vinod1
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Posts posted by vinod1
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The main point is that before you read any value investing books like Security Analysis, etc you need to get a good understanding of accounting. A good place to start is "The accounting Game" by mullis.
Vinod
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My background is in engineering and did not have any economic/finance background. Reading Intelligent Investor and other value investing books, it felt like sitting in the cockpit of a space shuttle - you get exited and want to do something but did not have a real clue. I completed my CFA which provided a good background - accounting, economics, statistics, financial analysis (at least how not to do it or way it is performed by analysts). I did feel it is a waste of time relative to the time spent. If you can look at the curriculum it provides a roadmap of what things you might need to learn and in what order. It however misses completely on how to actually go about investing in the markets.
I found that I learned most from Graham's Security Analysis, the practical aspects of it. Then started reading and analyzing Annual Reports/10-K's, etc. The first 200 annual reports did not make much sense, but I kept reading anyway. Then after getting a good feel for the various industries and companies from reading the annual reports, I then selected a few industries and a few companies in each. Then spent a couple of years drilling down into the industries and companies. So I would really dig deep into 2-4 companies in a specific industry. 20-30 years of annual reports if available and try to also look at data of the past 30-40 years to see how they have evolved. Now I am comfortable with valuing companies that are within these specific industries. So if I have to look at a new company within the industry it takes relatively less time to get upto speed.
Vinod
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Here's the excel. The first tab is based on book value growth and the bank specific tabs are based on a couple of key variables (growth in loans, growth in pretax preprovision profits, charge offs, etc). This obviously over simplifies reality, but the idea is to get a sense of returns under various scenarios - you can play with the variables in blue.
The BofA A warrant does not have the strike price reduction feature from dividends, so it needs this adjustment.
There's also some historical info on charge offs and aggregate banking system financials that can help as background. Also some info on the experiences from the early '90s on a few banks (note Wells Fargo actually recorded zero provisions in '95).
Of interest, in the last 3 majors charge off cycles (mid seventies, early nineties, early 2000s) it took exactly 4 years to go from peak to trough. If we assume that the peak was in the 4Q/2009 (the tab called 2010 shows this for the big banks ex Citi), then we're in for a slow and steady process of charge off reductions. This is at odds with what Walls Street is projecting for some major banks (e.g. COF); this cycle might be longer, but it's hard to see how charge offs will simply stay where they are, which is what they assume.
Finally, I did not have time to update data from the 3Q, but this can be easily done in tab 2010.
damianolive,
Outstanding effort. Thanks for sharing.
Vinod
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Bronco
Sorry. I agree completely with you w.r.t the examples. What I was commenting on is your statement "is it double counting if in today's terms I have both the assets and the NPV of future earnings." I made the assumption that the future earnings are being produced by the same assets. In your examples that is not the case. The investor referred to in the article seem to be adding up both the asset and furture earnings from the same asset.
Vinod
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Just food for thought - is it double counting if in today's terms I have both the assets and the NPV of future earnings.
The NPV of future earnings will include write-downs to certain assets - P,P&E for one.
If I have cash of $1B and a yacht I rent for $100M per year (net of expenses), the IV of the company IMO is the $1B + the NPV of the $100M annual stream.
I believe each situation needs to be reviewed individually, but I tend to value the IV of a company based on excess working capital + NPV of future earnings. However, I think each situation needs to be reviewed differently.
For example, a movie theater may produce breakeven results, but if I can buy it for $10m and build a hotel on it, who knows?
Yes. It is double counting.
Take another example, if you have a $1000 in your bank account that is paying 5% interest. Do you capitalize the interest and add back to your principle to get the total value?
Vinod
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After reading the full report, I stand corrected:
Says Rees, “ I generally assign an estimated fair value on a company
based on the value of net tangible assets plus a ten multiple
on estimated forward run rate earnings. ”
This is nuts!
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It is double counting no doubt but I think we might be missing the context in which he is adding up the asset value and earning power value. Look at the example,
Here ’ s a basic explanation of how Rees determines value. Say
Rees fi nds a company with low debt and fi gures out that its tangible
asset value is $ 5 per share. If his estimate for forward earnings per
share was $0.10 he might apply a price - earnings multiple of 10 to
that. That would amount to $ 1 of future earnings value, so Chris
would simply add the two to get a $ 6 estimated fair value for the
stock. He would then seek to purchase it at a 50 percent discount
to that value, or $ 3. If the stock price was too high, he would simply
move on to the next candidate.
The earnings are 2% on the business tangible value. So he is estimating what the tangible value would be like a few years out and seeking to purchase at a discount to its eventual tangible value. If you think of it it is no different than removing any expected losses from the tangible value to arrive at an expected tangible value a little further out in the future. It would have made more sense if he is projecting the asset value say over 2-3 years rather than projecting out for 10 years (which is more like capitalizing earnings).
Vinod
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For every dollar that you are putting into either WFC common or WFC warrants, the equation seemed to be
1. If WFC trades below $54 around the expiry of options in 2018 - WFC common has the higher expected return
2. If WFC trades above $54 around the expiry of options in 2018 - WFC warrants has the higher expected return
The downside seems to favor WFC common as long as WFC trades above $0. So if you are expecting a price of about $54 in 2018 I would think common is the better option. If you have higher expectations on WFC price then the warrants are the way to go.
Vinod
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Who has that helped really, to keep rates close to 0% for so long?
The only people benefiting from a 0% policy are the banks and hedge funds.
I just see a grand game of manipulation with very little impact for Main Street.
Cardboard
At the end of the day 0% rates are like shuffling money from the left hand pocket to the right had pocket as each $ saved by a borrower is offset by an equivalent $ that is not earned by a saver. So it is a form of redistribution.
The only benefit seems to be to induce some sort of bubble and pray that it fuels economic growth (at least in the short term) and hope that the bubble pops out when the economy is in a much better shape to handle the aftermath.
Vinod
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COC,
What an outstanding first post! I have a word document of comments on this board that I want to re-read and your first post went right into it. I hope to have the pleasure of reading more of your comments. Thank you!
Vinod
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Buffet would get 50% return because he has 70 years experience in the stock market. I believe Ericopoly on this board had a 20 000% return over the last 10 years (about 70% annualized return). You can ask him how he did it.
BeerBaron
I think that is an extremely good point that often seems to get ignored.
For all his talk about getting 50% returns, if you look at what Buffett has actually achieved, it had been about 25%-30% in his partnership days. This I would take it as the upper limit of realistic performance that can be achieved by a super investor. Mere mortals should not be too dis-satisfied with something lower.
Vinod
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Given Fairholme's size, I agree that it will be difficult but he does seem to be changing some of the deals he is getting involved with (General Growth is one) so amongst managers I think he has the best chance for his size. I think part of the reason for the interest of stocks on this board is to outperform funds. If you cannot do that by a significant margin why waste your time?
Packer
Agree completely. I think many people on this board can and would outperform the market by a significant margin. My point is regarding only mutual funds and that for the average person (not the value investing fanatics of this board :-) ) index funds are the more reasonable choice.
Vinod
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over the past 15 year SEQUX has returned 9.71% while BRKA has returned about 10.20%. I don't think most of the fund's out performance has been due to berkshire. From what I can remember the fund "only" had about 20% or so in Berkshire for most of the time.
Now, if we look over the past 5 years (since Ruane died) the fund has still performed nicely, but not nearly has close as BRK. 3.76% (top 3% of funds within that category) vs 8.96% for BRK. S&P 500, meanwhile was around .21%.
Good point. I am shooting from the hip here, based on vague recollection. I stand corrected.
Thanks
Vinod
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That is why the best modest size fund out there (Fairholme) is going to get you S&P + 12% but many boardmembers can get S&P +15% or higher.
Packer
If you think Fairholme would be able to beat S&P 500 by 10% going forward over the next 10 years, I would gladly take up an offer to bet otherwise.
Vinod
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As to value mutual funds outperforming over time, I disagree. Over a 10-yr period, Longleaf has outperformed over 5%. So has Sequoia, Farholme, Mairs & Power Growth, Mutual Series and Harbor Int'l. What funds were on your list that underperfomed? Did they have a value manager at the helm and low turnover? I agree that some value index funds can add some value via low cost and a value tilt but buying index funds over the past 10-yrs has not yielded much return.
You guys seem to relagate the average investor to some kind of idiot who is an emtional basket case. I disagree. I especially disagree about readers of the Intelligent Investor. If you have gotten to that reading and understand the concepts then you should at least be able to find an advisor/mutual fund that follows those ideas. True there are some folks that are emotional basket cases but what we and value investors do is not rocket science. It can be performed with algebra and an average IQ. High IQ's may be a disadvantage due to making the process too complex when it doesn't have to be.
Packer
Graham had a wonderful paragraph that I am unable to find now. It goes something like this: Investing is a business undertaking and should be carried out as such. It is incorrect to think that with just a little effort one can achieve results substantially better than the market as a whole. It requires a level of intensity that a businessman would employ in the conduct of his business. Nevertheless a great majority of the people seem to have this belief. No one would think that can achieve great wealth in a business if they spend just a little effort but this same reasoning does not seem to apply when investing in stocks.
I probably butchered what he wrote but that I think is what he said.
All the funds you mentioned are good. The question is, can an average Joe - who would never every read or even understand the Intelligent Investor at least to the degree that is required to select good managers - been able to find these managers 10-20 years before they had this performance?
I would not name a message board that I had participated in a long while back about indexing, but we had people with several years of experience who ran trading floor and have written books on investing (pretty good too) argue about the riskiness of a 3% allocation between two funds one of which had 600 stocks and the other had 2000 stocks. Here they are worrying about a 3% portfolio allocation that is spread over 600 stocks as being too risky and that the 2000 stocks fund is better. My point here is just because someone reads Intelligent Investor (many of these guys did), it would make them good value investors. Let me say that the first time I read the Int Investor, I liked it but did not really get it. You could count me in as one of the basket cases at that time :-)
Vinod
Vinod
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As to value mutual funds outperforming over time, I disagree. Over a 10-yr period, Longleaf has outperformed over 5%. So has Sequoia, Farholme, Mairs & Power Growth, Mutual Series and Harbor Int'l. What funds were on your list that underperfomed? Did they have a value manager at the helm and low turnover? I agree that some value index funds can add some value via low cost and a value tilt but buying index funds over the past 10-yrs has not yielded much return.
You guys seem to relagate the average investor to some kind of idiot who is an emtional basket case. I disagree. I especially disagree about readers of the Intelligent Investor. If you have gotten to that reading and understand the concepts then you should at least be able to find an advisor/mutual fund that follows those ideas. True there are some folks that are emotional basket cases but what we and value investors do is not rocket science. It can be performed with algebra and an average IQ. High IQ's may be a disadvantage due to making the process too complex when it doesn't have to be.
In summary, I think recommending index funds to those folks who understand and accept value investng precepts is not very smart. This is what Zweig does throghout the value investing book (which I think is a shame) because if you didn't know otherwise (via boards like this) you would be condemend to lower performance than the concepts would provide. To a certain extent its like a Bible commentary written by an agnostic or atheist.
BTW I have no problems with his type of commentary in Random Walk Down Wall Street as this is consistent with the concepts in that book.
Packer
I would look at 20 year returns for a better idea of what returns can be achieved. I posted longleaf's and they are not all that impressive. Also, most value funds and incorrectly measured against the overall market rather than to the type of stocks that generally are populated in their funds. Take Pabrai for example, he loads the funds mostly with small and value stocks (per the academic definition, of low price/book), so I do not think it would be correct to measure his performance aganist S&P 500 but rather aganist say Russell 2000 value or some combination thereof. I know measuring performance this way is a can of worms, but this is something I found most good value investors have done a bad job off, as a result of insufficient attention/thinking on this topic.
Mairs and Powers, yes it out performed by 4% over 20 years, but if you had instead looked at in comparision to small value index, it probably outpermed by a smaller percentage over this period.
Yes, we have a few mutual funds that have outperformed by a little (1-3%) over 20 years, but I do not think it would have been easy to pick the succesful funds ahead of time. I am not saying someone who is well immersed in value investing like folks on this board, cannot pick good value managers who can outperform the market by a little bit. For the average investor, it is practically impossible.
If you really want to look at Sequoia performance under current manager's take out BRK and look at the performanc of the rest of the portfolio. You know they have BRK due to their predecessor's inclusion, so this would give you a good idea of current manager's capabilities. It is not very impressive.
Vinod
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Whoa there! If the great majority of us underperform the market over the long term, that implies that research has negative value or that our costs entirely eat the value of our research. I can tell you that my costs are very low....like 0.1% per year. Even Vanguard would have trouble doing that. I'm pretty confident that I can meet that 0.1% hurdle.
SJ
SJ,
I am talking about the average Joe, not the members of this message board. If I had a pick of several investors on this message board especially the majority of those who post with some frequency, I have no doubt in my mind they (yourself included) would outperform the market.
Value Investing (a la Buffett/Graham) is so counter-intutive and unlike how the work is accomplished/success is achieved in other fields. I do not think it can be practiced successfully say by 80 to 90% of the overall general population. That and only that is my point.
Vinod
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Chairman Warren Buffett reiterated his view that for most small investors who don't have time to research individual companies, cheap index funds are the best way to invest in the stock market.
"The best way in my view is to just buy a low-cost index fund and keep buying it regularly over time, because you'll be buying into a wonderful industry, which in effect is all of American industry," Buffett told CNBC anchor Liz Claman.
"If you buy it over time, you won't buy at the bottom, but you won't buy it all at the top either," the billionaire investor said.
http://www.marketwatch.com/story/warren-buffett-backs-index-mutual-funds-over-etfs
When a shareholder asked for the single best specific investment idea Buffett could recommend to an individual in his 30s, Buffett said: "I would just have it all in a very low-cost index fund from a reputable firm, maybe Vanguard. Unless I bought during a strong bull market, I would feel confident that I would outperform ... and I could just go back and get on with my work."
http://seekingalpha.com/article/75563-buffett-s-advice-to-the-berkshire-faithful-buy-index-funds
Vinod
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If you take a look at some of the best value mutual funds, they have only added a very modest (1-2% ) after-tax out-performance over the broad stock market. Take longleaf partners fund, they outperformed before-tax by about 2.6% over S&P 500 index. If you really benchmark this over say Russell 1000 value which I think is the most appropriate and that investors could own this fund (though not over the same period), then it turns into insignificant out-performance to downright underperformance (I really dont have the numbers for 1000v but know it outpermed S&P by a little bit).
I posted the performance records of about 20 pre-selected group of value investors mutual funds in the old MSN message board wondering why they have not really shown any good performance compared to the stock market. It seems it should be so easy to beat the market but it is not in practice.
A lot of this is due to (1) behavior of investors themself which force managers to worry about short term performance and make subobtimal choices (2) drag due to asset size that does now allow many opportunities to be expolited (3) compensation more aligned with getting more AUM.
Vinod
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I think what Graham has stated is that if you know you can't deal with picking your own stocks then at least understand the value philiosophy and chose an advisor that can (low turnover value funds or RIAs that invest with such managers). In my mind, index funds are buying into the Efficient Market Hypothesis (which I disagree with). The effects of index investing over the past 10 years have been a disaster to which I am suprised no one has commented (other than not investing in stocks).
Packer
Believe it or not, investing in Index funds has nothing to do with efficient markets (though they tend to go together in peoples minds). It is simple math and logic. People investing in Index funds for the very long term (DCA over 30-40 year period for example) would earn the business returns i.e. about 6% real returns. Since all the active investments involve much higher costs, nearing about 1.5% to 2% of the real returns every year, active investors as a group earn about 4% real returns. Thus on aggregate, indexers outperform something like 80-90% of all investors over say a 30 year period. It makes a lot of sense to just invest in an index fund and outperform 80-90% of the people over a 30 year period. If you disagree, you need to answer one question: Do you believe that all the investors in aggregate can outperform the market? and Do you think all the investors in aggregate earn return higher than what the business generates over the long term?
Now efficient marketeers take this to an extreme and say no one can outperform the market expect by luck. We know that is not true. However, this does not take away from the fact that for the vast majority of the people, by definition, index funds are the most suitable option.
I spent several years immersed in efficient markets and their study before finding home in Graham and Buffett.
"It is no difficult trick to bring a great deal of energy, study, and native ability into Wall Street and to end up with losses instead of profits." - Ben Graham
Vinod
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Just wanted to throw in a quick poll on the heels of a recent discussion in "Why we love FFH" thread.
I would not buy anymore because I have as much as I want at the current discount to IV. If I did not have any then maybe my answer would be different.
Vinod
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For those of you who are interested in old annual reports here is site that has WFC old reports from 1967 onwards
http://www.wellsfargohistory.com/archives/annualreports/index.htm
Vinod
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My son just entered High School. It so happened that one of his middle school teachers got kids thinking in terms of stock investing in 8th Grade. Of course, I tried to influence my son to take on value investing. I'm still trying, especially the long term investing idea you know. I'm trying...the teacher's method involved selecting stocks and talking up monthly gains and such...oh well.
Here is what I am telling my Son. Get that teacher's e-mail and write to him at the end of each year and report progress on a portfolio made up of just 3 names: BRK, FFH and WFC, for comparison with indexes and the teacher's portfolio. I will post on this board on Jan 1 each year.
The teacher's method reminds me of a cartoon, "I recommend this stock which is outperforming the market since 1 PM today".
Vinod
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Bronco, Power Corp/Power Financial do the same as Loews. Their returns have been stellar for as long as anyone except Buffett. Major holding is Great West; lesser holdings are IGM Financial; Pargesa (agglomeration of public and private European holdings. They also keep a good handle on the downside. PWF is one of my largest non FFH holdings. They could easily take any of the subs private but have never even hinted at it. I am not sure why they have chosen this method except perhaps it offers more chance to raise money via bonds and preferred shares. It also allows their various CEOs to run somewhat autonomous operations - which decreases corner suite turnover. Their turnover in management is very low. Very smart operation. One of the few companies I am willing to hold in my RRSP accounts.
Thanks for flagging this out.
Vinod
Parallel's between banking and healthcare -- Healthcare has been dead money.
in General Discussion
Posted
The main difference is valuation. JNJ, PFE, MRK, etc are all being valued at PE ratios in the mid 30's. At an earnings yield of less than 3%, poor returns are baked in at those prices. Even using conservative normalized earnings, some of the bank stocks are at PE of about 6. At an earnings yield of greater than 15%, unless you run into some really severe economic/company specific issues you should have a satisfactory return.
Vinod