Tim Eriksen
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Posts posted by Tim Eriksen
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I think your point on 401k funds is insightful. More often than not, those plans will come up with a single alternative if any.
As for getting on platforms, I would expect that to be quick and easy for Janus to do assuming its other funds are already available. What am I missing here?
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I find it interesting that Allianz has lost over $4 billion in market capitalization today, while Janus has gained about $650 million. Not that the market is efficient, but this doesn't make sense. If Gross managed 220 billion it is priced as if all of it is leaving (2% of AUM for fixed income is a reasonable rule of thumb). Not very likely. And if the outflows did occur it is assuming only 1/7 of it follows Bill Gross. That doesn't make sense to me either. If the assets are there based on Gross's track record why would 6/7 of the assets that leave go elsewhere??? So either Janus is not pricing in all the benefits or Allianz is taking an excessive beating.
There's also a factor that more of the revenue stream will likely accrue to Gross personally, to the extent that he can draw away the assets he had managed at PIMCO.
But I think the bigger reality is that tons of assets will go elsewhere - if you're an institution with a PIMCO managed separate account, you want to flee the uncertainty of PIMCO but you also can't credibly take the money to an upstart manager with little real track record in fixed income, even if it has a big name attached. So a lot of that money will wind up with other established credit managers ... BLK has added more than $1bn in market cap today.
So is Gross' departure giving justification to move assets elsewhere? To me, if someone had assets at Pimco because of Gross wouldn't they most likely move them to Janus since Gross is going there?? Why move them to LM, BEN or BLK etc.?? If someone thought those other firms/managers were better wouldn't they have already chosen them. In other words, Gross switches firms so he drops from 1st choice to 3rd or 4th. Why??
Janus share price move is implying that about $50 billion will follow if I assume 45bp in fees and 16% net profit margins.
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I find it interesting that Allianz has lost over $4 billion in market capitalization today, while Janus has gained about $650 million. Not that the market is efficient, but this doesn't make sense. If Gross managed 220 billion it is priced as if all of it is leaving (2% of AUM for fixed income is a reasonable rule of thumb). Not very likely. And if the outflows did occur it is assuming only 1/7 of it follows Bill Gross. That doesn't make sense to me either. If the assets are there based on Gross's track record why would 6/7 of the assets that leave go elsewhere??? So either Janus is not pricing in all the benefits or Allianz is taking an excessive beating.
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For dividends, you have a tangible known return. Of course, though, that company could cut or raise its dividend. Nothing is guaranteed. But, I am willing to bet that on average, a dividend is better overall than a buy back for share performance. Although, I would really like to see a case study that analyzes this.
Not really. In theory, book value and intrinsic value drop the amount of the dividend. You have a known tangible redistribution, or return of capital. The actual returns of the business are its earnings, or you could argue the change in intrinsic value.
Any study will be flawed due to the many companies that buyback shares to offset dilution not because the price is well below IV. In general, if I own the stock I want the company to be buying it back. If I don't think they should buyback stock (absent substantial opportunity to invest in their business) why would I own it??
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if you own a stock and rather get dividends' data-ipsquote-timestamp=' it means your holding a overvalued stock. You should look at that first. [/quote']
I like dividends because I'm not a taxable investor, and because I don't own my companies for their "capital allocation" skills so do not expect them to know when their stock price is low or high.
We want MOAR dividends.
If you don't expect them to know when their stock price is low or high, how could they ever know when to issue stock in a transaction, or as compensation, or more importantly, know what price to sell the company at? Are you seriously okay with them doing whatever the advisory firm tells them??
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I figure you would have to find the return on investment for two options
1.) Keeping the $1B in cash and its effect on value with 40.2M shares... Adds $25 per share to Assets
2.) Buying back $1B worth of shares (2M shares. Now would have 38.2M shares) and its effect on the value...
What would you do to figure out option 2 value?
estimate intrinsic value per share
note you seem to be looking at the change in yearend share totals. They repurchased 2.6 million shares. So year end share total would have been 40.8 absent the repurchase. I am not saying the repurchase was wise, that would take a great deal of effort to analyze, I am saying repurchases above book value per share are not inherently problematic.
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To people on this board, buybacks are known and understood to be a great benefit to shareholders when the buybacks are done at attractive levels. The issues with all the media commentary on buybacks, and the several research studies on the topic, are that they look at all buybacks. Obviously, not all buybacks are good. If shares are cheap, buybacks are great; if shares are expensive, buybacks are probably not the ideal use of capital.
Ultimately, just as with the rest of the markets, most people are not good investors, and they buy high and sell low. With buybacks, you get the exact same dynamics. Smart companies that do it right are few and far between, but that doesn't impact whether or not "buybacks" as a concept are a positive or negative.
Exactly!!
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I have always been told that whenever a company is buying back their shares its a good thing for the shareholders. I ran some numbers on one company and starting to think otherwise.
ISRG- Intuitive Surgical
Equity at year end 2012 $3,580M
At year end 2013 ISRG bought around $1B of their stock, decreasing their shares outstanding from 40.2M to 38.2M. If they didn't buy the stock, assuming the cash went to cash asset the equity would have increased to $4,500M.
The book value on the equity of $4,500M w/40.2M shares equals about $112/share.
The 2013 Equity Value adding in for the buybacks is $3,501M w/new 38.2M shares equals about $91.66 Book value/share.
This doesn't make any sense to me. Can anyone explain?
Matt
Share repurchases are not ALWAYS good but in general they are (there are few absolutes). The benefits of share repurchases has been discussed many times on the board so I won't rehash that. In this case, they repurchased shares at a price higher than book value. That is not inherently bad. Book was $90 per share. EPS was $17 per share. Cash and investments near $70 per share.
IF they had only paid $110 per share, that would have been higher than book value (meaning book value per share would decrease) yet I presume you would see it as highly beneficial (6x earnings and 2x net of cash/investments). So I hope you would agree that the the issue is not that it was above book value, but rather if the actual price they paid ($420 per share average for 2.6 million shares) was beneficial versus paying a $25 special dividend? The point is did they pay more than intrinsic value??
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Thanks for this. Sounds like a good book, and I plan to read it.
Nevertheless, how much of it breaks new ground? Did you learn anything truly earth-shaking, or was it merely, as you put it, "useful."
Like all similar books profiling the methods of legendary investors, it starts with that subset of legends (from my cursory look via Amazon), and looks at their attributes and practices, assuming those attributes/practices are critical, and that the unsuccessful investors were missing many of these traits. Even Buffett's famous essay on The Super-Investors of Graham-and-Doddsville suffers from being a retrospective analysis of only the successful.
I'd like to see a historical prospective study of the entire class of value investors who already possess the critical attributes/practices, and find out what percentage of them beat the index by 5%+, and what particular factors are associated with the laggards. I would presume this study would be much, much harder, maybe impossible, but it would truly break new ground.
I share your question on does it break new ground.
While I understand your point on Buffett's essay, I am not sure it is fair. It was given in 1984. I think he would have used nearly the same subset (Schloss, Munger, Ruane, Guerin) 15 years earlier. Ruane was his recommendation in 1970 when closing the partnership and was one of three trustees for his personal funds should he die at that time (1970). I guess it is possible that Buffett might have included additional names if he had given the talk 15 years earlier who would not have not beat the market subsequently, but none spring to mind from his biographies.
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There seems to be a bit of confusion over maintenance and capex. In the US maintenance and repairs are expensed as incurred. This includes repairing broken items - leaky roof repair, etc. Capex is capitalized (added to the basis) and depreciated over time. This is remodels, new roof, new carpet, etc. The carrying amount for a apartment or commercial building would never get to zero unless all capex stopped for a number of years (40 max but I believe could be less since items such as a carpet could be tracked separately and depreciated faster than 40 years). With an industrial building it would be more possible since the tenant may be doing improvements, and the building is simpler..
To the main point earlier, there is a reason REITs report, and investors focus on, FFO - funds from operations which excludes depreciation. While they are using in terms of cash flow, I think value investors recognize it as reasonably accurate since depreciation is approximately 2.5% (1/40) which is near historical inflation, so it made a decent quick calculation for real return.
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At this stage (having about $1,000 to invest) the more important focus should be growing your investing capital and gaining understanding of value investing. In other words, I would be more focused on trying to save additional funds. The difference between 8 and 10% return is only $20 so focusing on saving more money is more important.
Why the focus on dividends ("at least a 5% dividend") versus capital appreciation?
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I decided to create the filing in Word and use Vintage Filings (a division of PR Newswire) for the filing. A filer has to get a CIK code from the SEC first. Vintage will electronically submit the form for $99. Someone can do that part on their own. It was easy to find the 13D requirements on line and to look at filings by others and modify them. Vintage charges $149 for the first page and $14 per additional page. The total 13D filing was 7 pages plus a two page letter. I haven't received the bill yet.
I could have done it for free by learning the SEC's .txt filing system, but I went through that about 5 years ago and I more than happy to pay a few hundred dollars to not have to do that again. The other down side to doing it on your own is the final product looks vastly different (i.e., crappy) than the professionally done product.
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Anyone on the board ever been required to file a 13D or 13G (5% owner) with the SEC? If so, I am trying to find out cost to file, firms that do it, difficulty in doing it yourself, etc. Feel free to comment here or via private message.
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The Big Short p. 40-41 says that Burry received $1 million after tax for 25% from Greenblatt and $600,000 from White Mountains for a smaller piece plus a promise to invest $10 million in the fund. It is unclear if the ownership percentage was a straight revenue royalty, which is what I suspect it was based on my experience, or just % ownership of the management company.
Every seed deal is different depending on where the manager is starting from. Some are unknown and managing less than a million. Others have some popularity and a much higher AUM. It also depends on how scalable the manager's investing talents are. Can the approach handle $100 million, what about $1 billion or $5 billion?
In addition there are a lot of moving parts. Is there a revenue hurdle before the royalty or is it on the first dollar? Are the seed investors also investing in the fund? Are they paying full fees or just management fees?
I am aware of other deals, including my own, but I am not going to discuss specific people or amounts.
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I've recently been thinking about how I approach bank investing. I look for banks cheap on a P/TBV basis and work out from there. Once I determine something is cheap enough to my satisfaction I look at other factors, but cheap on a P/TBV is always my first step.
What are other approaches used? For example is there anyone looking for growing banks, or improving banks?
Just curious as to other approaches.
You approach banks the same way you other companies. It makes sense and works for you.
As more of an EPV (earnings power value) investor I approach banks the same way as I do other stocks. I believe that book value should not be the focus, rather earnings power. I want growing earnings at a low price. The goal is to have share price appreciation capture both the increased earnings along with the PE multiple expansion.
I like to look at the efficiency ratio and look for banks that are growing and have true earnings hidden due to loan loss provision. Efficiency ratio captures cost control, or to say it another way, gross margins. I prefer high gross margins to lower. There are tons of inefficient banks trading below book, but are hampered with high costs, either operational or on the deposit side, or hampered with lower revenue opportunities.
With loan loss allowance, many banks add 1% to their provision for new loans which in a low rate environment more than offsets the net interest income in that initial quarter since few are earning 4% net interest margins. So I calculate run rate without the additional provision related to new loans to reflect true earnings.
Having said that I own no banks right now because I haven't found any that fit that criteria at an attractive price. I am sure there are some, I just have been focused on other areas of the market. One reason is that long term I believe eventual rising rates will cause a lot of problems for banks with fixed rate loans. We may have a bit of a repeat of the late 1970's where the cost of new deposits could be higher than older loans on the books.
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It was based on his estimate of long term rate of return for the Dow. In the 1961 letter (written in Jan 1962) he said:
"Over any long period of years, I think it likely that the Dow will probably produce something like 5% to 7% per
year compounded from a combination of dividends and market value gain. Despite the experience of recent
years, anyone expecting substantially better than that from the general market probably faces disappointment."
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I studied a bunch of people who outperformed by a very wide margin and try to see what buffett did in the early days. I think the way to go is find the most mispriced stocks (not necesairily the best companies or business models!), this is almost always small and micro caps. There are more of them, and they get less attention. And CATALYSTS. They are very important I think. And also concentrate. And finally, be willing to say next a lot. Be very picky.
For example, an idea with 70% upside to fair value (where massive outperformance will stop becoming likely) will not put the odds in your favor to get a 30 40 or 50% annual return if there is no clear catalyst. If your ideas take on average 3 years to pay off (which a lot of case studies show), then to get 40% you need to find idea's that have on average 170% upside total. Probably more because some will not work out. Or a high probability of less upside being made very obvious to the market in a fundamental way. Preferably some growth that can add to longer term upside if you have to wait. But probably more because some will not work out.
And catalysts. I get the idea that catalysts are like a forbidden word for buffett followers and grahamites. It somehow implies short term thinking and trading. But that is not true, it simply means having the odds in your favor by not having to wait for potentially 5-10 years and sitting in value traps.
You only need about 5-6 new ones each year, given that you hold them more then 1 year on average if you want a 10-15 stock portfolio. I think key is to focus on high upside idea's and keep saying next if they don't seem very mispriced. And catalysts.
Micro Caps, Catalysts and Concentrated Portfolio. That is what I came to understand as the best approach for me to get high returns over time. I view catalysts like retailing. I would rather have higher turnover (due to near term catalysts) and 20 to 50% gains, than lower turnover (waiting a long time for a bigger % gain). Ignoring taxes for the moment, each turnover increases my capital. 100 becomes 130 which becomes 169, etc.
The funny thing is Buffett made significant sums on arbitrage. Arbitrage is nothing more than an idea with a known near term catalyst. Thus his partnership portfolio had known near catalysts (i.e. arbs), likely medium term catalysts (even if he had to be it - Sanborn Map, Dempster Mill, Berkshire, and I would argue AmEx), and some unknown long term catalysts, which required a deeper discount. He was able to take come situations that were in the third category and move them into the middle category.
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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?)
To me it is completely dependent on what is going on with the intrinsic value. IV should be growing at greater than 10% per year. If not then you have to make sure you are not in a value trap, or just betting on a buyout. Time is the friend of a good business because it should be worth more each year. If the stock languishes like DTV did for awhile, I don't worry it is just a coiled spring (IV is growing and eventually the stock price will catch up). This is when you should buy more like Buffett did with Washington Post in the 70's. 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.
Having said all that I constantly think about my existing stocks. I am not waiting 5 years for the thesis. I am evaluating every new piece of information to see if it confirms or contradicts my thesis. So far I have only held a few stocks for 5 years. I believe you marry for life, but you can change stocks as often as you like.
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Thanks for the article, but I am not convinced by the thesis. In the 50's and 60's buffett invested in 400 companies total so the majority must be cigar butts. They must all contribute to his overall results, because if he was getting 30-50% a year he cannot have laggards in his portfolio....
I'd love to have list of his holdings back then (not just the 5 or 6 mentioned in snowball and other books)
There is a chapter one of the editions of Permanent Value authored by Andrew Kirkpatrick that shows a snapshot of the Buffett Partnership holdings in early 1950s. It's a copy of the hand written ledger used by Buffett. There are probably 70 stocks listed with prices and share information.
Great! That's exactly what I was looking for! I got a hold the 1994 edition at the library (the author wants me to buy it as 3 kindle parts of $10 each, too greedy!)
Good luck. I have the 1998 edition and it is not in there. It is my understanding that the book gets larger every year. Not sure what year the information on the holdings first showed up. I would like to see it myself.
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Anyone know/have the 2013 AVM letter?
The link for the 2013 letter is in the post above yours.
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I'm in Washington state and went through the process in late 2005 and 2006. It was surprisingly simple. The last three forms look familiar and I likely completed them, but I do not remember the Form BD.
This site may help
http://www.dfi.wa.gov/sd/iachecksheet.htm
Feel free to PM me
Tim
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Thanks for the explanation. I had never heard of that strategy before.
What is the point of getting rid of the small shareholders? (b/c they increase costs???)
It is to reduce costs. Fairly common for unlisted micro caps to implement since Sarbanes Oxley.
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It isn't about whether it will reach $1 million, only a fool doubts that; however, it is all about how long it will take.
1k to 10k in 9 years
10k to 100k in 13 years
100k to 192k in almost 8 years
It could very well be 15 to 20 years from today.
And what is the return then? And would you be satisfied with that?
1k to 10k in 9 years was 29.16% average annual return
10k to 100k in 13 years was 19.38% average annual return
100k to 192k in almost 8 years is below 9% average annual return
It could very well be 15 to 20 years from today. Projects to about 8.5% to 10.5%
Would I be satisfied with 8.5% to 10.5% average annual return? Absolutely not. Although I understand how some find it completely acceptable.
You have chosen 2006 as the starting point for your projections.
I have a couple of other projections (everyone has a projection about the future, don't we all?)
If an investor put money into BRK and left it there,
Since 1983, the $1000 has turned to the $192000 of today, implying an ~ 18% return. At this rate, $1M in 2025
Since 1992, $ 10,000 has turned into the $192,000 of today, implying a ~ 15% return. At this rate, $1M in 2025
Since 2010, $ 100,000 has turned into the $192,000 of today, implying an ~18% return. At this rate, $1M in 2024
Forget about projections, I've actually realized a 16% return, by buying BRK first in 2006 and then buying a whole bunch in 2009.
I'm sure there are a many CoBF message board posters who will no doubt produce far better results than this into the future.
But I'm quite satisfied with what I've actually gotten and expect to remain satisfied going forward. This has less to do with how Mr. Market values BRK, rather there is the sense of a real lollapalooza going on at Berkshire of late. Copious amounts of value is being created as we speak.
Just to be clear. I didn't purposefully choose 2006 to make returns look lower, that was the year it broke 100,000, which was from the original post. Nor was in any way trying to suggest someone should be dissatisfied owning BRK.
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It isn't about whether it will reach $1 million, only a fool doubts that; however, it is all about how long it will take.
1k to 10k in 9 years
10k to 100k in 13 years
100k to 192k in almost 8 years
It could very well be 15 to 20 years from today.
And what is the return then? And would you be satisfied with that?
1k to 10k in 9 years was 29.16% average annual return
10k to 100k in 13 years was 19.38% average annual return
100k to 192k in almost 8 years is below 9% average annual return
It could very well be 15 to 20 years from today. Projects to about 8.5% to 10.5%
Would I be satisfied with 8.5% to 10.5% average annual return? Absolutely not. Although I understand how some find it completely acceptable.
Share Buybacks
in General Discussion
Posted
Huh? You lost me. As a value investor you want growth in IV and/or closing of gap between market price and IV. My point was what are dividends? They are a return of capital. Dividends don't create high return. The business has to do that. Dividends are just one way for the businesses returns to be allocated. When paying a dividend there is no net change in IV. A $10 stock that pays a a $1 dividend is all else equal, now a $9 stock. IV is the same (10 = 9+1). Your value is now a $9 stock plus the $1 dividend (less taxes on the dividend). So you may be slightly worse off due to taxes.