scorpioncapital

So let's say a company has $1 in equity and $1 in debt. It earns 50 cents. Return is 25%. Can you ever know what the return would have been if they didn't employ the $1 in debt? If the debt earns at the same rate as equity, then it's 1:1. But what if the equity was earning far more than the new debt so that the incremental debt earns far less. Haven't ever seen a company break this down.

Sounds like you have to remove the % of income & interest due to the debt, if there is a way to separate this out.

I don't see how including debt can determine quality of business. It seems return on equity is the only measure of quality businesses. If a business earns high ROE due to debt, it's not due to the business quality but the leverage factor unless one condition is met - it can earn the same return on the debt which means incredible ability to scale up. This may be the case for the best of the best but most are just juicing the leverage factor at a much lower return than their core return.

It would seem both ROIC and EV are similar in that they include debt. As such, does it imply lowering return expectations since adding debt to the denominator would almost certainly reduce the return. I.e. If a company earns 20% on equity with no debt and then it adds debt equal to equity but does not increase earnings much, returns now go down to 10%.

Is there a list of high return on equity stocks at a reasonable price? I was reading that Buffett believes a good business is key. However, it seems some filters are in order - the high return is not due in large part to debt or if there is debt, if you divide by the debt, the ROE is still high. - the high ROE is not due to a cyclical business at a high point in the cycle. - the price is reasonable or in fact more than reasonable right now. - You or someone you respect understands the business well if it's in tech and you're pretty convinced of this assessment. - If ROE is not high now but is about to be high for many years due to key business trends.

Well, like he said if you buy an asset for 2 million and extract 1 billion from it over 20 years, you are going to do very well. I'd say luck is important in finding the right, opportunistic deals, but the skill part is in knowing a) that a great business model excels over an average one and b) a skilled ceo enhances returns on all levels, even in finding those lucky deals and managing for best returns. Even if you never found the 100 bagger, a combination of A and B can still give you a great return. I'd add a 'C', if you have a choice don't invest with people you don't know, don't know what they're doing or going to do, or don't like what they say or write. Much better to invest in yourself (your own business or job skills) than in a stranger. Of course if you can get to know them and find out they are something very special, then go for it!

Well let's look at it like this. I've seen stocks with puts that are 30-40% OTM. The yield on collateral retained by the brokerage is 20% for 6-8 months. Furthermore the company is buying back stock in significant amounts. Fed put AND company put floor under the stock price. Care to calculate the odds of an adverse event vs a favorable one?

What I find striking is their evolution. The first 5-10 years you couldn't tell what was happening. It looked like a pretty cut and dry financial company. It really hit home the message that you have to really know the management in these situations and what it is they are doing. It didn't seem at all clear, only later did the letters become more "folksy" like Buffett's letters.

It's interesting as a historic document, but I don't feel that Leucadia today has any resemblance to these events. It's under new management and looks quite different.

"The reason lies in the fact that you don't know @ the time whether a better opportunity will show up in the near future for you to deploy the cash. So buying @ 1.3x BV could be an issue if better opportunities arrive." Couldn't you just issue stock and/or sell stock in the acquisition even if you bought back your shares? That way you can hedge no opportunity with the flexibility to buy something big if it came along.

I was profoundly intrigued by horse betting recently in Vegas and a simple strategy of betting only on highest implied odds in the expectations market with no consideration of fundamentals. I was surprised how well this worked. It seems a crowd often assesses odds quite accurately and was thinking if anyone knows how this might work with stocks. Is there a quick way to determine the implied return expectations of a given stock price? Eg.. Given any stock price, what are investors in aggregate implying as their return goal?

My eyes are popping out at all these references to 20,30,40,50% returns. Am I the only one not getting these?

"If my thesis is not based on growing IV but a sum of the parts or a future event then you are in danger of having missed something important in terms of timing or cost. " Unless it's losing money, every company should be increasing IV by some amount. Although sometimes the IV is a drip. Then there is the issue of cyclical businesses. Low points in a cycle could add maybe 5% per year to IV but it has to be averaged out with the good times. It seems a business cycle would be a good proxy for holding period. Not sure if there are any studies showing the ebb and flow of American business cycles over the years to see how long they generally last.

With Ben Graham investing you almost have to sell out after 3-5 years if your return expectation is buying a 50 cent dollar and getting 20% and it doesn't happen. So actually the next question becomes if your return expectation isn't met, do you bail or do you set a new period of lower expectations? Suppose you wanted to get 20% and after 5 years you end up getting 0%. Do you now say, ok, I'm willing to settle for 13% and give it another 5 years or maybe even still have the same goal but extend the yardstick or just start from scratch again and try to find a new security that you know as well as the one you own?

Interesting discussion. I wonder though how much of these timeframes are the product of recent experience? 3-5 years seems rather short. There were times in the 50s,60s,70s where one had to wait much longer. The other issue is what happens if you are wrong on the undervaluation? If this happens one may get out just when the stock actually gets cheap. Well, really this question is kind of like marriage if you are a long term investor :)

I was wondering how long do people here hold a stock before passing judgement on their expected return? Do you wait 5 years, 10 years or longer? And if it does not meet your expectations at these benchmarks what % do you sell down (if not all of it?)

What I found interesting was the link between volatility of return and final return. He seems to argue that a volatile return of the same magnitude is less preferable than a stable one over time (obviously) and slightly lower (maybe less obvious). So we've heard value investors like Buffet say that they prefer a lumpy 20% vs a smooth 15% anytime. In this case, what they are saying is that a lumpy higher return is still higher than a gradual lower return. But perhaps implicit in this is that the lumpy return be high enough to compensate for that volatility, otherwise, any reasonable investor would just take the gradual return.

I've had 30% margin maintenance and initial on S&P500 stocks with IB Canada since at least 2008.

IB offers 30% margin requirement on S&P 500 component stocks. I always thought this was standard across all brokers but possibly not. As for margin calls, they are "pretty nice". They'll let it go minus 1 to 2% of total stock value (appx) up to about an hour before closing before acting automatically.

invisible bankers was pretty good, I just read it yesterday. I really liked the chart that showed how many dollars customers actually get paid out for different types of insurance. Title insurance was really the most profitable, it isn't really insurance, just legal research. It was interesting to see that speciality insurance is the best gig in town for companies!

I've been looking at several DEF 14s and it has made for some fascinating reading. Specifically, I've been looking at what boards set as their targets for performance-linked compensation such as special bonuses, options, and RSUs. For example, one thing can be seen is that for companies where return on equity or growth in bv/share is the primary performance target, compensation varies wildly for the same or sub-par performance. Some have targets set at 11% return on bv, others have 15%, some have payouts that are significant even below target. Some businesses are simple, others complex. I'm thinking why not choose the least amount of compensation for the highest target? Does anyone know if the annual targets are a moving target or are fixed? Clearly if you move the target each year based on a compensation advisory board or firm, you're changing the benchmark and it seems unfair. Other DEF 14s actually have no targets and they say, we compensate at our discretion. Some of these boards have compensated far more than those that had a target and some far less. In short, do companies believe their industry dictates compensation, or their own personal circumstances? Some for example, will compensate for a large acquisition, even though that is subjective whether it creates value.

I've experienced this strangely enough in Google advertising. You can go for multi phrase keywords or strange combinations with high click through rate but like 5 clicks a month. You may even pay nothing for it and get a high return. Or you can go for a big generic keyword and get huge volume, expensive cost and try to make it up on your skill. It may even be huge volume and low cost and still be profitable. In the end, it always seems to come down to finding a niche. In this sense, I have to agree with the idea that some sort of specialty insurance is best. What about re-insurance? Are the dynamics of that any different?

From a purely theoretical standpoint, there are many types of insurance stocks and rates, is there one that has better economics? There are - Mortgage Insurance - monthly premiums, low risk of default, relatively predictable, very commodity like. - P&C - Reinsurance - Speciality Insurance - Auto insurance etc...

"shorting" indirectly such as in options can reduce collateral requirements so if you think the stock will be in a range for a given amount of time, and you don't want to lock up your capital, this is a necessary component.

"Does anyone really think the S&P could drop 70%" If the money supply doubles, the S&P500 will have effectively crashed by 50%. After the initial margin calls, it should zoom up like crazy. It's the same argument that the US can never default in nominal terms on its debt cause it can always print money to pay the bonds. But it can very much default in real terms. So in the end, it is the shaking out due to volatility of over-leveraged players that becomes the primary danger