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ageofsocrates

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    EV/EBITDA vs EV/EBIT vs P/FCF

    in General Discussion

    Posted

    there's no single metric. One problem of the p/fcf as highlighted previously by packer16  is the growth component.

     

    Companies that are cheap may not be good investments. At one point, for-profit education companies were trading at extremely low p/fcf valuations.  However, some of 2nd/3rd tier companies were in terminal decline and could not sustain the growth that they had experienced before.  They were generating strong FCF but at unsustainable rate.

     

    EV/EBITDA allows one in a way to identify cheap companies that may have a growth component. However, it's one of many financial metrics that a value investor will need to look at before deciding whether a stock is a suitable investment.

     

    my 2 cents.

    Pabrai/Buffett partnership fee structure

    in General Discussion

    Posted

    Regarding questions about how those of us who started small have grown.  My AUM / client history is below (formed business in late '06) which I think is typical of a small RIA with only minimal / medium connections to wealth who lives far off the Street:

     

    YE '07 - $0.31m / 11

    YE '08 - $0.31m / 15

    YE '09 - $1.06m / 19

    YE '10 - $2.42m / 30

    YE '11 - $3.25m / 34

    YE '12 - $3.82m / 39

     

    Probably will close out this year with $6-6.5m and 50+ clients.

     

    For what it's worth, I think there are many ways to success, and they mostly depend on what you want / define as success.

     

    I started at the urging of some friends, who persisted to harass me for several years after college.  They suggested to me my business model based on my concerns, which at the time were:

     

    1) I liked investing, I don't like dealing with clients / running a business (I wouldn't describe myself as entrepreneurial)

    2) I had a full time job, and I hated the idea of marketing financial services to get a size which would sustain itself

     

    My friends just said to manage the assets of clients the same as my own, no exceptions, and just tell clients to take it or leave it.  They told me to setup shop with the expectation that clients wouldn't talk to me, and keep it that way.  Seemed reasonable to me, so that's what I did.

     

    For those who think this is so hard, I can only say that "yes" it take a long time commitment... but I think it's simple (maybe not easy).  I would say that if you are managing your own money *and* you strongly believe you are exceptional at managing assets, I think the stretch to managing money isn't a big one.  So what if you don't make money for 5-7 years... what does that matter?  If you want a "job" that can generate high income immediately, well then I agree it sucks, but how many people really are doing this for that reason (maybe a lot, but I doubt it)? 

     

    This is a job you can do on the side (obviously not ideal, but if you are managing your own money you likely are already doing that right?).  Also, as with almost any business, the value (NPV) of the business lies deeply out in the future cash flows, and I think if you think of this as creating a business (not really my focus, but it's certainly an aspect of what I do this) you have to think the same way.  Assuming you can do 2-3% above market after fees for 10 years (not 5) I can *guarantee* you that unless you are trying to hide, you will be found whether you doing any marketing at all.

     

    For me, I have always done no marketing, just word of mouth, mostly because I truly believe that what I wrote above.  Your clients at the start aren't really what create the most business value (or value for clients themselves)... in the long term what creates value is a long run of above average performance coupled with clients who stick it out because they believe and understand what you are doing so they actually experience your above average performance (so many great investors fail this second test).  There is no value in tricking / marketing clients to join you because they will be the first to bail on you (whether you are doing well or not) for the smallest reasons.  They will then spread bad words about you and it won't do you any good - again, in the long run.  It's much better to get clients / assets only when they are a good match for your philosophy, and to be continually clear about what your strategy is so that over time you can create a clear and accurate honest representation of yourself and your business.  I believe genuine honesty coupled with performance (as well as clear speaking / presentation skills) are key to this business.  Marketing is not remotely required if you only care about terminal value as opposed to near term income.  The behavior of the money management business in general is clearly geared in the opposite way, and that is probably the biggest opportunity to those of us doing this on a small scale with a long time horizon.

     

    When I started my plan was that I would have to do it as a side business until I had $4-5m (with my fee / cost structure that means about $45k in income) which has proven to be pretty accurate based on my personal / family expenses.  Also, I had the assumption that many clients would be on the fence until I had a 5-7 year track record because from I what I knew of psychology that is when a track record becomes "real" to most regular folks.  Both of these assumptions have held true generally from what I have seen.

     

    Overall, I think I have experienced what could be described as typical business results for someone doing this solo without marketing.  I think I've had some lucky breaks getting some big clients, or maybe also having some higher net worth friends than others may have, but I also started right before the Great Recession (and my portfolio focus is on financials generally) so maybe it balances out.

     

    Just my perspective, I appreciate others sharing their experience.  My comments above weren't meant to disagree or argue with anyone with a different perspective, I just wanted to share my own thoughts as a small data point.

     

    Ben

     

    Hi Benhacker.

     

    Just a quick question. How many hours did you put in researching companies when you were working at a fulltime job?

    I am thinking about switch my broker to IB. Any risks there?

    in General Discussion

    Posted

    Options settle the next day.  So instead of selling your common shares you can write deep-in-the-money calls (lowest strike on the market).

     

    Get your cash tomorrow.

     

    Eliminates 2 out of the 3 days in the settlement period.

     

    Bonus:  you might not have to pay tax because you didn't sell your common.  See "constructive sale" rules -- I said "might".  You have to play by the rules in order to avoid the tax.

     

    I wrote deep-in-the-money FFH calls, used the proceeds to buy ORH calls.  Then when ORH popped, I sold ORH and bought back the FFH calls.  I didn't owe tax on the FFH.  But if I'd instead sold the FFH shares, I would have needed to pay tax.

     

    Thank you Eric. But waiting for a day still sounds inconvenient to me. because in my Fido cash account, I can sell a stock and immediately use that unsettled proceeds to buy anything, be it option or stock.

     

    Are you using portfolio margin? Aren't you worried about their instant liquidation policy?

     

    I was terrified of the instant liquidation policy before I understood was portfolio margin is -- then I switched from Reg-T to portfolio margin and I don't worry anymore.

     

    Thank you Eric.  could u please tell me a bit more about portfolio margin?

    I don't plan to actually use margin. I am just worried if ib platform would have a bug and force me to liquidate

     

    Scneario:

    1) $100,000 cash balance initially. 

    2)  I purchase $190,000 worth of common stock, and $10,000 worth of puts using a $100,000 loan.  $200,000 total invested

    3)  The puts are at-the-money

     

    Okay, under Reg-T margin the account could be liquidated in a flash crash.

     

    Under Portfolio Margin they can see that the puts completely protect the value of the loan they've extended me.  So I'm safe in a flash crash.

     

    From their perspective, it's the same as if I invested $90,000 into the common stock and just put $10,000 into at-the-money calls (without taking a loan).

     

    But instead of doing that with calls, I have the outstanding margin loan hedged with at-the-money puts.  It's non-recourse leverage at this point -- they know that and I know that. 

     

    In my example I'm assuming puts and calls are at the money, and there is pricing parity.

     

    Hi Eric,

     

    Just a quick question. How  far out do u usually buy the puts for (i.e 6 mths or 1 year)?

     

    I am holding 2015s presently.  I will roll them to 2016s within a few months of their issue.

     

     

    Hi Eric,

     

    Just wanted to hear your thoughts on this. Selling at the money puts in a margined account as a way to open a stock position (using margin). Subsequently, then using the premiums collected (from selling puts) to buy at the money puts to hedge

    I am thinking about switch my broker to IB. Any risks there?

    in General Discussion

    Posted

    Options settle the next day.  So instead of selling your common shares you can write deep-in-the-money calls (lowest strike on the market).

     

    Get your cash tomorrow.

     

    Eliminates 2 out of the 3 days in the settlement period.

     

    Bonus:  you might not have to pay tax because you didn't sell your common.  See "constructive sale" rules -- I said "might".  You have to play by the rules in order to avoid the tax.

     

    I wrote deep-in-the-money FFH calls, used the proceeds to buy ORH calls.  Then when ORH popped, I sold ORH and bought back the FFH calls.  I didn't owe tax on the FFH.  But if I'd instead sold the FFH shares, I would have needed to pay tax.

     

    Thank you Eric. But waiting for a day still sounds inconvenient to me. because in my Fido cash account, I can sell a stock and immediately use that unsettled proceeds to buy anything, be it option or stock.

     

    Are you using portfolio margin? Aren't you worried about their instant liquidation policy?

     

    I was terrified of the instant liquidation policy before I understood was portfolio margin is -- then I switched from Reg-T to portfolio margin and I don't worry anymore.

     

    Thank you Eric.  could u please tell me a bit more about portfolio margin?

    I don't plan to actually use margin. I am just worried if ib platform would have a bug and force me to liquidate

     

    Scneario:

    1) $100,000 cash balance initially. 

    2)  I purchase $190,000 worth of common stock, and $10,000 worth of puts using a $100,000 loan.  $200,000 total invested

    3)  The puts are at-the-money

     

    Okay, under Reg-T margin the account could be liquidated in a flash crash.

     

    Under Portfolio Margin they can see that the puts completely protect the value of the loan they've extended me.  So I'm safe in a flash crash.

     

    From their perspective, it's the same as if I invested $90,000 into the common stock and just put $10,000 into at-the-money calls (without taking a loan).

     

    But instead of doing that with calls, I have the outstanding margin loan hedged with at-the-money puts.  It's non-recourse leverage at this point -- they know that and I know that. 

     

    In my example I'm assuming puts and calls are at the money, and there is pricing parity.

     

    Hi Eric,

     

    Just a quick question. How  far out do u usually buy the puts for (i.e 6 mths or 1 year)?

    Thoughts on a Sell-Side Equity Research Job?

    in General Discussion

    Posted

    There are other alternatives you may want to consider.  You can invest your own account and gain experience that way keeping your existing job.  There are some folks on the board doing that right now.  This will allow you the freedom to invest where you want not where the client wants.  In some cases explaining why you are buying the cheap unloved stock to a client takes more effort than selecting the stock.  I have done this and would not want to explain to someone why their money is in LinTV and Alliance Healthcare and the high weights in the portfolio.  To a certain extent even when you get to the buy-side, you will be constrained by the buy-side firms constraints.  There is a reason why mutual funds (even good value oriented funds) have a hard time beating the market by a significant amount, it's their constraints (including size).  If you beat the index by a few percentage points you are considered a genius under these constraints.  If you do your own account approach, you don't have those constraints and achieving better than market performance can be easier.

     

    Second, you can enter a field that is related where there is good demand but not as much supply.  Business valuation is one area right now where that is the case.  But as with a sell-side analyst you will be starting at the entry stage and it will take 18 to 24 months before you can start to feel confident in performing the analysis on your own.  Just some thoughts.

     

    Packer

     

     

    Hi Packer,

     

    What are the necessary qualifications to make a switch into business valuation? Masters in Accounting or CFA? Appreciate any guidance.

    Value Investing Hooligans!

    in General Discussion

    Posted

    Got this frm whitney tilson's email. Its taken from another message board.

     

    Author: RoughlyRight   

    Number: of 198479

    Subject: DJCO 2013  Date: 2/7/2013 12:50 AM

     

    I attended the Daily Journal meeting with Charlie Munger today. Charlie is 89 now, but he doesn’t seem much different to me then when I first started attended such meetings (WSCO, BRK) 18 years ago. The meeting was in L.A. My 19-year-old son lives in L.A. as he’s a freshman biomedical engineering student at USC. At my encouragement, he skipped his Calculus class today and caught about 2/3’s of the meeting (it lasted over two hours). My son quickly typed up his notes based on points he thought worth writing down; there was a lot more covered. I’m posting his notes. It’s likely someone will have more complete notes to post.

     

    My son’s notes come from the perspective of someone not interested in investments. He’s a fairly worldly 19-year-old, but he is just 19. I’m excited that was able to learn from Charlie.

     

    Daily Journal Meeting Notes – February 6, 2013

     

    1. Public notice business–previously highly lucrative, but now being downsized by technology

    2. Charlie has not seen a housing bust like the one in recent years at any prior time in his life

    3. After the Japanese bombed Pearl Harbor, one congressperson voted against war (used to illustrate the fact that we can never get unanimity)

    4. Daily Journal was never used to spew a political ideology

    a. Charlie thinks this was the best business policy, makes the Daily Journal a trusted source

    5. Charlie doesn’t believe in a “master plan” but rather just reacting to the current needs of the marketplace/society

    6. Charlie has never taken a penny out of the Journal

    a. Charlie and his colleagues sincerely want people they barely know (that own stock in the DJ) to turn out alright

    b. They don’t mind putting these people through a little hell along the way (chuckles)

    7. Amazon takes territory from incumbents by brute force

    8. The housing bust was created by people who blindly believed mathematical formulas over common sense; made the US pay a dear price for this

    9. A good way to think: articulate those things that you do not want (i.e., things you’d like to avoid) and live a life that avoids such things. It seems simple, but many people don’t live their lives this way.

    10. Why should criminal law dictate our behavior? We would never behave this way in a relationship, yet it’s common to behave this way in business.

    11. Charlie doesn’t think society will function well if a bunch of people are making money simply by being clever (and then get “soft, white, wrinkly” hands)

    12. There should always be a category in your mind that reads “this is too tough for me to fix.”

    13. The method of corporate acquisitions in America usually hurts the shareholder

    a. Berkshire seems to be an exception

    14. “If you get pancreatic cancer, are you going to buy your way out of cancer? I don’t think so.”

    15. If your product becomes a by-product of another company’s main product (e.g., Microsoft packaging a free encyclopedia in Windows) you’ve now acquired pancreatic cancer…but worse.

    16. During the construction of the transcontinental railroad, some congresspersons took bribes from people like Huntington and Stanford

    17. Charlie likes to live a life that has some fun in it (not all sure things)

    18. The wealth of the country is based on the productivity of the country

    a. Right now, we aren’t a very productive country, so this is bad for our overall welfare

    19. If you want to get rich:

    a. Have a few decent ideas

    b. Have a lot of knowledge about them

    c. Stick with it through the ups and downs

    20. Charlie never paid attention to the “stupid” things taught in business classes

    21. Department stores may not have the world’s greatest future; they realized this upon purchasing one

    22. Charlie worst investment decision: he didn’t borrow money for buying stock in Bellridge Oil, and it soon sold out for over 35x what he was going to pay for it

    a. You’ll only get a few risk-free opportunities in your life to make an investment/decision. Charlie regrets not having made this investment.

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