bmichaud
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Posts posted by bmichaud
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It's not an accident that Buffett is the largest shareholder. It's blasphemy to even mention WFC in the same breath as Citi and B of A.
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Take it for what it's worth, but back during Buffett's BPL days, even when he was finding 50 cent dollars such as Sanborn, Berkshire, and Dempster (prior to these moving into the private company portion of his portfolio), he was still allocating a portion of his portfolio to market-insensitive opportunities such as workouts and private company investments. I've always struggled to reconcile this, b/c if you find something that is selling for 50 cents but is worth a dollar, why worry about the overall market? But I think Buffett answers this in his early letters saying that tho the Generals will outperform over time, they will act very much in sympathy with the market - so in other words, even a 50-cent dollar bill will act marketwise, so it is prudent to allocate capital to market insensitive investments.
Again, take it for what it's worth.
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18 hrs a day 6 days a week? Give me a frickin break. Get a life.
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Bronco, I like your thinking. I think there is a place in a portfolio for small net-net positions like that, but I much prefer (and very much do) to load up on a wonderful company.
Take Radio Shack for example - it's been discussed recently, and just today it's up pretty big on takeout rumors, and something tells me it will at a decent amount above the current price - I just don't feel comfortable loading up on that, so I stick it in the 1% of capital LEAPS bucket.
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Myth, completely agree.
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The longer it takes for the net-net to reach full value, the greater the advantage to the better company. If it takes three years for both to reach full value, the net-net has a 26% IRR and the good co has a 22% IRR. At four yrs, the IRRs are 18.9% and 19.5%, respectively.
So without a catalyst, isn't the better co a better pick, and even more so considering you could allocate probably 3 times the amount to the good co (let's say 15%) as to the bad co (let's say 5%).
Just trying to reconcile the Buffett style of old with Buffett's current style. I am starting to believe there is not a huge difference, and that Buffett switching from cigar butts to great companies was not BECAUSE of using a greater amount of capital, but rather coincidental with using a greater amount of capital.
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Yes to all three
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I am looking at two companies right and am wondering how the board would approach this.
Company 1 is selling at 50% of net-net, and company 2 is selling at 76% of intrinsic value, has a 7.5% growth rate, and has a dividend/buyback yield of 4.9%.
Company 2 is clearly a stronger company but it is not the proverbial 50 cent dollar.
Does BPL-Buffett go for Company 1 and BRK-Buffett go for Company 2? What would board members go with?
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Again, never said XOM and CVX are speculating. I said it is speculation to invest in CHK assuming the oil majors continue to pay the prices they have been paying. I love XOM - they just have the ability to sit on low NG prices for a long while. In my mind the majors are over paying for NG properties when they could go acquire all of CHK at a price well below the JV transaction-implied NAV. XOM could buy CHK at a 30% premium to today's prices and still acquire it for less than the JV-implied value is.
This debate has spiraled IMO. I was merely trying to define speculation as buying an asset that requires someone paying a higher price for in order to obtain a return on that investment versus something that throws off cash flow. Simple as that. And like we concluded before, we can agree to disagree.
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"Yes. A "value investor" would be naive to assume he's the only party that cares to assess the economic value of the asset in question."
Yes the other party is thoroughly analyzing the FCFs of the asset, but think about what XOM and CVX are paying for these nat gas properties - there has to be an element of desperation to replace reserves bc the prices they are paying do not make sense based on the underlying cash flows. So CHK and SD look good on implied NAV based on recent JV transactions, but without a sound basis for those transactions (I.e. Rational cash flow assumptions), an investment based on implied NAV is highly speculative (at least in my mind).
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"I find that definition of speculation to be too broad for my purposes. It equates bets based upon greater fools to bets on rational incentives. Someone playing the greater fool angle is relying upon an actor who, in turn, relies upon an even greater fool. A land developer, on the other hand, counts upon rational business incentives that should be realizable in a stable market. During the period in which both actors are holding the asset, they seem superficially indistinguishable, but time will differentiate them.
If you analyze their returns, you should see differing factors, where the greater fool benefits from momentum, and the land developer benefits from expected cash flows."
I would agree with that. Though I think my main point is to convey the difference between investing $1b into a piece of land and never selling it versus buying $1b worth of KO stock and never selling it. One throws off cash and the other does not; so in order to generate a return on the non-cash generating asset, you MUST rely on the price action. And like I said, there are varying degrees of intelligent investing/speculation. However you want to define it, solely relying on the price action of an asset is more speculative than relying on cash flows.
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"I see your point and you see mine. We will just have to agree to disagree, but thats what makes a market. Happy investing."
Agreed. Best of luck!
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"Its not speculation because there is no cash flow. There is a cash flow valuation, and a net asset valuation."
You cannot have one without the other. Companies sell below book value b/c their cash flow generation is not commensurate with the carrying value of their assets. An asset's value MUST be supported by its cash flow. If an asset is carried on the books at $1 billion and the required return on that asset is 10% but it only earns 5%, the market value of the company MUST be $500 million in order for investors to earn their required return on capital.
If I buy a piece of land for $1 billion and do nothing else (i.e. I do not develop it), that piece of land generates ZERO cash flow. So if I want to generate a return on my investment, how will I do that if there is no cash flow being thrown off? The only possible way for me to generate a return, without putting more money into the project via development, is to sell the land for a price higher than I bought it for.
Yes that land has utility, hence it very well may be a good investment; but without additional investment to develop it, literally the only way for me to generate a return is to sell it for higher than I bought it for. So if I buy a piece of land for $1 billion, and let's assume the market for land is perfectly efficient, then that $1 billion represents the present value of all future cash that can be extracted from the land. Because land in and of itself does not throw off cash, the future cash that can be extracted from the land MUST be from a future sale. So using easy math, if I think the land will sell for $2 billion in 10 years and my discount rate is 7.2%, then the PV of that future cash flow is $1 billion.
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"I think you misunderstand here, Assets have value because they can produce cash flow. A piece of land doesnt rely on the greater fool, it relies on the fact that the land has an intrinsic value because it can be put to a better use which generates cash flow. You are confusing all non cash flow generating assets with gold inmo. An empty building still has value, and so does a patch of land with oil on / in it."
IMO, if I purchase an asset that does not generate cash flow, then in order to generate a return on my investment, I am relying on the price action of the asset. Whether that price action is dependent on fear (i.e. gold), demand for RE development (land), or industrial output (oil), I consider depending on the price action of the asset to be speculation. There are obviously varying degrees of intelligent speculation - I would much rather speculate by purchasing a barrel of oil versus an ounce of gold b/c the demand for oil (industrial use) is far more tangible than the demand for gold (fear). But the fact of the matter is that both are considered speculation. Holding a barrel of oil generates $0 of cash flow - the only cash flow generated is when you sell that barrel of oil to someone who has a better use for it. Same with land - if JOE does not develop the land it holds into a cash flow-generating asset, then JOE will generate $0 return on its holdings until it is SOLD to someone else who is willing to pay a greater (or less, as Einhorn is arguing) price than JOE paid for it. Regardless of what type of use JOE's land can be used for, JOE is speculating that a future buyer will pay more for it (if JOE does not develop it), or if JOE decides to develop the land, then that original investment was a call option on a future investment (that is how CHK describes the cost of its acreage, as a call option on oil - I assume SD does the same).
SD & CHK are definitely highly interesting asset plays, and I can almost guarantee I am going to regret not taking a position - I have been debating CHK ever since a board member wrote about it at $23.
I don't mind speculating on the price of oil/commodities/dollar etc..., but I think Buffett's use of Burlington was brilliant b/c essentially regardless of the price of oil, Burlington will be carrying goods AND has pricing power. A safer, and albeit lower risk/lower return play than a CHK or SD.
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"I dont think there is anything wrong with timing the market. I attempt to do it with most investments lol. I just dont agree with this whole armagedan is coming I want 100% cash mantra. My issue is you are focused on the level of the market vs. the IV whatever you are interested in. I react similar to Soro, im fidgety and nervous, and bothered when the markets are high. The only way I end up getting piece is by selling something and holding cash. I just dont agree with 100% cash, then back in and then back out. You find yourself like our original poster. Missing great 2-3 month rallies on cheap securities. Again different styles, yours is a fair one."
I never said 100% cash - right now i'm 50% cash, 50% long. And no I did not miss the rally beginning Sep 1, 2010 - I actually do pay attention to short-term market indicators via this investment firm in Ohio (James Investment Research) that provide extremely good short-term market analysis. So within my exposure guidelines (i.e. 50% long when the market is at FV, 75% long when the market is at 75% of FV), I will take advantage of short-term rallies such as the one those guys called back at the beginning of Sept. So I will admit I am a lot more nimble with my portfolio than I am probably indicating. Just wanted to clarify though that I am not at all 100% in cash right now.
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I agree. Definitely have to have a macro opinion for commodities. I like how depressed nat gas is right now, which depresses CHK, but I like at the same time how it's shifting to oil. I'll probably regret not getting in.
See with my conservative bent, I am looking at Dominion as a way to play the Marcellus area as they are investing billions at an almost guaranteed 12% roe. But someone will prob do far better in CHK or SD.
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Exactly - reliance on the greater fool theory immediately renders the position speculatve because you are not relying on the asset to generate your return. That is fine though - some are better than others at speculation, I just am not one of them.
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It's not about knowing EXACTLY what earnings will be in 5 years - nobody ever said that. It's about finding something that you can predict within a narrow range of probabilities what earnings power will be 3, 5, and 10 years from now. My circle of competence does not include WDC or SD, but Myth, those are obviously within your circle, thus you are able to get comfortable with the long-run value of those plays, because even though you hold them short-term, the intrinsic value is based on long-run earning power (obviously the Street is very short-term focused and would consider one year of $5 EPS "normalized" despite the high probability EPS in 3 years will be $2 on a hypothetical company). I cannot get comfortable with the long-run earning power of a WDC due to the lack of pricing power, capital intensity, and potential for changing technology.
I have not studied SD at all other than looking at the financials on Google Finance just now, so I could be completely off here, but....
The highest operating cash flow in the last four years was ~$580mm, and let's say maintenance CAPEX is ~$300mm, that brings us to ~$280mm of normalized FCF to equity. At the current market cap of $4.56B, the PE is 16.28X. I've gone through this exercise with CHK, and tried to justify holding something at such a multiple due to the implied value of the assets, but I just can't get comfortable. The capital reinvested back into these companies is just incredible, and given the high exposure to NG and the uncertain future regarding the supply/demand picture for NG and hence the future returns on this massive reinvestment, it's more of a speculative situation. But I have been watching it ever since around $7.50 a share all the way up to where it is, so it's my loss.
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Saying the market is 10% overvalued is not a timing thing, it's a pricing thing. I have absolutely no clue what will happen with the macro picture, not even the slightest. If we were amidst world war 3 right now and the SP 500 was at 900 I would say the market is roughly 75% of fair value, and I would be around 75% long. We're a little over FV here and I'm a little less than 50% long. I'm not timing the market by doing that, I am simply managing exposure based on the market's price. It doesn't need to be one or the other.
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It's crazy to wait for a 5x PE on Coke, I don't support that thinking at all.
I was only responding to the claim that the intrinsic value of the market only matters if you own the market. I'm not at all quoting Buffett in a box. 10+ years of letters indicate he managed his exposure based on the general level of the market even when he found opportunities like AXP.
This Buffett guy says that if you are truly buying something as an investment, then you should not care if there is a quote market for the asset. As a poster said today, that test would eliminate a lot of investment. If everyone was honest, that test would eliminate RSH, SD, CHK, WDC, and STX. As much as these are "value" investments, if everyone was honest, very few people have the ability to feel comfortable judging these companies purely based on the strength of their businesses for the next five years. RSH could be earning 50% of what it is now five years from now; SD and CHK are asset plays that generate no cash flow, hence a position in them is speculation bc it relies on other companies overpaying for their assets; and, to quote another tremendous investor, Charlie Munger says that nobody can truly value a tech company (for memory's sake, he said that if he were to test a group of investors, he would give them a question asking to value a tech company, and would fail anyone who tried). STX earns around $1 billion right now, give or take, yet nobody knows what they will be earning five years from now, hence it is a highly uncertain proposition to estimate a terminal value. I don't know as much about WDC, but it's the same thing - nobody has one frickin clue what they will earn in five years, the industry economics are garbage.
I say ALL of that to say that Buffett has extremely good reasons for saying what he does, and using his quotes to defend an investment thesis is like quoting the investment bible. He quotes Benjamin Graham practically every time he is on camera - so yes, I will continue to use this fellow named Buffett as a source for defending sound investment rationale.
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Buffett allocated BPL between generals and workouts/controls based on the IV of the market. Can't be that irrelevant.
Pabrai was down 70 percent over two years then up 100 percent the third year. My math arrives at a cumulative three year return of -40%. So ya, he ignored the general market level and....
As Buffett says many times in his early letters, in a down market, even the most undervalued issues will decline. And Buffett did pairs trading to eliminate the market risk!!! Why would he do that if he didn't care about market exposure??!! Buffett was obsessed with market exposure - why not take that as a lesson?
I personally think, as with almost anything, there is a happy medium for the situation. Being 90% or 10% long are both equally unwarranted at these levels.
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Why don't we use this opportunity to convert a macro discussion into a simple market valution discussion.
Munger - what is your estimated intrinsic value of the SP 500 and what are your market exposure guidelines at various levels of under/over valuation?
I pose the same question to the rest of the board.
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"We think the US will ultimately have to do an Icelandic type restructuring, but there will be a lot of company."
aka the US federal government is at risk of default? Or do you mean the private sector is at risk of default, i.e. states and municipalities.
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"You are correct there are not that many large $ ideas out there but if each of these guys had smaller $ they probably could find plenty of places to invest. Just look at the 1960's and the Buffett Partnership as an example. Graham had stated in 1959 and again in 1964 that the market valuation level was high. However, Buffett was able to outperform throughout this period in part becasue of the small size of the partnership at the time and the ability to invest in smaller situations that others could not."
Perhaps they could. It's not fair to say that I cannot find companies selling at a legit 2, 3, or 4X earnings because I simply do not have the time to research given my full time job and studying - if I was able to devote 40+ hours a week, I might be able to find opportunities such as Buffett finding Western Insurance (I believe it was Western Insurance) selling at 2X earnings, or Michael Burry finding a company selling for less than 1X free cash flow back in the early 2000s. Or maybe if I understood the insurance business better I would find some of the ideas on this board more compelling. All that to say - I am in the market enough and look at a variety of screens looking for incredibly cheap stocks and I cannot find anything close to what I was finding back in 2008 and 2009 when there were in fact "net nets" available (SOAP and CROX for example) and high quality companies selling at a ridiculous multiple of normalized earnings (American Express ultimately bottoming at $9 versus $3 to $5 of normalized eps).
In order to generate the "50% guaranteed returns" that Buffett claims he would be able to generate with less than $1 million, one would have to invest a significant percentage of NAV in a limited number of Western Insurance-type opportunities. So for example, a MFI stock that I find compelling right now is Seagate - it currently has a a $7B market cap, a $2B announced BB, and LTM earnings of $1.6B. This is outrageously cheap, but given the competitive landscape of the business, it is not something I want to own long term or hold a substantial position in. I do want to own it though given that it doesn't have to do much more than fart to generate a decent return on a stand-alone basis and has the potential to be taken over - but it's only a 5 to 10% position. If it doubles, I make 5 to 10%. I need ten 5% positions such as this to generate 50% returns - I can't find those opportunities right now.
I ultimately want to manage more than a trivial amount of capital (aka I want to manage money professionally), so I try to invest how I would manage other people's money (for example, the aggressive portion of my parent's retirement account). Would I feel comfortable putting maybe 15% of my personal discretionary money into Seagate right now? Perhaps. Would I put 15% of my parent's money into Seagate? Heck no - maybe 5%.
Regarding Buffett's outperformance: for all of his rantings regarding the overall market valuation back when he ran his partnership, he found a HUGE number of net net opportunities. Given the number of net nets, I find it rather difficult to believe that the general market was that over valued - AND Buffett was a lot of times 80% exposed to the market, not exactly a defensive position. Buffett never truly invested through a bear market cycle (as Klarman or Watsa has) - he got out a little before the ultimate market top. Not unlike if a hedge fund manager started in the early 1990s and got out at the top of the tech bubble. I would love to have seen how he would have performed through that 70s bear market that Munger got destroyed in.
All that to say - given the general level of the market right now, I think it is highly dangerous going virtually "all in" in opportunities such as a Seagate, Apollo, or any gaming companies that have been mentioned on this board, and letting the market take care of itself. Even if I diversified and bought the top 30 small cap MFI stocks and forget about the market at this level, I would get OBLITERATED in a 2008/2009 downturn - I don't care how cheap the security is.
Perhaps I am wrong though - I may be waiting 20 years for another 2008/2009 opportunity. My plan though is to generate superior risk-adjusted returns through this period of market overvaluation while waiting for the "fat pitch" of a substantial market downturn where I can truly go "all in." Only time will tell.
Ben
Terrific Arnold Van Den Berg Interview!
in General Discussion
Posted
Berkowitz's record CRUSHES CM's and Berk is managing a massive amount of capital