Tag Archives: CHIPOTLE

CHIPOTLE MEXICAN GRILL (CMG) – UPDATED WRITEUP

CONCLUSION:

 Chipotle is firing on all cylinders. Same store sales are up, among the very best in the industry. Margins are improving. New locations are opening well. There continues to be a long runway for further growth in units. Their position relative to digital ordering, takeout and delivery sales from their relatively small store allows them to regain the market share lost in 2015-2016 and attract new customers as well. Their separate “make line” allows them to provide superior service to customers who are dining outside the four walls, and that competitive edge should be in place for the foreseeable future.

The stock has regained, and even exceeded the valuation relative to earnings and EBITDA that was maintained in their younger days. There is no reason to expect a fundamental stumble here. Absent a general market downtrend, we expect CMG stock performance to parallel the continued earnings and cash flow improvement.

 THE COMPANY:

 Chipotle Mexican Grill, Inc. operates Chipotle Mexican Grill restaurants which feature a varied menu of burritos, burrito bowls, tacos and salads. Their mission statement is “Cultivating a better world by serving responsibly sourced classically cooked food with wholesome ingredients.” Chipotle continues to be a brand with a demonstrated purpose and at the core of their commitment is Food with Integrity. The idea behind Chipotle’s inception was to show that food served fast didn’t have to be a typical “Fast Food” experience. As of December 31, 2019, Chipotle operated 2,580 locations throughout the U.S. and 30 international and 3 non-Chipotle restaurants.

STORE LEVEL UNIT LEVEL ECONOMICS (Source: 2019 10K SEC Filing):

UNIT LEVEL ECONOMICS COMMENTARY:

AUV rose 10% in fiscal 2019 primarily driven by 7% increase in comparable restaurant transactions. Additionally, digital sales increased from 7.1% to 18% of revenue for the full year 2019; an increase of 10.9% of revenue for the full year 2018. Cost of Goods Sold increased by 20 basis points in 2019 primarily due to higher protein costs and food expenses related to the launch of Chipotle Rewards in March 2019. These increases were partially offset by the menu price increases taken at the end of 2018. Labor Costs decreased by 90 basis points primarily due to sales leverage, partially offset by wage inflation. Occupancy Costs decreased in 2019 by 60 basis points primarily due to sales leverage on a largely fixed cost basis. Other Operating Costs decreased by 40 basis points in 2019 primarily due to sales leverage and, to a lesser extent, elevated store repair and maintenance costs in 2018. This was partially offset by increases in Delivery Expenses in 2019.

Store level EBITDA increased from 18.7% in 2018 to 20.4% in 2019; an improvement of 170 basis points. This was achieved primarily as a result of sales leverage.

UNIT DEVELOPMENT

DEVELOPMENT COMMENTARY:

During fiscal 2019 Chipotle opened 140 new restaurants and closed 7 units for a net total of 2,622 at end of fiscal 2019. In 2020: 150-165 new locations are planned.

SAME STORE SALES

SAME STORE SALES COMMENTARY

Comparable restaurant sales increased 11.1% in 2019 as a result of a 7.0% increase in transactions and a 4.1% increase in average check.

RECENT DEVELOPMENTS – Per Q4’19 Earnings Release and Conference Call

Fourth quarter results were very strong. Comp sales were up by 13.4%, including 8.0% transaction growth. Price was only 2%, so the balance was menu mix. Digital sales grew by a dramatic 78.3%, accounting for 19.6% of total sales. The strong sales allowed for “leverage” in every store level expense line, demonstrating how top line progress solves lots of problems. CGS was down 10 bp to 33.1%, Labor was down 60 bp to 26.5%. It’s worth noting that the labor efficiency was in spite of the inefficiency involved in openings 80 new restaurants in Q4. Occupancy Expense was down 70 bp to 6.5%, Other Operating Costs were down by 70 bp. The restaurant EBITDA operating margin was therefore up 220 bp to 19.2%. Diluted EPS, adjusted for legal, corporate restructuring and certain other costs, was up 66.3%. In addition to the 80 new restaurants, whose opening volumes management has described as the “highest in company history”, there was one relocation and three were closed. There were 46 Chipotlanes opened in Q4, for a total of 66 operating at year-end. $38M of stock was repurchased in Q4, $168M for the year. Also noteworthy is the Company effort to retain valued employees and build an improved culture, which is being done by way of Debt-Free Degrees, improved crew bonus programs and better mental health coverage.

There continues to be the opportunity to enhance store level margins further. Management points out the possibility of generating a 25% store level EBITDA at $2.5M of annual store revenues, and that possibility is obviously not as far away as it might have seemed a year or so ago.

In 2020, 150-165 new restaurants are planned, more than half with Chipotlanes. Management is guiding to mid-single digit comp sales in 2020, no doubt taking a conservative view, going up against difficult comparisons and the past success of carne asada. The Company continues to buy back stock, with an additional $100M approved in Q4, on top of the available $69.4M at 12/31. In terms of Q1’20 expectations, labor costs are expected to be in the mid 26% range (including 4-5% labor inflation), CGS in the mid 32% range (with moderating avocado costs partially offset by higher carne asada expense).

In recent product and marketing news: CMG announced the launch of Guac-mode – an exclusive benefit that will unlock access to free Guac rewards exclusively for Chipotle Rewards members. During the month of February, Reward members who purchase a regular priced entrée and scan their App will receive Guacamole (considered one of the best in the industry) as a topping for free. The Company has also announced plans to revamp their menu in 2020, and introduce one or two new menu items per year. The very successful Carne Asada will be coming off the menu in QTR-1 (might return later as a permanent menu item). New to the menu (during Qtr-1) will be a new Queso Blanco which will replace the existing Queso. Still in test are Quesadillas and Beverages. Pre-configured diet driven lifestyle bowls were introduced in January and there was “terrific feedback”. In terms of CMG’s success with digital marketing and delivery, the digital pickup shelves are now systemwide and 98% of the stores have a delivery capability. There are now 8.5 million members in the loyalty program less than a year after being launched.

The Company is enhancing employee benefits, with Debt-Free Degrees, crew bonus programs and better mental health coverage.

 CONCLUSION: Provided at the beginning of this article

Roger Lipton

BILL ACKMAN, WITH 41% OF ASSETS IN QSR, CMG AND SBUX COMBINED, IS STILL NOT WELL POSITIONED

BILL ACKMAN, WITH 41% OF ASSETS IN QSR, CMG & SBUX COMBINED, IS STILL NOT WELL POSITIONED

We wrote an article on October 11th, discussing the three major positions in Bill Ackman’s Pershing Square Capital portfolio, within our knowledge base, that comprise a massive 41% of his $8.3 billion portfolio.

At the close of business, October 11th, Restaurant Brands (QSR) was $56.26, Chipotle (CMG) was $434.06, and Starbucks (SBUX) was $54.87. Our conclusion on October 11th was that he should switch his QSR immediately into McDonald’s (then at $163.98), sell his CMG to take advantage of the huge move since new management has been installed, and hold his SBUX (which has moved up nicely).

We have no reason to think that he has made any moves in the last several weeks, but Restaurant Brands, McDonald’s and Chipotle have all reported third quarter results. Starbucks reports tonight.

From the close of business October 11th to last night’s closing price, Restaurant Brands, at 53.06 was down 5.7%, or $85M on the $1.5B position. McDonald’s, at $178.42 was up 8.8%, so would have made Ackman’s Pershing Square Capital a profit of $132M. Chipotle closed at $465 so Ackman would have foregone a profit of 7.1% or $63M on his $900M investment.

Our advice, less than three weeks ago, to Ackman can definitely be considered “theoretical” in terms of the practical ability to switch $1.5B positions instantly, or sell $900M worth of Chipotle on the spur of the moment, and Ackman’s positions are established on the basis of long term prospects. Acknowledging that three weeks doesn’t “make a season” or prove a thesis, Ackman’s portfolio would be ($132M+85M-$63M) a cool $154M better off, or 4.5% of the $3.4B in these three positions, especially costly when all hedge fund managers are fighting for every basis point in a difficult market environment.

Our points here are (1) too many multi-billion hedge funds, and other institutions are playing hunches rather than making well informed long term judgements. This is a function of not enough really attractive reward/risk investment propositions when trillions of dollars of capital are competing to generate “alpha” after nine years of a bull market (2) there is too much emphasis on short term performance, trying to “game” the monthly comps for example,  rather than evaluate long term strategic positioning (3) in too many cases, the self confidence of multi-billion dollar money managers is unjustified. They are very smart, hard working, in many cases have become very rich (which breeds inflated egos), and can’t be expected to know as much they should about every industry. Rather than make Bill Ackman an undeserved particular example: Eddie Lampert, still a billionaire, had no chance whatsoever to turn around Sears based on his strategies, and there were lots of highly experienced retailers that could have told him so. It has taken ten years to play out, but it was clear to many of us years ago that the brilliant and successful Lampert was wasting enormous time and money on Sears.

If we were speaking with Ackman today, we would suggest that it’s not too late to adjust the portfolio. The last three weeks are history.  Let’s see what happens over the longer term.

Roger Lipton

BILL ACKMAN BETS $1 BILLION ON STARBUCKS – SHOULD YOU FOLLOW HIM?

BILL ACKMAN BETS $1 BILLION ON STARBUCKS – SHOULD YOU FOLLOW HIM?

Bill Ackman’s Pershing Square Management (now managing about $8.3 billion), announced on Tuesday a new billion dollar holding in Starbucks. Typical of his disclosure of major new positions, he made a lengthy presentation at an investment conference. We will get to a discussion of his rationale regarding SBUX, but we’ve followed Ackman’s career, since we’re in the same business (on a much, much smaller scale), and a few highlights will likely be of interest to our readers.

His long term record is outstanding. According to Pershing Square’s website, since inception in 2004 through calendar ’17, the compound annual return, after fees, has been 13.6%, versus 8.7% for the S&P 500 index.  However, the really great years were the early ones, when returns from 2004 through 2007 were  up 42.6%, 39.9%, 22.5% and 22.0% respectively. The year’s 2007 through 2014 were still good, though not as spectacularly consistent,  down 13.3%, up 40.6% (must have been short in 2008), up 29.7%, down 1.1%, up 13.3%, up 9.7%, up 36.9%. The last four years, from 2015 through 2018 have been disappointing, down 16.2%, down 9.6%, down  1.6% and up something like 10% YTD in ’18.

Ackman has made some spectacularly big gains, since he makes big bets, and has had equally impressive losses. Among his largest gains have been MBIA, General Growth Properties, Platform Specialties, and Restaurant Brands (which is an outgrowth of his holdings in Burger King and Tim Horton’s, which merged). His losses have included JC Penney, Target and Valeant. He become a household name with a well publicized short position in Herbalife a few years ago, and finally exited the position after an extensive and expensive campaign to put the company out of business.  Ackman’s brilliance and tenacity are unquestioned. One could question, however, whether any money manager has the right to personally decide whether a company deserves to be in business. It’s one thing to announce a short position. It’s another to take it upon yourself to contact bankers and employees and anyone else you can find (in the case of Herbalife: their sales network) in an effort to discredit the organization.

Which brings us to Ackman’s current large bets within the universe that we know pretty well, namely his positions in Restaurant Brands (QSR), Chipotle (CMG), and, most lately, Starbucks (SBUX). His $8.3 billion portfolio is down quite a bit from $18.3 billion in 2015, no doubt due to his lackluster performance lately. His CMG is worth about $900M, his SBUX is worth about $1 billion, and his QSR is worth about $1.5 billion. These three positions, therefore, represent a total of about 41% of his $8.3 billion portfolio.

In summary, we don’t think this major portion of his portfolio will outperform the general market, or even the restaurant industry in general.

Regarding Restaurant Brands (QSR), by far the largest of the three positions: We’ve written extensively, which readers can access through our Home Page. In a nutshell, the stock is more than adequately valued, since the largest contributor to their EBITDA, Tim Horton’s, is a troubled chain, Popeye’s is too small to move the corporate needle much, and Burger King, though it has performed well under QSR’s leadership, continues to operate in a very competitive burger segment. The “low hanging fruit”, that was opportunistically picked by the QSR financial engineers, is gone, so the earnings progress of the past won’t be duplicated from this point forward. We refer readers, again, to our previous more extensive discussions. A heck of a case can be made, in terms of the fundamentals and the relative valuations, that QSR should be switched into MCD immediately.

Regarding Chipotle (CMG), still almost $1 billion holding, Ackman’s original position, taken a couple of years ago, in the 400s, after falling to a low of about $260, has come back to a profitable point, and Ackman’s has exited about 25% of his position. We wrote, a couple of years ago, that he had no “edge” relative to his knowledge of CMG. There was no undervalued real estate, or other opaque asset that  could be monetized. His opinion was no better than yours or mine whether the brand could, or would, regain its previous popularity. Ackman has gotten lucky, because CMG has run back to $440 today (was briefly over $500 in mid ’18), and he is more or less even on the position. The huge move in the stock has more than adequately anticipated the fundamental recovery, now selling at over 50x ’18 EPS, and 27x trailing EBITDA. It is three full years since the crisis of ’15, and same store sales are only up by single digits against easy comparisons. Backing out menu price increases, traffic has barely improved from the lows. Further backing out the progress with their mobile app, in store dining traffic is still less impressive. Suffice to say: CMG, still challenged, is no bargain at current levels.

Regarding Starbucks (SBUX), the most recent purchase. Once again, we have written extensively on this situation, which we encourage you to access with the Search function on our Home Page. This is a great worldwide brand. They will continue to grow, especially in China. They will continue to buy back billions of their own stock. However: the future growth will be slower than in the past, so the price/earnings multiple is unlikely to expand, which Ackman is counting on. Ackman has discovered  that Starbucks is selling caffeine, and we’ve pointed out many times that selling an addictive product is a significant corporate advantage. (Maybe that’s why Constellation Brands, STZ, has invested $4 billion, for a 38% in Canopy Growth, CGC, a cannabis company with a market cap of $10B, over 20x ’19 estimated sales.) However, back at SBUX, food sales are about 25% of sales, so, backing out the increase in food sales,  caffeine sales are down over the last couple of years. In a nutshell, as in the case of his CMG purchase, he has no edge. His argument that the valuation of SBUX, in terms of earnings and cash flow, is well below the long term average, that is almost inevitable when growth expectations are less than was the case historically. Ackman expects SBUX to double in price over the next three years. Since the earnings per share will likely not grow at more than a mid-teen rate, even including stock buybacks (don’t forget the rising labor costs), he is counting on valuation expansion, which we consider unlikely. Having said all that, we consider it unlikely that he will lose money on this position over the next several years. Starbucks is a very strong company. It will just not be as profitable as he hopes.

In summary:

We don’t expect that Ackman’s performance, nominally and relatively, will improve by way of the above 41% of his portfolio. Starbucks is unlikely to do any major damage, but Restaurant Brands is substantially overvalued. He should switch immediately into McDonald’s or something else. He should consider himself lucky if he can exit Chipotle in one piece. From a broader standpoint: If this is the best Ackman (a very smart guy) can find in the marketplace today, it is not a good commentary on the state of the market.  situations.

Roger Lipton

CHIPOTLE (CMG) – Stock Is 300 points lower over last two years – What to do now?

CHIPOTLE (CMG) – 2 yrs. later, stock down over 50%, getting hammered again, what now?

We’ve written repeatedly about Chipotle over the last two years, almost always from a cautious standpoint. Readers can use the search function on our home page to revisit the various articles.

Earnings were released last night, and the stock is down $48 as this is written, to $276. per share. Investors and analysts were obviously very disappointed with the results and the prospect for near term improvement. We will not rehash the quarter here, since you can get that elsewhere. We will instead focus on our view relative to current store level performance, and the likelihood of better results.

Our focus, as a potential investor, should be on the existing system and the new stores that are being built. The AUV is now running at a rate of about $2M. The systemwide store level margin was 16.1% and 17.6% over the last three months and nine months, respectively. New stores are apparently doing about $1.5M with a first year store level EBITDA margin of about 10%. The average investment in leasehold improvements and equipment runs about $800,000. If we assume 18% EBITDA store level return on the current systemwide AUV of  $2M, and 10% first year EBITDA return on $1.5M, we get a cash on cash return of 45% and 19% respectively. These returns are more than satisfactory for the mature stores, but less than exciting in the first year. The problem is that, charitably speaking, the AUVs and margins have been challenged for the last twenty four months, and the big question is whether volumes and margins will improve or not.  This is especially so, with the stock still trading at over thirty times estimates for ’18 that will probably settle in the $7.00-$8.00 EPS range.

I think part of the extreme reaction by CMG stock this morning, is a result of what I would call encouraging commentary by Chipotle’s Chief Marketing Officer,  Mark Crumpacker,  and Bill  Ackman, a prominent institutional stockholder. In late September, Crumpacker’s internal email memo was somehow obtained, and  cited,  by Bloomberg, saying that “diners like its new queso dish, even though some dissatisfied customers took to Twitter and other social media outlets to trash it”.   Ackman, affiliated with two Board members, was quoted as saying that while “he hadn’t tried queso, people in his office had tried it and liked it” and the stock then trading around $312 “is extremely cheap”.  He also said “I’m beginning to believe that Twitter is filled with a bunch of Chipotle short sellers.”

What’s somewhat surprising to me is that,  though Crumpacker’s internal memo was presumably  not intended for public distribution, some observers would assume that Ackman had an informed opinion regarding the impact of the queso introduction. The hope that Queso was doing very well, brought back to reality by last nights discussion, has been dashed, and may be contributing to the dramatic stock plunge this morning.

While the Company claimed to be satisfied with results of the rollout, indicating a high single digit sales lift when launched, then “leveling off” after initial trial. “Currently 15% of our customers continue to order queso”. As an analyst and an observer with no  horse in this race (I’m not long or short CMG right now.) I’ve tried it, found it adequate, but far from a “game changer”. It may or may not contribute a few points to the comp, but it is not an “Oh, Wow!”

Remaining Strategic Issues

Many critics of the Company over the last two years have questioned the continued construction of 180-200 new stores, over 10% unit growth, at the same time retooling the system to prevent further operational problems. Announced last night was a reduction of unit growth, to 130-150 in ’18. Steve Ells, CEO, described the thought process on the conference call last night as follows: “..as Scott (new Chief Restaurant Officer) got involved…it was very clear that, the analogy I would use is we’re changing the tire while the car’s still moving and here we have a lot of people that we need to train or retrain how to run a great restaurant…….opening up new stores is a big distraction. You have to start thinking about hiring people months and months in advance….you’ve got to train people in advance of the opening..turnover in a new restaurant often is high…..so it’s a distraction in a lot of ways.” To which I say: “Really?”  and “Too Little, Too Late!” It seems to this observer that 130-150 new stores could still be reasonably “distracting” from the ongoing challenge to regain old customers and attract new ones.

Another “strategic” decision that has been made,  predicted, by myself and others, to be foolish and expensive has been the huge expenditure to buy back stock, at valuations that have been far from inexpensive. Prior to the most recent quarter, about ONE BILLION DOLLARS was spent to buy back stock in the mid $400 range, on average. I wrote over a year ago that the company was “out of their mind” to be buying stock back, at over $500 per share, especially when they knew the upcoming news would not be good. The folly continues. In the most recent quarter, $102.5 million was spent, at an average price of $341. An additional $100M has been authorized. There is still over $500M on the balance sheet and no debt. Could have been over $1.5B.

FROM THIS POINT FORWARD:

There are lots of initiatives that are in place, including the contribution from a number of highly qualified restaurant executives that have been added to the team. For details of this effort,  I  encourage interested observers to read the transcript of last night’s conference call. (https://edge.media-server.com/m6/p/izb7479f)  It’s all promising, but challenging, especially in an environment that is generally unforgiving. Over the last two years, as the Chipotle brand has been undermined, new and old competitors have not been standing still.

In summary: My conclusion is about the same as it was two years ago, when CMG was over 100% higher. There is no rush to invest here, even with the stock down so substantially. The valuation is far from “cheap”. There are better alternatives if an investor wants to pay well over 30x expected earnings in calendar ’18.

CHIPOTLE – 2 Yrs. Ago – Everybody wanted to be the next Chipotle – Today, Not So Much!!

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  • Opportunity to “Ask Rog” about your personal concerns, regarding individual companies or broader economic trends. Roger will use his best efforts to answer questions submitted, obviously limited by the number of requests . He may answer your question by email directly and/or include your question with his “Roger’s Rap” releases.
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CHIPOTLE (CMG) UPDATE – QUARTERLY REPORT COMING TOMORROW

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INCLUDED IN YOUR ANNUAL SUBSCRIPTION:

  • Broad economic insight. As described in “Restaurants/Retail – Why Bother?” the restaurant and retail industries provide a leading indicator of far broader economic trends. You no longer have to be the last to know.
  • Two to three analytical pieces per week (“Roger’s Rap”) personally written by Roger Lipton describing corporate developments within his industry specialization, including their relevance to the broader economy.
  • Periodic “macro” discussions personally written by Roger Lipton, analyzing fiscal and monetary matters that will likely affect your investments and your business.
  • Opportunity to “Ask Rog” about your personal concerns, regarding individual companies or broader economic trends. Roger will use his best efforts to answer questions submitted, obviously limited by the number of requests . He may answer your question by email directly and/or include your question with his “Roger’s Rap” releases.
  • You are provided access to “Friends of Rog”, depending on your financial and operational needs. The outstanding individuals suggested here, have been personally “vetted” by Roger over decades. Roger receives no compensation based on whether or not use their services.
  • A free copy of the legendary best selling book, How you can Profit from the coming devaluation, as shown at right, written in 1970 by Harry Browne, which predicted the 2000% rise in the price of gold. This profound piece is more relevant today than ever, so Roger re-published it in 2012. This book will help you preserve the fortune you are in the process of accumulating.

CHIPOTLE UPDATE – STILL A STATE OF FLUX

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INCLUDED IN YOUR ANNUAL SUBSCRIPTION:

  • Broad economic insight. As described in “Restaurants/Retail – Why Bother?” the restaurant and retail industries provide a leading indicator of far broader economic trends. You no longer have to be the last to know.
  • Two to three analytical pieces per week (“Roger’s Rap”) personally written by Roger Lipton describing corporate developments within his industry specialization, including their relevance to the broader economy.
  • Periodic “macro” discussions personally written by Roger Lipton, analyzing fiscal and monetary matters that will likely affect your investments and your business.
  • Opportunity to “Ask Rog” about your personal concerns, regarding individual companies or broader economic trends. Roger will use his best efforts to answer questions submitted, obviously limited by the number of requests . He may answer your question by email directly and/or include your question with his “Roger’s Rap” releases.
  • You are provided access to “Friends of Rog”, depending on your financial and operational needs. The outstanding individuals suggested here, have been personally “vetted” by Roger over decades. Roger receives no compensation based on whether or not use their services.
  • A free copy of the legendary best selling book, How you can Profit from the coming devaluation, as shown at right, written in 1970 by Harry Browne, which predicted the 2000% rise in the price of gold. This profound piece is more relevant today than ever, so Roger re-published it in 2012. This book will help you preserve the fortune you are in the process of accumulating.

CHIPOTLE UPDATE – EARNINGS AND SALES PREVIEW – COMPANY REPORTS NEXT TUESDAY

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INCLUDED IN YOUR ANNUAL SUBSCRIPTION:

  • Broad economic insight. As described in “Restaurants/Retail – Why Bother?” the restaurant and retail industries provide a leading indicator of far broader economic trends. You no longer have to be the last to know.
  • Two to three analytical pieces per week (“Roger’s Rap”) personally written by Roger Lipton describing corporate developments within his industry specialization, including their relevance to the broader economy.
  • Periodic “macro” discussions personally written by Roger Lipton, analyzing fiscal and monetary matters that will likely affect your investments and your business.
  • Opportunity to “Ask Rog” about your personal concerns, regarding individual companies or broader economic trends. Roger will use his best efforts to answer questions submitted, obviously limited by the number of requests . He may answer your question by email directly and/or include your question with his “Roger’s Rap” releases.
  • You are provided access to “Friends of Rog”, depending on your financial and operational needs. The outstanding individuals suggested here, have been personally “vetted” by Roger over decades. Roger receives no compensation based on whether or not use their services.
  • A free copy of the legendary best selling book, How you can Profit from the coming devaluation, as shown at right, written in 1970 by Harry Browne, which predicted the 2000% rise in the price of gold. This profound piece is more relevant today than ever, so Roger re-published it in 2012. This book will help you preserve the fortune you are in the process of accumulating.