in July, President Obama held a Twitter town hall meeting. During a recent coworker meeting in our office, a round of hands showed that nearly everyone had a Facebook page. One of the holdouts, despite strong reservations, volunteered to start a page and share the experience for this newsletter. She explains,

Because my primary concern was privacy, I initially spent time adjusting the settings to be as restrictive as possible without defeating the whole concept of social networking. Another concern was how time consuming it might be: spending hours looking up old classmates and coworkers. I found others to be exceedingly helpful when asking for advice, tips or their own personal Facebook experience. Ask a coworker for help with spreadsheet data entry and he’s too busy; ask him to show you how to “tag a photo” and he suddenly has time. With social networking, it is only fun if everyone is playing the same game. Friends and family were thrilled that I finally arrived at the party.

As the above account illustrates, the public’s relationship with social media is highly personal and familiar. Most have made connecting to social sites as routine as checking email or grabbing lunch. Therefore, the prospect of investing in a stock that is well understood and deeply associated with daily life is very enticing, and clearly more exciting than, say, the next discount clothing company public offering. If the world was run by 7 year old boys, and the company responsible for the current toy action figure craze was going public, we would likely be witnessing a similar level of mania.

This frenzy was perhaps most visible in the wild price fluctuations of LinkedIn, the first social networking site to go public. Trading opened at a price of $45 and from there the stock nearly tripled to $122 before closing its opening day at $94. Subsequent closing prices dropped to the low $60s in June and have climbed again to over $100. In the July 25th issue, Fortune magazine explains that real estate agents and luxury car dealers sense a “boomlet” in Silicon Valley (where LinkedIn offices are located) and are anxiously waiting for a windfall when employee shares vest in the coming months.

Back to Basics: Signs of a Strong Company

When evaluating what to buy, entrepreneurial investors look for specific strengths that suggest a company of quality. These criteria include a simple business model, wide competitive advantage, recurring revenue, a healthy corporate culture, and low reinvention risk among others. If a company stacks up well against these first tests, we are then ready to perform a more comprehensive financial analysis. With these qualitative factors forming the basis of the inspection, we are able to deconstruct the current bubble hysteria surrounding the social media internet companies. For example, Living Social and Groupon provide a similar online service of offering discounts at local merchants (narrow competitive advantage), yet they have no inventory risk and low capital requirements.

Similarly, Facebook attractively sits with a strong revenue base, low inventory risk, and a near monopoly of the social networking environment. But holds on market share are exceedingly tenuous, as Friendster and MySpace have proven. The average Google user may (or may not) remember that Lycos and Yahoo were the seemingly unassailable leaders of internet search services in the very recent past. And now Google has launched a competitor to Facebook with the service, Google+. As Mark Zuckerberg’s character explains in the The Social Network, “Even a few people leaving would reverberate through the entire userbase. The users are interconnected. That is the whole point. College kids are online because their friends are online and if one domino goes, the other dominos go.”

Using established quality checks, some new internet companies are extremely appealing while others are not. Yet the bubble debate stubbornly continues to group all the tech companies together while viewing the current events with the same lenses that were used during the last internet bubble. One overpriced stock does not sink all boats.

The housing bubble in the 2000s and the internet bubble of the 90s were largely a middle class phenomenon. Wide-spread public participation swelled until the “pop” and the echo boomed across the whole nation. Today’s phenomenon, however, is distinctly different. Original Facebook investor Peter Thiel convincingly argues that the current so-called tech bubble lacks some fundamental elements of bubbles past. Namely, because most of the new companies are not yet public, at this point only venture capitalists have actual money at stake. He states in a New York Times article in June, “much of the bubble talk surrounds five companies: Groupon, LinkedIn, Zynga, Facebook and Twitter…five companies do not make a bubble.” Today, while there is not yet mass participation, there is mass enthusiasm which makes fundamental evaluations and “strong company” tests all the more vital.

FOMO: Fear of Missing Out

In a recent opinion article in TechCrunch, a leading industry publication, Mark Suster states, “What I believe is happening is that private-market investors are getting ahead of themselves for FOMO: fear of missing out.” This results in a disconnect between price and value. Perhaps the most fundamental principle of value investing is to resist the temptation to allow emotion to guide buying decisions and to instead buy when price represents an adequate discount to value.

Instead, by our estimation, prices for social media companies in general are at a premium to value; complicated by the fact that so much of their value is influenced by the anticipation of growth in future earnings. For example, LinkedIn has a $9 billion valuation with just $243 million in 2010 revenue; Groupon’s IPO is projected between $20 to $30 billion with just $713 million in revenue last year; online gaming site Zynga has an estimated $20 billion value with $593 in revenue, and Facebook’s $100 billion valuation is supported by $2 billion in revenue.

In fact, for the price of Facebook at its projected IPO value, one could own all of the following companies: Starbuck’s, Fed Ex, Hershey, Molson Coors, the New York Stock Exchange and Clorox. Yet while a stock’s valuation may resemble a floating bubble, it should not let one conclude that the company is not worthwhile or that the profits are not real. Similar to the recent technology bubble, we have no doubt that a number of recent and future internet start-ups will be wildly successful and make investors money. The problem we see is that the current valuations already assume extraordinary future success for years to come and this simply can not be true for all start-ups. In this highly emotional time, it is foolish to speculate which companies will weather the winds and which will “pop” early. However, it is always wise to apply time-tested fundamental tools of analysis to determine “strong” companies, with robust cash flow, resilient business models, and solid dividend yields that are also reasonably priced.

July 8th 2011
Stocks to own going into the next week featuring picks from West Coast Asset Management’s President Lance Helfert.

July 2011
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Summer 2011
Giving Back: WCAM shares their entrepreneurial approach to socially responsible investing.