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JBird

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Posts posted by JBird

    Setting up an investment fund - need some advice

    in General Discussion

    Posted

    I actually have a question unrelated to the legal/cost aspect.

     

    A friend and I are also pondering opening our own partnership. We do our own research, but once we open the fund, I think we'll be worried about trusting our own ideas initially. We are thinking that in the first few years we want to clone most of our investments, Pabrai style. Of course we would still reverse engineer and follow them like a hawk. But in the beginning we mainly want to buy stocks that Buffett, Berkowitz, Chou, etc. are in, to remain safe. Is this a sound strategy?

     

    If you wanted to answer this question Munger-style I think you would turn it back onto yourself. Would you employ an investment manager who planned on using a clone philosophy because he lacked confidence in his own ideas? The idea of course is: don't sell something you wouldn't buy yourself.

    Prem and BBRY?

    in Fairfax Financial

    Posted

    Salomon's could have taken Berkshire out if Buffett had not stepped in.  Cheers!

     

    Can you explain this? The wording makes it seem like your saying if Berkshire's Salomon stake went to zero it would've been life or death.

    13-f for Q2

    in Berkshire Hathaway

    Posted

    Ok, new wild ass guess. Apple!  ;D Very uncharacteristic but its large enough and it is arguably cheap. Unlikely it is Apple.  But to be honest it would not surprise me at all if one or both of the Ts took a large position.

     

    I know you're kidding but I'd be happy to wager that it isn't a tech company  :D

    Elon Musk Interview on Bloomberg

    in General Discussion

    Posted

    Elon Musk, "Boil things down to first principles. Use reason from there; as opposed to reasoning by analogy."

     

    Paraphrasing:

    "I looked at the cost of the raw material to build the rocket. It was certainly less than 5% of the finished product; maybe less than 2%. So I was able to see there’s a great deal of room for improvement, even if the rocket is expendable.

     

    If on the other hand I had analyzed it by analogy; I’d have said, “Well what are all the other rocket company’s rockets cost? What historically have rockets cost?"

     

    And that would be an analogy but it doesn’t illustrate what the true potential is. So a first principles approach is a good way to understand what new things are possible."

     

    A nice insight, and probably not hard to see the application to the investment process.

     

    Shorting stocks

    in General Discussion

    Posted

    Considering you are not using your own money to short the possible upside is far greater than 100%, perhaps it can be compared to the initial margin used? In addition, you can use the funds from the short to reinvest in a long which means an infinite upside, with other people's money ;)

    What broker is allowing you to use proceeds from short positions to initiate long positions?

    Valuation Techniques Help Please

    in General Discussion

    Posted

    Here's an example of valuing businesses: http://webreprints.djreprints.com/3026020366910.pdf

     

    Understanding the business is key. I'm not sure how to choose a discount rate. I only feel comfortable estimating intrinsic value when there are comps to look at. Usually if something is trading at low multiples, I don't think about a target price.

     

    When I read about EBITDA I can't help but think of Charlie Munger calling it bullshit earnings, yet so many people seem to use it. 

    Most of Geoff Gannon's articles cite EBITDA. But I like his thought process in researching the actual company.

     

    If I understood the article, this guy uses an industry comp as a basis for EBITDA and cash flow.

     

    Different strokes for different folks I guess. 

    It's times like this that I see why people use Buffett's owner earnings number.

     

    That Munger quote is one of my favorites. Here's one from Buffett, ""We’ll (Berkshire Hathaway) never buy a company when the managers talk about EBITDA. There are more frauds talking about EBITDA. That term has never appeared in the annual reports of companies like Wal-Mart, General Electric, or Microsoft. The fraudsters are trying to con you or they’re trying to con themselves. Interest and taxes are real expenses. Depreciation is the worst kind of expense: You buy an asset first and then pay a deduction, and you don’t get the tax benefit until you start making money. We have found that many of the crooks look like crooks. They are usually people that tell you things that are too good to be true. They have a smell about them."

     

    Augustabound, your username got me thinking. For the golf-minded reader, EBITDA is akin to what may be called SYB-WELR; Shot Yardage Before Wind, Elevation, Lie, and Rough. A player may happily boast his distance before WELR on the range, but ignoring WELR on the actual golf course makes him look like a total horse's ass.

    Valuation Techniques Help Please

    in General Discussion

    Posted

    It's a great question to ask. The discount rate is your required return rate. Since you always have the option of investing at the risk-free rate, you're required return rate must at least match the risk-free rate. Above that rate, it's your call. If the risk-free rate is extremely low, you may find it appropriate to use a much higher rate.

    Buffett quote

    in General Discussion

    Posted

    "They were a remarkably homogenous group of men, mostly headed to General Motors, IBM or U.S. Steel after they got their degrees. U.S. Steel was a good business… it was a big business, but they weren’t thinking about what kind of train they were getting on."

     

    Snowball, by Alice Schroeder

    Measuring Risk

    in General Discussion

    Posted

    Buffett has said over and over that the attractiveness of an investment is based on its after-tax return as measured by mathematical expectation (1966 Partnership Letter, 1988 Berkshire Letter), or said another way, by its probability-weighted range of values (2011 Berkshire Letter).

     

    If the risk of an investment is based on the reasoned probability of a loss in purchasing power over the holding period, measuring the amount of risk taken in a single investment is straightforward.

     

    Measuring the amount of risk taken in the entire portfolio is also simple. Take the probability of loss for each individual holding and multiply those probabilities together.

     

    To use the coin tossing example where the value of Heads is -1 and Tails 1, the probability of loss in one trial is 50%. Two trials is 25%. Ten trials is 0.09%.

     

    An expected value (EV) calculation forces the investor to assign probability weightings to his range of estimates of intrinsic value. Over time the investor can use actual outcomes to judge his effectiveness at weighing probabilities. In my view, the benefit of a EV estimate is clear; it's a tool the investor uses to not only help him looking forward, but to judge himself looking backward.

     

    We're all terrible with precision when it comes to the future so we'll never get a probability-weighted range of values totally correct. I think it that in certain cases these EV numbers will prove useful though. A brief example to illustrate:

     

    An investor allocates 100% of his portfolio in 15 stocks (with same value outcomes as the coin flip example). He estimates the probability of loss on any 1 of the 15 stocks is 50%. Now say the portfolio does lose purchasing power- the probability of him being correct about the odds and simply being a victim of bad luck is 1 in 33,333. (50% ^ 15)

     

    Feedback appreciated

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