no_free_lunch

I basically do nothing but copycat investing, in the sense that I try not to source any of my own ideas. I mean really, nobody cares where you got your ideas from it's just a matter of your returns. Not that I follow a particular manager, I include VIC, blogs, this board in my list of sources but that's where I get everything from. So much easier to just scan through other's ideas looking for something that stands out than starting from a screener. Once I find something I definitely do my DD but only if what I see has merit. In the past I would try to build my own thesis from scratch and I find the process flawed. When you invest time learning about a stock you become somewhat attached and it is just harder to walk away from it. When it's not your idea, very easy to walk. Ultimately, I think it is somewhat of a numbers game, in that the more mental models of different equities you can build and rank the more likely you are to build a higher performing portfolio.

My worst mistake, hands down, was buying tech stocks in summer of 2000. That was the start of my investment career! I remember thinking that the nasdaq was down about 30% so stocks must be cheap, right? I didn't know what value investing was, I was just dumb, young, over confident, and ignorant all mixed together. I borrowed a sum which subsequently took me 2 years to pay down. It ended up being a total disaster. The stock market went down for another 2 years, just insane, merciless, unending declines. You catch a bit of an updraft and then it would sink to even lower lows. I think at one point I was down 75%. Quite the learning experience. I was done and I think if I hadn't discovered value investing I probably would have just stuck with ETFs for the rest of my investing career. The one lesson from all of that was to know what you are holding, so you can be comfortable if it goes down temporarily (as in for several years). At the time I had about 5 stocks and only 1 did I really understand. When it was down 70%, it was no big deal as I knew it would come back eventually. The others I sweated the whole time.

longinvestor, I am always curious to hear how people navigated the GFC. Care to provide any details?

Thanks .. ThanksAndYouAreWelcome I will have a look at these. Any suggestions on the best metrics to use?

What do you see as the one foot bars?

Sure, but keep in mind that I just invest as a hobby. Basically it is a story stock. You have a CEO who is very aggressive and yet very disciplined from a capital allocation perspective. When he first came in he got rid of all businesses where he did not see a competitive advantage or room to build scale. He started acquiring companies and lopping operational expenses down aggressively. He merged with biovail (while maintaining his role as CEO) and as a result now has a 5% tax rate. With the Bausch & Lomb transaction he bought a company with $700M EBITDA and has plans to "bump" that up to $1.5B with cost-cutting over the next year and a half. There is also decentralized operations, a focus on avoiding competitive areas, geographical diversity, focus on businesses not subject to government regulations (e.g. the bausch purchase), non-traditional accounting (you need to focus on cash EPS), willingness to walk from deals (they walked from a huge one earlier this year), his compensation agreement, more that I just can't think of right now. If you read the outsiders and then start to study this company, it's like you're reading another chapter in the book. The CEO is not that old either, there could be quite a future ahead. As for the pesky details of what you are paying, I go out on a limb and trust the cash eps forecasts that management puts out. You guys are probably trying to figure it out from the traditional statements and I commend you, but I didn't do that. With their cash EPS they add back amortizations, stock-expenses and one-time costs. It is a similar concept to owner earnings but probably a bit more aggressive than buffet would like. Anyways, they are forecasting ~$2.05 for Q4 of this year. However, the cost-cutting for bausch and lomb, plus other acquisitions will not be done by q4 of this year. I crudely estimated that with their total announced cost-cuts they will probably be looking at $2.3-$2.4 per quarter by Q4 of next year, that will be their rough run-rate. So around $9.5 per share cash earnings run rate in 15 months. So you are getting them for around 11x cash earnings once the cost-cuts are in effect. That is assuming that they stand still for 2014 and just cost-cut/pay down debt. I doubt they will do that. There will be more acquisitions / stock repurchases / a merger but something else will happen. IV is a tough one. I think it's more than you are paying now but probably not that much. Some of the other major pharma companies are around 13-14 times earnings. I think valeant deserves a bit more, maybe 14x. I actually think my 14 multiplier is probably too low, should be more like 16-18 given what he has done and the businesses he is in but you also have to consider how lean they run R&D and that their are concerns about organic growth. For that reason I pull it back to 14 as they will always need acquisitions. So if they get to $9.5 that is only $133 and that's not for 15 months or so. So I am buying a dollar a year from now for $.75. Not a great bargain but not overly expensive either. My view is that in a year they will be talking about 2015 earnings at $11-12 and the stock could be at $150. You really need to get comfortable with the CEO to buy into it. It's not a huge bargain unless you believe he can continue to work his magic.

There is some value to using meta-critic to evaluate games (and possibly movies). It is going to be rare that you find a disconnect between a metacritic score and a publisher's stock but I have had it happen. http://www.metacritic.com/

Bought VRX today, 7% position. My timing is no doubt horrible on this one, with it being up double over past year and 10-fold since 09. Nevertheless, the more I read on the company the more I feel like I'm reading a case study from "the outsiders". Their execution has been just incredible and in spite of the huge runup in price, they are still cheap based on next years forecasted earnings. EDIT: I should also add, thanks to Gio for all the posts on this one.

IBM?

Novus was interesting in that after the deal was officially announce and trading resumed, you could still buy the stock at over a 10% discount to the takeout price. I sat there watching it, thinking I must be missing something but sure enough the gap has been closing.

I have been trying to find a legal precedent case for this. I mostly just see cases regarding govennment seizure/acquisition of people's properties, nothing that really fits with this situation. It would be nice to see that someone has taken this type of case up before, and won. Has anyone come across any good precedent's?

Don't forget when comparing canadian newspapers to us newspapers, that there is a free alternative in canada called the CBC. It is funded by the federal government so doesn't need to turn a profit (although they are being pushed to increase revenues). When I was looked at NWSA I recall reading that in the UK, the newspapers are not doing as well with paywalls due to the BBC which is the UK equivalent of the CBC. To me this is a critical difference when coattailing Buffet..

Have you looked at wall street oasis?

EBIX?

To me the risk is not that the government swoops in and shuts them down, they have better things to worry about. It's that they've started the wind-down, with 15% reductions per year. So couldn't they just do nothing and in 5 years time there is really just not much of a business here and private markets have taken over? This has probably been discussed on this thread before but could you play this one by buying both fannie/freddie and then hedging by buying private mortgage insurers (radian?). Someone has to eat the pie right? It seems that if they are shut down it will be a windfall for the private guys. In bruce's slides, the GSEs are insuring something like 97% of mortgages if I read it right.

Too hard to call. The market has been so manipulated by interest rates / deficit spending that I am not sure that standard market dynamics apply. For instance, we are in the middle of a recovery and yet job growth keeps stalling out. Retail sales suck. House prices though are going up, equity prices are going up. I don't know, I will stay in on the basis of american energy production and the fact that there is still pent-up demand but this definitely doesn't feel right.

I bought a little more MBI today. It is back to levels not seen since the settlement with BAC. Upside seems substantial and it seems a considerably better bargain than most else out there.

This is regarding 'the other side'. Personally there are a couple micros in my town that I have invested in. One I worked at previously, no insider info but I know it well enough to know that it won't go bankrupt so I buy it every few years when it is down. I have also seen and heard other locals invest in the 2 companies. My dentist was telling me that he invested in one. The word gets around and the local community buys into it. I don't know how significant this is relative to the market cap but with a $10M company, and local investors putting in 5,10,50k I could see them being a significant force.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1364827

Their focused picks beat out any of their traditional portfolios. http://www.gabelli.com/research/focus-five.html

I have been a bit busy but I had a quick look at this. The problem with just pulling the top 5 from a diversified portfolio is they aren't necessarily the 5 stocks that the manager has the most confidence in. Some portfolios they just represent stocks that have run-up and that haven't been trimmed. In other cases they are also only marginally higher than say the next 5, so the top position is 6% of AUM, the 6th is maybe 4.5%, the 10th is 4%. It gets pretty noisy. I don't think there is a definitive answer on this. Certainly you can get higher returns with a concentrated portfolio. Whether you can do so without risking a blow-up is open to debate.

I think best bet is to just script it. Then you can get a much larger sample.

I wouldn't mind doing some more analysis on concentration effects. To do so you need data. Does anyone know where you can get real-world trading records? Preferably from a guru but I am open to suggestions.

Well I have posted my results before and I don't mind embarrassing myself once again. I run a diversified portfolio with ~30 stocks, a value investing style and doing investing purely as a hobby. From fall '03 to november '12 I outperformed the S&P by about 2% per year. That being said it really seemed that I would get around 5-10% over the index when I really devoted myself to it but I would always burn out after a 3 or 4 months and then just ignore the portfolio for lengthy periods. I think I once went a full year without even checking my balance. I have switched to a more concentrated style (10-12 stocks) so it will be interesting to see in another decade what the difference is.

This is a great discussion. I have been going back and forth myself regarding portfolio sizing. While I certainly appreciate the merits of allocating heavily to your best ideas, I also find that you can never know everything. Personally I think things are ideal around 10 stocks, this is sufficient diversification but turnover is reasonable enough that I am not crushed trying to find ideas. The one strong counter-example is Peter Lynch who just beat the living crap out of the averages for about 15 years while holding hundreds and ultimately over a thousand companies.