Tuesday, March 8, 2011

David Sokol on Minimizing Mistakes

SFGate recently reported on the management philosophy of David Sokol, one of Buffett's highly-praised business managers. While noting that details can be found in Sokol's book, Pleased but Not Satisfied, the article itself summarizes a few of the lessons. Regarding minimizing mistakes, for example, it says:
In Sokol's mind, operational excellence consists of paying attention to detail and minimizing the making of mistakes or other small problems that could turn into big issues. For example, some oil companies have been cited numerous times for a lack of attention to seemingly small manners, and that have resulted in oil pipeline leaks or oil well explosions. In many cases, these damaging events might have been less severe, or could even been prevented with attention to seemingly minor maintenance activities. Because of a lack of attention to detail, the last oil company might experience huge declines in its reputation and profits. Openness and candidness are other key ingredients to excellence, according to Sokol. In his words, "the more uncomfortable the situation, the more valuable a candid conversation becomes."
There's nothing revolutionary there; it's really just the basics. But actually doing what is "basic" is another story. And Buffett loves those who do the basics well, decade after decade.

Saturday, March 5, 2011

Short Stocks Like David Einhorn?

Business Insider recently linked to an interview with David Einhorn in which he lays out how he short stocks--or at least how he did it in this past financial crisis. Here's the relevant section:

Interviewer: Okay. I guess I want you to continue to sort of chronologically in August of ’07, as you said you see BNP Paribas freeze redemptions and that gives concern and you’re talking to the rating agencies among other things and you’ve identified the type of companies that you had concerns about. Can you just sort of take us through chronologically through the end of ’07 and into ’08 and how things changed, if at all, for you folks?

David Einhorn: Yeah absolutely. So this is sometime in August, we put on a bunch of positions and our team here basically divided up the names for sort of further work cause we wanted to figure out which were the ones that were the most exposed. Whereas the initial couple dozen was ticked off relatively quickly over the course of a weekend, which is not our normal amount of time to [do] due diligence, but I felt that given what was going on, there may not be a lot of time. And so we began putting on those couple dozen positions a little faster than we ordinarily would if we were just researching an individual security.
So from there we began concentrating our work and trying to figure out well which were the better, more exposed companies and which were the less exposed companies and over the course of the next couple of months, we focused the list down and we covered a number of the shorts and we increased a number of the shorts as we focused on the people that we thought were most vulnerable.
In sum, Einhorn quickly shorted a group of businesses in an industry with problems, worked feverishly to differentiate the worst of that bunch from the best, and then covered his shorts or added to them accordingly. You can check out the rest of the interview at Santangel's Review.