Welch vs Bezos

I created my article repository site (also known to some as a blog), ContrarianEdge.com, in 2004. When I was trying to pick its name I did a lot of soul searching. I was thinking, what’s the common thread among all of my articles? I realized that it’s my willingness to disagree with a popular opinion if my research leads me to a contrary conclusion. Thus Contrarian Edge.

That doesn’t mean I disagree with the common opinion all the time, not at all. It’s just that when I agree with one – which happens often, actually –there is little value in it: Love, hate, or indifference is already priced into the stock.

A lot of times I won’t have an insight into a business because I don’t understand it or because it’s too complex. GE is a great example today. I’m a value investor; I should be all over this stock that is making a generational low. Not at all. I looked at GE a half a dozen times over the years, and every single time I walked away without understanding the business or what it is worth. 

To make things worse, despite GE’s being one of the most-admired companies in the US, I have always hated its culture. Jack Welch went into the corporate history books as the best American CEO ever. I’d argue that this history needs some serious rewriting. Welch built a company with a “beat this quarter” culture. Jack’s GE was not in the business of building moats and investing for the long run; he was in the business of beating quarters. In his book, Welch raved that from the early 2000s GE always beat Wall Street estimates. He was proud of how managers of one division were able to “come up with” a few more cents of earnings if another division fell short of its forecast. I kid you not – reread that sentence, three times. If I was at the SEC I’d investigating GE’s accounting.

GE played games with their earnings for a long time, but the reality that its cash flows couldn’t cover its dividend, which was supposedly half of its earnings, is what triggered a wake-up call for investors. GE is another reminder that it is incredibly dangerous to own a stock just because you like the dividend. Consistency of recurrence of dividend payments creates an optical illusion that the dividend will always will be there. Just think about it: GE’s dividend of 96 cents was half of what the company was expected to earn and it still couldn’t afford to pay it. 

I’d argue that Welch is on the opposite end of the spectrum from Jeff Bezos. Bezos doesn’t even know how to spell quarterly earnings. In one of his interviews Bezos explained that Amazon makes decision years out. So the current quarter’s report reflects decisions Amazon made several years ago. I don’t want to own companies that are run by the likes of Welch, but we own a few that are run by the likes of Bezos. When I hear management praise their ability to beat last quarter’s earnings, I run. 

GE was ultimately destroyed by enormous capital misallocation. They assumed anything they touched with Six Sigma, independent of the price they paid, would turn to gold. So they didn’t care how much they paid for acquisitions. (I’ll discuss the topic “death by acquisition”  next week in part two of this article.)

There is another lesson for me here. We always look for simplicity and transparency. If a company’s business is complex and opaque, we move on. One of the most important things in investing is what you do in between buying or selling a stock. After you buy it is just a matter of time before your initial assumptions come under fire. Maintaining rationality throughout your ownership of the company is paramount, and to do that you need to understand the business well. Thus (at least for us) the business cannot be opaque or overly complex. (We set an upper limit to the IQ required of us to understand the business.) So that’s why I have no opinion on GE shares today. 

Once in a while, after we’ve done extensive research on a business we understand, I may have an opinion that is contrary to the market’s. In those few situations you can drive a truck between the stock price and what we believe the company’s value is, and this is when we dig in and become contrarians. Today’s article is about one of those instances.

Finally, I implore you, don’t let this article be the end point of your research. I talk to a lot of perspective clients whose portfolios are assembled based on “compelling” articles they’ve read on MarketWatch, Yahoo Finance, Motley Fool, or even in my emails (articles). This article represents our thinking today, not forever. If facts change, I’ll change my mind, and you may or may not find me writing about it (unless you are IMA client, then for better or worse you’ll get a fifteen-page quarterly letter).

This may sound harsh – I’m sorry – but I rarely reply to emails that ask, “What do you think about this company now?”  There is only so much time in a day, and I’d be answering these emails all day long. We never make a decision based solely on someone else’s research; that is always just a starting point for our own research. You should do the same. (You can read about that in this article.)

 

Vitaliy Katsenelson, CFA
Student of Life, CEO

 

I am the CIO at Investment Management Associates, which is anything but your average investment firm. (Seriously, take a look.)

 

I wrote two books on investing, which were published by John Wiley & Sons and have been translated into eight languages. (Even in Polish!)

 

In a brief moment of senility, Forbes magazine called me “the new Benjamin Graham.” (They must have been impressed by the eloquence of the Polish translation.)

 

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Comments

ReturnOfDaMac Thu, 02/22/2018 - 17:14 Permalink

Neutron Jack was the first to start the demise of 'Murican manufacturing.  Six sigma was great, but the rest of his ideas were just bankspeak so he could cash out options at inflated prices and stuff 'em in your 401k.

PiratePiggy Branded Fri, 02/23/2018 - 01:01 Permalink

That is exactly right.  Who wants a six sigma web page and all the costs associated with testing it, as well as the slowness of getting to to market.

 

Instead, do a good job and have a page called "Feedback". You'll have 100% of the market share as your competition is figuring out how much they need to borrow to pay the six sigma consultants.

In reply to by Branded

The Alarmist stacking12321 Fri, 02/23/2018 - 04:34 Permalink

GE under Welch didn't have a corporate culture ... It had a cult of Jack Welch.  Managers would show every new hire the annual Welch letter to shareholders as a way to inspire them to drink the Koolaid. Six Sigma, Bullet Train, Indian Programmers ... it all sounds good to those willing to jettison stakeholders to please the one shareholder who really mattered. Immelt was just as much a class act as Just Jack ... just sayin.  I'm surprised GE Capital didn't spin GE off before they had the life beaten out of them by Fairfield.  GE is a company that deserves to die.

In reply to by stacking12321

BarkingCat stacking12321 Fri, 02/23/2018 - 08:45 Permalink

We cannot judge if Bezos is a good businessman or a bad one.

He never had to play by the fiscal rules that hearly everybody else had to.

He has had a never ending money to backup whatever decision he made for Amazon, and this money was not even something that Amazon has earned.

I would venture to say he is a lousy businessman by how Amazon has lost money for well over a decade, but the truth is that I do not know how he would run it if he did not have that never ending stream coming from investors. 

There is no denying that he is a shitty humanoid and he screws over anyone and everyone: his suppliers, his employees and his customers. 

 

Now that Bezos owns Whole Foods, what are the chances that those produce marked as organic are not?

In reply to by stacking12321

Eric Masters Thu, 02/22/2018 - 18:08 Permalink

sigma 6 is motorola; and welsh is a wallstreet 80s creation neo-fordist supply side black scholes laffer curve  piece of shit; how is GE doing today? ..also comparing bezos to GE? ...this article is so fuckign stupid...the only comparison is between how Bezos is a monopolist and both companies live off of public money, dont pay taxes and fuck labor i nthe ass. ..and call it flexible , innovation , disruption...vomit

New_Meat Thu, 02/22/2018 - 20:01 Permalink

Welch raided GE Re to the tune, at the end, of $19+ BB.  Immelt never stood a chance because he had to pay off Swiss Re, then September '08 happened and the magic of GE Captial bankrupted the company.  They still do the tax-loss-carry-forward dance.

Welch used GE Re as a piggy bank--he can never be forgiven for that.

skipweston Fri, 02/23/2018 - 01:20 Permalink

From the Watchman Letter: https://steemit.com/@skipweston
Economic Truth
I wonder if this Contributor bother to look at Amazon's fundamentals. The Business Media loves AMZN. They always point to the "Amazon Effect" as retailers suffer losses. Once again here are the facts about Amazon.

Amazon stock price is over $1489 per share and pays no Dividend.
P/E Ratio of 241.
Amazon's US online sales market share is 4.7%.
Total US Sales Market share 1.5%
Profit Margin of 1.7%.
The lowest interest rates in 5000 years. The Central Banks injecting $14 Trillion into the Financial system with over $4 Trillion of Stock Buybacks. This has created the illusion that CEO's like Bezos of Amazon and J Michael Pearson of Valeant Phamaceuticals are corporate Gods. The fall of Valeant is of course the "Amazon Effect"

messystateofaffairs Fri, 02/23/2018 - 04:41 Permalink

This may sound harsh – I’m sorry – but I rarely reply to emails that ask, “What do you think about this company now?”  

Ok so I'll ask Cramer then. So there, booyah.

El Hosel messystateofaffairs Fri, 02/23/2018 - 05:31 Permalink

 Yes, that was harsh.                                                                                                                            

 I was really hurt too, at least we found out what happened to GE... 17 years in the rears

 

In reply to by messystateofaffairs

Whoa Dammit Fri, 02/23/2018 - 08:07 Permalink

Both Welch & Bezos are corporate televangelists. Worshipping anyone simply because they were able to maneuver themselves into a position of wealth is a false paradigm. 

We shall see how well the miracle of Amazon's vertical acquisitions work out in the future.