
Porsche: The Hedge Fund That Also Made Cars - ryan_j_naughton
http://priceonomics.com/porsche-the-hedge-fund-that-also-made-cars/
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caboteria
I've heard Harvard described as a hedge fund that has figured out a great way
to avoid taxes.

~~~
jessaustin
They're not quite on a level with the Catholic Church, but give them a few
centuries...

~~~
CamperBob2
Of course, Ikea could school them both when it comes to tax dodges.

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Argorak
I am constantly amazed on how well IKEA stays out of the spotlight as a
corporate entity. We complain about Apple and Google, while IKEA is playing at
least in the same league.

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tinco
But IKEA is not originally a US company, if anything it's avoiding Swedish
taxes.

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Argorak
And that matters how? I'm not from the US, so I'm more concerned about Google
and Apple avoiding local taxes here as well.

Also, I'm sure IKEA avoids local taxes as good as possible as well.

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tinco
It explains why US media are not covering it as much.

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Argorak
I didn't speak about US media. Also, is US media your only source?

It's the same over here, IKEA flies under the radar very well.

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tinco
Well I'm in The NL and it's been in the news here because their holding is
registered here for tax reasons. I think they're one of nl's biggest tax
payers.

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Argorak
Yes, but has it been in the news as much as Apple or Google? It's not like
it's not a topic over here, but usually in the business part of the newspaper,
somewhere down the page. It's not a secret, but rarely an issue people
complain about. Which IKEA is probably quite okay with.

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lisper
Berkshire-Hathaway was a textile company (and then an insurance company)
before it became an investment company.

[http://en.wikipedia.org/wiki/Berkshire_Hathaway](http://en.wikipedia.org/wiki/Berkshire_Hathaway)

"In 1962, Warren Buffett began buying stock in Berkshire Hathaway after
noticing a pattern in the price direction of its stock whenever the company
closed a mill. Eventually, Buffett acknowledged that the textile business was
waning and the company's financial situation was not going to improve. In
1964, Stanton made an oral tender offer of $11-1⁄2 per share for the company
to buy back Buffett's shares. Buffett agreed to the deal. A few weeks later,
Warren Buffett received the tender offer in writing, but the tender offer was
for only $11-3⁄8. Buffett later admitted that this lower, undercutting offer
made him angry.[7] Instead of selling at the slightly lower price, Buffett
decided to buy more of the stock to take control of the company and fire
Stanton (which he did). However, this put Buffett in a situation where he was
now majority owner of a textile business that was failing."

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soperj
Yeah, but Buffett was a investor from the beginning, not a textile manager, he
just used the company to keep doing what he was doing. He also calls it his
worst purchase ever.

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mandeepj
Any idea why Buffett calls Berkshire as his worst purchase ever? I think it
will be interesting to read

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MarkMc
The answer to your question is in Buffett’s 1985 letter to shareholders [1].
The extract below is great demonstration of his business acumen, clarity in
writing, humour, and fairness.

\-------------------------------

> The domestic textile industry operates in a commodity business, competing in
> a world market in which substantial excess capacity exists. Much of the
> trouble we experienced was attributable, both directly and indirectly, to
> competition from foreign countries whose workers are paid a small fraction
> of the U.S. minimum wage. But that in no way means that our labor force
> deserves any blame for our closing. In fact, in comparison with employees of
> American industry generally, our workers were poorly paid, as has been the
> case throughout the textile business. In contract negotiations, union
> leaders and members were sensitive to our disadvantageous cost position and
> did not push for unrealistic wage increases or unproductive work practices.
> To the contrary, they tried just as hard as we did to keep us competitive.
> Even during our liquidation period they performed superbly. (Ironically, we
> would have been better off financially if our union had behaved unreasonably
> some years ago; we then would have recognized the impossible future that we
> faced, promptly closed down, and avoided significant future losses.)

> Over the years, we had the option of making large capital expenditures in
> the textile operation that would have allowed us to somewhat reduce variable
> costs. Each proposal to do so looked like an immediate winner. Measured by
> standard return-on- investment tests, in fact, these proposals usually
> promised greater economic benefits than would have resulted from comparable
> expenditures in our highly-profitable candy and newspaper businesses.

> But the promised benefits from these textile investments were illusory. Many
> of our competitors, both domestic and foreign, were stepping up to the same
> kind of expenditures and, once enough companies did so, their reduced costs
> became the baseline for reduced prices industrywide. Viewed individually,
> each company’s capital investment decision appeared cost- effective and
> rational; viewed collectively, the decisions neutralized each other and were
> irrational (just as happens when each person watching a parade decides he
> can see a little better if he stands on tiptoes). After each round of
> investment, all the players had more money in the game and returns remained
> anemic.

> Thus, we faced a miserable choice: huge capital investment would have helped
> to keep our textile business alive, but would have left us with terrible
> returns on ever-growing amounts of capital. After the investment, moreover,
> the foreign competition would still have retained a major, continuing
> advantage in labor costs. A refusal to invest, however, would make us
> increasingly non-competitive, even measured against domestic textile
> manufacturers. I always thought myself in the position described by Woody
> Allen in one of his movies: “More than any other time in history, mankind
> faces a crossroads. One path leads to despair and utter hopelessness, the
> other to total extinction. Let us pray we have the wisdom to choose
> correctly.”

[1]
[http://berkshirehathaway.com/letters/1985.html](http://berkshirehathaway.com/letters/1985.html)

~~~
MarkMc
Can't help quoting a little more to give an insight into Buffett's character:

> Though 1979 was moderately profitable, the business thereafter consumed
> major amounts of cash. By mid-1985 it became clear, even to me, that this
> condition was almost sure to continue. Could we have found a buyer who would
> continue operations, I would have certainly preferred to sell the business
> rather than liquidate it, even if that meant somewhat lower proceeds for us.
> But the economics that were finally obvious to me were also obvious to
> others, and interest was nil.

> I won’t close down businesses of sub-normal profitability merely to add a
> fraction of a point to our corporate rate of return. However, I also feel it
> inappropriate for even an exceptionally profitable company to fund an
> operation once it appears to have unending losses in prospect. Adam Smith
> would disagree with my first proposition, and Karl Marx would disagree with
> my second; the middle ground is the only position that leaves me
> comfortable.

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datainplace
Priceonomics. The blog that also is a startup.

Sorry, I couldn't resist.

~~~
rohin
Don't feel bad about the joke, that's how we think of ourselves too (I work at
Priceonomics). I think it's actually an interesting advantage versus a content
site that just thinks of themselves as a content site.

~~~
datainplace
I miss the old price guides, but I enjoy the blog (it's in my RSS feed). I may
even buy the book one day.

For those of you who missed the story of Priceonomics' pivot, Techcrunch has a
good writeup: [http://techcrunch.com/2013/11/26/priceonomics-data-
services/](http://techcrunch.com/2013/11/26/priceonomics-data-services/)

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nathell
Did anyone mention McDonald's, the real estate company that also happens to be
making hamburgers, yet?

[http://money.howstuffworks.com/mcdonalds.htm](http://money.howstuffworks.com/mcdonalds.htm)

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raverbashing
They also make money on the pig price oscillations.

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arjunrc
This is a must-read for automobile fans. Ferdinand Piech is as tech and
business savvy as he is diabolical, and this article gives you a little
perspective of that. I hope someone writes a book about him soon.

I mean, if you personally played a hand in creating the Audi Quattro (that
dominated rallying) and the world's fastest car (Veyron, reviving a dead
brand), which everyone deemed impossible, you've got to be in the history
books of the automobile world.

Can't wait to see how they compete with electric upstarts and how they evolve
their Ducati motorcycle brand.

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ExpiredLink
> _I hope someone writes a book about him soon._

Mostly in German:

[http://www.amazon.com/s/ref=nb_sb_noss?field-
keywords=Ferdin...](http://www.amazon.com/s/ref=nb_sb_noss?field-
keywords=Ferdinand+Pi%C3%ABch)

~~~
arjunrc
Thank you for the link. I found one English one, which dedicates part of it
about him.

[http://www.amazon.com/Six-Built-Modern-Auto-
Industry/dp/B005...](http://www.amazon.com/Six-Built-Modern-Auto-
Industry/dp/B005Q5Y3SE)

I do wish for a proper English biography, written by someone like Steven Levy
or Walter Isaacson.

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jakozaur
The story of one of the largest short squeeze:
[http://en.wikipedia.org/wiki/Short_squeeze](http://en.wikipedia.org/wiki/Short_squeeze)

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tim333
Probably the largest ever in nominal dollars. If you adjust for inflation
there might be some historical stuff that would beat it I guess?

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tim333
I note a couple of down votes but the market cap increased by approx $300bn in
a couple of days to $370bn. Anyone know any short squeezes that beat that?

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wdewind
It's an interesting story but hard to understand why they are saying it's a
hedge fund. The fact that Porsche made an investment in VW that affected the
larger financial markets does in no way equate to Porsche being a hedge fund,
especially since that investment was made to allow them to continue
manufacturing cars, not as a switch to focusing on financial markets.

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iaw
1) Porsche's investment did not impact the larger financial markets in any
way. Porsche's investment impacted VW stock and nothing else (I believe
Porsche was 100% privately owned at that time)

2) Porsche's actions were like a hedge fund because they designed a financial
situation where they couldn't lose (up until the financial collapse cut off
their liquidity). Had the markets not collapsed and Porsche had been able to
borrow like it could in 2007 they would've owned VW, the issue is that the
markets collapsed and massive lending restrictions were imposed requiring
Porsche to payback loans instead of roll them over. In the end they turned to
VW to pay back the loan. Had that external event not impacted the lending
environment Porsche would've acquired VW and subsidized their cost through
financial participants shorting VW stock.

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adwf
I think they are putting a little too much of the blame on Wiedeking here. The
CEO doesn't make huge stock purchases like this without board approval, and
Piëch was on the board of both Porsche and VW. To me it sounds a lot more like
a play by Piëch all along.

The article also understates the rivalry between Porsche and VW. They're
saying it's just Wiedeking behind it since '93, but it's really been going on
for a lot longer as far as I know.

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wolfgke
German newspapers at the time mainly blamed Holger Härter as the "mastermind"
behind the sketchy stock gamblings of Porsche.

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seanv
anyone who took a quick look at this and didn't read the whole thing, i highly
recommend it... i felt like i was reading Game of Thrones - Car Edition. What
a fantastic story I never knew about!

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cumeater
I like how desperately this article tries to portray Ferdinand Piëch as a
genius when he just got lucky. What if the "great Financial Crisis" of 2008
did not hit and a board member wasn't in bed with German Chancellor? These
shenanigans would have blown into Piëch's face.

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nicholassmith
Porsche also required the VW Rule to be repealed, irregardless of the
financial collapse that would have been a sticking point and could have
dragged on indefinitely or not happened at all. Porsche would have the 75% it
wanted but they couldn't have taken a full acquisition, and Piëch could play
the game from that position.

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swang
Wow I remember the squeeze, didn't know it cost Porsche it's independence.
Great read!

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burnte
It's a very dangerous gambit, because the more you buy, the more power you
give to the company you're buying, because so much of your wealth is tied up
in them, their actions directly affect your wealth without you having any
control. It's the same reason the argument that China could crush the US
economically by calling in its debt is so wrong. That would deflate the dollar
to such a point that China would lose literally a trillion dollars of value.
Porche simply forgot how much power they had given away.

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ot
It seems that this move has been performed enough times to deserve its own
(very amusing) name: Pac-Man defense

[http://en.wikipedia.org/wiki/Pac-
Man_defense](http://en.wikipedia.org/wiki/Pac-Man_defense)

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hosay123
Blatant clone of a vastly more concisely written (read: not padded using a
thesaurus) article by Ivan Krstic

[https://radian.org/notebook/porsche](https://radian.org/notebook/porsche)

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abat
The Krstic article is an explanation of the short squeeze that happened near
the end. This is just a small part of the Priceonomics article. The
Priceonomics article includes a lot more history about the companies and
people involved as well as the German politics protecting VW. The Krstic
article doesn't even include the twist ending where VW buys Porsche.

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pjtr
I'm curious, how much did Wiedeking personally profit from this scheme? How
much would he have made had he continued "just focusing on making cars" as the
article concludes he should have?

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ManuelKiessling
Seems like the article actually is an experiment that tries to find out in how
many ways you can misspell the word Porsche.

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oxryly1
Excellent article. In depth, with great sources.

And all on one page!

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guiomie
Quite a good read.

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srhngpr
They should make a movie out of this.

"Das Hedge Fund"

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cjbenedikt
"DER" Hedge Fund...;-)

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pd0wm
The slogan of Volkswagen is "Das Auto". Or did you knew ;)

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wolfgke
"Das Auto" is correct German, but neither "Das Hedge Fund" nor "Der Hedge
Fund" is. Only "Der Hedgefond" is correct.

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peterfirefly
Bessermacher.

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pranayairan
such an amazing post. Loved it !!

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immaceleb
is that true?

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CamperBob2
It's true, but it's also true that the Piëch and Porsche families have always
been like the two guys duking it out over the island in LOST. This particular
"business relationship" goes back multiple generations.

The good news for owners and fans of the cars is that Porsche's doing their
best work ever under the Volkswagen AG umbrella.

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MrBuddyCasino
I know nothing about cars, but I heard from someone who worked there that for
some parts, they now have to send half of them back to Volkswagen because they
don't meet specifications anymore, and that bureaucracy is on the rise.

Just hearsay, so take this with a grain of salt.

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CamperBob2
_I know nothing about cars, but I heard from someone who worked there that for
some parts, they now have to send half of them back to Volkswagen because they
don 't meet specifications anymore_

This is a _good_ thing. In 1992, it was my job, as a Porsche customer, to find
all of those bad parts. :-P These days the factory does a better job catching
the problems before they escape the building.

