KCLarkin

Thanks to Charlie Munger (and behavioral finance), it is easy to read minds:

A few obvious places to look (with historical examples): - Negative cash conversion cycle (Apple, enterprise software) - Toll booths (Mastercard, Moody's) - Asset Light (SiriusXM, broadcast TV in the old days) - Pricing power (Philip Morris, See's Candy)

Jurgis, I don't have the answers. I am just trying to understand the comments you made on the Cimpress thread (or more specifically Schwab711's explanation for your comments). I guess what I am trying to understand is how you, Jurgis, value a company that is reinvesting 100% of earnings. Schwab711 made a pretty convincing defense of your approach. But then you are left with the challenge of valuing a company with $0 in Real FCF.

What are you trying to measure with this? This seems to be just cash piling up on the balance sheet or net shareholder yield (dividends + buybacks + debt repayments). For Apple, in the Jobs, era, how valuable was the FCF that wasn't reinvested? It's still sitting offshore earning a pittance. The ability to reinvest at high rates of return is extremely valuable, but you seem to be undervaluing any firm that is reinvesting. For a growing firm, "real" FCF by your definition will be hurt by: - Growth OpEx spent in advance of growth (sales, marketing, R&D) - Increasing Working Capital to support growth - Growth CapEx - Acquisitions So a company that is growing 20% per year (Cimpress) has $0 FCF by your definition, but a dying company (Outerwall) has $200M. So Outerwall is more valuable than Cimpress?

I bought a sizeable position in Rolls Royce on Friday.

My numbers are for Ontario (not just Toronto), which may explain the difference: http://www.cba.ca/contents/files/statistics/stat_mortgage_db050_en.pdf

After the Toronto bubble burst in 1989, mortgage arrears in Ontario peaked at 0.72%. Just because a housing market crashes, doesn't mean banks will have big losses. Though common in the U.S. Bank failures are virtually non-existent in modern Canadian history.

Glenn Greenberg, Lou Simpson, Don Yacktman, Sequoia, Tom Russo. In Canada, Donville Kent is a pure play on quality growth. His performance so far is spectacular but doesn't have sufficient history. I disagree with you on Mecham. Especially on Cimpress, which is my top holding.

https://www.google.ca/search?q=How+Much+Do+Silicon+Valley+Firms+Really+Earn%3F&oq=How+Much+Do+Silicon+Valley+Firms+Really+Earn Personally, I just try to avoid companies where I can't trust the non-GAAP numbers (especially companies that issue stock).

The obvious challenge is that FASB tries to make accounting objective when it is actually subjective: -- Charlie Munger

I think the case for inefficiency in micro-caps and nano-caps is much stronger. Small caps (>300 M) seem pretty efficient to me.

That is the theory but the facts don't really back it up: http://aswathdamodaran.blogspot.ca/2015/04/the-small-cap-premium-fact-fiction-and.html I'm not saying there aren't opportunities in small caps, I just don't think "inefficiency" is the reason they exist.

The question assumes that any inefficiency in small caps is an advantage for smaller investors. Inefficiency usually means information asymmetry. My experience is that information asymmetry usually gives insiders and pros an advantage over small investors. Personally, I like to make bets when I have all the information (or at least the same amount of info as my opponent). Plus, I think this whole line of argument gives the EMH way too much credit. I always approach small caps with skepticism based on Howard Marks' second level thinking. If everyone knows small caps outperform large caps and everyone knows they are inefficiently priced, how can they be under-priced? My portfolio is almost exclusively $1B plus and I see no shortage of opportunities.

Not quite Cliff Notes but required reading: http://www.amazon.com/The-Essays-Warren-Buffett-Corporate/dp/1611634091

I don't think banking is an industry where small is necessarily better than big. There are scale advantages and diversification benefits. Have you looked at OZRK?

You are most likely correct. Most prominent value investors own at least one of BAC, JPM, or WFC. The big question is which one to own? I own WFC (and a bit of BAC) but suspect that the more marginal banks (BAC) will do better if interest rates rise and lending picks up.

Someone should look at Stella-Jones. I haven't done any work on it but it has 30% annual return over the last 20 years. $10k becomes $1,268,714.32. It has a $3B CDN market cap and I never hear it mentioned anywhere.

I first bought this in April 2013 at $135 CAD. Sadly, I did not make it a big position at that time even though I felt it was the best company in Canada. I didn't know how to do a proper valuation on M&A driven firms. I found it by looking at Mawer New Canada's holdings. Mawer has excellent portfolio managers but they don't provide a lot of commentary on their holdings. Later, I found that a portfolio manager named Jason Donville was mentioned in nearly every article about CSU. Donville is very generous about sharing his thoughts in his quarterly letters and on BNN. His writings provided me with a good way to think about M&A driven firms: http://www.donvillekent.com/roe-reporter.php AFAIK, he first mentioned CSU in 2009.

Any recent thoughts? Jason Donville is very high on CRH but I get scared when I see a chart like this.

I bought a big position after the announcement but sold. As a Canadian, I would prefer to hold QSR long term.

CSU.to constellation software - CEO gets no salary, no bonus, no options, AND he pays his own travel expenses QSR, Heinz, BUD - anything 3G buys is well run

Actually, what I am saying is that there are quantitative variables that will impact your investment in the short term. These tend to get quickly priced into the stock and will be discussed in every earnings release. There are sector specific variables and more generic variables. But there are qualitative aspects that will determine your long term returns and these are less efficiently priced. For retail stocks, same store sales growth and new store openings are key variables. But there are qualitative differences between ANF and TJX which made TJX a much better investment. Yet Mr. Market actually gave ANF a slightly higher multiple over the last 20 years.

If you google the headline, you can bypass the paywall.

There are two sets of variables that will impact your returns: 1) Short term 2) Long term I look for divergence between the short term impacts and the long term impacts. For example: IBM: - Short term: Forex headwinds, weak emerging markets, software pricing, execution issues - Long term: Capital allocation, sticky customers, recurring revenue WFC (2013): - Short term: Low interest rates, regulatory burden, weak mortgage market - Long term: Growing low-cost deposits, high ROE, cross-selling Vistaprint (2014): - Short term: Depressed margins, european macro issues - Long term: Economies of scale Patrick Dorsey's "Little Book that Builds Wealth" gives a good framework for thinking about the variables that truly matter. However, I'm not sure that a single variable is always the key to an investment. For example: Apple (circa 2013): - Very low EV/EBIT - Smartphone market growing rapidly - Relatively high dividend yield and large cash pile likely to be used for buybacks/dividends - NTT Docomo, China Mobile deals likely to occur - New iPhone product cycle - New product categories promised by Cook - Moat: Sticky ecosystem, Integrated software & hardware, strong brand, Exceptional management, World class supply chain, design - ... Maybe that's why Buffett would never invest in Apple. But Apple was so cheap that you didn't need everything on the list, you only needed 1 or 2. It doubled because everything clicked (plus Icahn).