You can't make a good deal with a bad person.
Turnarounds seldom turn.
“If you don’t know jewelry, know the jeweller.”
You do things when the opportunities come along. I’ve had periods in my life when I’ve had a bundle of ideas come along, and I’ve had long dry spells. If I get an idea next week, I’ll do something. If not, I won’t do a damn thing.
If a business does well, the stock eventually follows.
There are all kinds of businesses that Charlie and I don’t understand, but that doesn’t cause us to stay up at night. It just means we go on to the next one, and that’s what the individual investor should do.
I am out of step with present conditions. When the game is no longer played your way, it is only human to say the new approach is all wrong, bound to lead to trouble, and so on. On one point, however, I am clear. I will not abandon a previous approach whose logic I understand ( although I find it difficult to apply ) even though it may mean foregoing large, and apparently easy, profits to embrace an approach which I don’t fully understand, have not practiced successfully, and which possibly could lead to substantial permanent loss of capital. - 1969
If I was running $1 million today, or $10 million for that matter, I’d be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I’ve ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that. “Homespun Wisdom from the ‘Oracle of Omaha’", BusinessWeek, 5 July 1999.
No sector is a good buy unless you understand the business. However, I do believe that there is good value and great opportunity now in the financial sector because it is extremely unpopular. Sector’s themselves don’t make good buys, companies that are undervalued make good buys. You know how to value a business, you project the future cash flows discounted to present and buy with a margin of safety. The earnings prospects need to be greater than the current value. Anything that is unpopular is always great to look at. If I was getting out of school right now, I would take a look.
None of this means, however, that a business or stock is an intelligent purchase simply because it is unpopular; a contrarian approach is just as foolish as a follow-the-crowd strategy.
-WB
Showing posts with label README. Show all posts
Showing posts with label README. Show all posts
Sunday, July 21, 2013
Avoiding mistakes - routine is key
Having well-defined procedures is a start. For everything from acquisitions to annual budgets, when CFOs and management teams follow well-structured processes, more careful analysis takes place. Checks and balances kick in that can curb impulses and other destructive forms of fast thinking.
Wednesday, July 03, 2013
Diversification reduces risk
If there is a bet on a flip of a coin : $100 becomes $120 on heads and becomes 0 on tails.
Value of bet is : 120 *0.5 + (-100) * 0.5 = 10.
Return is 10/100 but worst case is too risky (-100%)
If there are 10 coins, $10 bet on each, it becomes : $12 on each head and $0 on tails.
value of bet is 5heads and 5 tails : 10* (12 * 0.5 + (-10) * 0.5) = 10 = 10%
If it is 4H:6T : 4*(12 * 0.5) + 6*(-10)*0.5 = 24 -30 = -6 = -6%
-Lastly, O’Shaughnessy believes that proper diversification is a key factor in maintaining a profitable portfolio. He recommends at least 25 stocks in a micro-, small- or mid-cap portfolio and at least 10 in a large-cap portfolio.
-In case you were wondering, a strategy based on buying stocks with the worst 6-month returns and then holding for a year had an annualized return of 4.15 percent (compared to 14% for low p/s)! As stated in the book, “If you’re looking for a great way to underperform the market, look no further [than buying relative strength laggards].”
-Low P/S and P/B led to best returns. Adding a generic relative strength strategy based on a 6-month return factor with annual rebalances outperformed further.
Value of bet is : 120 *0.5 + (-100) * 0.5 = 10.
Return is 10/100 but worst case is too risky (-100%)
If there are 10 coins, $10 bet on each, it becomes : $12 on each head and $0 on tails.
value of bet is 5heads and 5 tails : 10* (12 * 0.5 + (-10) * 0.5) = 10 = 10%
If it is 4H:6T : 4*(12 * 0.5) + 6*(-10)*0.5 = 24 -30 = -6 = -6%
-Lastly, O’Shaughnessy believes that proper diversification is a key factor in maintaining a profitable portfolio. He recommends at least 25 stocks in a micro-, small- or mid-cap portfolio and at least 10 in a large-cap portfolio.
-In case you were wondering, a strategy based on buying stocks with the worst 6-month returns and then holding for a year had an annualized return of 4.15 percent (compared to 14% for low p/s)! As stated in the book, “If you’re looking for a great way to underperform the market, look no further [than buying relative strength laggards].”
-Low P/S and P/B led to best returns. Adding a generic relative strength strategy based on a 6-month return factor with annual rebalances outperformed further.
Saturday, June 29, 2013
From "The outsiders" by William Thorndike
-The outsider CEOs achieved extraordinary results by consistently zigging while their peers zagged.
-The outsider CEOs consistently calculated the projected return before starting a project. They believed that the value of the financial projections was determined by the quality of their assumptions, not by the number of pages. Many developed single-page analytical templates that focused employees on key variables. These deceptively simple but analytical one-pagers served as a trigger to invoke Kahneman's slower reflective/analytical System 2
-To Buffett, there is a compelling Zen-like logic in choosing to associated with the best and in avoiding unnecessary change.
-Buffett believes that excellent investment ideas are rare and exceptional returns come from concentrated portfolios. "We believe that a policy of portfolio concentration may well decrease risk if it raises the intensity with which an investor thinks about a business and the comfort level he must feel with its economic characteristics before buying into it"
-Better to change vessels in a chronically leaking boat than to patch leaks
-See's : The Turning point : WB bought See's for $25 million. They had tangible book of $7M and 4.2M in pre-tax profits. They paid an exorbitant 3X book and 6 times pre-tax income compared to Graham's strictures. They saw a beloved brand with excellent returns on capital and untapped pricing power. The company has sent 1.65B in free cash to Omaha in 39 years.
-Buffett's contrarian insight was that companies with low capital needs and the ability to raise prices were actually best positioned to resist inflation's corrosive effects.
-The deals not done were very important.
-Singleton was a very disciplined buyer, never paying more than 12 times earnings and purchasing most companies at lower multiples. Many companies were acquired using Teledyne's pricey stock.
-The outsider CEOs achieved extraordinary results by consistently zigging while their peers zagged.
-The outsider CEOs consistently calculated the projected return before starting a project. They believed that the value of the financial projections was determined by the quality of their assumptions, not by the number of pages. Many developed single-page analytical templates that focused employees on key variables. These deceptively simple but analytical one-pagers served as a trigger to invoke Kahneman's slower reflective/analytical System 2
-To Buffett, there is a compelling Zen-like logic in choosing to associated with the best and in avoiding unnecessary change.
-Buffett believes that excellent investment ideas are rare and exceptional returns come from concentrated portfolios. "We believe that a policy of portfolio concentration may well decrease risk if it raises the intensity with which an investor thinks about a business and the comfort level he must feel with its economic characteristics before buying into it"
-Better to change vessels in a chronically leaking boat than to patch leaks
-See's : The Turning point : WB bought See's for $25 million. They had tangible book of $7M and 4.2M in pre-tax profits. They paid an exorbitant 3X book and 6 times pre-tax income compared to Graham's strictures. They saw a beloved brand with excellent returns on capital and untapped pricing power. The company has sent 1.65B in free cash to Omaha in 39 years.
-Buffett's contrarian insight was that companies with low capital needs and the ability to raise prices were actually best positioned to resist inflation's corrosive effects.
-The deals not done were very important.
-Singleton was a very disciplined buyer, never paying more than 12 times earnings and purchasing most companies at lower multiples. Many companies were acquired using Teledyne's pricey stock.
Saturday, May 04, 2013
buffett 2013 AM
http://dealbook.nytimes.com/2013/05/04/live-blog-berkshire-hathaways-2013-shareholder-meeting/
Q Asked about Herbalife and Ackman's fight and multi-level marketing.
A Mr. Buffett replies that the ultimate test is whether there’s a market for the goods being sold. And in the case of Pampered Chef, he says, there’s no question that there is. (BH owns Pampered Chef, also an MLM)
Qut still, interest rates will rise, and it will be a “shot heard around the world.”
Q Asked about Herbalife and Ackman's fight and multi-level marketing.
A Mr. Buffett replies that the ultimate test is whether there’s a market for the goods being sold. And in the case of Pampered Chef, he says, there’s no question that there is. (BH owns Pampered Chef, also an MLM)
Qut still, interest rates will rise, and it will be a “shot heard around the world.”
A separate question from Ms. Quick: How does the policy affect Berkshire’s companies? Mr. Buffett notes how asset prices have risen because of the abundance of cheap debt, as well as lowering the costs for a deal like the Heinz takeover.
“This is like watching a good movie, as far as I’m concerned,” he says, “because I don’t know how it will end.”
Mr. Buffett says that the past decade has generally been rough for business. That said, if the market continues to rally as it has this year, Berkshire will suffer its first five-year period of trailing the S.&P. 500.
“It won’t be a happy day, but it won’t discourage us,” he said. He added as a caveat that the company is likely to outperform the market in down years.
- What Buffett says about his research and process in making investments given there are legendary stories of his past due diligence, including of American Express, where he hired advisers. That contrasts to the $5 billion he put into Bank of America in 2011, which Buffett has admitted he decided in the bathtub would be a good idea and called.
-
“You have to love something to do well at it. ... It is an enormous advantage if you absolutely love what you are doing. ... The nature of it is that intensity adds to your productivity.That follow-up shareholder asked them about metrics and screening for stocks, and Buffett and Munger both said they don’t really look at numbers.
- “We are looking at businesses exactly like we are looking at them if somebody came in and asked us to buy the whole business,” Buffett said. He said they then want to know how it will do in ten years.Munger was even more forceful: “We don’t know how to buy stocks by metrics ... We know that Burlington Northern will have a competitive advantage in years ... we don’t know what the heck Apple will have. ... You really have to understand the company and its competitive positions. ... That’s not disclosed by the math.Buffett: "I don’t know how I would manage money if I had to do it just on the numbers"Munger, interupting, "You’d do it badly."
Friday, May 03, 2013
WB U nebraska speech contd
We pay no attention to economic forecasts. I don’t read anything [along those lines]. I read annual reports, but I don’t read anybody’s opinion about what’s going to happen next week, or next month or next year.
The second question is whether there are any special industries we favor. The only thing we favor is industries we can understand. And then, we like businesses with what I call “moats” around them. We like businesses that are protected in some way from competition. If you go in the drugstore and say “I want to buy a Hershey bar” and the guy says “I’ve got an unmarked chocolate bar that’s a nickel cheaper,” you’ll buy the Hershey bar or you’ll go across the street.
One of the interesting things to do is walk through a supermarket sometime and think about who’s got pricing power, and who’s got a franchise, and who doesn’t. If you go buy Oreo cookies, and I’m going to take home Oreo cookies or something that looks like Oreo cookies for the kids, or your spouse, or whomever, you’ll buy the Oreo cookies. If the other is three cents a package cheaper, you’ll still buy the Oreo cookies. You’ll buy Jello instead of some other. You’ll buy Kool Aid instead of Wyler’s powdered soft drink. But, if you go to buy milk, it doesn’t make any difference whether its Borden’s, or Sealtest, or whatever. And you will not pay a premium to buy one milk over another. You will not pay a premium to buy one [brand of] frozen peas over another, probably. It’s the difference between having a wonderful business and not a wonderful business. The milk business is not a good business.
Anything that differentiates your product – those are the businesses we like to be in.
The durability and strength of the franchise is the most important thing in figuring out [whether it’s a good business]. If you think a business is going to be around 10 or 20 years from now, and that they’re going to be able to price advantageously, that’s going to be a good business. And if somebody has to have a prayer session every time they want to raise the price a dollar a pound on whatever they’re selling, that’s not going to be a good business.
One of the things you will find, which is interesting and people don’t think of it enough, with most businesses and with most individuals, life tends to snap you at your weakest link.
The two biggest weak links in my experience: I’ve seen more people fail because of liquor and leverage
Sunday, April 21, 2013
Buffett Nebraska
Q What exactly do you do all day?
A I spend an inordinate time reading. I probably read atleast six hours a day, maybe more.And I spend an hour or two on the telephone.And I think. Thats about it.
-I would say there is no hunch or intuitiveness or nothing of the sort. I try to sit and figure out what the future economic prospects of a business are. I try to figure out whether the management is someone or a group I both trust and admire, and I try to figure out whether the price is right. I mean that: Its the right business, the right people and the right price.
A I spend an inordinate time reading. I probably read atleast six hours a day, maybe more.And I spend an hour or two on the telephone.And I think. Thats about it.
-I would say there is no hunch or intuitiveness or nothing of the sort. I try to sit and figure out what the future economic prospects of a business are. I try to figure out whether the management is someone or a group I both trust and admire, and I try to figure out whether the price is right. I mean that: Its the right business, the right people and the right price.
Buffett notredame, pricing power
Buffett Notredame
-I would say that the most important thing in business, and investments, which I regard as the same thing, from our standpoint, is being able to accurately define your circle of competence.
-You need very few good ideas in your lifetime. You have to be willing to have the discipline to say, “I’m not going to do something I don’t understand.”
-Why should I do something I don’t understand? That’s why I find it an advantage to be in Omaha instead of New York. I worked in New York for a few years, and people were coming up to me on the corner and whispering in my ear all the time. I was getting excited all the time. I was a wonderful customer for the brokers.
-But now you say “I don’t know how to evaluate the Washington Post.” It isn’t that hard to evaluate the Washington Post. You can look and see what newspapers and television stations sell for. If your fix is $400 and it’s selling for $390, so what? You can’t [invest safely with such a small margin of safety]. If your range is $300 to $500 and it’s selling for $80 you don’t need to be more accurate than that.
-[Question from audience about how many of his investment ideas are pitched to him by others.]
-I would say that the most important thing in business, and investments, which I regard as the same thing, from our standpoint, is being able to accurately define your circle of competence.
-You need very few good ideas in your lifetime. You have to be willing to have the discipline to say, “I’m not going to do something I don’t understand.”
-Why should I do something I don’t understand? That’s why I find it an advantage to be in Omaha instead of New York. I worked in New York for a few years, and people were coming up to me on the corner and whispering in my ear all the time. I was getting excited all the time. I was a wonderful customer for the brokers.
-But now you say “I don’t know how to evaluate the Washington Post.” It isn’t that hard to evaluate the Washington Post. You can look and see what newspapers and television stations sell for. If your fix is $400 and it’s selling for $390, so what? You can’t [invest safely with such a small margin of safety]. If your range is $300 to $500 and it’s selling for $80 you don’t need to be more accurate than that.
-[Question from audience about how many of his investment ideas are pitched to him by others.]
Practically none. The Wall Street Journal is my deal source. There are 1,700 or 1,800 of
America’s companies that I’m generally familiar with
-We read hundreds and hundreds of annual reports every year. I own 100 shares of everything. I find this much more reliable than asking to be put on a mailing list
-Well, I would say this. If we were working with $25 million – so we could sort of look at the whole universe of stocks – I would guess that you could find 15 or 20 out of three or four thousand that you would find that were A) selling for substantially less than they’re worth, and B) that the intrinsic value of the business was going to grow at a compound rate which was very satisfactory.
-You don’t want to buy a dollar bill that’s sitting for 50 cents, and it demands positive capital, and it’s going to be a dollar bill ten years from now. You want a dollar bill that’s going to compound at 12% for [a long time].
-Incidentally, I would say that almost everybody I know in Wall Street has had as many good ideas as I have, they just had a lot of [bad] ideas too. And I’m serious about that. I mean when I bought Western Insurance Security selling at $16 and earning $20 per share, I put half my net worth into it. I checked it out first – I went down to the insurance commission and got out the convention statements, I read Best’s, and I did a lot of things first.
-A couple of fast tests about how good a business is. First question is “how long does the management have to think before they decide to raise prices?” You’re looking at marvelous business when you look in the mirror and say “mirror, mirror on the wall, how much should I charge for Coke this fall?” [And the mirror replies, “More.”] That’s a great business. When you say, like we used to in the textile business, when you get down on your knees, call in all the priests, rabbis, and everyone else, [and say] “just another half cent a yard.” Then you get up and they say “We won’t pay it.” It’s just night and day. I mean, if you walk into a drugstore, and you say “I’d like a Hershey bar” and the man says “I don’t have any Hershey bars, but I’ve got this unmarked chocolate bar, and it’s a nickel cheaper than a Hershey bar” you just go across the street and buy a Hershey bar. That is a good business.
-I’ll try this on the students later: What’s the highest price of a daily newspaper in the United States? [Pause] The highest priced daily newspaper in the United States is the Daily Racing Form. 150,000 copies a day, $2.25 a copy, they go up in 25 cent intervals, and it doesn’t affect circulation at all. Why? There is no substitute. If you go to the track, assuming you’re a forms player, you don’t want “Joe’s Little Green Sheet”, you want The Form. And it doesn’t make any difference what it costs! There is no substitute. And that’s why they’ve got a 65% pretax margin. It doesn’t take a genius to figure it out.
There are products like that, and there are products like sheet steel. And they’re night and day.
-Then [I said] “I’ve got only one other question: How do you figure out how much to charge people? You look like a man of awesome commercial instincts – you started with a $1,500 radio station, now you’re worth $4 or $5 billion dollars.”
He said “Well, that’s another good question. I just tell my US managers to try and make 45% pretax and figure that’s not gouging.”
-Lord Thompson, once he bought the paper in Council Bluffs, never put another dime in. They just mailed money every year.
- The idea was that, essentially, he raised prices and raised earnings there every year without having to put more capital into the business.
-The product was undifferentiated (berkshire lining). The candy product is differentiated (sees). (Garbled story of Hershey Bar and Coke versus unbranded but modestly cheaper products).
-You really want something where, if they don’t have it in stock, you want to go across the street to get it. Nobody cares what kind of steel goes into a car.
-someday, there’s going to be some business I understand selling for way less than the value I arrived at. It doesn’t have anything to do with book value, although it does have to do with earnings power over a period of time. It usually relates, fairly closely, to cash [flow]
-Essentially, they ignored it because it was so familiar. But that happens periodically on Wall Street.
-Western Insurance companies: I didn’t have any background in insurance. But I knew I could understand it if I worked at it for a while. And all I was really trying to do was disprove this thing. I was really trying to figure out something that was wrong with this. Only there wasn’t anything wrong. It was a perfectly good insurance company, a better than average underwriter, and you could buy it at one times earnings.
-think the Wall Street Journal is essential. I spend 45 minutes a day with the Wall Street Journal. Actually, I got up the night before, about 11:00... I frequently read it at night. But I’ll read anything. Actually, I probably spend five or six hours a day on reading
-Buried in rented suit
-We read hundreds and hundreds of annual reports every year. I own 100 shares of everything. I find this much more reliable than asking to be put on a mailing list
-Well, I would say this. If we were working with $25 million – so we could sort of look at the whole universe of stocks – I would guess that you could find 15 or 20 out of three or four thousand that you would find that were A) selling for substantially less than they’re worth, and B) that the intrinsic value of the business was going to grow at a compound rate which was very satisfactory.
-You don’t want to buy a dollar bill that’s sitting for 50 cents, and it demands positive capital, and it’s going to be a dollar bill ten years from now. You want a dollar bill that’s going to compound at 12% for [a long time].
-Incidentally, I would say that almost everybody I know in Wall Street has had as many good ideas as I have, they just had a lot of [bad] ideas too. And I’m serious about that. I mean when I bought Western Insurance Security selling at $16 and earning $20 per share, I put half my net worth into it. I checked it out first – I went down to the insurance commission and got out the convention statements, I read Best’s, and I did a lot of things first.
-A couple of fast tests about how good a business is. First question is “how long does the management have to think before they decide to raise prices?” You’re looking at marvelous business when you look in the mirror and say “mirror, mirror on the wall, how much should I charge for Coke this fall?” [And the mirror replies, “More.”] That’s a great business. When you say, like we used to in the textile business, when you get down on your knees, call in all the priests, rabbis, and everyone else, [and say] “just another half cent a yard.” Then you get up and they say “We won’t pay it.” It’s just night and day. I mean, if you walk into a drugstore, and you say “I’d like a Hershey bar” and the man says “I don’t have any Hershey bars, but I’ve got this unmarked chocolate bar, and it’s a nickel cheaper than a Hershey bar” you just go across the street and buy a Hershey bar. That is a good business.
-I’ll try this on the students later: What’s the highest price of a daily newspaper in the United States? [Pause] The highest priced daily newspaper in the United States is the Daily Racing Form. 150,000 copies a day, $2.25 a copy, they go up in 25 cent intervals, and it doesn’t affect circulation at all. Why? There is no substitute. If you go to the track, assuming you’re a forms player, you don’t want “Joe’s Little Green Sheet”, you want The Form. And it doesn’t make any difference what it costs! There is no substitute. And that’s why they’ve got a 65% pretax margin. It doesn’t take a genius to figure it out.
There are products like that, and there are products like sheet steel. And they’re night and day.
-Then [I said] “I’ve got only one other question: How do you figure out how much to charge people? You look like a man of awesome commercial instincts – you started with a $1,500 radio station, now you’re worth $4 or $5 billion dollars.”
He said “Well, that’s another good question. I just tell my US managers to try and make 45% pretax and figure that’s not gouging.”
-Lord Thompson, once he bought the paper in Council Bluffs, never put another dime in. They just mailed money every year.
- The idea was that, essentially, he raised prices and raised earnings there every year without having to put more capital into the business.
-The product was undifferentiated (berkshire lining). The candy product is differentiated (sees). (Garbled story of Hershey Bar and Coke versus unbranded but modestly cheaper products).
-You really want something where, if they don’t have it in stock, you want to go across the street to get it. Nobody cares what kind of steel goes into a car.
-someday, there’s going to be some business I understand selling for way less than the value I arrived at. It doesn’t have anything to do with book value, although it does have to do with earnings power over a period of time. It usually relates, fairly closely, to cash [flow]
-Essentially, they ignored it because it was so familiar. But that happens periodically on Wall Street.
-Western Insurance companies: I didn’t have any background in insurance. But I knew I could understand it if I worked at it for a while. And all I was really trying to do was disprove this thing. I was really trying to figure out something that was wrong with this. Only there wasn’t anything wrong. It was a perfectly good insurance company, a better than average underwriter, and you could buy it at one times earnings.
-think the Wall Street Journal is essential. I spend 45 minutes a day with the Wall Street Journal. Actually, I got up the night before, about 11:00... I frequently read it at night. But I’ll read anything. Actually, I probably spend five or six hours a day on reading
-Buried in rented suit
Mecham
Mecham:
-It’s really quite simple. I need to understand the business like anowner. The firm needs to have staying power; I want to be confident about thegeneral nature of the business and industry landscape on a longer term basis
-In fact, I think very little about quarterly earnings and more aboutthe barriers to entry, competitive landscape/threats, the ongoing capital needsand overall economics, and most importantly, the durability of the business
-Wealso stress test the business under various economic scenarios and look to anormalized earnings power. We passed up many seemingly attractive ideas overthe years as we would ask, “What happens under 7-10% unemployment (whenunemployment was in the 4-5% range) and 6-8% interest rates?
-“Is the business overly reliant on loose credit extension and frivolousspending?” Many names didn’t hold up under these stress test scenarios, so wepassed.
-We prefer cockroach-like businesses — very hardyand almost impossible to kill!
-Oftentimes a key cog of valueis in a form that’s difficult to measure — brands, mindshare/loyal customers,exclusive distribution rights, locations, management, etc. Sometimes it’s thelocation of assets that can be hugely valuable. Waste Management [WM] andUSG [USG] both have assets that are uniquely located and almost impossible toduplicate, which provides a low-cost advantage in certain geographies.
-Any time you arepaying a price today that’s dependent on heroics tomorrow — fantastic growthfar into the future, favorable macro environment, R&D breakthroughs, patentapproval, synergies/restructurings, dramatic margin improvements, large payofffrom capex, etc. — you run the risk of inviting pesky over-optimism(psychologists have shown overconfidence tends to infect most of us), whichcan result in skewed probabilities and payoffs. We want to see a return todayand not base our thesis on optimistic projections about the future. Investments based on projections that are disconnected from any historicalrecord make us leery. Investments dependent upon a continued frothy macroenvironment (housing, loose credit) are prone to over-optimism as well — howmany housing-related/consumer credit companies were trading at 6x multiplesgrowing 15%+ inviting IV estimates 5x the current quote?
-How do you generate investment ideas?
-Wealso stress test the business under various economic scenarios and look to anormalized earnings power. We passed up many seemingly attractive ideas overthe years as we would ask, “What happens under 7-10% unemployment (whenunemployment was in the 4-5% range) and 6-8% interest rates?
-“Is the business overly reliant on loose credit extension and frivolousspending?” Many names didn’t hold up under these stress test scenarios, so wepassed.
-We prefer cockroach-like businesses — very hardyand almost impossible to kill!
-Oftentimes a key cog of valueis in a form that’s difficult to measure — brands, mindshare/loyal customers,exclusive distribution rights, locations, management, etc. Sometimes it’s thelocation of assets that can be hugely valuable. Waste Management [WM] andUSG [USG] both have assets that are uniquely located and almost impossible toduplicate, which provides a low-cost advantage in certain geographies.
-Any time you arepaying a price today that’s dependent on heroics tomorrow — fantastic growthfar into the future, favorable macro environment, R&D breakthroughs, patentapproval, synergies/restructurings, dramatic margin improvements, large payofffrom capex, etc. — you run the risk of inviting pesky over-optimism(psychologists have shown overconfidence tends to infect most of us), whichcan result in skewed probabilities and payoffs. We want to see a return todayand not base our thesis on optimistic projections about the future. Investments based on projections that are disconnected from any historicalrecord make us leery. Investments dependent upon a continued frothy macroenvironment (housing, loose credit) are prone to over-optimism as well — howmany housing-related/consumer credit companies were trading at 6x multiplesgrowing 15%+ inviting IV estimates 5x the current quote?
-How do you generate investment ideas?
Mecham: Mainly by reading a lot. I don’t have a scientific model to generateideas. I’m weary of most screens. The one screen I’ve done in the past was bymarket cap, then I started alphabetically. Companies and industries that are outof favor tend to attract my interest. Over the past 13+ years, I’ve built up a baseof companies that I understand well and would like to own at the right price. Wetend to stay within this small circle of companies, owning the same namesmultiple times
-That’s the beauty of the public markets: If you can be patient, there’s a goodchance the volatility of the marketplace will give you the chance to owncompanies on your watch list. The average stock price fluctuates by roughly80% annually (when comparing 52-week high to 52-week low). Certainly, theunderlying value of a business doesn’t fluctuate that much on an annual basis, sothe public markets are a fantastic arena to buy businesses if you can sit stillwithout growing tired of sitting still
-We try andstick with companies we understand, where we have a high degree of confidencein the staying power of the firm. We spend considerable effort thinking criticallyabout competitive threats (Porter’s five forces, etc). We really stress long-termstaying power and management teams with proven track records that are focusedon building long-term value. Then we always “stress test” the thesis againstdifficult economic environments.
-If the financialcrisis taught nothing else, it showed how elegant financial models that calculaterisk to decimal point precision act like a sedative towards critical thinking andeven common sense
-Most investors are their own worst enemies — buying and sellingtoo often, ignoring the boundaries of their mental horsepower. I think ifinvestors adopted an ethos of not fooling themselves, and focused on reducingunforced errors as opposed to hitting the next home run, returns would improvedramatically
-That’s the beauty of the public markets: If you can be patient, there’s a goodchance the volatility of the marketplace will give you the chance to owncompanies on your watch list. The average stock price fluctuates by roughly80% annually (when comparing 52-week high to 52-week low). Certainly, theunderlying value of a business doesn’t fluctuate that much on an annual basis, sothe public markets are a fantastic arena to buy businesses if you can sit stillwithout growing tired of sitting still
-We try andstick with companies we understand, where we have a high degree of confidencein the staying power of the firm. We spend considerable effort thinking criticallyabout competitive threats (Porter’s five forces, etc). We really stress long-termstaying power and management teams with proven track records that are focusedon building long-term value. Then we always “stress test” the thesis againstdifficult economic environments.
-If the financialcrisis taught nothing else, it showed how elegant financial models that calculaterisk to decimal point precision act like a sedative towards critical thinking andeven common sense
-Most investors are their own worst enemies — buying and sellingtoo often, ignoring the boundaries of their mental horsepower. I think ifinvestors adopted an ethos of not fooling themselves, and focused on reducingunforced errors as opposed to hitting the next home run, returns would improvedramatically
Thursday, April 04, 2013
When to walk away
Scott doesn’t need predictions of US$60 iron ore to tell him to steer clear of the notoriously cyclical sector. If he can’t reasonably predict the future demand or supply for something — especially a commodity like iron ore — he simply walks away.
There are no penalties in the investing game for missing out on the next big winner.
Thursday, February 21, 2013
Buffett on pricing and a good business
In an interview with the Financial Crisis Inquiry Commission (FCIC), Buffett said, "The single most important decision in evaluating a business is pricing power. If you've got the power to raise prices without losing business to a competitor, you've got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you've got a terrible business." Lubrizol appears to fit the bill.
Read more: http://www.marketfolly.com/2011/03/why-did-warren-buffett-purchase.html#ixzz2LY1buBpj
Read more: http://www.marketfolly.com/2011/03/why-did-warren-buffett-purchase.html#ixzz2LY1buBpj
Wednesday, October 10, 2012
Greenblatt on investing
"When we buy things, we like companies that generate large amounts of cash flow relative to the price we're paying. On the short side, we would like to be short, high-priced, cash-eating companies."
"If you don't lose money, most of the alternatives are good. Even if you don't know what the upside is - if you just know there's upside - you can create scenarios where you have an excellent risk/reward. Positions with limited downside are the types of positions that I have loaded up on in the past. Not the positions with the biggest payoff. I could buy a lot knowing that I wouldn't lose much and that there were good possibilities that it was worth a lot more over time."
Wednesday, June 29, 2011
Howard marks
From Howard Marks book "The most important thing"
-Risk avoidance is likely to lead to return avoidance as well. Risk control is the best route to loss avoidance.
None of us is in this business to make 4 percent. We could easily avoid all risk, and so could you. But we'd be assured of avoiding returns above the risk-free rate as well.
-The road to long term investment success runs through risk control more than through aggressiveness. Over a full career, most investors' returns will be determined more by how many losers they have and how bad they are than by the greatness of their winners. Skillful risk control is the mark of a superior investor.
-Risk avoidance is likely to lead to return avoidance as well. Risk control is the best route to loss avoidance.
None of us is in this business to make 4 percent. We could easily avoid all risk, and so could you. But we'd be assured of avoiding returns above the risk-free rate as well.
-The road to long term investment success runs through risk control more than through aggressiveness. Over a full career, most investors' returns will be determined more by how many losers they have and how bad they are than by the greatness of their winners. Skillful risk control is the mark of a superior investor.
It's easier to know what to do at extremes than it is in the middle ground, where I believe we are today(aug 2013)
When there's nothing clever to do, the mistake lies in trying to be clever.
-The process of intelligently building a portfolio consist of a) a list of potential investments b) estimates of their intrinsic values c) a sense of how their prices compare with their IV estimates d) an understanding of the risks involved in each, and of the effect their inclusion would have on the portfolio being assembled.
- The first step is to make sure that the things being considered satisfy some absolute standards, that they meet some minimum criteria. For example someone may narrow their list to those whose riskiness falls withing acceptable limits, since there are risks with which the investor may not be comfortable. Examples are risk of obsolescence in a fast-growing segment of technology, a risk that a hot consumer product will lose its popularity, subjects that some investors consider beyond their expertise, some companies may be unacceptable because their industries are too unpredictable or their financial statements are not transparent enough.
-Usually its price has been falling, making the first-level thinker ask, "who would want to own that"? (It bears repeating that most investors extrapolate past performance, expecting the continuation of trends rather that the far-more-dependable regression to the mean. First level thinkers tend to view past price weakness as worrisome, not as a sign that the asset has gotten cheaper.
- Convertible securities give investors advantages of both bonds and stocks, they were only issued as a last resort by weak companies lacking alternatives, such as conglomerates, railroads and airlines. Mainstream investors felt they unnecessarily introduced complexity. Well, when everyone feels there is no merit in something, its reasonable to suspect its unloved and thus possibly under priced.
-One of the things I want to point out that there aren't always great things to do, and sometimes we maximize our contribution by being discerning and relatively inactive.
-So here's a tip : You'll do better if you wait for investments to come to you rather than go chasing after them. You tend to get better buys if you select from the list of things that sellers are motivated to sell rather than start with a fixed notion as to what you want to own.
- At Oaktree, one of our mottoes is "we don't look for investments; they find us". We try to sit on our hands, we don't go out with a buy list.
-Sometimes things are mostly fairly priced. Its essential that we recognize the condition of the market and decide on our actions accordingly. Ted Williams - one of the greatest hitters of baseball contributed to his own success by an intensive study of his own game. He broke down the strike zone into 77 baseball-sized cells and charting his results at the plate, he learned his batting average was much better when he only went after pitches in his "sweet spot".
- How to recognize the fat pitch? One way to be selective is to ascertain whether we're in a low return environment or a high-return environment.
-Forced sellers are beautiful and let down efficient markets. -Margin calls, withdrawals, ratings change etc. If chaos is widespread, plummeting prices, withdrawals of credit, feat among counter parties and prices can fall much below intrinsic value.
- Macro future is unknowable. The more we concentrate on smaller-picture, the better to gain advantage.
-Are forecasts as a whole consistently actionable and valuable ? Answer is NO
-If you know the future, its silly to play defence. You should behave aggressively and target the greatest winners; there can be no loss to fear. Diversification is unnecessary and maximum leverage can be applied. But its foolhardy since no one can know the future. Overestimating what you're capable of knowing can be extremely dangerous. Acknowledging the boundaries of what you can know - and working within those limits can give you a great advantage.
- Cycles : 1) redouble our efforts to predict future 2) ignore cycles, just try make good investments with total disregard for cycles (buy-and-hold) 3) figure out where we are in the cycle, and what that implies for our actions. To me, number 3 is the right one.
- The quality of a decision is not determined by the outcome. In the long run, there's no reasonable alternative to believing that good decisions will lead to investment profits. In the short run, we must be stoic when they don't. A good decision is one that a logical, intelligent and informed person would have made under the circumstances as they appeared at the time, before the outcome was known.
- the suboptimizers of the "I don't know" school put their emphasis on constructing portfolios that will do well in the scenarios they consider likely and not too poorly in the rest.
- In amateur tennis, the match goes to the player who hits the fewest losers. The winner just keeps the ball in play until the loser hits it into the net or off the court. Play defensive!
-There are two principal elements in defense. The first is exclusion of losers from portfolios. This is best accomplished by conducting extensive due diligence, applying high standards, demanding a low price and generous margin for error and being less willing to bet on continued prosperity, rosy forecasts and developments that may be uncertain.
-The second element is the avoidance of poor years and exposure to meltdown in crashes. In addition, this required thoughtful portfolio diversification, limits on the overall riskiness borne, and a general tilt toward safety.
-Sources of error are either analytical/intellectual or psychological/emotional. The former are straightforward:we collect too little information or incorrect information. Or perhaps we apply the wrong analytical processes, make errors in our computations or omit the ones we should have performed.
-one type of analytical error is "a failure of imagination". By this I mean either being unable to conceive of the full range of possible outcomes or not fully understanding the consequences of the more extreme occurrences.
-Inadequate due diligence leads to investment losses.
-The process of intelligently building a portfolio consist of a) a list of potential investments b) estimates of their intrinsic values c) a sense of how their prices compare with their IV estimates d) an understanding of the risks involved in each, and of the effect their inclusion would have on the portfolio being assembled.
- The first step is to make sure that the things being considered satisfy some absolute standards, that they meet some minimum criteria. For example someone may narrow their list to those whose riskiness falls withing acceptable limits, since there are risks with which the investor may not be comfortable. Examples are risk of obsolescence in a fast-growing segment of technology, a risk that a hot consumer product will lose its popularity, subjects that some investors consider beyond their expertise, some companies may be unacceptable because their industries are too unpredictable or their financial statements are not transparent enough.
-Usually its price has been falling, making the first-level thinker ask, "who would want to own that"? (It bears repeating that most investors extrapolate past performance, expecting the continuation of trends rather that the far-more-dependable regression to the mean. First level thinkers tend to view past price weakness as worrisome, not as a sign that the asset has gotten cheaper.
- Convertible securities give investors advantages of both bonds and stocks, they were only issued as a last resort by weak companies lacking alternatives, such as conglomerates, railroads and airlines. Mainstream investors felt they unnecessarily introduced complexity. Well, when everyone feels there is no merit in something, its reasonable to suspect its unloved and thus possibly under priced.
-One of the things I want to point out that there aren't always great things to do, and sometimes we maximize our contribution by being discerning and relatively inactive.
-So here's a tip : You'll do better if you wait for investments to come to you rather than go chasing after them. You tend to get better buys if you select from the list of things that sellers are motivated to sell rather than start with a fixed notion as to what you want to own.
- At Oaktree, one of our mottoes is "we don't look for investments; they find us". We try to sit on our hands, we don't go out with a buy list.
-Sometimes things are mostly fairly priced. Its essential that we recognize the condition of the market and decide on our actions accordingly. Ted Williams - one of the greatest hitters of baseball contributed to his own success by an intensive study of his own game. He broke down the strike zone into 77 baseball-sized cells and charting his results at the plate, he learned his batting average was much better when he only went after pitches in his "sweet spot".
- How to recognize the fat pitch? One way to be selective is to ascertain whether we're in a low return environment or a high-return environment.
-Forced sellers are beautiful and let down efficient markets. -Margin calls, withdrawals, ratings change etc. If chaos is widespread, plummeting prices, withdrawals of credit, feat among counter parties and prices can fall much below intrinsic value.
- Macro future is unknowable. The more we concentrate on smaller-picture, the better to gain advantage.
-Are forecasts as a whole consistently actionable and valuable ? Answer is NO
-If you know the future, its silly to play defence. You should behave aggressively and target the greatest winners; there can be no loss to fear. Diversification is unnecessary and maximum leverage can be applied. But its foolhardy since no one can know the future. Overestimating what you're capable of knowing can be extremely dangerous. Acknowledging the boundaries of what you can know - and working within those limits can give you a great advantage.
- Cycles : 1) redouble our efforts to predict future 2) ignore cycles, just try make good investments with total disregard for cycles (buy-and-hold) 3) figure out where we are in the cycle, and what that implies for our actions. To me, number 3 is the right one.
- The quality of a decision is not determined by the outcome. In the long run, there's no reasonable alternative to believing that good decisions will lead to investment profits. In the short run, we must be stoic when they don't. A good decision is one that a logical, intelligent and informed person would have made under the circumstances as they appeared at the time, before the outcome was known.
- the suboptimizers of the "I don't know" school put their emphasis on constructing portfolios that will do well in the scenarios they consider likely and not too poorly in the rest.
- In amateur tennis, the match goes to the player who hits the fewest losers. The winner just keeps the ball in play until the loser hits it into the net or off the court. Play defensive!
-There are two principal elements in defense. The first is exclusion of losers from portfolios. This is best accomplished by conducting extensive due diligence, applying high standards, demanding a low price and generous margin for error and being less willing to bet on continued prosperity, rosy forecasts and developments that may be uncertain.
-The second element is the avoidance of poor years and exposure to meltdown in crashes. In addition, this required thoughtful portfolio diversification, limits on the overall riskiness borne, and a general tilt toward safety.
-Sources of error are either analytical/intellectual or psychological/emotional. The former are straightforward:we collect too little information or incorrect information. Or perhaps we apply the wrong analytical processes, make errors in our computations or omit the ones we should have performed.
-one type of analytical error is "a failure of imagination". By this I mean either being unable to conceive of the full range of possible outcomes or not fully understanding the consequences of the more extreme occurrences.
-Inadequate due diligence leads to investment losses.
Monday, May 30, 2011
Buffett again
- Rule No.1 : Never lose money. Rule no.2 : Never forget rule No.1
- It is easier to stay out of trouble than it is to get out of trouble.
- There is a huge difference between the business that grows and requires lots of capital to do so and the business that grows and doesn't require capital.
- I look for businesses in which I think I can predict what they're going to look like in ten to fifteen years' time.
- If you let yourself be undiciplined on the small things, you will probably be undisciplined on the large things as well.
- There is nothing like writing to force you to think and get your thoughts straight.
- IPOs: The only time to buy these is on a day with no "y" in it. Investment bankers will never serve you a bargain, but the stock market will.
- That which is not worth doing at all is not worth doing well.
- Our menthod is very simple. We just try to buy businesses with good-to-superb underlying economics run by honest and able people and buy them at sensible prices. That's all Iam tryng to do.
- Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause teh stock to be misappraised.
- Uncertainty actually is the friend of the buyer of long-term securities.
•On anger and patience: You can always tell a man to go to hell tomorrow.
Monday, October 26, 2009
Walter schloss principles
Warren Buffett on Schloss:
He knows how to identify securities that sell at considerably less than their value to a private owner: And that's all he does. He owns many more stocks than I do and is far less interested in the underlying nature of the business; I don't seem to have very much influence on Walter. That is one of his strengths; no one has much influence on him.
Here are 16 golden rules for investing from Walter Schloss. Thanks to Todd Sullivan for the finding:
2. Try to establish the value of the company.
3. Use book value as a starting point to try and establish the value of the enterprise. Be sure that debt does not equal 100% of the equity.
4. Have patience. Stocks don’t go up immediately.
5. Don’t buy on tips or for a quick move. Let the professionals do that, if they can. Don’t sell on bad news.
6. Don’t be afraid to be a loner but be sure that you are correct in your judgment. You can’t be 100% certain but try to look for the weaknesses in your thinking. Buy on a scale down and sell on a scale up.
9. Don’t be in too much of a hurry to sell. If the stock reaches a price that you think is fair, then you can sell. Before selling reevaluate the company again and see where the stock sells in relation to its book value. Be aware of the level of the stock market. Are yields low and P-E ratios high. Are people very optimistic etc?
10. When buying a stock, I find it helpful to buy near the low of the past few years. A stock may go as high as 125 and then decline to 60 and you think it attractive. 3 years before the stock sold at 20 which shows that there is some vulnerability in it.
11. Try to buy assets at a discount than to buy earnings. Earning can change dramatically in a short time. Usually assets change slowly. One has to know much more about a company if one buys earnings.
12. Listen to suggestions from people you respect. This doesn’t mean you have to accept them.
15. Prefer stock over bonds. Bonds will limit your gains and inflation will reduce your purchasing power.
16. Be careful of leverage. It can go against you.
Don't lose money !
He knows how to identify securities that sell at considerably less than their value to a private owner: And that's all he does. He owns many more stocks than I do and is far less interested in the underlying nature of the business; I don't seem to have very much influence on Walter. That is one of his strengths; no one has much influence on him.
Here are 16 golden rules for investing from Walter Schloss. Thanks to Todd Sullivan for the finding:
2. Try to establish the value of the company.
3. Use book value as a starting point to try and establish the value of the enterprise. Be sure that debt does not equal 100% of the equity.
4. Have patience. Stocks don’t go up immediately.
5. Don’t buy on tips or for a quick move. Let the professionals do that, if they can. Don’t sell on bad news.
6. Don’t be afraid to be a loner but be sure that you are correct in your judgment. You can’t be 100% certain but try to look for the weaknesses in your thinking. Buy on a scale down and sell on a scale up.
9. Don’t be in too much of a hurry to sell. If the stock reaches a price that you think is fair, then you can sell. Before selling reevaluate the company again and see where the stock sells in relation to its book value. Be aware of the level of the stock market. Are yields low and P-E ratios high. Are people very optimistic etc?
10. When buying a stock, I find it helpful to buy near the low of the past few years. A stock may go as high as 125 and then decline to 60 and you think it attractive. 3 years before the stock sold at 20 which shows that there is some vulnerability in it.
11. Try to buy assets at a discount than to buy earnings. Earning can change dramatically in a short time. Usually assets change slowly. One has to know much more about a company if one buys earnings.
12. Listen to suggestions from people you respect. This doesn’t mean you have to accept them.
15. Prefer stock over bonds. Bonds will limit your gains and inflation will reduce your purchasing power.
16. Be careful of leverage. It can go against you.
Don't lose money !
Saturday, August 01, 2009
Points from Klarman's "The Value Of Not Being Sure"
- Financial markets are manic and best thought of as an erratic counterparty rather than as an arbiter of the accuracy of one's investment judgements.
- Historically, little volume transacts at the bottom or on the way back up and competition from other buyers will be much greater when the markets settle down and the economy begins to recover. Moreover the price recovery from a bottom can be very swift. Therefore, an investor should put money to work amidst the throes of a bear market, appreciating that things will likely get worse before they get better.
- Process, Not Outcome :The only things one can really control are investment philosophy, investment process and the nature of clients. Controlling your process is absolutely crucial to long-term success in any market environment/.
- James Montier, recently pointed out that when athletes were asked what went through their minds just before competing, the consistent response was a focus on process, not outcome.
- Success virtually requires that a process be in place that enables intellectual honesty, rigor, creativity and integrity.
Wednesday, May 20, 2009
Buffett quotes from 1974
"you never have to swing. You stand at the plate,
the pitcher throws you GM at 47 ! X at 39 ! and nobody calls
a strike on you. There's no penalty except opportunity lost.
All day you wait for the pitch you like; then when the
Fielders are asleep, you step up and hit it."
the pitcher throws you GM at 47 ! X at 39 ! and nobody calls
a strike on you. There's no penalty except opportunity lost.
All day you wait for the pitch you like; then when the
Fielders are asleep, you step up and hit it."
Sunday, March 22, 2009
Buffett interview prefer newspaper delivery
Notes from Buffett visit with Emory Students held on February 6, 2009
----
Buffett:
No sector is a good buy unless you understand the business. However, I do believe that there is good value and great opportunity now in the financial sector because it is extremely unpopular. Sector’s themselves don’t make good buys, companies that are undervalued make good buys. You know how to value a business, you project the future cash flows discounted to present and buy with a margin of safety. The earnings prospects need to be greater than the current value. Anything that is unpopular is always great to look at. If I was getting out of school right now, I would take a look.
Buffett:
Risk does not equal beta. Risk comes around because you don’t understand things, not because of beta. There are normally 10 filters or so that I go through when I hear an idea. The first is can I understand the business and understand the downside not just today but five to ten years from now. There have been very few times that I’ve lost 1% of my net worth. I might be risk averse but I am not action adverse. I just stay within my circle of confidence.I need only need to be right a few times and can let thousands of ideas go by.
You have to know your sweet spot. The beautiful thing about investing is that it’s a “No called strike game” where unlike baseball the only strikes in investing are when you swing. I don’t have to swing.
When I do invest, I don’t care if the stock price goes from $10 to $2 but I do care about if the value went from $10 to $2. Avoid debt. I decided early on that I never wanted to owe more than 25% of my net worth, and I haven’t… exept for in the very beginning. I like to play from a position of strength. I always try to have the odds in my favor.
Think about what the asset will produce. Look at the asset, not the beta. Stock price is not that important to me, it just gives you the opportunity to buy at a great price. I care more about the business than I do about events. I care about if there’s price flexibility and whether the company can gain more market share.
If I were running a business school I would only have 2 courses. The first would obviously be an investing class about how to value a business. The second would be how to think about the stock market and how to deal with the volatility.
Q: Why did you invest in Harley-Davidson?
Buffett: I like the 15%. I measured that 15% against other credits and it looked attractive on both a relative basis and an absolute basis. Also, we have to have a certain amount of the portfolio go to debt. Any company where you can get your customers to tattoo your name on their body has quite a strong brand. For this investment I had to think what is the probability that they will not pay me back and would I want to own the company if they did not, basically that the equity isn’t worth zero.
I bought See’s in 1972 and I think understanding the value of brand helped drive the decision to buy Coca-Cola in 1988.
Buffett: [Showed his blank schedule book]. Bill Gates is overscheduled. I am extremely lucky and I can say no to anything because there isn’t an entity that can use economic pressure to make me do something. A lot of CEOs get into a lot of the rituals that are part of the job. I would rather deliver papers than be the CEO of GE. The 76 or so CEOs that run companies at Berkshire don’t have to deal with bankers or lawyers. At Berkshire, we’ve never had a meeting for all of them anywhere. There are no presentations and no committees. They can be more productive, and it makes it attractive when they can do what they like to do best.
When I took over Solomon I had to pick the best person to run it. I asked myself, “Who would I go into a foxhole with?” I never look at grades or where you went to school. When I picked Deryck Maughan, he never asked me about pay or options or indemnity. He went to work.
----
Buffett:
No sector is a good buy unless you understand the business. However, I do believe that there is good value and great opportunity now in the financial sector because it is extremely unpopular. Sector’s themselves don’t make good buys, companies that are undervalued make good buys. You know how to value a business, you project the future cash flows discounted to present and buy with a margin of safety. The earnings prospects need to be greater than the current value. Anything that is unpopular is always great to look at. If I was getting out of school right now, I would take a look.
Buffett:
Risk does not equal beta. Risk comes around because you don’t understand things, not because of beta. There are normally 10 filters or so that I go through when I hear an idea. The first is can I understand the business and understand the downside not just today but five to ten years from now. There have been very few times that I’ve lost 1% of my net worth. I might be risk averse but I am not action adverse. I just stay within my circle of confidence.I need only need to be right a few times and can let thousands of ideas go by.
You have to know your sweet spot. The beautiful thing about investing is that it’s a “No called strike game” where unlike baseball the only strikes in investing are when you swing. I don’t have to swing.
When I do invest, I don’t care if the stock price goes from $10 to $2 but I do care about if the value went from $10 to $2. Avoid debt. I decided early on that I never wanted to owe more than 25% of my net worth, and I haven’t… exept for in the very beginning. I like to play from a position of strength. I always try to have the odds in my favor.
Think about what the asset will produce. Look at the asset, not the beta. Stock price is not that important to me, it just gives you the opportunity to buy at a great price. I care more about the business than I do about events. I care about if there’s price flexibility and whether the company can gain more market share.
If I were running a business school I would only have 2 courses. The first would obviously be an investing class about how to value a business. The second would be how to think about the stock market and how to deal with the volatility.
Q: Why did you invest in Harley-Davidson?
Buffett: I like the 15%. I measured that 15% against other credits and it looked attractive on both a relative basis and an absolute basis. Also, we have to have a certain amount of the portfolio go to debt. Any company where you can get your customers to tattoo your name on their body has quite a strong brand. For this investment I had to think what is the probability that they will not pay me back and would I want to own the company if they did not, basically that the equity isn’t worth zero.
I bought See’s in 1972 and I think understanding the value of brand helped drive the decision to buy Coca-Cola in 1988.
Buffett: [Showed his blank schedule book]. Bill Gates is overscheduled. I am extremely lucky and I can say no to anything because there isn’t an entity that can use economic pressure to make me do something. A lot of CEOs get into a lot of the rituals that are part of the job. I would rather deliver papers than be the CEO of GE. The 76 or so CEOs that run companies at Berkshire don’t have to deal with bankers or lawyers. At Berkshire, we’ve never had a meeting for all of them anywhere. There are no presentations and no committees. They can be more productive, and it makes it attractive when they can do what they like to do best.
When I took over Solomon I had to pick the best person to run it. I asked myself, “Who would I go into a foxhole with?” I never look at grades or where you went to school. When I picked Deryck Maughan, he never asked me about pay or options or indemnity. He went to work.
Friday, July 25, 2008
Investmentu cash flow
Three Ways to Beat Analysts at Their Own Job by Floyd G. Brown, Advisory Panelist
The problem is that DCF based on computer models with assumptions about future sales, earnings and growth rates. What you end up with is highly subjective.
So what should we look at?
Cash Balances and Debt When the economy turns down, highly leveraged firms get in trouble first. Cash Flow The market will - over time - value cash flow in similar ways. Look for times when the market undervalues a company's cash by finding out how much cash a company is producing today. Cash flow is the lifeblood of a company. You can reasonably expect that Wall Street will appreciate the value of free cash flow in the future, even if the firm is out of favor today.
In the 1990s, oil stocks greatly underperformed the market. But they generated huge amounts of cash. I started buying these deeply undervalued stocks in the late '90s knowing that eventually, the historic cash flow generation would win out.
Can the company continue to generate healthy cash flow and earnings?
Secrets to understanding the picture of any company through their annual report.
The problem is that DCF based on computer models with assumptions about future sales, earnings and growth rates. What you end up with is highly subjective.
So what should we look at?
Cash Balances and Debt When the economy turns down, highly leveraged firms get in trouble first. Cash Flow The market will - over time - value cash flow in similar ways. Look for times when the market undervalues a company's cash by finding out how much cash a company is producing today. Cash flow is the lifeblood of a company. You can reasonably expect that Wall Street will appreciate the value of free cash flow in the future, even if the firm is out of favor today.
In the 1990s, oil stocks greatly underperformed the market. But they generated huge amounts of cash. I started buying these deeply undervalued stocks in the late '90s knowing that eventually, the historic cash flow generation would win out.
Can the company continue to generate healthy cash flow and earnings?
Secrets to understanding the picture of any company through their annual report.