Good Reading -- August 2014

August 15, 2014

Facts and Figures

 

  • 76% of American adults lack confidence that their children's generation will have a better life than they do. (Source: WSJ/NBC poll)

    • For a counterpoint, see "What Today's Economic Gloomsayer's Are Missing" (also below)

 

Books

 

  • "Business Adventures" -- Sadly I hadn't heard of this book before, but any time Bill Gates and Warren Buffett refer to something as their favorite book about business it's worth paying attention. (The original hardback has been out of print for years but it someone bought the rights and it's now available as a paperback and e-book).

    • "Bill Gates's Favorite Business Book" -- the original article in the Wall Street Journal. 

    • "The Best Business Book I've Ever Read" -- an even better post from Gates's blog.

    • "Xerox Xerox Xerox Xerox" -- a free pdf version of a chapter of the book courtesy of Gates Notes. (Subscribers to the New Yorker can access the articles in the archives with some free excerpts here.)

  • "Quiet: The Power of Introverts in a World That Can't Stop Talking" -- Well written, thoughtful (in most places), and just interesting all the way around. Thoughts on business, parenting, and relationships.

 

Links

 

  • "Two Cheers for Too Big to Fail" -- Roger Lowenstein argues, correctly in my opinion, that many of the arguments against "too big to fail" are misguided.

  • "What Today's Economic Gloomsayers are Missing" -- the epic (or not) battle in the economics department at Northwestern rages on, and it's interesting that the optimist is apparently winning on campus. For what it's worth, no less an authority on technology and human development than Bill Gates endorses the optimist's view: "I couldn't agree more" that technology will prevail in this debate.

  • "Blackrock: The $4.3 Trillion Force" -- This article is Carol Loomis's swan song at Fortune, which is reason enough to read it. There are also some interesting nuggets that I didn't know, including that Fink and Schwarzman had a disagreement that lead to BlackRock's sale to PNC for $240 million. PNC has since recognized $12 billion pretax and still owns a 21% stake valued at $11 billion.

  • "The Secretive Billionaire Who Built Silicon Valley" -- the very interesting life story of John Arrillaga Sr.

  • "I Dare You to Watch This Entire Video" -- courtesy of Shane Parrish and his excellent blog. 

  • Project Claret -- What do you get when you combine Donald Sterling's sale of the LA Clippers and some investment bankers? A new all-time low standard for shamelessness, I suppose. But you also get valuation analysis on the basis of adjusted EBITDA excluding payroll...never mind the fact that payroll is more than half of revenue and 5x bigger than the already useless EBITDA figure. And even though the recent "comps" were ~7-8x EBITDAPayroll, paying 20x EBITDAPayroll is actually a bargain because sure enough, EBITDAPayroll is about to take off! More analysis ishere. 

Articles

 

  • Karl Albrecht and Aldi -- Good articles about the recently passed Karl Albrecht and his career with Aldi. There are some very close parallels to Sam Walton/Wal-Mart, Costco, Les Schwab, Kemmons Wilson/Holiday Inn, et al. "Our only consideration when we are working out a product's price is how cheaply we can sell it."

  • "Soccer, a Beautiful Game of Chance" -- I highly recommend the Mauboussin book mentioned in the article. 

 

Karl Albrecht, a Founder of Aldi Stores, Dies at 94

By DENNIS HEVESI and JACK EWINGJULY 21, 2014

Karl Albrecht, who with his brother Theo returned from Allied prisoner-of-war camps after World War II to find their mother’s corner shop still standing in bombed-out Essen, Germany, then proceeded to build it into the international grocery empire Aldi, died on Wednesday in Essen. He was 94.

His death was confirmed by Aldi, which delayed the announcement until after his funeral.

The Aldi chain formerly managed by Mr. Albrecht (the name is short for Albrecht Discount) now has nearly 5,000 stores worldwide, including 1,300 in the United States, two of them in the New York City area, and all of them known for spartan décor and low prices. A separate organization formerly run by Theo Albrecht, which also uses the Aldi name, has 4,800 outlets in Europe.

“Our only consideration when we are working out a product’s price is how cheaply we can sell it,” Karl Albrecht once said.

As teenagers, the brothers would tow a wooden wagon along the cobbled streets of Essen’s Schonnebeck neighborhood, selling fresh buns. Their father, Karl, a miner, had been disabled by emphysema in the 1930s, making it necessary for their mother, Anna, to open a food store in a four-story brick rowhouse. The store somehow survived more than 200 Allied bombings of the industrial city of Essen, home of the Krupp armaments manufacturer.

Drafted into Hitler’s Wehrmacht, Karl Albrecht was wounded and captured on the Russian front, and Theo, a member of the Afrika Korps, was seized by American troops in Tunisia.

The brothers took over the store after the war and by the late 1940s had begun opening more shops around the city, selling milk, bread, butter and other basics at low cost as Germany struggled with its postwar recovery. By 1955, the Albrechts had more than 100 stores and, by 1960, more than 300 throughout much of West Germany.

Today, Aldi stores usually offer no more than 2,000 products, most of which are private-label brands. (Other supermarkets carry as many as 45,000 items.) The products are often stacked on wooden pallets in the cardboard boxes in which they were delivered. Offering a limited assortment of basic products ensures constant turnover, reduces spoilage and labor, and gives the chain significant purchasing power with its suppliers — all to keep prices low.

Like that of any discount chain, Aldi’s price-cutting business model gave it a competitive advantage not only over independent stores, forcing some to close, but also over other discount rivals.

“What makes Aldi so special is that, quite simply, its prices are cheaper than just about anyone else’s, including Walmart’s,” The New York Timesreported in 2008. “Where else can you buy an 18-ounce box of raisin bran cereal for just $1.49? Or a frozen pizza for $3.99? Or how about a DVD/CD player for $24.99?”

The strategy paid off for the brothers. Karl Albrecht was No. 24 on Forbes magazine’s most recent list of billionaires, and the richest German, with a fortune estimated at $25.9 billion. In 2009, Theo Albrecht, who died in 2010, had a net worth of $18.8 billion.

In 1961, after a disagreement about whether to sell cigarettes, the brothers divided the company into two operations within Germany, Karl running Aldi Süd and Theo running Aldi Nord. As they expanded into other countries, Karl controlled operations in Britain, Australia and the United States, while Theo ran the stores in Europe. Theo stepped into the American market in 1979 by buying the Trader Joe’s chain, applying some Aldi principles to upscale items like California wine, goat cheese and olive oil.

Karl Hans Albrecht was born on Feb. 20, 1920.

As he and Theo aged, they turned the business over to their sons and outside managers. The Frankfurter Allgemeine newspaper reported that among Karl Albrecht’s survivors were a son and a daughter, and that his wife died last year.

He and his brother were known for remaining out of the public eye, a reclusive bent that was reinforced in 1971 after Theo was kidnapped and held for ransom for 17 days. They divided their time between fortresslike homes overlooking the Ruhr Valley near Essen and the 18-hole golf course that Karl built near the Black Forest in southwestern Germany.

Karl Albrecht maintained his low profile to the end. Even his retirement in 2002 was observed quietly, with the Irish newspaper The Sunday Tribune reporting, “Karl Albrecht hasn’t been quoted since 1953, when he spoke to an industry group.”

 

The story of Karl Albrecht, the man who destroyed Tesco

 

The retailer is on its knees, thanks to a German war veteran who turned the family grocers into the Aldi chain

TONY PATERSON  Tuesday 22 July 2014

The removal this week of Tesco chief executive Philip Clarke more than anything signals just how seriously the retail giant’s shareholders are treating the difficulties from which new boss Dave Lewis must now try to extricate the troubled group.

Of course, for “difficulties”, one need look no further than just down the high street to Aldi, a German supermarket which has gone from being sneered at as a harshly-lit thrift store to being regarded as a powerful, credible rival.Indeed, this year Aldi was crowned the UK’s top supermarket chain. And with the blanket media coverage afforded the announcement this week of the death of one of the two brothers who founded the company, it’s clear that the once-humble retailer is now a cultural phenomenon.

A black and white photo of a little grocer’s shop in a working class district of once heavily industrial Essen has been appearing in newspapers across Germany since Monday. A steelworker in a flat cap peers through its window at a shop front packed with bottles stacked in rows and tin cans piled on cardboard trays.

The picture was taken in 1913, yet 101 years on, the no-frills display of groceries on sale in the heart of Germany’s Ruhr region appears strangely familiar. It comes almost as no surprise to learn that the shop in Essen’s Heustrasse was the prototype Aldi.

Aldi co-founder Karl Albrecht (AP)

Written in bold Gothic script above the shop’s front door is the name Karl Albrecht. There can be little doubt that the first Karl and his wife were on to a winner with their Spartan marketing approach: Their son – also Karl Albrecht – developed the concept with his younger brother Theo and both went on to become founders of the chain and Germany’s richest men.

Karl, sole survivor of the two reclusive brothers, died last week at the age of 94, leaving an estimated €18.4bn and an empire which has long since invaded Britain.

In keeping with his family’s famous obsession with secrecy, the death was not announced until Monday, by which time Karl had already been buried. Theo died in 2010, aged 88.

Despite their huge wealth, the Albrecht brothers were revered by many Germans as symbols of post-war success who displayed modesty and Teutonic thrift. “The richest German who taught us how to save,” was how Bild described Karl Albrecht yesterday.

For the Albrecht family and Aldi, the demise of the discount empire’s last surviving founder marks the end of an era that began in the very early days of West Germany’s post-war “Wirtschaftswunder” or “economic miracle” in the 1940s.

Karl (right) and Theo Albrecht were brought up in humble surroundings in the then industrial Ruhr city of Essen. Their father was a miner whose ability to earn a living underground was cut short when he contracted emphysema.

The family was suddenly obliged to open a small grocery shop to stay afloat. But the Albrecht boys were determined not to be miners. Theo stayed in the shop and learned the grocery trade, while Karl trained in a delicatessen.

Both brothers fought with the German Wehrmacht during the Second World War. Karl was wounded on the Russian front. Theo survived the war in the desert with Rommel’s Afrika Korps. After the war, back in Essen, the brothers took the grocer’s shop in Essen’s Heustrasse as their starting point. But they decided that they wanted branch stores – and as many as possible. Their idea was that workers in the industrial Ruhr weren’t bothered with fancy stores or fripperies – they just wanted affordable goods which they could buy daily. The brothers started expanding in the Ruhr in the late 1940s. By 1954 they had opened 50 branches, sticking religiously to their business slogan: “The best quality at the lowest price.” The Spartan atmosphere of Aldi stores soon became legendary. There was no advertising. One of Karl Albrecht’s few public remarks was that Aldi’s advertising was “the cheap price”. Unlike most shops, early Aldi stores did not even have shelves.

An Aldi store in Bristol. The retailer was crowned the UK’s top supermarket chain earlier this year (Getty)


The chain’s brand name Aldi – which stands for Albrecht discount – was launched in 1961, by which time the two brothers had gained a reputation that still causes a mixture of fear and respect among Aldi’s wholesale suppliers. Both were renowned for their ruthless negotiating style and for driving suppliers to cut the tightest of deals to ensure that prices were rock bottom. They were even reputed to be the first people to turn off the lights in a room because they were worried about wasting electricity. Karl Albrecht only allowed himself one luxury. His passion for golf drove him to build a golf hotel in southern Germany in 1976. He kept his own private bungalow on the grounds which was connected to the golf course via a tunnel to ensure secrecy. Theo was equally thrifty. When he was kidnapped by a lawyer with gambling debts in 1971 and held for 17 days, he paid up the equivalent of €3.5m ransom for his release. Yet it later emerged that he had bargained over the sum for days. He demanded tax relief on the payment, claiming it was a business expense.

The brothers’ reputation for reclusiveness is part of German business folklore. There are only a handful of photographs of the two men which have ever been published.

By the late sixties, a row between the brothers saw them divide their German empire into Aldi North and Aldi South. Theo became head of North and Karl of South.

By this time shopping at Aldi had become a cult phenomenon for Germany’s middle classes. BMWs and Mercedes started appearing in Aldi car parks with their owners lining up inside the store to collect a cardboard box full of the latest Aldi wine or olive oil bargain. “We are not like the French who spend a relative fortune on good food,” noted one German newspaper yesterday.

Aldi currently operates 3,230 branches in Germany with 50,000 staff. It also has branches across Europe, in Australia and the United States, resulting in a global turnover of around €57bn. The company claims that 87 per cent of Germans shop at Aldi on a regular basis.

But while Aldi’s overseas expansion continues, in Germany it is embroiled in a furious price cutting war with its discount competitors, Lidl, Penny, Rewe and Edeka. And that is only one of Aldi’s current problems. As Germany’s Focus magazine warned yesterday: “ With Karl Albrecht’s death there is now a real risk of a power vacuum occurring at Aldi headquarters.” The magazine said it was hoped that his grandson, Peter Max Heister, could fill the void.

 

 

 

Soccer, a Beautiful Game of Chance

 

JULY 7, 2014

 

 

 

I’ve been watching the World Cup with some frustrated American social scientists. When they see an underdog team triumph with a miraculous rebound or an undeserved penalty kick, they don’t jump up and scream “Goooaaalll!” They just shake their heads and mutter, “Measurement error.”

If you regard a soccer match as an experiment to determine which team is better, then it’s not much of an experiment. It involves hundreds of skillful moves and stratagems, yet each team averages only a dozen shots, and the outcome is decided by several quick and often random events. In most games, no more than three goals are scored, and the typical margin of victory is a single goal.

To a scientist, the measurements are too few to draw a statistically reliable conclusion about which team is more skilled. The score may instead be the result of measurement error, a.k.a. luck.

That can make soccer seem terribly unfair, at least to many Americans accustomed to higher-scoring sports. We don’t understand why the rest of the world isn’t clamoring for a wider goal or looser offside rules or somethingto encourage more scoring.

But if the rest of the world took our helpful advice, would soccer really be any fairer? Not necessarily, say the economists and statisticians who have been analyzing the balance between skill and luck in sports and in the rest of life.

Because of fluke goals, low scores and the many matches that end in ties, soccer is less predictable than other major sports, as Chris Anderson and David Sally explain in their soccer book, “The Numbers Game.”

The authors, who are professors at Cornell and Dartmouth, as well as consultants to soccer teams, found that the team favored by bettors won just half the time in soccer, whereas the favorite won three-fifths of the time in baseball and two-thirds of the time in football and in basketball. After surveying the research literature, they concluded that a soccer match’s outcome was about half skill and half luck.

But just because an individual soccer game can be decided by a lucky bounce doesn’t mean that the game is less fair than other sports.

There’s another factor to consider: the paradox of skill, as it’s termed by Michael Mauboussin, an investment strategist and professor at Columbia, in“The Success Equation.”

Suppose the world’s best Scrabble player, which would be a computer, competes against a novice. The computer’s skill will routinely ensure victory even if the novice draws better tiles. But if that computer plays an equally skilled opponent, an identical computer running the same program, then the outcome will be determined entirely by the luck of the draw.

That’s the paradox of skill in sports, business and most other competitions: As the overall level of skill rises and becomes more uniform, luck becomes more important. Mr. Mauboussin has calculated that luck matters less in English soccer’s Premier League than in the N.F.L. and in Major League Baseball, because the American leagues have evened the level of skill among teams by sharing revenue, imposing salary caps and giving better draft choices to the weaker teams.

 

 

Soccer in the rest of the world doesn’t have these constraints, so there are much bigger disparities in teams’ skills. In league play, rich clubs like Manchester United, Real Madrid and Bayern Munich buy the best talent. In the World Cup, the larger, more affluent countries can lure the best coaches and draw from a bigger pool of talent.

“Of all the major team sports, soccer is the most unequal in the sense that teams with vastly different resources regularly compete against each other at the highest level,” says Stefan Szymanski, an economist at the University of Michigan and a co-author of “Soccernomics.” If matches were purely contests of skill, the many David-and-Goliath games in soccer would be boring — and seem unfair in another way.

“If you doubled the size of the goal, then soccer would become like basketball, and in a high-scoring game, the rich teams would almost always win,” Dr. Szymanski says. “Randomness favors the underdog. Would we ever want to reduce the role of luck in soccer? No way.”

Still, some forms of soccer luck just seem dumb, like the flip of a coin before a penalty shootout that determines which team goes first in each round. The first kicker makes the shot about three-quarters of the time, which puts pressure on the other team’s kicker to even the score.

That added pressure is presumably why the team going second wins the shootout only 39 percent of the time, according to Ignacio Palacios-Huerta, a game theorist at the London School of Economics and the author of “Beautiful Game Theory: How Soccer Can Help Economics.”

In experiments with professional soccer players, Dr. Palacios-Huerta found that the odds became more even in a penalty shootout if one team led off in the first and fourth rounds, and its opponent led off in the other three. Dr. Szymanski prefers a different shootout modification to further help the underdog: Let the lower-seeded team go first in all the rounds. Either change sounds like a good idea.

So does an innovation from American sports: peer review. It could reduce the most maddening form of soccer luck, which occurs when a penalty kick is wrongly awarded after a player pretends to be fouled near the goal. No other sport gives players such an incentive to scam the referee. Before awarding a penalty kick that may well decide the match, officials could at least review video replays to make sure the referee saw a foul instead of a flop.

Over the long haul, with enough measurements over the duration of a season or a World Cup, skill does prevail in soccer. The law of large numbers limits the underdogs’ lucky streaks. League championships and the World Cup are repeatedly won by the same few powerhouses, because it takes skill to endure.

But the outcome of any one match is unpredictable enough to confound the most sophisticated computer modelers, as Roger Pielke Jr. of the University of Colorado has demonstrated in his evaluation of a dozen forecasts for this World Cup. He found that the “stochastic model” of Goldman Sachs economists and the elaborate Soccer Power Index developed by Nate Silver of FiveThirtyEight made fewer correct predictions for games in the group stage than did much simpler systems based only on the monetary value of the players or on the teams’ ranking by FIFA, soccer’s world governing body.

The best forecasters turned out to be a team at Danske Bank in Copenhagen and a software engineer named Andrew Yuan. But they were still wrong about 16 of the 48 games, and they identified only 11 of the 16 teams to advance past the group stage.

No matter how much number crunching the quants do, no matter how skilled a team is, there’s just no way to anticipate the measurement errors in each match. The forecasters, like the players, may complain about their bad luck, but it’s a fortunate state of affairs for the fans, especially those who root for underdogs like the United States.

 

Please reload

Featured Posts

I wrote previously that I think most of the important ideas in the investment profession can be found in a short list of books and articles. From my e...

"Mount Rushmore" Reading

February 9, 2017

1/6
Please reload

Recent Posts
Please reload

Archive