WB on moats

Wonderful castles, surrounded by deep, dangerous moats where the leader inside is an honest and decent person. Preferably, the castle gets its strength from the genius inside; the moat is permanent and acts as a powerful deterrent to those considering an attack; and inside, the leader makes gold but doesn't keep it all for himself. Roughly translated, we like great companies with dominant positions, whose franchise is hard to duplicate and has tremendous staying power or some permanence to it. (Berkshire Hathaway Annual meeting, 1995)

You need a moat in business to protect you from the guy who is going to come along and offer (your product) for a penny cheaper. (Warren Buffett Talks Business, 1995)

We're not pure economic creatures, and that policy penalizes our results somewhat, but we prefer to operate that way in life. What's the point of becoming rich if you're going to have a pattern of operations where you continually discard associations with people you like, admire, and find interesting in order to earn a slightly bigger figure?

Mine : Does a company make its customers and suppliers better off ?

From " A checklist for investors"
An itemized list of procedures and how to follow them, the surgeon Atul Gawande has written, can "hold the odds of doing harm low enough for the odds of doing good to prevail."

Decades' worth of psychological studies show that people are extremely good at figuring out which information they need for a decision—but do a poor job of using that evidence methodically over time

As the Nobel Prize-winning psychologist Daniel Kahneman's book "Thinking, Fast and Slow" puts it, "Humans are incorrigibly inconsistent in making summary judgments of complex information."

-Rub your nose in your own failures," he urges. "Avoiding the mistakes you've made in the past will take your error rate way down in the future."

Mr. Pabrai says he believes that the flubs made by great investors fall into five groups: valuation, or how cheap an investment is; leverage, or risks associated with borrowing; management and ownership; "moats," or how well-fortified business are against competition; and personal biases.

First he does all his other research; then he works through the checklist to make sure he didn't miss anything.

Among the questions on Mr. Pabrai's list: How good is management at allocating capital? Is cash flow overstated because of an unsustainable recent boom?

Guy Spier, managing partner of Aquamarine Capital, a Zurich-based investment firm that manages $160 million, uses his checklist to determine, among other things, how a company makes its customers and suppliers better off. That, he says, helps him figure out how likely the company is to be able to fend off competitors.

Yacktman Funds Interview - Great Answers From Great Investors

From :
Yacktman Funds Interview - Great Answers From Great Investors


-The Yacktman Funds seem to contain a lot of “wonderful businesses” as opposed to classic Ben Graham net-net cheap businesses?
-
4. Can you walk us through the investment process at the Yacktman Fund?

A: A good amount of the time is spent finding the ideas. You can quickly filter a lot of things out. Once we’ve sifted through the ideas, generally the first thing we do is to read the annual reports and the proxy statements. We try to first get an understanding of the business so the business description section of the 10K is a great place to start. Then we move on to the risk disclosure section. Those are put together by management and lawyers sitting in a room trying to figure out what can go wrong with the business. These people are worried about getting sued so they’ll include the things that keep them up at night or keep them nervous in the disclosure in case something goes wrong.

I read the business description and risk disclosures first and then move on to financial statements and footnotes. We also use sell side research reports for industries we are not familiar with to help us get up to the speed. We also read trade articles or other publications that are relevant to the business. Typically, the last place we go is to the management team because management is usually there to sell you on why to own the stock. It’s much better to analyze what they have done than have them tell you what they are going to do.

We also try to get an understanding of how the businesses have performed historically. For instance, last night we were looking at the operating margins of consumer companies the 1960s and 1950s. We like history a lot because it gives you a great perspective on what might happen in the future.

-We usually buy and sell gradually. For the most part, we are slow in and slow out. Again, we don’t set a price target. Instead, what we do is we’ll make the stock 2% of the portfolio at this price and 3% if it drops further.

-Comparing companies of different industries using P/E or P/S ratio does not help you when you have a business that to earns a dollar and pays out a dollar and another business that earns a dollar and puts 50 cents back to keep up with competition. So when we are valuing a business, we’d like to focus on the forward rate of return. By that I mean if I buy a stock today at this price, what is my anticipation of the return I am going to get in the future? This forward rate of return includes free cash flow yields and anticipated growth rate.

-Furthermore, we will look at historical data and get an idea of how the business has been doing over the past 10 years. What percentage of earnings did they get to keep? We are trying to get a general idea for the future but we are not forecasting. If you are forecasting whether the business is growing at 7% or 8% in the future, you’ve already got a problem. We look at what the mean case scenario is and what the likely distribution of scenarios around the mean case scenario is. If you look at Procter and Gamble, in 20 years they will probably still own Tide, they are probably still going to be in hair and shampoo and they are still probably going to be dominating. You can pretty much forecast to a certain degree of certainty what is it going to be like in 20 years. But you can’t tell what Microsoft or Intel are going to look like in 20 years.

-The lower the ability to forecast the future, the lower the valuation should be. We’ll pay less because there is more volatility associated with it.

-And risk to us is not the risk of the stock price, it is the risk that the business is not performing as we expected. You can have a business that has been doing very well for the past 10 or 20 years but they may not be doing as well in the future. The newspaper business is a good example of this. We had looked at Gannett in the past. In 2004, at the multiple it was trading, you could expect to earn about 8.5 to 9 percent if they can repeat what they have achieved during the past 10 years. At the end of 2004, we were asking what are the odds that this newspaper company is going to keep earning 8-9% in the next 10 years and it was pretty obvious that the business model of the newspaper business is deteriorating and we did not think it was going to earn 8-9% in the future, we quickly threw the idea away.


-8. When you find out that you have made a mistake in your investment analysis, how do you go about exiting the position? Do you sell it right away?

A: As we gathered historical data from the new management team we did not feel confident in so we sold the position. If you think you’ve made a mistake, you should sell right away. Why hold something you are not comfortable with?

A: There are three co-managers of the funds. Where you see positions are very large, it is usually because we have a uniform consensus from the portfolio managers. Very often it is a relatively cheap low risk, high quality stock.

-We actually looked at JC Penney’s debt and we did not invest in it. It will be very hard to get interested in the equity if we passed on the debt.

-15.What advice would you give amateur investors with regard to suppressing the excitement and urge to act?

A: Some of the biggest investment risks come from valuation and businesses that are in highly competitive, rapidly changing markets. We would recommend sizing positions to manage the risk or uncertainty.

-Investing in cigar butts or wide moat? Both are ok if reasonable return can be expected.

From Do You Feel Lucky? Maybe Investors Should


But aren't individuals at the mercy of high-speed traders and institutional investors with giant portfolios?

"I think a lot of that talk is nonsense," Mr. Cloonan says. "Institutions are very short-term, constantly trading in and out. They're more concerned about not doing worse than average than they are about trying to think originally as investors."

For investors who are patient and disciplined, do their research and don't get caught up in the Wall Street game of trading too much, "it's easier than it's ever been to do pretty well," Mr. Cloonan says. "You just have to decide to do the right thing."

good quotes

“If you own the best dealership, the top bank, and the finest restaurant in town, you will do well.”
― Charlie Munger on Diversification

“I’m not interested in meeting management today… I’m more interested in finding out how a person has behaved in the past.”
― Bruce Berkowitz

“Successful investors tend to be unemotional, allowing the greed and fear of others to play into their hands. By having confidence in their own analysis and judgement, they respond to market forces not with blind emotion but with calculated reason. Successful investors, for example, demonstrate caution in frothy markets and steadfast conviction in panicky ones. Indeed, the very way an investor views the market and it’s price fluctuations is a key factor in his or her ultimate investment success or failure.”
― Seth Klarman


“The most successful horse players (I guess they lose the least) are the ones who don’t bet on every race but wager on only those occasions when they have a clear conviction.”
― Joel Greenblatt

During a visit to Columbia Business School many years ago, a student asked Warren Buffett how one could best prepare for an investing career. Mr. Buffett picked up a stack of financial reports he had brought with him and advised the students to read "500 pages like this every day". One of the students in the class happened to be Todd Combs. Mr. Combs took the advice quite literally and eventually got into a habit of reading far more than 500 pages per day. This work ethic contributed to a successful career running a hedge fund and a position at Berkshire Hathaway allocating several billion dollars of capital.

WB criteria for valuation of the market and some quotes

From a Motley Fool article :

In 2001 Buffett explained that determining whether the market is expensive or cheap doesn't have to be complicated. Here's the metric he uses:

The market value of all publicly traded securities as a percentage of the country's business -- that is, as a percentage of GNP. Basically, Buffett divides the total market capitalization of the U.S. stock market by gross national product. GNP measures the value of goods and services that a country's citizens produce regardless of where they live. This includes the value of goods and services that American companies produce abroad.

Buffett : "If the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you. If the ratio approaches 200% -- as it did in 1999 and a part of 2000 -- you are playing with fire."

The most common way to calculate the market value is by looking up the market capitalization of the Wilshire 5000. The market cap of the Wilshire 5000 was $20.6 trillion. The Federal Reserve Bank of St. Louis has a great website where you can locate GNP ($16.9 trillion). (http://research.stlouisfed.org/fred2/series/GNP/)

Dividing the total market cap by GNP gives 122% indicates that the market is getting pricey.


-We don't spend any time looking back. We figure there is so much to look forward to, there's just no sense thinking of what might have been, it just doesn't make any difference. You can only live life forward. You can perhaps learn something from the mistakes

-Interest rate impact. What you really want to know in investments is what is important and what is knowable. If its unimportant or unknowable, you forget about it. We don't want to pass up a chance to do something intelligent because of some prediction that we're no good on anyway. So we don't read, or listen or do anything based on macro factors, zero.

-Concentrate on what will happen, not on the when. The when is unknowable.

Good checklist for investing

There's a good compilation of questiosn to think of before investing.

The Quality Of Business Earnings - Checklist Of Questions

by Tannor Pilatzke


Here are quotes by WB from here :

“Investing is reporting. I told him to imagine an in-depth article about his own paper. He’d ask a lot of questions and dig up a lot of facts. He’d know The Washington Post. And that’s all there is to it.”

“You need a moat in business to protect you from the guy who is going to come along and offer it (your product) for a penny cheaper.”

“If (you go into a store and) they say ‘I don’t have a Hershey bar, but I have this unmarked chocolate bar that the owner of the place recommends,’ if you’ll walk across the street to buy a Hershey bar or if you’ll pay a nickel more for the (Hershey) bar than the unmarked bar or something like that, that’s franchise value.”



“How much more fruitful it is for us to think about whether the product is likely to sustain itself and its economics than to try to be questioning whether to jump in and out of the stock.”

“If I’m thinking about investing in a specific company, I try to size up their business and the people running it. And as I read annual reports, I’m trying to understand generally what’s going on in all kinds of businesses. If we own stock in one company and there are eight others in the industry, I want to be on the mailing list for the annual reports of the other eight because I can’t understand how my company is doing unless I understand what the other eight are doing. I want perspective on market share, margins, the trend in margins – all kinds of things...”

“It’s amazing how well you can do in investing with what I’d call “outside” information. I’m not sure how useful inside information is. But there’s all kinds of “outside” information around as to businesses. And you don’t have to understand all of them. You just have to understand the ones you’re thinking about investing in. And you can. But no one can do it for you.”

“In my view, you can’t read Wall Street reports and get anything out of them. You’ve got to get your arms around it yourself. I don’t think we’ve ever gotten an idea from a Wall Street report. However, we’ve gotten a lot of ideas from annual reports. Charlie?”


“PUCCI”: Pricing, Units, Costs, Competition and Insiders



“Investors should remember that their scorecard is not computed using Olympic-diving methods: Degree-of-difficulty doesn’t count. If you are right about a business whose value is largely dependent on a single key factor that is both easy to understand and enduring, the payoff is the same as if you had correctly analyzed an investment alternative characterized by many constantly shifting and complex variables.” -- Warren Buffett

For the casual investor, Greenblatt recommends buying a portfolio of 20-30 Magic Formula stocks, holding for one year, and then re-running the process annually.

On the interest rate environment

The 'Rate Gap' Is Rising (http://online.wsj.com/news/articles/SB10001424052702304384104579143450479627172?mod=djemITP_h)
The gap between deposit rates and borrowing rates is higher than it's been in 32 of the last 40 years. by Andrea Coombes


Low interest rates have been bruising savers for years, but for a while those same low rates
were proving a boon to mortgage borrowers.

Not anymore.

In fact, the gap between the interest consumers earn on a savings account and the rate they pay on a 30-year fixed-rate mortgage is its widest in two years—and among the highest in more than 40 years—according to data analyzed by MoneyRates.com.

The widening spread also is a sign of the hurdles faced by retirees and other savers who are trying to generate income from relatively conservative investments.


For the month of September, the spread between the average rate on a 30-year fixed-rate mortgage (4.49%) and the average rate on a one-month certificate of deposit (0.06%) was 4.43 percentage points, according to data from the Federal Reserve and Federal Deposit Insurance Corp.


Since 1971, the average gap between those rates has been 2.83 percentage points. In 2007, the gap hovered around one point.

The gap has been higher than average since November 2008, shortly after the onset of the financial crisis, coinciding with efforts by the Fed to push short-term rates lower to stimulate the economy. Then the difference shrank to less than four percentage points for most of the past two years.


The problem for savers is that rates on savings accounts, money-market funds and certificates of deposit are tied very closely to short-term interest rates. But other interest rates are subject to a variety of market forces that tend to drive those rates higher, including lenders' perception of risk from inflation and default.


"If you're a bank and you're going to make a 30-year commitment, you don't want to be caught receiving a substandard interest rate," says Richard Barrington, a senior financial analyst at MoneyRates.com. "You're going to be pretty quick to raise your rates on any hint that mortgage rates might be due to go up."


The highest gap recorded since 1971 between 30-year fixed-rate mortgages and one-month CDs was 6.2 percentage points in August 1982. But back then, a one-month CD paid more than 10%. Today, by comparison, "the income-producing ability of your savings has virtually disappeared," Mr. Barrington says.

Consumers have a few options. Consider owning only shorter-term CDs, so you don't lock yourself into meager payments for the long run. Look into online savings accounts, which have fewer restrictions than CDs yet may pay the same or better rates right now. And consider shorter-term mortgages, since they tend to have lower interest rates than 30-year loans do.

From http://on.wsj.com/15ApOsp    Why Tough Teachers Get Good Results

Psychologist K. Anders Ericsson gained fame for his research showing that true expertise requires about 10,000 hours of practice, a notion popularized by Malcolm Gladwell in his book "Outliers." 

The rap on traditional education is that it kills children's' creativity. But Temple University psychology professor Robert W. Weisberg's research suggests just the opposite. Prof. Weisberg has studied creative geniuses including Thomas Edison, Frank Lloyd Wright and Picasso—and has concluded that there is no such thing as a born genius. Most creative giants work ferociously hard and, through a series of incremental steps, achieve things that appear (to the outside world) like epiphanies and breakthroughs.

Prof. Weisberg analyzed Picasso's 1937 masterpiece Guernica, for instance, which was painted after the Spanish city was bombed by the Germans. The painting is considered a fresh and original concept, but Prof. Weisberg found instead that it was closely related to several of Picasso's earlier works and drew upon his study of paintings by Goya and then-prevalent Communist Party imagery. The bottom line is that creativity goes back in many ways to the basics. "You have to immerse yourself in a discipline before you create in that discipline."

http://online.wsj.com/article/SB10001424127887324324404579044891534700108.html

Many money managers spend their days in meetings, riffling through emails, staring at stock-quote machines with financial television flickering in the background, while they obsess about beating the market. Mr. Munger and Mr. Buffett, on the other hand, "sit in a quiet room and read and think and talk to people on the phone," says Shane Parrish, a money manager who editsFarnam Street, a compelling blog about decision making.

We're happy due to: a strong sense of purpose, meaningful work, good friends, health, loving relationships, chance to learn, grow and help others. Long term profits come from having a deeper purpose, great products, satisfied customers, happy employees, great suppliers, and from taking responsibility for the community and environment.
John Mackey (Investment checklist)

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

From PD James "The private patient"

-His life was a mess. Some part of his nature, timid, indolent, lacking in confidence, had led him into this pattern of indecision, of leaving things to sort themselves out, as if he put faith in a benevlovent providence which would operate on his behalf if left alone.

-You surely understand one thing, the need to do what every instinct of your body tells you is ordained for you.

-Don't we all at some time or another make a decision which we know is absolutely right, the assurance that some enterprise, some change, is imperative? And even if it fails, to resist it will be a greater failure. I suppose some people would see that as a call from God.

-Life is too precious and too short to waste on people we don't care for, and much to precious to give up on love.

-A garden she could make and cherish, a useful job that she could do without strain with people she respected...

-"I like you, I respect and admire you. I'm never bored on irritated when we're together, and we share the same passion for the house, and when I return here and you're not about I feel an unease which is difficult to explain. Its a sense that there's something lacking, something missing. Can you call that love? Is it enough? It is for me, is it for you? Do you want time to think about it ?" And now she turned to him, "Asking for time would be play-acting. It is enough".

From "http://www.businessnewsdaily.com/4211-business-profile-warren-buffett.html"

"You can have the greatest goals in the world," he said, "but if you have the wrong people running it, it isn’t going to work. On the other hand, if you’ve got the right person running it, almost anything is possible."

-When his first child was born, he turned a dresser drawer into the baby's bassinet and borrowed a crib for the second child. Not one for fancy cars, Buffett drove a Volkswagen until his wife upgraded him to a Lincoln Towncar. 

-"I'm happy there," he said. "I'd move if I thought I'd be happier someplace else. How would I improve my life by having 10 houses around the globe? I'm warm in the winter; I'm cool in the summer. It's convenient for me."

-"I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will."

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.

Aswath Mohan on Valuation

-Some analysts determine operational cash to be 1-2% of revenues. Rest is treated as excess cash and used to reduce debt balance.

-It is safer to separate cash and marketable securities from operating assets and to value them individually.  Thisis because we use operating income to estimate free cash flows to the firm and operating income generally does not include income fromfinancial assets. Once you value the operating assets, you can add the value of the cash and marketable securities to it to arrive at firm value.

From Seth Klarman's 2007 MIT speech

-A steadily rising housing market erased fears of credit risk, since one’s credit really doesn’t matter if the collateral—in this case houses—is only going up in value 

-Institutional selling of a low-priced small-capitalization spinoff, for example, can cause a temporary supply-demand imbalance. If a company fails to declare an expected dividend, institutions restricted to owning dividend-paying stocks may unload shares. Bond funds allowed to own only investment-grade debt would dump their holdings of an issue immediately after it was downgraded below BBB by the rating agencies. Market inefficiencies, like tax selling and window dressing, also create mindless selling, as can the deletion of a stock from an index. 

-My firm’s approach is to seek situations where there is urgent, panicked or mindless selling.

-smart investors look to the market not as a guide for what to do but as a creator of opportunity.

-The best investors do not target return; they focus first on risk, and only then decide whether the projected return justifies taking each particular risk

Case Schiller P/E