Fat Pitch

If this is true then the implications will be massive (2nd industrial/energy revolution). Crazy if they just leap frogged all the current research on fusion reactors and pulled out mini generators. Doesn’t pass the smell test to me, but they put Skunk Work’s reputation on the line here so maybe... http://www.reuters.com/article/2014/10/15/us-lockheed-fusion-idUSKCN0I41EM20141015

Apparently Ebola can be spread around via the air http://www.ncbi.nlm.nih.gov/pubmed/7547435#

There’s something to be said about buying marginal commodity plays. I think oil will be higher 10 years from now, but without a strong balance sheet and being the low cost producer, one can get killed in this industry. Maybe the Saudis and Russia are going full tilt for a while, but I know they can’t keep this up without damaging their reserves so rationality will have to return eventually. Stick with strong balance sheet companies just in case this takes longer than expected. It helps you sleep well at night even if your positions are down -40%+. That’s the greatest lesson I’ve learned from 2008-2009.

Has anyone looked into Suncor or Canadian Oil Sands Limited? Syncrude looks like a monopoly on the best oil sand reserves in Canada. If they can maintain costs then 5-10yrs out this might become a very valuable asset, assuming the marginal cost of oil keeps increasing like it has for the last 20yrs...

So I'm creating a spreadsheet to pull 10yr financials and I'm trying to calculate the shareholder wealth that was created over that time period. Ideally I would just sum up the net income lines, but I realize there's a bit too much discretion for management to fudge the numbers. So I devised two other methods of approximating the earnings. 1. Free cash flows (Net Operating Cash Flows (minus) depreciation & amortization). Yeah not absolutely perfect, but it's a good ball park estimate. 2. Sum up the changes in Equity from year to year and add back any dividends/buy backs and subtract share (preferred) issuance. Now I ran this screen on several companies and I got some interesting results. For a company like IBM, the % variance between Net Income, FCF and Changes in Equity came out to ~3%. For other companies like ACN (Accenture) the variance was 80%. Of course the numbers I'm pulling may be wrong, but I'm wondering what other reasons could there be? I'm figuring there's mark to market changes in pension liability, hedges, etc from the comprehensive income statement or there might have been spin offs? If there's a spin off then wouldn't the changes in equity capture it? I'm thinking looking at these three methods might be a good barometer for seeing how "clean" the company accounting might be.

Gio, Do you assign any handicaps to your investment thesis for Fairfax? I can see how they can make 15%/yr returns, but I usually assign a probability of it happening. You can discount the ending BV 20yrs from now back to the present with any rate you want as your ROI target, but I like to discount that final number by an additional 25%-70% depending on the investment.

Have any of you looked at the valuations of Tempur Sealy, TPX? Its absolutely ridiculous.

This argument between Bill Fleckenstein and the idiots on CNBC is hilarious... http://www.cnbc.com/id/102006263

Does anyone know what’s the maximum dollar amount Fairfax can lose in any given year from their insurance exposure?

What makes you think they’ll offer a price? I think they’ll just take the assets for nothing and jail anyone they can get their hands on. sorry to hear you jump ship, I will stay on the way John Templeton told us I think you quoted the wrong person, I’m just watching this from the sidelines.

What makes you think they’ll offer a price? I think they’ll just take the assets for nothing and jail anyone they can get their hands on.

Whatever Calpers does, do the opposite!

Who needs humans when you can program these robots/machines to have wants and desires to create that artificial demand to propel industries? The bigger question is what you do with “surplus” population? This will probably usher in the post human era :P

I'm glad someone figured it out. The whole premise of an economy is centered around the owners of production "renting" the labor from "freed" folks. Turns out it's cheaper to pay someone a wage then actually owning them since wages can deflate in real terms, but having to feed, clothe, and put a roof over their heads actually keeps up with inflation. Karl Marx alluded to the final steps of capitalism is to completely displace human labor with machines in his Communist Manifesto. Of course the workers will feel disenfranchised and rise up beginning the age of communism. Pretty amazing foresight from someone writing in the 1800's.

Great addition to the forum! Looking forward to going through this while on a lunch break in the salt mines!

my favorite getty quote... Rise Early, Work Hard, Strike Oil!

I literally almost fell off my chair reading this...

Once I identify a bank earning above 1% ROA I look into the sources of the revenue stream. Every bank can take in deposits and lend it out to earn that margin spread. I try to look for banks with other sources of reoccurring revenue such as asset management on the side or other fee based transactions. Chesapeake Financial is a great example of a bank earning a decent portion of their revenue from fee based transaction. Yeah the efficiency ratio isn't so great, but the earnings has been steady in its growth over the last decade. There's another bank, Trinity Bank of Fort Worth Texas. This bank only lends out money, but Jeffrey Harp is one heck of a banker. I think their ROA is around 1.5% and that's only on margin spreads in this depressed interest rate cycle. I can see the ROA increasing to 2% when we normalize down the road. Check out their annual letters, they are a good read. The stock is not exactly cheap, but you may get some motivated sellers down the road. The discount rate is an arbitrary number. I just happen to use 10%. This number does not change based on the investment. The only number that changes is how confident I am in the business when I handicap the NPV of the DCF. As for assigning growth rates on businesses, I am very hesitant in assigning anything above 8%. I usually do half the 10yr growth rates. Basically I try to get my returns on a high FCF yield.. any growth is just a hedge against inflation.

It depends on what you are trying to accomplish. Are you trying to buy cheap liquid assets or cheap future cash flows? When it comes to banks looking at ROA is a great indicator of how effective management is at converting assets into earnings. Anything above 1% ROA is worth looking at, but be sure to adjust for one-time events. Buying cheap liquid assets can work if there’s a catalyst to liquidate the bank or a plan to replace the incompetent management. If no catalyst is present then cheap assets can stay cheap for a really long time. I find buying cheap liquid assets interesting, in a sense it provides you a large margin of safety (buying $1 for 50 cents), but if the earnings power of the bank is terrible then that $1 stays roughly $1 year after year once you factor in ~4-5% inflation. It has the illusion of “safety”, but you are running against the clock to off load your holdings at a higher price to realize the gain. Buying reliable future cash flows at a reasonable discount will result in that $1 growing larger and larger year after year without you having to sell. In this case time is on your side. Both methods work, but you just gotta go with how your brain is wired to think.

Not one for technical analysis. I do see some validity in volume levels when it comes adding/reducing holdings.

It’s pretty easy spotting great companies; the trick is to wait for the right price. I agree it’s almost impossible to be patient and ignore the markets’ temptations to be active so why not channel this urge in some other way? The best way I found dealing with the markets is to simply play a game that simulates markets. Some of the tycoon type games are great for satisfying that urge to trade/make money/do stuff without harming your real assets. These games also teaches you something about compounding.

My quick screens is to look for stable gross margins and high ROIC for at least a business cycle or two. Then I quickly read what the company does and think of a mental model for it. This helps with visualizing how the company functions in its particular ecosystem. Next I quickly run through Porters Five Forces of competitive advantage to see how I can compete/kill the company. 95% of the companies I look at fail that last check. For those that remain I go through the filings and see how management speaks about the business and see if they admit mistakes from past acquisitions. I try to see if GAAP income converges with my FCF estimates over a business cycle or two. You learn a lot by doing this... very surprising how some companies are spot on whereas others are miles apart (massive red flags). If everything checks out I'll throw it on my shopping list with a rough estimate of what I think it is worth. Most of the time these companies are trading at high valuations... shouldn't be a surprise. I figure if you build a list of about 50-100 companies you really understand and know then all you have to do is play the waiting game. Usually you are waiting for a recession, some institution investor puking shares for whatever reason or some bad headline news/scandal that won't impact the company long term, but will freak out investors short term. I assume there's a 1% chance (probably too low) of something happening that will create a superior buying opportunity in any given year for a company. With 50 - 100 companies that you are tracking this creates decent odds you can deploy capital about once a year. Oh yeah I also keep a journal whenever I purchase something and record why I am buying it and my state of mind. It's really interesting going back and seeing how off basis you can be, hah.

Earnings power of BofA is about $2/share and Buffett picked up warrants with strike price of $7 for a 28% yield. He was getting a 6% earnings yield on AMEX, that’s a huge difference. He was banking on tech like growth. Remember this was in the 60s where decent companies were trading at 3x earnings.

Wow so he really did pay up for a business in the 60s? I figured AMEX traded down to 3x earnings since that's all he was buying during that time. I'm wondering how Buffett discounts growth and decides when to pay up for it. Paying for 20%+ growth and it doesn't materialize will lead to heavy losses.

I bring it up as KO has been a very poor investment for a large group of people, for a large period of time. KO didn't just spike up for a month or two. If you bought in 1996 to something like 2001, you have not really made that much of a return. Even Buffet made a mistake with KO, he refused to sell at or near the top. So I question your assertion that KO provides investors to make returns that will make them fabulously wealthy "forever until forever". Buffett couldn't have sold since it would have triggered a massive sell off. That's life when you become the market, but to say he just sat on the stock is a mistake. He gave shares in Berkshire which at the time was mostly inflated by his portfolio holdings to start up MidAmerican Energy. So in effect he did sell off his stake in KO and others to gain ownership in the utility business. KO has been a great company and investment for many decades, provided you didn't over pay. People who bought KO when it was yielding 1% FCF were just idiots.