(B)(N) PCP Precision Castparts Corporation

Courtesy: Precision Castparts Corporation

Deal Book. We generally don’t place big bets on just one company unless we’re planning to own all of it but that’s what Mr. Buffett did today in his $37 billion purchase of Precision Castparts Corporation (TheStreet, August 10, 2015, Warren Buffett’s Massive Bet on Aerospace is Textbook Buffett). Mr. Buffett says that he likes the management and that he likes its export markets in aerospace engineered products – if it flies and if it’s made of metal then likely some of its parts were made by PCC – but $37 billion is still a pretty big bet in a strange (bespoke) industry (please see below) even for Berkshire Hathaway.

And thanks, Mr. Buffett, for another big payday – Precision Castparts has been trading in our (B)-class portfolio for several years but we were finally stopped-out at $250 last year and now we don’t need to worry about buying it back at a lower price and we can put our money to work in the rest of this industry if we want to and we don’t have the liquidity problem that often comes with ownership.

But it raises the question of “ownership” and “corporate governance”: is it “better” to own a company and all of its earnings or to own some of lots of companies and some of all of their earnings and not have an overly large “position” in any company?

Most of us don’t have that choice but when we’re buying World Oil (The Company) or World Telecoms & Telekoms, we can say that “that’s ours” – all of it – we’re “Big Oil” or we’re “World Telecoms” (and the Internet) and high-tech cast parts is a much smaller but equally critical industry and there aren’t many listed companies that do the kind of work in titanium and nickel alloys that Precision Castparts does – only seven (please see below) – although we suspect that there are some “unlisted” companies in Russia and China that do.

Figure 1: The Price of Ownership

But the downside to “ownership” is that we might have to say that we’re the Canadian Mines; please see the illustration on the right (and click on it and again to make it larger as required) and for more details please click on the links above because we’re talking about “Extreme Economics” and what we have to do to earn a living from money.

The Price of Ownership

The “price of ownership” is liquidity – we might not be able to get our money when we need it – and we might not be able to get any of our money if the earnings and dividends are slack for a while and we might also have to sell some of what we own at a “low price” just to pay the rent (so to speak) or our pensioners if we’re a pension fund and that seems to happening in the Canadian Mines which haven’t reached the bottom yet after three years of trying.

But the listed companies in this market of high-tech cast parts are very skimpy on dividends and they might as well be privately-owned although the earnings return on the shareholders equity is less than 10% which is hardly an investment return for anybody and we can do a lot better by running them as an industry and as a (B)-class portfolio and unhook ourselves from the management and the earnings and look to market for a bigger payday; please see Exhibit 1 below for more details (and click on it and again to make it larger as required).

Exhibit 1: (B)(N) Aerospace Parts-R-Us

Figure 1.1: (B)(N) Aerospace Parts-R-Us – Cash Flow Summary

For more information and examples of the Free Market Yield and the terms that we have used above, please see our Posts “(P&I) The Dismal Equation (Ecclesiastes 9:1)” and “(B)(N) S&P 100 Volatility Risk and The Full Moon” and “(B)(N) NASDAQ 100 Volatility and The Stone Bunnies“ and for an introduction to The Barometer “(B)(N) What’s A Girl To Do” or “(P&I) The Swiss Franc Debacle“.

And for more information on real “risk management” in modern times and additional references to the theory and how to read the charts and tables, please see our Post, The RiskWerk Company Glossary and “(P&I) Dividend Risk and Dividend Yield“, and our recent Posts “(P&I) The Profit Box” and “(P&I) The Process – In The Beginning“; and we’ve also profiled hundreds of companies in these Posts and the Search Box (upper right) might help you to find what you’re looking for, such as “(B)(N) TLM Talisman Energy Incorporated” or “(B)(N) ATHN AthenaHealth Incorporated” or “(B)(N) PETM PetSmart Incorporated“, to name just a few.

And for more applications of these concepts please see our Posts which rely on the Theory of the Firm developed by the author (Goetze 2006) which calibrates The Process to the units of the balance sheet and demonstrates the price of risk as the solution to a Nash Equilibrium between “risk-seeking” and “risk-averse” investors within the demonstrated societal norms of risk aversion and bargaining practice. And for more on The Process, please see our Posts The Food Chain and The Process End-Of-Process.

And for more on what risk averse investing has done for us this year, please see our recent Posts on “(P&I) The Easy (EC) Theory of the Capital Markets” or “(B)(N) The Easy (EC) Theory of the S&P 500“, and the past, The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class action, La Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.

And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100. And for more on what’s Working in America, Big Oil, Shopping in America or Banking in America, to name just a few.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond™
Alpha-smart with 100% Capital Safety and 100% Liquidity
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.