Warren Buffett released his letter to shareholders this morning. I break it down with my thoughts and go over some of the key highlights.
 
The full letter can be found here: http://www.berkshirehathaway.com/2018ar/linksannual18.html
 
If you'd like to connect with me regarding the letter to discuss more, feel free to reach out!
 
Connect with Eric Schleien:
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#51: 2018 Berkshire Hathaway Letter to Shareholders

Eric Schleien discusses value investing, rational investment analysis, and vital mental models.

Business

Investing

Careers

Management & Marketing

Business News

Shopping

Welcome to another episode of the Intelligent Investing Podcast with your host, Eric Schleien. In this insightful episode, we have the pleasure of speaking with Ben Kogut from Rooster Equity. Ben is a seasoned commercial real estate investor who has raised over $110 million through syndications and has a wealth of knowledge to share about triple net lease investing.
Key Takeaways:
Ben Kogut's Journey: From starting in commercial real estate in 2005 to becoming a partner in a mid-sized syndication firm and eventually founding Rooster Equity.
Triple Net Lease Investing: Understanding the benefits and intricacies of triple net lease properties.
Using AI in Real Estate: How AI and data play a crucial role in evaluating investment opportunities.
Raising Capital: Strategies for building investor relationships and successfully raising capital for real estate projects.
Market Analysis: Ben's insights on the current real estate market and future trends.

About Ben Kogut:
Ben Kogut has been involved in commercial real estate since 2005 and has specialized in acquiring retail, medical, and industrial properties. His expertise in syndication has led him to raise over $110 million, and he recently founded Rooster Equity, a company focused on raising private equity capital for commercial real estate assets.
Listen to the Full Episode:
In this episode, Ben shares his journey, strategies, and valuable insights into the world of commercial real estate investing. Whether you're a seasoned investor or just starting, this episode is packed with practical tips and expert advice.
Watch the Full Episode on YouTube here
Connect with Ben Kogut:
Website: Rooster Equity
LinkedIn: Ben Kogut on LinkedIn

Connect with Eric Schleien:
Website: Eric Schleien
LinkedIn: Eric Schleien on LinkedIn
Twitter: @EricSchleien
Intelligent Investing Podcast: Podcast Link

Subscribe & Review:
If you enjoyed this episode, please subscribe to the Intelligent Investing Podcast on Apple Podcasts, Spotify, or your favorite podcast platform. Don't forget to leave a review!
 
For more episodes and expert insights, visit the Intelligent Investing Podcast. Connect with Eric Schleien on social media and stay updated with the latest episodes and investment tips.

#174: Triple Net Lease Investing Secrets with Ben Kogut

In today's episode, I sit down with my buddy Robbie Kramer to discuss the ultimate value investment, relationships. Last week, I had the pleasure discussing investing on his show. You can listen to the episode, here. If you prefer to watch it on YouTube, you can watch the episode, here.
The most important relationship you'll ever invest in is probably who you end up marrying. Choosing quality romantic partners is Robbie Kramer's specialty. It was an absolute joy to sit down with him and chat all things relationships, romance, and dating.
 
Watch this episode on YouTube

 
Transcript
For a transcript of today's episode, click here. 
Show Notes
[00:01:18] Marrying the right person
[00:02:35] People who are successful in their careers yet stunted in their relationships
[00:10:05] Common Mistakes Men Make
[00:13:07] Instagram and Online Dating
[00:14:53] Three Prompts for Dating Profiles
[00:19:56] Socially Awkward Men
[00:22:29] “...Some of these guys are worth a hundred million dollars, running big funds, very wealthy. Social, but either they're still single or they have a wife who they're pretty much like in an emotionally abusive relationship, like they're just not happy. If they're very honest with themselves, they're not happy with their romantic life, and that stuns me how you could be actually fairly socially incompetent.”
[00:23:35] Unhappy Relationships
[00:24:51] Social Freedom Exercises
[00:27:41] The Wealthy Executive Who Hides Behind Masks
[00:33:14] Optimizing your life
Links From The Episode
Profile Prompts
Photo Feeler

Get In Touch With Robbie Kramer
Instagram
Inner Confidence
The Leverage Podcast

 
My Other Podcast
Hey All! I’ve started a second show completely devoted to the field of Ontology which is another huge passion of mine. Please check out The Eric Scheien Podcast which is an ontological podcast where I break down distinctions of human consciousness as an access to enhancing performance.

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Email: IntelligentInvesting@gmail.com

#173: The Ultimate Value Investment - Robbie Kramer

Summary
In this episode, I break down the current paradigm for shareholder activism, speak to the new model that I invented which is vastly superior both in results and reliability. We discuss the myth of "if it can't be measured, it doesn't exist", the myth around "soft skills", and how people often ask the wrong questions or measure the wrong stuff due to perverted influences by HR departments.
If you're interested in more discussion of the new model for shareholder activism I developed, see the following links below:
A New Model For Shareholder Activism (Podcast)
The Proxy Activism Project
A New Model For Shareholder Activism (Blog)
A New Model For Shareholder Activism (YouTube)
A New Model For Shareholder Activism (Eric Schleien / John King)
Netflix, Sears, and Tribal Leadership (Eric Schleien / John King)
How To Keep Large Companies Innovative (Eric Schleien / Scott Forgey)
Eric Schleien discussing Tribal Leadership
Eric Schleien discussing Activist Investing
CBRE Case Study – Tribal Leadership
Comparing Transformational & Transactional Leadership (Eric Schleien)
Cultural Issues In The Hospital Industry (Eric Schleien)

New Podcast
Hey All! I’ve started a second show completely devoted to the field of Ontology which is another huge passion of mine. Please check out The Eric Scheien Podcast which is an ontological podcast where I break down distinctions of human consciousness as an access to enhancing performance.

HELP OUT THE PODCAST





If you like The Intelligent Investing Podcast, please consider leaving a rating and review on Apple Podcasts. It takes less than 30 seconds to do and makes a huge difference! You can also join the Facebook page!      
You can subscribe to the podcast on the following platforms:
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TuneIn
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Email: IntelligentInvesting@gmail.com
 

#172: The New Model For Shareholder Activism; The BS Myth Around ”Soft Skills”; Measuring The Wrong Stuff

NEW PODCAST
Hey All! I’ve started a second show completely devoted to the field of Ontology which is another huge passion of mine. Please check out The Eric Scheien Podcast which is an ontological podcast where I break down distinctions of human consciousness as an access to enhancing performance.
Summary
I received this email last year about Trupanion and wanted to address some points made. The entire email is here:
Hi Eric,
 
I come in peace as a Chester County native who still very much prefers Wawa over Sheetz, despite living in Pittsburgh. You seemed very open to hearing counterpoints, as per your podcast on TRUP, so I wanted to give you some things to chew on. 
 
You made two points (I'll summarize): 1) It is justifiable to exclude development expenses from IRR and 2) there are "no accounting shenanigans" going on. 
 
I would love, then, to hear your thoughts on the following:
 
Let's first level set with the IRR methodology: the company allocates fixed expenses between Subscription and Other based on their relative revenue contributions. This includes a pro-rata allocation of G&A; expenses. 
 
So let's get into G&A; expenses -- what's in there? Typical back office stuff, finance, accounting, etc. But also a couple million bucks of rental income related to subleasing of the company HQ. Per their 2019 10-K: "The change was primarily due to a $3.1 million increase in compensation expenses, a $0.8 million increase in professional service fees, and a $1.5 million increase in depreciation expense mainly due to owning our home office building since August 2018, partially offset by a total of $2.6 million in savings from additional lease income and less rental expense."
 
The rental income has the effect of reducing reported G&A; (i.e. it's netted against expenses). So my first question for you is as follows: if you firmly believe development expenses that aren't related to acquiring new pets are justifiably excluded from IRR calculations, how are you comfortable with several million dollars of sublease income that's clearly not related to acquiring subscription pets benefitting IRR?


 
Next up is their pet-food VIE. Also from the 10-K: The Company has also entered into a series of agreements to provide ancillary services to the variable interest entity at cost. The Company provided $1.2 million and $1.4 million of these services for the years ended December 31, 2020 and 2019, respectively, which were recorded against its operating expenses.
 
So TRUP provides back office support to the VIE and reduces its reported opex to account for the compensation for providing the services. 
 
So the next question is the same as the first: Would you bucket this in line with "development expenses" as being rightly excluded from IRR, or are you OK with the company getting the tailwind from the expense reduction?
 
Now here's where the situation becomes a bit more nefarious. The VIE has received a total of $9.5 million of funding from TRUP, including $7.0MM of preferred capital and $2.5MM from a line of credit. Think for a minute about what's going on here: the company pushed $9.5MM of cash down to another legal entity, and now reduces its reported OpEx for services provided to the VIE, with the payments being made with money TRUP used to finance the VIE. Money coming out of one pocket and right into the other. 
 
Third question: Do you think this is an accounting shenanigan?
 
Lastly, management knows PAC is getting out of hand and pulled a fast one in the first quarter to make it look like they've got things under control. Aren't you the slightest bit curious how they're going to hold PAC at $280 for the balance of this year in an increasingly competitive environment?
 

Management casually slipped in the following comment during the earnings call: "We expect stock-based compensation to be around $6-$7 million per quarter for the remainder of the year." Coupled with the $8.4 million of SBC already booked in 1Q'21, TRUP is on track to recognize $28 million of SBC expense in 2021. Putting this figure into perspective, it is 3x higher than last year's $8.9 million of total recognized SBC expense. Last year SBC expense was 1.8% of revenue; this year it will be 4.1%.
 
What does SBC have to do with PAC and IRR? 
 
Well, for the purposes of calculating PAC (a key input into the IRR calculation), management excludes SBC because it's non-cash. By upping the portion paid in the form of equity, management is artificially reducing the level of PAC incorporated in their IRR calculation. in 1Q'21, fully-loaded PAC (including SBC) was $328/pet, representing 22.4% y/y growth. SBC embedded in Sales and Marketing was $40/pet -- leaps and bounds above historical levels ($20/pet). See the charts at the bottom of the email. Had SBC been more in-line with historical levels ($20/pet), PAC (for the purposes of the company's IRR calculation) would have been ~$310...much closer to the full year figure I was expecting.
 
This is all a long winded way of saying, if you were to run the company's IRR calc with PAC of $315 or above, there is absolutely no way they would be within the boundaries of their self-imposed 30-40% target range. The only reason they'll print numbers within range this year is a result of their increased use of SBC in compensating their employees.  
 
The table below illustrates Restricted Stock grants (not expense, but grants) since 1Q'19. The grants in the most recent quarter -- $66 million! -- jump off of the page and explain why SBC will be elevated in the quarters to come. But don't just take my word for it. From what I can tell, we both respect Buffett a lot, and here's what he's got to say on the topic: "I have no objection to the granting of options. Companies should use whatever form of compensation best motivates employees -- whether this be cash bonuses, trips to Hawaii, restricted stock grants or stock options. But aside from options, every other item of value given to employees is recorded as an expense." 
 
 When it comes to SBC, RSUs are a functional cash equivalent, so there is no legitimate justification to exclude the related expense from any measure of profitability -- GAAP or otherwise.  



 

 

 
Perhaps using RSUs makes sense for the time being given the extreme overvaluation of TRUP. Management can handsomely compensate employees and gloss over the dilutive impact on the company's financials. But what happens when shares are back at $30, but territory partners are expecting their compensation to remain flat in nominal terms? Shareholders will either be 1) massively diluted or 2) the company would have to lean more heavily on cash compensation. The latter of the two options is a functional non-starter at the current juncture given the company's persistently negative free cash flow (another topic the bulls don't understand, but I'll let sleeping dogs lie on this one).
 
Last question: Do you believe SBC is a true expense? If it is, should the company be including it in its IRR calculation?  


 
Management updated guidance, and frankly, I think the financial outlook is worse than I was expecting. "Adjusted Operating Income" -- which is ex. SBC, D&A;, and Pet Acquisition -- is forecast at $75MM. PAC -- ex. SBC -- is forecast at $66MM. That leaves us to $9MM. "Development expense" will be $4MM (at the mid), SBC is $28MM, D&A; will be $12MM, resulting in a pre-tax net loss of $35MM. This is larger than the company's cumulative net loss for the past six years combined! 
 
 
I know this is a battleground stock and don't expect everyone to come around. But I also think: 1) there's only one set of correct answers to the questions I've laid out above, 2) none of the afforementioned points are "dumb", and 3) management is using sleight of hand to paint a picture of the company that is out of step with reality.  As someone who puts a lot of value in associating with the right people, I certainly don't appreciate the games / shenanigans that Daryl and team are pulling. 
 

 
$MM
Adjusted Operating Income
75
- PAC
(66)
- Development expense
(4)
- SBC
(28)
- D&A;
(12)
Pre-tax Income
(35)
 

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If you like The Intelligent Investing Podcast, please consider leaving a rating and review on Apple Podcasts. It takes less than 30 seconds to do and makes a huge difference! You can also join the Facebook page!      
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Email: IntelligentInvesting@gmail.com
Disclosure: Eric Schleien and some SMA clients of Eric Schleien through GSCM own shares of TRUP. Nothing here is investment advice. Do your own due diligence.  

#171: Rebuttal To Some Trupanion Hate $TRUP; Discussing the Toxicity Of Twitter $TWTR

NEW PODCAST
Hey All! I’ve started a second show completely devoted to the field of Ontology which is another huge passion of mine. Please check out The Eric Scheien Podcast which is an ontological podcast where I break down distinctions of human consciousness as an access to enhancing performance.
NET NET HUNTER
This episode is sponsored by Net Net Hunter. If you’re interested in finding high-quality stocks trading at fractions of liquidation value – this research service is for you. I personally use this service at my firm to help me research tiny and obscure net-net stocks all around the world. Using Net Net Hunter comes out to way less money than hiring an analyst to do the exact same thing manually. It’s a service I love and I am proud to be able to offer this service to my listeners. If this is something you’re interested in, please click here.
Summary
Evan Bleker is a professional investor who has built his track record by buying high quality net net stocks. When not researching stocks, he focuses his time on helping small investors learn the strategy so they can earn great returns.
Evan manages two investing websites: Net Net Hunter and Broken Leg Investing.
Net Net Hunter
Complete guide to net net stocks
Broken Leg Investing
Deep Value Guide

Evan discussed Warren Buffett’s net net investing practice during his partnership. Further resources available here:
You can follow Evan’s portfolio performance here:
You can sign up for his free newsletter on the Net Net Hunter home page.
 
Show Notes
1:06 - What is Westell (WSTL)?
2:24 - Estimating liquidation value
3:07 - A simplified approach to finding high quality net-net stocks
3:55 - The 5G rollout
5:10 - Potential catalyst
5:26 - Dark Companies; The new SEC rule
8:57 - Westell quarterly update


HELP OUT THE PODCAST





If you like The Intelligent Investing Podcast, please consider leaving a rating and review on Apple Podcasts. It takes less than 30 seconds to do and makes a huge difference! You can also join the Facebook page!      
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Email: IntelligentInvesting@gmail.com
Disclosure: Eric Schleien and some SMA clients of Eric Schleien through GSCM own shares of WSTL. Nothing here is investment advice. Do your own due diligence.  

 

#51: 2018 Berkshire Hathaway Letter to Shareholders

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