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   Strategies & Market TrendsBuffettology


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To: LauA who wrote (1700)7/24/1999 2:15:00 AM
From: James Clarke
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Disney

"Zippedey doo da, Zippeday 'ey.
For internet presence we're gonna overpay.
Plenty of losses comin' our way.
Zippedey doo da, Zippeyday 'ey"

My question is what price Disney? 25? 22? 20? This puppy is clearly a Buffett stock, and the stock price is disintigrating under current management. (Remember what Buffett says - buy a business that could be run by morons, because someday it will be - that is where Disney is today). These guys just bought out a large internet company at a premium to the market price. And then Eisner shows up on CNBC talking about what a great deal it was. You just want Bambi to grow some horns and gore him.

And if they are doing deals like that, I don't know how relevant any valuation analysis can be. I am interested below 25, but I have a lot of trouble having much conviction.


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To: James Clarke who wrote (1702)7/24/1999 1:05:00 PM
From: LauA
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Mike and James, your present value thinking appears to be much more profitable than my speculations on the future. When I posed the question to the GEICO porfolio investment guys about how they determine if a company with high ROE will return value to the shareholder in the future via higher stock price, they recommended such a look to the past, and present.

In Fry's yesterday a salesman was laughing at customers who buy iMacs, but he admitted that they buy them. He told of a graphics designer who bought one recently, and then had to upgrade it so much that it cost the same as a G3. He said consumers are buying them as decorator items - what color goes with other things in the room? Blueberry, grape, and tangerine sell. Strawberry doesn't. So Mike's observations on pricing of the iBook trump my thoughts that it is an iBrick (because of weight) and that its announcement has a quality of 'vapor' because volume shipments will begin after the back to school buying has ended.

At Fry's the salesman said that customers are buying iMacs to get on the iNet - he said that's about all it does well. Meanwhile eMachines in Fry's is being given away - Free with a sign up for 3 years of ISP at $22/month. Of course next week Alta Vista will be offering a Free ISP.

Which brings up new complications in valuation of the net. AOL has bankrolled eMachines which is currently the 4th largest producer of PC's. (Is Apple in the top 10?) They bundle an eMachine with Compuserve (an AOL ISP). But with Free ISP's around, how long will the conventional AOL, Earthlink, Mindspring model survive? The Free ISP will sport targeted ads. They catalog every URL that's visited and construct a profile for each user (who's anonymously, but uniquely identified by his/her log in password. The business model will approach commercial radio and TV with the fillup of allowing impulse buying.

Hence a Disney needs to be there. Their choice is to buy or build. It's hard to know how to value a current iNet player, but you must recognize that it's not all that easy to find worker bees to build a new company. Paradigms seem to be shifting every 6 - 12 weeks, but most of the real estate has been staked out already. Passive branding may get more valuable as stores become places you shop, and the 'Net becomes the place you buy. On the other hand, if your on-ramp guides you to a certain universe of names, these 'free' ISP's may develop the merchandising power that WalMart has today.

"Hi Ho, Hi Ho, it's off to thunk, I go"

Lau

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To: James Clarke who wrote (1702)7/24/1999 1:44:00 PM
From: Mark Marcellus
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Remember what Buffett says - buy a business that could be run by morons, because someday it will be - that is where Disney is today

Actually, Peter Lynch said that. Buffett stresses buying into management where you have the utmost faith in their competence and integrity. It's also important to note that he did not exactly buy into Disney, Disney bought Cap Cities. There was a lot of speculation at the time as to whether he would sell his stake. He may wish that he had, now.

The irony is that there was a time when Disney was a well managed company. In retrospect, it looks like Frank Wells might have had a lot more to do with that than he was given credit for.

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To: Mark Marcellus who wrote (1704)7/24/1999 1:54:00 PM
From: Michael Burry
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I guess I would also add that the thrust behind the "run by morons concept" is that the business should still be thriving while it is being run by morons. The idea is that it will be an even greater business under geniuses. So the troughs will still be palatable and the peaks will be ecstasy. Just buying a business in trouble because it is being run by morons doesn't make sense to me. The trough then becomes unpalatable, and the peak may be just average or worse.

As well, we must always be wary of the latter situation, since it is not entirely certain that a genius will be able to turn the business around at all. The qualitative judgements become quite important.

I happen to like Disney a lot. I agree with those that say the ESPN franchise is worth the ABC price. I think that they are making the right net moves, but with poor execution and without regard to creating shareholder value through correct pricing. In the 21ish range, I'd buy some. I've already bought a tiny itty bit for a family member who thought she should own some (she also had to have GAP), but that's just in a portfolio I manage, not one of my own.

Now I've just been asked to manage a couple custodial counts for a couple just-born nieces. They'll need the money in 18 years. And you can bet Disney will be going in those too, at the right price.

Mike

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To: Mark Marcellus who wrote (1704)7/24/1999 6:26:00 PM
From: Michael Burry
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Actually, Buffett did buy Disney, twice. Once, in 1966, and the other at the time of the Cap Cities transaction. Buffett had an option of cash or stock, or a combination. He chose all stock, and additionally bought shares of Disney in the market. From his 1995 letter:

We have also recently bought Disney stock in the market.

One more bit of history: I first became interested in Disney in 1966, when its market valuation was less than $90 million, even though the company had earned around $21 million pre-tax in 1965 and was
sitting with more cash than debt. At Disneyland, the $17 million Pirates of the Caribbean ride would soon open. Imagine my excitement a company selling at only five times rides!

Duly impressed, Buffett Partnership Ltd. bought a significant amount of Disney stock at a split-adjusted price of 31› per share. That decision may appear brilliant, given that the stock now sells for
$66. But your Chairman was up to the task of nullifying it: In 1967 I sold out at 48› per share.

Oh well, we're happy to be once again a large owner of a business with both unique assets and outstanding management.


Judging purely from these descriptions, I would say that Disney today is much different than at the times he bought the stock. As well, it fails the "moron" test. But I'll always be looking for the right entry.

Mike

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To: LauA who wrote (1703)7/24/1999 6:32:00 PM
From: Michael Burry
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LauA,

Re: present value thinking, I'll be the first to admit that I'm not investing much like Buffett. Graham was a great investor, but Buffett took it to a new level and improved upon it. Times change, and the next great investor will certainly have taken Buffett's approach to a different level.

Mike

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To: James Clarke who wrote (1702)7/24/1999 8:52:00 PM
From: Shane M
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Jim,

Here's a link discussing some technology that could materially impact media outlets like Disney. Sounds like a cool device to have too.

cgi.pathfinder.com

Shane

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To: Michael Burry who wrote (1707)7/24/1999 10:11:00 PM
From: Shane M
   of 4643
 
Mike,

Here's a little piece by Fortune on Pre Paid Legal

cgi.pathfinder.com

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To: Shane M who wrote (1709)7/24/1999 10:35:00 PM
From: Michael Burry
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That's misleading. The company in its current form hasn't been around that long. If excess acquisition costs can be booked as an asset, I don't see why the commission advances can't. Just recognize what they are when you do your valuation. It's stinky, no doubt. And if the insiders start to bail, I will too. It's like the timeshares, and like Apple. The negative bias is so great, and the shorts so tremendous that it makes the perfect contrarian play.

Also, its cooperation deals with CNA and other large insurers has yielded low to nil sales. This is most concerning to me, and is the thing that makes me regret bringing it up on this board. When I come right down to it, I own it for reasons other than Buffett's tenets.

Mike

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To: Michael Burry who wrote (1705)7/24/1999 11:28:00 PM
From: James Clarke
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<<Now I've just been asked to manage a couple custodial counts for a couple just-born nieces. They'll need the money in 18 years. And you can bet Disney will be going in those too, at the right price.>>

My first baby is scheduled to pop out in three weeks, and I am starting a college fund right off. I'm thinking the same thing as you are about Disney - just waiting for the right price, then in it goes. Maybe that price comes during a market meltdown, maybe it comes without one. (I am in no hurry to invest this account with the market at 30 times earnings and interest rates going up.) The problem with this patient strategy is that my wife has loved Disney since she was a little kid with her Bambi blanket in Japan 35 years ago. So ever since I told her I'm looking at Disney she asks me every day why I haven't bought it yet so she can get the annual report. So if I miss it, I am going to have hell to pay.

"Run by morons" was probably a facetious comment. Eisner had a hell of a run with this business for five years. But the guy has always struck me as sleazy - maybe it was the half a billion of options he cashed in near the peak, maybe it was the board's payoff of several other executives to the tune of $100 million each. But I don't like to see sleazy management running a company with Disney's image. They do not behave like owners.

JJC

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