vinod1
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Posts posted by vinod1
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I have mostly used book value since it is so hard to improve upon.
At a high level we know that depreciation may not reflect what is really happening to the asset. Inflation can distort the actual value. A new firm seeking to enter the market would not duplicate the same PPE as newer equipment would have higher productivity. So you need to know quite a bit about the industry production methods to be able to improve upon book value.
A rough approach to get around the above is to use price per unit of production times capacity. Example, find the market price of a plant per ton of aluminum produced and use this to find the reproduction value for the aluminum plant. Use comparable companies data.
Also if my investment case is going to be dependent upon getting this number with precision, it is probably not worth bothering about.
Vinod
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berkshire101,
I don't have margin on my account. It's a joint account. I want to know if I have to liquidate my holdings in order to transfer brokerages. And how long is the process and how much does it cost? Thanks.It's quite simple. You usually just want to do an automated customer account transfer service (I think that's the acronym?) aka ACATS transfer. It takes maybe 7-10 days. As mentioned above, if you close out completely, Fido will charge you maybe $25-50 (I can't remember). All positions will be transfered in kind, and the basis (if properly reported / known at Fidelity) will be transferred accurately to IB within maybe 1-2 months (usually works well).
Note, if you have some mutual funds at Fidelity, IB will need you to liquidate those if they aren't in their list of funds they can hold... but other securities should be just fine to move.
It's really quite easy and seamless in my experience (I fund most new accounts for my clients this way and that is where I am speaking from).
Also, even if you had a margin account, it's simple to transfer over, you just need to let IB know you have a loan at the other broker I believe.
Two small notes:
1) If you have $0 cash at Fidelity when you transfer, the account closing fee will be considered "margin" and thus you can't transfer, so just a heads up to have net-cash after the closing fee.
2) On joint accounts, make sure you speak with IB support and title your new IB account *exactly* how they want given your Fidelity account... middle initials and other somewhat minor titling things matter to IB.
3) Also note to understand IB's joint account withdrawal rules... generally (I think it's still like this) they say that you can deposit from a bank titled under your name, or wifes name, but they will only let you withdrawal into a jointly titled account.
Hope that helps, glad to see IB getting more business! :)
Thank you very much! That was really helpful! I'll give IB a call and hopefully they can help me with the transfer. Thanks again! :)
berkshire101,
I transferred to IB from Vanguard Brokerage Account a long while back and the only issue I had is that the cost basis did not transfer correctly. But you would be able to correct this manually yourself. So just make sure you have accurate cost basis information in case you need it.
Vinod
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Gamecock-YT,
Wow!! Thank you!
By any chance do you have Coke annual reports for late 1970s or early 1980s?
Thanks
Vinod
Looks like it skips around a bit:
Thank you!!!
I have spent a bit of time trying to find these reports and had no luck. I cannot thank you enough.
Vinod
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Gamecock-YT,
Wow!! Thank you!
By any chance do you have Coke annual reports for late 1970s or early 1980s?
Thanks
Vinod
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Anyone know what the general composition of the Fairfax bond portfolio is to have any idea of the duration risk we're facing?
I'm in the camp of lower rates for longer, but I certainly want to have a better idea of how it will affect Fairfax if I'm wrong than I currently do.
Thanks,
They give this out in the AR, page 99. Change in earnings at 1% and 2% change in rates is about -$700 million and -$1.3 billion. This assumes a parallel rise in rates.
Vinod
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has anyone seen research on how accurate GMO's projections are?
I have been following GMO very closely since around 2001. They used to issue a much more detailed forecasts by sub-asset classes at that time. Even one of the foremost efficient market gurus and who I respect a great deal, William Bernstein, studied GMO methodology and commented that GMO does these forecasts in just about the best way that is humanely possible. My own experience also supports this.
In 1999, they issued a 10 year forecast for 11 different asset classes (small value, large cap value, REIT, etc.) and they nearly got everything right.
Vinod
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However, in that case, we just give up. We don't try to predict those things. We don't say, "Well, we don't know what's going to happen." Therefore, we'll discount some cash flows that we don't even know at 9% instead of 7%. That is not our way to approach it.
Hi Vinod - do you know in what year Buffett made this quote? I ask as I'm interested in tracking Buffett's public comments on discount rates, to see how they compare to prevailing inflation/US bond rates of the time period. Hoping to calibrate the equation somewhat to see what there is to learn.
You would not find much on discount rates from Buffett because he is on record as saying that he does not use discount rates.
Charlie talked a little bit more on this and he adds an interesting twist, that of comparing to the best alternative you have.
Vinod
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However, in that case, we just give up. We don't try to predict those things. We don't say, "Well, we don't know what's going to happen." Therefore, we'll discount some cash flows that we don't even know at 9% instead of 7%. That is not our way to approach it.
Hi Vinod - do you know in what year Buffett made this quote? I ask as I'm interested in tracking Buffett's public comments on discount rates, to see how they compare to prevailing inflation/US bond rates of the time period. Hoping to calibrate the equation somewhat to see what there is to learn.
Sorry, I do not remember the exact source or date of this quote. He is giving an example and that is not the rate that he is actually using. Munger said something around the fact that they would not be using a much lower discount rate than 10% - even if treasury rates go much lower.
My understanding is that Buffett/Munger use something like 10% as the discount rate and adjust it upward if long term rates are much higher than 10% but they do not want to adjust it much below 10% even if rates are very low. As Buffett says they have margin of safety at every step of the way when valuing a business.
Vinod
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Stock picking and the choice of a proper discount rate for a particular stream of cash flows go hand in hand. You can't pick stocks without first picking a discount rate.
Sure. But assuming your investment analysis is accurate, the optimal investments at an 11% discount rate are the same as the optimal investments at an 8% discount rate. You have more options to choose from at an 8% discount rate, but they are suboptimal.
If you are using the same discount rate for all companies, then yes, it's clearly just a matter of "how low are you willing to go?" to find opportunities, and I guess the rate you choose becomes more about the macro environment than anything else (clearly the rate you use to discount cash flows must be lower today than in the 1980s).
But using the same discount rate for all companies is a bit of a stretch. Personally, I may be happy to invest in a stock like KO if, based on my best projections of future cash flows, I expect a return of 8% per year. Given that even 30-yr treasuries are sub-3%, earning an expected 8% return on a "safe" stock like Coke would be highly attractive. On the other hand, if based on my best projections of future cash flows, I expected an 8% return from investing in Facebook, I wouldn't do it. The risk of those cash flows that I project being far off the mark is too high relative to an 8% rate of return. I would want a much higher expected rate of return, maybe closer to 15%.
So I guess it comes down to how you handle risk in your valuation. Perhaps you use a low discount rate for all companies, but devise different scenarios and probability-weight them in order to come up with a valuation. Or, you come up with expected cash flows and discount them at a rate in line with the level of risk to achieving them, depending on the company.
The difference a discount rate makes is huge. For Fastenal, at an 8% discount rate, my model says I should be willing to pay $65-70 for the stock. At an 11% discount rate, I should pay no more than ~$35.
There are some times that the opportunity and the business are so obvious that you don't even need to project cash flows or think about a discount rate (AAPL at $380 per share is the best recent example I can think of). But it seems to me that with situations like Fastenal, you can't avoid thinking about future cash flows and a proper discount rate. Looking at the current multiple on earnings or cash flow and "eye-balling it" isn't much help in that kind of scenario.
Philly,
I hear you and understand your point. It is a valid concern, but using different rates makes comparing different investments very difficult. I just use 10% for everything and adjust the required margin of safety by using a probabilistic approach.
Buffett's comments on this make a lot of sense:
When we look at the future of businesses we look at riskiness as being sort of a go/no-go valve. In other words, if we think that we simply don't know what's going to happen in the future, that doesn't mean it's risky for everyone. It means we don't know – that it's risky for us. It may not be risky for someone else who understands the business.
However, in that case, we just give up. We don't try to predict those things. We don't say, "Well, we don't know what's going to happen." Therefore, we'll discount some cash flows that we don't even know at 9% instead of 7%. That is not our way to approach it.
Once it passes a threshold test of being something about which we feel quite certain we tend to apply the same discount factor to everything. And we try to only buy businesses about which we're quite certain.
But we think it's also nonsense to get into situations – or to try and evaluate situations – where we don't have any conviction to speak of as to what the future is going to look-like. I don't think that you can compensate for that by having a higher discount rate and saying, "Well, it's riskier. And I don't really know what's going to happen. Therefore, I'll apply a higher discount rate."
Vinod
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A really good post by Pettis:
http://blog.mpettis.com/2014/12/how-might-a-china-slowdown-affect-the-world/
Vinod
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How about putting a giant question mark on the dominant thought of our times, the efficient market hypothesis? That is a nobel prize winning idea. What adjective does that deserve?
So Benjamin Graham is a genius, as well as every other investor who tries to find undervalued securities.
To think either Buffett or Graham are not genius's is to do violence to either English language or common sense or both.
1. Graham came up with the process of systematically analyzing companies.
2. He became the only person ever offered professorships from three different Columbia departments —math, English and the classics.
3. Widely credited to be the father of value investing.
4. Wrote two books on international economics despite having no formal study in economics. Keynes himself is said to be impressed by one of the books.
5. He had a show on Broadway at the same time that he is published "Security Analysis". Reading Security Analysis, you can see how accurately he identified, behavioral biases, management behaviour, Wall Street behaviour, investor behaviour and behaviour of corporate boards. It is eerily accurate and decades ahead of its time.
So yes, he is a bit more than an investor looking for undervalued securities.
Vinod
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Surprising part of XOM was he was in and out in a flash.(for BRK)
If I remember correctly at the time he bought XOM, he had a choice of AAPL in 400s, MSFT in 30s, ORCL in low 30s. At that point some posters here felt that his buying XOM as opposed to these other mega caps was sort of a vote on their relative value and riskiness. I find it interesting that the others are up at least 50% and XOM down to flat.
I guess XOM doesn't fall under this quote ;-)
Buffett quote: “Our favorite holding period is forever.”
You left out an important caveat that he added to the above quote.
"When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever."
So this conveys some info on how he views Exxon.
Vinod
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I really recommend Michael Pettis on this subject. His writings were a real eye-opener to me especially with regard to moral, work ethics and how much they have to do with a country's economic development. A good example for debunking those work ethic myths his this piece of his:
http://carnegieendowment.org/2013/05/21/excess-german-savings-not-thrift-caused-european-crisis
I can't recommend enough his excellent book on the Chinese economy where he discusses at length the arguments you've just made.
+1
I too found Michael Pettis book very helpful. It made me rethink a lot of what I thought I knew about macroeconomics.
In addition, unlike many economic books, he lays it out the likely causes of something in terms of x, y and z and then gives reasons why one might be more right than the other. So you are free to come to a different conclusion from the author if you think the other reasons are more persuasive.
Vinod
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When I say "resilient", it means it does not make or break the investment. So instead of getting a 15% return he would end up with 10% return, if the CEO turns out to be a crook or worse. So it does not mean CEO is totally irrelevant, just that the business can carry a poor manager without killing the investment thesis. When he has a chance of course he would want to have a better manager.
Edit: if you want another example, take JNJ. I don't know if we can blame CEO on this one, but this is an example where Buffett business was hit hard by "unknowns". Of course, it recovered - after CEO change and Buffett selling... :)
This again makes my point. Even with all the unknowns what happened? At most value is stagnant for a few years and it is up and running again. I did not follow JNJ for a while so just looking at operating earnings, it is growing pretty well after a couple of years of stagnation.
I also do not think the CEO is to blame for this and even if he not changed I think JNJ would pretty much be in the same position it is today.
Vinod
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When I say "resilient", it means it does not make or break the investment. So instead of getting a 15% return he would end up with 10% return, if the CEO turns out to be a crook or worse. So it does not mean CEO is totally irrelevant, just that the business can carry a poor manager without killing the investment thesis. When he has a chance of course he would want to have a better manager.
I don't think KO produced 10% return with bad CEOs. I think pretty much any business can be killed by bad CEO. Of course, if Buffett owns a large chunk of such business, he's likely to can the CEO faster than the business loses 50% of its value.
I will agree that there are some businesses that are likely to be resilient to some "unknowns". So your idea to buy businesses resilient to most "unknowns" might be good one. I just don't believe that any businesses are resilient to bad CEO. And in "bad" I don't necessarily mean corrupt or stupid. They might be just not fit the business and the context the business finds itself in.
Edit: if you want another example, take JNJ. I don't know if we can blame CEO on this one, but this is an example where Buffett business was hit hard by "unknowns". Of course, it recovered - after CEO change and Buffett selling... :)
Well the bad CEO you are referring to must be Paul Austin, who is the CEO from 1966 to 1981. He increased earnings about 10 times during this period from $47 million to $420 million. Even if you include some dilution that is pretty good.
Let us look at the bad patch where he did indeed diworsify. This is the period from 1973 till his retirement in 1981. Earnings increased from $215 million to $447 million or about 10% per share. Add in around 1 1/2 to 2% in dividend yield over this period, you are looking at an intrinsic value growth of around 10%. I do not have per share figures and I am sure there is dilution and I am sure it is helped by the high inflation of the 1970s but you get the picture. Here we have a CEO who is hell bent on value destruction and still the result is not so bad.
I am not talking about share performance, as it is a different matter as it is impacted by compression of PE multiples across the market.
Yes, any business can be killed by a bad CEO, just as any business can go bankrupt. But when we are investing we are looking at probabilities. How many very high quality businesses got killed by a bad CEO?
I seem to be in the mood for Buffett quotes so let me answer my own question with another quote:
It has an incredible distribution system. Tell me how you'd attack that business? You wouldn't want to anyway, as the market's not big enough. Larson-Juhl has a HUGE moat. I always ask myself how much it would cost to compete effectively with a business. With businesses like these, nothing's going to go wrong. If you bought 20 of them, 19 of them would work out well.
All I am saying is if you stick to these kinds of businesses you are much less likely to be exposed to bad kinds of unknowns.
Vinod
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How do you figure out what you don't know in investing?
I have found over the years that even after a lot of work I can still not understand a key overriding consideration of a business.
I think it was Walter Schloss who said that you have to own a business to really understand it.
Here are 3 types. I am really interested in type 3, as that is what is more controllable and can cause losses.
1. Unknowns that are identified previously.
2. Random Unknowns.
3. Unknowns that are due to ignorance.
You can instead take the approach of Buffett. The vast majority of the businesses that Buffett bought, are resilient to all three items you mentioned above. A CEO having an affair or worse do not impact the valuation of most of the businesses in Buffett's portfolio.
I do not think Buffett knows the in's and out's of Wells Fargo's or Bank of America's each operation in depth at the division level, and I do not think such knowledge is needed or necessary to invest successfully. Look at his definition of understanding a business and it tells a lot about what he focuses on:
"It's a question of being able to identify businesses that you understand and you are very certain about. When I say understand–my definition of understand is that you have to have a pretty good idea of where it's going to be in ten years. I just can't get that conviction with a lot of businesses, whereas I can get them with relatively few. But I only need a few–six or eight, or something like that."
or look at his definition of risk
"We think first in terms of business risk. Business risk can arise in various ways. It can arise from the capital structure. When somebody sticks a ton of debt into a business, if there's a hiccup in the business, then the lenders foreclose. It can come about by their nature –there are just certain businesses that are very risky. We tend to go into businesses that are inherently low risk and are capitalized in a way that that low risk of the business is transformed into a low risk for the enterprise. The risk beyond that is that even though you identify such businesses, you pay too much for them. That risk is usually a risk of time rather than principal, unless you get into a really extravagant situation. Then the risk becomes the risk of you yourself –whether you can retain your belief in the real fundamentals of the business and not get too concerned about the stock market."
I think it is better for us also to focus on such businesses where we are less exposed to risks you mentioned.
Sorry for tossing Buffett quotes, you probably know most of these by heart, but they covey the message better.
Vinod
I actually didn't know these ones. The concept of being able to visualize where a business will be in ten years is very valuable, even if you have no intention of holding it ten years. Would have saved me from botch ups like Yellow pages, sfk, and RIMM. This seems really important in this era of creative destruction.
Agree completely. This is probably one of the best filters to avoid "value traps".
Vinod
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Let me throw one more Buffett quote on Management:
We’ve spent many years buying many things without meeting managements at all. If we buy the entire business, we care very much about management and whether they’ll behave in the future as they have in the past. But in marketable securities, we read the annual reports. In marketable securities, however, we’ve still bought into some extremely good businesses run by people we didn’t care for because we thought they couldn’t screw them up.
Vinod
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You can instead take the approach of Buffett. The vast majority of the businesses that Buffett bought, are resilient to all three items you mentioned above. A CEO having an affair or worse do not impact the valuation of most of the businesses in Buffett's portfolio.
Sorry, but this is not true. Please read "Snowball". Buffett has fired multiple CEOs because they underperformed. Including 2 CEOs of KO via backroom deals. So CEOs "having and affair or worse" do impact performance of even KO. And KO is not an exception, this has happened with multiple businesses Buffett invested in.
I also think that Buffett is deluding himself if he thinks that he knows where IBM will be in 10 years. But that's perhaps different discussion. :)
I did read Snowball. In fact, I spent several months (not including reading over the years his annual letters multiple times, etc) diving into his investments and what he said on many aspects of investing and distilled them into a core set of action items and portfolio constraints in developing my own investment approach. So I do at least know a bit about Buffett.
When I say "resilient", it means it does not make or break the investment. So instead of getting a 15% return he would end up with 10% return, if the CEO turns out to be a crook or worse. So it does not mean CEO is totally irrelevant, just that the business can carry a poor manager without killing the investment thesis. When he has a chance of course he would want to have a better manager.
Vinod
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How do you figure out what you don't know in investing?
I have found over the years that even after a lot of work I can still not understand a key overriding consideration of a business.
I think it was Walter Schloss who said that you have to own a business to really understand it.
Here are 3 types. I am really interested in type 3, as that is what is more controllable and can cause losses.
1. Unknowns that are identified previously.
2. Random Unknowns.
3. Unknowns that are due to ignorance.
You can instead take the approach of Buffett. The vast majority of the businesses that Buffett bought, are resilient to all three items you mentioned above. A CEO having an affair or worse do not impact the valuation of most of the businesses in Buffett's portfolio.
I do not think Buffett knows the in's and out's of Wells Fargo's or Bank of America's each operation in depth at the division level, and I do not think such knowledge is needed or necessary to invest successfully. Look at his definition of understanding a business and it tells a lot about what he focuses on:
"It's a question of being able to identify businesses that you understand and you are very certain about. When I say understand–my definition of understand is that you have to have a pretty good idea of where it's going to be in ten years. I just can't get that conviction with a lot of businesses, whereas I can get them with relatively few. But I only need a few–six or eight, or something like that."
or look at his definition of risk
"We think first in terms of business risk. Business risk can arise in various ways. It can arise from the capital structure. When somebody sticks a ton of debt into a business, if there's a hiccup in the business, then the lenders foreclose. It can come about by their nature –there are just certain businesses that are very risky. We tend to go into businesses that are inherently low risk and are capitalized in a way that that low risk of the business is transformed into a low risk for the enterprise. The risk beyond that is that even though you identify such businesses, you pay too much for them. That risk is usually a risk of time rather than principal, unless you get into a really extravagant situation. Then the risk becomes the risk of you yourself –whether you can retain your belief in the real fundamentals of the business and not get too concerned about the stock market."
I think it is better for us also to focus on such businesses where we are less exposed to risks you mentioned.
Sorry for tossing Buffett quotes, you probably know most of these by heart, but they covey the message better.
Vinod
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Let’s say your goal is to compound capital at 15% annually.
I would suggest caution against setting return targets, every very reasonable ones. Buffett, Munger and Klarman, all warned about this very same point. I used to have a return target as well one time, but very quickly realized my mistake before it cost it me too much.
Setting a return target is individual equivalent of the Corporate Strategic Plan. It not only does not work but triggers so many other behavioral biases that it would hurt your portfolio.
Basically when you target return, you would be focusing on the upside ignoring risk. Of course, you would tell yourself that you would do no such thing. Since investing is not like working in a factory where you can decide to put in an extra 20% more time and make proportionally higher income. You get the returns that are available in the market. If your target returns are not available, you would be tempted to load up on risk to make it up.
Vinod
Vinod
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I've never worked in a mutual fund or a hedge fund. So maybe fund managers and analysts are very congenial and philosophical and debate ideas on their merits. Maybe these guys are like two English professors debating a good book over a pint at a pub, I don't know, it's possible.
My experience is from working at companies both large and small. There is undeniably a power dynamic between a boss and a subordinate. Outside of very rare occasions I'd say it's uncommon for a subordinate to question a boss' pet project, and even worse call it a lark.
To take this to the corporate world. What I see here is some executive who has spent a decade on some project. That's not an insignificant amount of time. He then hires an analyst to look into the position, they consult with outsiders, evaluate everything. Then he's asked his opinion, what do you think it'll be? Maybe he'll say it's good but give the cautionary language. "The real estate is valuable, we have a margin of safety, but there is an outside chance x, y, or z might happen that could potentially come close to impairing part of the thesis."
When I've seen execs question the pet project of a CEO at places I've worked it's the questioning exec who's looking for a new job. I've never seen the CEO suddenly change their mind.
But like I said, I've never worked in a fund. Maybe funds are politics free, and maybe the people at funds are different, I don't know. The way 'guru' managers are exalted on this board I'm not sure they can even make a bad decision. Even their worst decisions are good ones.
+1
This has pretty much been my experience. When your boss gives you something to research or investigate, they almost invariably have an idea of what the result should be and you are expected to basically come up with compelling reasons why that is in fact a really great idea.
Vinod
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Relevant quote from the book:
Figure 11-6 also shows the total real return from equities in each country (the green bars).
Visually, real returns seem unrelated to GDP growth, and statistically, the correlation is -0.27
for 1900–2000 and -0.03 for 1951–2000. These findings, while based on much longer periods
than earlier research, are not new. Siegel (1998) found that from 1970–97, the correlation
between stock returns and GDP growth was -0.32 for seventeen developed countries, and
-0.03 for eighteen emerging markets.
Vinod
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I believe there is a tremendous body of evidence that clearly states that aggregate market PER-SHARE, PRE-TAX, REAL, TOTAL returns (at the country level) are not *at all* correlated with long term GDP growth. I think they are certainly correlated (in certain ways, maybe with a lead or lag) with changes in GDP growth from expectations.
There is a good book that has data that provides a very compelling case for inverse correlation between GDP growth and stock market returns.
Triumph of the Optimists: 101 Years of Global Investment Returns
Vinod
So this would mean that over long periods stock returns are always negative right? If countries continue go grow (GDP growth) then returns should be negative over the long haul? If you extrapolate out a bit it would mean that equity investing is a losing game, as the world grows we're trying to swim against the tide. Yet this doesn't seem to be the market experience.
Since we have numbers the US has grown as an economy and our market has been biased upwards. So how does this jive with the research?
Dont take it too literally. It just means it would be a a bad idea to expect higher equity returns just because it has a higher growth rate.
The data if you care to look in the book, shows that countries that have higher growth rate are priced higher. So equity returns tended to disappoint investors who naively investing in high growth countries. Does this remind you of value investing?
Part of the explanation is also that to fund additional growth you need to make additional investments via debt and stock market issues which dilute existing shareholders.
Vinod
I guess I was thinking about this with a longer time window than most. I was thinking if you looked at 100/200/300 years of history what would you see? Someone mentioned short time periods, and in that vein I agree that growth in GDP doesn't correlate to returns. I'd like to see the data from 1906 to 2006 for example, what's the relationship between those two? My guess is that GDP growth and market growth are fairly tightly connected. All of the pessimism and optimism cancel out eventually.
The book I mentioned looked at the 101 year data from 1900 to 2000 and came to the conclusion I mentioned. The authors periodically publish an updated version of the data for a report they do for institutional investors so if you are interested you might find the data you are looking for there - but the conclusion does not change.
Their conclusions were something along the lines that as long as there is positive GDP growth, the GDP growth rate itself has weakly negative correlation to stock market returns.
Vinod
They said no compelling bargains in market...
in General Discussion
Posted
Liberty,
I wish you the very best of luck! Look forward to more of your wonderful posts if you do decide to retire.
FYI - I do not know if you have kids, but expenses have dramatically increased for me kids. This is partly due to housing, as after kids we realized there are lots of benefits to being in a better school district even though school ratings are mostly junk since they are just correlated to demographic profile. And houses in good school districts are 2x to 2.5x of average school districts in our area.
Vinod