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Earnings Updates + The Best New Book I’ve Read This Year


Below, I’ll touch on a couple of earnings reports from ideas I’ve written about here on the blog. And, with all the volatility of late, I recommend getting away from your computer screen (unless you’re buying) and curling up with a good book. I have just such a book for you…


I first “discovered” Rory Sutherland in 2014 when I read an excellent interview with him titled “This Thing For Which We Have No Name.”


Ever since, I’ve paid attention when he writes or speaks. So when I saw he had a new book out, I bought a copy without hesitation. The title is “Alchemy: The Dark Art And Curious Science of Creating Magic in Brands, Business and Life.”


The basic premise: There is a logical way to think about the world and what Sutherland calls a “pycho-logical” way to think about the world. We spend most of our time looking for logical explanations, but human behavior often is not logical.


As Sutherland explains:


“The alchemy of this book’s title is the science of knowing what economists are wrong about. The trick to being an alchemist lies not in understanding universal laws, but in spotting the many instance where those laws do not apply.”


Some examples will give you the flavor of what he’s talking about…


Consider the question: “Why do you brush your teeth?” (The book is full of such seemingly basic questions with surprising answers.)


Obviously, you might think you brush your teeth to maintain good dental hygiene and avoid cavities, etc. But if you think about human behavior, it contradicts that idea. Here’s Sutherland:


“If we were really interested in minimizing the risk of tooth decay, we would brush our teeth after every meal, yet almost nobody does this. In fact, the times when people are most likely to clean their teeth occur before those moments when we are most frightened of the adverse social consequences of visible stains or bad breath. When are you more likely to clean your teeth? Be honest. After eating ice cream, or when you’re going on a date?”


And thus, you have the real answer for why people brush their teeth. This affects how you market toothpaste, etc. It also stands as a good reminder to focus on behavior, not the obvious, stated reasons why people do things.


This is one of the core underlying themes of the book: there are two reasons why people behave the way they do. There is an ostensible logical reason. And there is the real reason. Sutherland's book is about digging for the real reasons, often not logical at all.


Sutherland also has lots of cool thinking aids and techniques. For example, in math, 1 X 10 is equal to 10 X 1… but not in the psycho-logical world. So, “100 people will pay more to make a journey once than one person will pay to make it 100 times.” Or: It’s easier to trick 100 people one time than it is to trick one person 100 times. And so on.


Think about Amazon. If people ordered only one thing occasionally, they probably wouldn’t mind paying shipping charges. But “one person who buys 100 things from Amazon every year is going to look at his annual expenditures on shipping and decide, ‘Hmm, time to rediscover Walmart.’” (Which, Sutherland adds, is why Amazon Prime needs to exist.)


He points out that the early Sears catalog was kind of like the Amazon of its day. For more than half of the population, then mostly rural, it was the main way to buy “anything remotely exotic.” In 1919, Americans spent over $500 million on mail order purchases, half of which went through two companies (Sears and Montgomery Ward).


One reason physical retail exists is because it’s a good way for a person to buy ten things in one go. Not so with online shopping:


“Try and buy ten different things simultaneously online and it turns chaotic. Items arrive on four separate days, vans appear at your house at different times and one delivery always fails. By contrast, the great thing about Walmart, which investors tend to overlook, is that people turn up, buy 47 different things, and then transport them home at their own expense. Amazon can be a very big business selling one thing to 47 people, but if it can’t sell 47 things to one person, there’s a ceiling to how large it can be.”


Another way this 1 X 10 does not equal 10 X 1 logic works is in the hiring of people. Sutherland says we are more likely to take risks hiring ten people than hiring one. I wonder if this applies also to investing. We are more likely to take risks if we have a 25-stock portfolio than one with ten names. Is that good or bad? Hmm…


Switching from Amazon to Uber… Sutherland writes about how people don’t mind waiting so much as they hate the uncertainty of it. Which of the following gives you more distress?


BA 786 Frankfurt – DELAYED

BA 786 Frankfurt – DELAYED 70 minutes


Neither is great, but at least with the second you have some control over the situation. You can go to a bar or whatever, knowing you have to occupy yourself for about an hour. With the first, it’s open-ended and your flight may even wind up being cancelled. It’s far more distressing.


So the brilliance of the Uber map is that you know how long until your ride arrives. People greatly favor this over the uncertainty of not knowing.


Another theme is the how we tend to focus on efficiency in dollars and cents terms and lose the important qualitative reasons for doing things. I like the “doorman fallacy,” as Sutherland calls it. When you define a doorman’s role as opening the door, then it is easy to automate that function and save money on the doorman.


But the doorman does more than open the door: “taxi-hailing, security, vagrant discouragement, customer recognition, as we in signaling the status of the hotel.” Sutherland says having a doorman can increase what you charge for a night’s stay.


The above are just snippets of a tiny fraction of the insights in this fat (360 pages), idea-rich book. Sutherland teaches that many stubborn problems are stubborn because they are logic-proof – hence their ongoing survival in the face of logical attempts to solve them. Sutherland invites us to take a psycho-logical approach instead. Many amazing insights follow.


The book gets you to ask unconventional questions and look at the world in an unconventional way. That’s what I most value about Sutherland’s thinking generally. And it’s why I’ve studied everything from Buckminster Fuller’s synergetics to Alfred Korzybski’s general semantics, from Robert Anton Wilson’s guerilla ontology to DT Suzuki’s Zen. All are ways of seeing things differently, thereby gaining new insights.


I heartily recommend the book!


*** Earnings Updates


I have a couple of thoughts on earnings reports for two companies below. The usual disclosures apply here: We own these names but can sell at anytime and I don’t have to tell you, so due your own diligence, etc.


Howard Hughes (HHC)


Howard Hughes had another quarter in which all their properties seem to be doing very well. The South Street Seaport in New York, however, is coming along more slowly than anticipated. The property showed a $4.1 million loss in the quarter. On the call, CFO David O’Reilly explained that “a lot of the losses that were associated with the Seaport are pre-opening losses that are not capitalized as you would see with traditional real estate. And that's associated with opening some new business this quarter. Given that we will be opening more restaurants and more businesses over the coming quarters, I would expect that those will continue.”


I think the market must’ve focused on this, to the exclusion of everything else, and the stock dropped 7% on the day. I’m not that concerned, as I think the Seaport will be a winner. But it is definitely the riskiest asset they own and it’s no cinch it’s a home run. However, there is so much else that covers you here, the stock could still be a big winner even if Seaport is just okay.


Interesting on the call how management got some heat for the gap between the stock price and net asset value. Here is part of what management said in response:


“Grant Herlitz - President


The Seaport had obviously taken a lot longer, but at the end of the day, if you understand the value of our company and you split it into parts to create a sum of the parts value based on product type, on land value and on condo sales, you get to a value that is way above where the market is trading the stock. We can't -- we don't disclose any NAV obviously because that's based on a number of different assumptions that different investors have based on different appetites for risks, but our business is solid.


David Weinreb - CEO


To follow-up on that… everything is on the table with this management team and our board, and you've seen us follow through on a number of other activities, not only that to try and close the gap to NAV, but also try to drive the NAV higher on a daily basis, which is really what -- why we come to work every day. And whether that's through a share buyback, through sale of noncore assets, through looking at joint ventures or looking at anything as it relates to all of our assets, there's no stone that we won't turn over to try to, a, drive the NAV of this company higher; and b, close that gap.”


I like this management team. The alignment is great. (Weinreb, in particular, has a lot of skin in the game). I think they have every incentive to unlock the value here and I’m confident they will do so.


Air Lease


Air Lease cranked out another solid quarter. Revenues were up 22% from the same quarter a year ago. Diluted earnings per share were up 23%. Margins and return on equity were all solid.


We did get some more color around the 737 MAX. It is 5.4% of the current fleet, or 15 planes. They have 28 MAX aircraft slated to arrive this year. Of that, only 2 were to arrive in the first quarter. If the MAX flies by the summer, it seems it won’t have much impact on Air Lease’s earnings.


The bigger delays, ironically, came from Airbus: 6 of the 8 aircraft slated to arrive in Q1 didn’t make it. Delays are not unique to Air Lease. It affects everyone. The delays tighten the supply-demand balance for new aircraft even further and could drive lease rates higher.


Nothing makes me change my mind here. The stock is still cheap. Historically, the valuation ebbs and flows as the market’s enthusiasm waxes and wanes for the aircraft lessors. At some point, the stock will trade for book again (or better) - currently $46+. When it does, we’ll have a nice gain from $33 (our average cost in the fund).


Thanks for reading. You can write me at info [at] woodlockhousefamilycapital.com


***

Published May 13, 2019

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