KCLarkin
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Posts posted by KCLarkin
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3 hours ago, Milu said:
I take a more simple estimation approach, through researching the company, reviewing financial statements history and making adjustments, I come up with a single normalised earnings/free cash flow number that I feel has a reasonable chance of being accurate of being achieved over the next 12 months. I will use this estimate to determine what the stock is currently yielding (earnings/Price), and then lastly I will apply a margin of safety to account for situations where the actual earnings end up being less than my estimate.
With this approach, you are systematically undervaluing the best businesses. Here is an example from my own "mistake" in using this normalized approach:
MSC (industrial distributor) YE 2015:
Trailing earnings: $3.79
Foward earnings (actual): $3.77
Normalized Earnings: ~$4.00
Cheapest Price 2015: $55
Normalized PE: 13.75
FASTENAL YE 2015:
Trailing earnings: $0.89
Foward earnings (actual): $0.87
Normalized Earnings: ~$0.75
Cheapest Price 2015: $19
Normalized PE: 25
On normalized PE, MSM was almost half the price of Fastenal! But which was cheaper? Over the next 9 years, performance was:
MSC
EPS CAGR: 5.3%
Annualized Return: 7.6%
FAST
EPS CAGR: 10.6%
Annualized Return: 17.2%
MSC was pretty close to fairly priced in 2015. Fastenal was the real bargain. But that is easy to say in hindsight. How could you have known at the time? There were a couple pretty strong clues:
MSC
ROE 17%
10yr EPS Growth: 9%
FAST
ROE 29%
10yr EPS Growth: 12%
Fastenal was clearly the better business. If you asked 100 investors in 2015 which was the better business, 100 (including me) would have said Fastenal. But then fools, like me, bought MSC because it was "cheaper".
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9 hours ago, Milu said:
Personally I have always used trailing multiples as it feels a bit more conservative, but if you think about it logically then some sort of forward multiple should make more sense as that is the current expected 'yield' of the stock.
Trying to be "conservative" is a mistake. You should try to be accurate. How many great and very reasonably priced companies have value investors missed because they were too "conservative".
I agree with Gregmal, you should be looking out at least 3-5 years. Trailing earnings are already priced into the stock. Forward earnings are usually too (though Meta is an example of "conservative" investors missing forward earnings by a mile).
If you look at only forward earnings, every great company will look expensive. If you use trailing earnings, every value trap will look cheap.
Nvidia is a great cautionary tale. In January 2022, TTM (2022) was $4.44. actual fwd (2023) was $3.34. You could have been conservative and estimated 2024 earnings at $3 or $4 or $5. But actual 2024 earnings were $12.96. Sure, you might have missed the drawdown from $300 to $100. But you would also miss the run from $100 to $900. Conservatism comes at a price.
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This also depends on your strategy. If you are buying a cyclical, you should be looking at the past 10-20 years. And then maybe overlay some thoughts on forward earnings. For a real growth stock, you should be looking out 5-10 years.
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9 hours ago, bizaro86 said:
I think it's quite possible that the economics of an annuity in this situation end up very closely approximating the following:
She gets the principal back, while the seller of the annuity gets 100% of the returns.
The OP should definitely price it out, but I'd be surprised if it's a no-brainer given the low life expectancy here.
Agree that it is unlikely a no-brainer and very likely a bad deal. But...
This is an insurance product not an investment, so you should be expecting to only get principal back..at best. You are insuring against the "risk" of her living longer than four years (or whatever the insurer's actuarial tables say).
Given her age and current principal drawdown, I'm not sure the insurance is necessary. She can probably afford to self-insure. I'd be worried about her burn rate rising if she needs more intensive LTC.
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Is there a Vanguard of annuities? It does seem like the ideal product for this life stage but the commissions and fees mean most annuities are a rip-off. Caveat emptor.
If you can’t find a good annuity, a fixed income ladder is probably the best option for that life stage. But honestly, her current portfolio seems fine unless you are convinced rates are coming down quickly.
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8 hours ago, thowed said:
But I hope that one thing that won't change is that a basket of good quality companies bought at reasonable prices will still perform OK.
These stocks did perform well 2000-2012. I looked at a few boring "compounders". The few stocks I looked at all did good to very good during this period (though this is hindsight because these are famous compounders in part because they performed well during this period):
Copart
Fastenal
Autonation
O'Reilly
Tractor Supply
Alimentation Couche-Tard
Boyd Group
Heico
Most of those have also done well in the 2012-2024 period, I think. And some newer flavours (e.g. Constellation Software and Transdigm) have done exceptional as well. So it is tempting to assume great compounders are "evergreen". But Mr. Market has bid many of these up, so who knows.
But if you can buy these types of companies at reasonable prices, you can generally ignore what the indexes do.
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But China will win a race to the bottom. If the only difference between phones is cost, China will win.
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Why is there so much desire to destroy American companies with strong market positions? Competition is now global and you need strong national champions. If you handicap American tech, who wins? China, Korea. In the best case, you give some modest market share to another American big tech co.
Can you imagine Taiwan trying to voluntarily cede TSMCs dominant position?
This reflexive hatred of "big tech" is such self-inflected nonsense.
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There is a book about him. Sadly, it is in French and I haven't seen any news of an English translation. And I can't read French so I don't know if it is worthwhile:
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On 3/21/2024 at 10:41 AM, james22 said:
To be fair, most don't bother to study it because they've been told it's a Ponzi by people who should know better.
When you've Buffet/Munger on one side of the argument and Sam Bankman-Fried the other, you can believe you know all you need to.
My favourite thing about doctors: the diagnosis will often just be a description of your symptoms... in Latin. Patient: Doc, my ass is itchy. Doc: You have pruritis ani. Patient: OMG, is it fatal?
I feel the same about crypto enthusiasts. They throw around a bunch of jargon to make it sound sophisticated. It is perhaps the simplest financial asset in history. Everything important about bitcoin could fit on a postcard. If you are really verbose, you could stretch it out to a one-pager.
Anyone who thinks that Buffett and Munger and Dimon aren't able to immediately grasp the essence of bitcoin is delusional. It reminds me of the Valeant bagholder's who thought Munger just didn't understand...
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As always, Matt Levine captures this well:
A crypto token is also an electronic token that you can buy or sell for money, but in a purified form. There’s no company, no product, no earnings, no cash flow. Sometimes a lot of people want to buy the token, and its price goes up; other times, they want to sell, and its price goes down. You have the most salient feature of finance — a volatile electronic token that you can trade — without any of the other features. There is less to learn!
Oh this is unfair and oversimplified, your crypto project is different...
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https://www.wsj.com/articles/SB10001424052748703977004575393180048272028
I think it is pretty obvious that he'd be a good fit for the board. But why would he want the role?
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I've never understood why Buffett thinks (thought -- has he mentioned it in the last 20 years?) this is a good metric. There are so many obvious flaws, I don't know why anyone takes it seriously. Similar to Lynch's PEG ratio.
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To answer the original question, ETF approval increases the likelihood I will start a position in BTC to 0.1%. The fact that Coinbase is the likely custodian knocks that back down to 0.001%.
The main use case for BTC (other than speculation and illicit activities) is theft and fraud. Having Blackrock as a sponsor does allay most of those concerns.
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But, I want to own great businesses. I don't have any interest in bonds, gold, commodities, art, or collectibles.
For me, the best thing about Crypto is that it diverts many of the speculators away from high quality businesses. The fact that y'all are getting rich quick off of Beenz 2.0 doesn't bother me. I'm okay getting rich slowly...
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Disclosure: I'm from the dotcom, Beanie Babies, Pogs generation. I'll let you get rich off your very wise investments in BTC. I just prefer great businesses at reasonable prices.
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1 hour ago, rkbabang said:
I'm still holding most of the Bitcoin I bought 10 years ago. I know people who have been holding longer than me. How is BTC not compatible with a buy-and-hold philosophy? Idiots.
Bogle didn't think ETFs were compatible with a buy-and-hold philosophy (and he is correct though the other advantages make up for this).
It Boggles my mind that people on this forum don't understand Vanguard. One of the most important financial institutions of all time.
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On Invest Like the Best, he said that he would stop active investing if he wasn't getting results. That implies that he is getting results.
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Other than the Collison foreward, there is no new content in this edition, correct?
"This abridged edition features a new foreword by Stripe cofounder and president John Collison."
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3 hours ago, ValueArb said:
Is it still growing mid-teens? 2022 revenues only grew 10% over 2021, and 2023 revenues are only up 7% over same periods in 2022. Operating profits have been flat from 2021 to TTM 2023. This is what makes GOOG hard for me, I don't know any easy way of filtering out COVID effects. 2020 +13%, 2021 +41%, then it's been slow ever since. GOOG crushed 2010 decade averaging 21% revenue growth but growing $300B in revenues is way harder than growing $30B.
When I say "growing mid-teens", I mean past tense (and I'm looking back to the last 10-K so one or two quarters won't cause recency bias). EPS growth is much better but when I eyeball it and try to ignore COVID effects, it's pretty hard to say this thing is not growing at least mid-teens.
Agree with you on efficiency. I believe it is both poorly run and unlikely to be better run. So please don't take this as a pitch for GOOG!
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6 hours ago, Dinar said:
Net income is NOT after maintenance cap ex. It is after depreciation, which is almost never = to maintenance cap ex.
Correct. If you are starting with NI, you need to add back depreciation and then you can use whatever number you want for "
maintenance cap ex". Just don't double count. You can use depreciation or "maintenance capex" but not both.Inflation is definitely an issue that will distort accounting earnings for many years for most companies. But many of Google's assets are generally deflationary, so the distortion may not be as great as imagined. I'll leave that to your discretion.
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56 minutes ago, Dinar said:
There is a mistake in your analysis. Some stock compensation expense actually is reflected in net income and EPS. Not all, but quite a bit of it.
There are two mistakes. Net income is after both SBC and maintenance capex. So you have a 4-5% Earnings Yield, cash on the balance sheet, growing mid-teens. With plenty of opportunities to run more efficiently.
It is true that "real FCF" is less than Net Income. But that should be the case when you are reinvesting for growth. If growth slows, they should get close to 100% "real FCF" conversion so you don't need to assume a constant "real FCF" multiple as long at P/E doesn't compress too much.
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50% of their U.S. stock portfolio is Mag7. You want them to add more?
Munger's been pretty clear on this. They wanted one tech stock and they chose Apple. No need to speculate.
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7 hours ago, vinod1 said:
I know a lot of value investors take pride in saying "I dont do DCF". Once you do understand how earnings, FCF, reinvestment are working, you dont have to actually lay out FCF1, FCF2.... FCF in perpetuity to actually calculate value. Then you take a short cut to DCF valuation, but underlying it is essentially DCF.
The mistake I made when starting out and for several years, is look down upon DCF and missed a lot of the insight it provides. I spend several months reading up Damodaran's Investment Valuation and it really opened my eyes. Assuming you are at the same level as Buffett and hence does not need to do some of the things just because he does not do it, is not wise.
Vinod
This is all true, in a way. But the problem with DCF is that if you actually knew FCF1....FCFN, the proper discount rate is... maybe 5%....the 30yr treasury rate?
The whole point of the risk premium is that you don't know FCF1...FCFN. And if you don't know FCF1...FCFN, you can't do DCF. And intrinsic value is only apparent in retrospect. So the U.S. stock market, over the past 100 years was almost always ridiculously undervalued. And one of Buffett's main insights was that, if you were an insurer, if you bought stocks with reasonably predictable coupons ("equity bonds") with your float instead of bonds you would clean up.
And so this gets to the main problem with DCF. If you use a "discount rate", you will almost certainly decide that Costco at 40x earnings is "expensive". And VSCO at 5x earnings is "cheap". But this neglects the fact that Costco is closer to a bond with a growing coupon. And VSCO is closer to an out-of-the-money call option. And Costco probably deserves a 6% discount rate. And VSCO probably deserves a 20% discount rate. And which is "cheaper"? Who knows.
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And so what happens is that price drives sentiment. And the "DCF" shadows price action. And it becomes useless in actually picking investments.
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In the past year, Meta has traded at $89 and at $330. Intrinsic value has probably not changed a single dollar in that time. What is the IV of Meta? Probably somewhere in the range of $50 to $1000. So obviously, you should buy below $50 and sell above $1000. But what the hell do you do in between?
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You mentioned Damodaran, who I admire. I looked up a few of his valuations of Meta:
2018 - $181 (stock at $155)
2022 - $346 (stock at $220)
2022 - ~$100 in a "doomsday scenario" (stock at ~110)
And to be fair, he was correct that Meta was undervalued all three times. So I guess DCF does work... if you are as skilled as, perhaps, the most famous "valuation" expert. But it is devilishly imprecise and definitely an art form. Doesn't mean you can't admire and learn from the fundamental truth of Intrinsic Value.
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20 hours ago, vinod1 said:
Buffett does DCF, he is just able to do the basic math in his head. His short cut method is pretty well covered by his biographer.
For most investors, until they become very good at it and understand the impacts, actually laying out a DCF is an extremely useful way to pick up nuances in valuation that are easy to miss.
Buffett doesn't really use DCF, at least according to the sources I've seen. He uses something more akin to a hurdle rate. It is easier and more intuitive and I'm frankly baffled that people use DCF*.
Company A is worth $100 and is trading at $50, tells me very little.
Company B is expected to return 15% per year, tells me a lot.
Example A, I guess, makes sense for cigar butt traders. You need a buy target and a sell target. Or if you are doing a private deal where the price is negotiated.
* Building a detailed model and seeing how different assumptions impact valuation is a fun and valuable experience, but I'm doubtful it will improve most peoples returns.
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I'm assuming the biographer you were referring to was Alice. Here is how she describes his process:
He looked at them in great detail like a horse handicapper would studying the races and then he said to himself, ―I want a 15% return on $2 million of sales and said, Yes, I can get that.‖ Then he came in as an investor.
OK, what he did was he incorporated his whole earnings model and compounding (discounted cash flow or DCF) into that one sentence. He wanted 15% on $2 million of sales (a doubling from $1 million current sales). Why does he choose 15%? Warren is not greedy, he always wants 15% day one return on investment, and then it compounds from there. That is all he has ever wanted and he is happy with that. ...You are not laughing, what‘s wrong? (Laughs)
It is a very simple thing, nothing fancy about it. And that is another important lesson because he is a very simple guy. He doesn‘t do any DCF models or any thing like that. He has said for decades, ―I want a 15% day one return on my capital and I want it to grow from there-ta da!
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1 hour ago, Spekulatius said:
I think consumer staples are selling off more due to higher LT interest rates than due to GPT-1 threats. The GPT-1 issue is just one more nail in the coffin and caused more selling pressure.
I’m looking more at the restaurants on Friday, rather than staples. DPZ down nearly 6%. Wing down nearly 5%. On a day that the consumer discretionary index was green.
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On 10/4/2023 at 8:13 AM, thowed said:
I suspect that this is one of those temporary dislocation opportunities to buy Consumer Snack companies cheaper than usual, while the Ozempic hype goes overboard.
I have no idea of the GLP-1 efficacy, but from crowd psychology it seems reasonable that people are getting over-excited about its effects in relation to snacking.
Similar sort of thing to 2021 when V & MA came down because they were going to be disrupted by BNPL and Crypto.
Anyways, snack cos aren't my favourite things generally, but at the right price, as 'bond proxies' you could arguably do a lot worse than Pepsi, Mondelez & possibly Hershey (as a US-only play).
Yes, my inclination when stocks are narrative driven is to fade. The same forces that are causing the sell-off in junk food also sold off auto parts and costco due to Amazon threat. Sold off convenience stores due to EVs. Mooned Peloton and 3d printers and tilray.
The problem here is that most of these stocks started at high valuations and have plenty of debt. Both aspects that aren’t aren’t appealing at current interest rates.
TLDR: the risk is potentially real but market will overreact in short term creating a buying opportunity.
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Clearly I am missing something with this premise. Isn't Carnegie famous for giving away his fortune?
Oh wait, I think you meant the Vanderbilt's. That makes more sense.
Do you use Trailing or Forward price multiples?
in General Discussion
Posted
I get that this can work when Mr. Market goes crazy. But intellectually, it makes no sense.