Your best long-term idea today?

[writser]

Well, if you say Buffett is 'dead wrong' and come up with a bunch of speculative names he should've bought you can expect some heat on a value investors forum.

[topofeaturellc]

or maybe he thinks its impossible to underwrite if AMZN is the low-cost retailer of the future.

 

The bull case on AMZN basically relies on them eventually having such a scale advantage they can procure and deliver so much cheaper than anyone else that they'll be able to earn great returns on capital and still have a moat.

 

Except in 1992 you might have said the same thing about WMT. And that was even true for a long-time. You even saw some of that cashflow.  It worked. You were right.  And yet if you bought and held it till today what was your annualized return? Low teens maybe? Price return was 7 and change.

 

But you were right. That's what's so crazy. Imagine if you were wrong?  I mean yes - you've outperformed the market, but ex-post would you have said that was a good bet? Given the odds you were wrong?

 

Sure sure, you could have sold in 2000 and looked like a genius - but here's a guy who explicitly says he buys and never sells.

[AchilliesValue]

Buffett probably passed because he has a pretty set pattern of waiting until something has a 10% pretax earnings yield. I don't own AMZN even though I think it's undervalued simply because the range of outcomes is too wide, but I think a lot of the bashing I've seen around here is from people who haven't done a whole lot of work on it. Granted doing work on AMZN is extremely difficult because their disclosure sucks.

 

Back on topic BOBS is probably my best current idea. I've owned it for over a year and it has nearly doubled, but remains meaningfully undervalued. The only reason I'm not adding is that it is already a large position and I'm afraid management will try to low ball for the remaining third they don't own.

[Patmo]

 

I have done no analysis and I never said that I did. I was just pointing out that your argument is results-oriented. If you put $1000 on black and win with roulette, did you make an 'indisputably' correct decision? No - you were just lucky. To judge the decision you have to focus on the business, not the stock price. Hence the CYNK reference.

 

You said, "The fact that a stock goes up after you decline to buy it doesn't mean your analysis was wrong".

 

Ok, then what shows this analysis is wrong or right?

Two points

1) Its antithetical to value investing to believe that market price moves validate or invalidate the research you did.

2) It doesn't really matter if your thesis was incorrect on something you didn't buy.  Its almost never worth rehashing it.

 

The reality is that value investing will always miss some great ideas. You have to be comfortable with that. 

 

I would never buy AMZN and I can't possibly fathom how someone who calls themselves a value investor as I conceive value investing could buy the shares. But that's ok.

 

Me too, but I'll also have more respect for someone who does their own thinking than a BuffetBitch who takes every word that comes out of our favorite friend's mouth as purer truth than the laws of nature. When you think for yourself, you give yourself a chance to improve. When you follow like a blind sheep, you stay a blind sheep. 

[merkhet]

 

I have done no analysis and I never said that I did. I was just pointing out that your argument is results-oriented. If you put $1000 on black and win with roulette, did you make an 'indisputably' correct decision? No - you were just lucky. To judge the decision you have to focus on the business, not the stock price. Hence the CYNK reference.

 

You said, "The fact that a stock goes up after you decline to buy it doesn't mean your analysis was wrong".

 

Ok, then what shows this analysis is wrong or right?

 

Your actual return.

 

Think about it this way. In 2004, Amazon was worth $20 billion. Let's assume that you bought the entire company for $20 billion. Over the course of the decade, you would have pocketed something along the order of $5 billion -- so a quick back of the envelope calculation shows that you would have earned a compounded at around 2.5% over the course of the decade.

 

The fact that the company is currently trading at 8x what it was trading in 2004 is because people are looking at Amazon the same way they look at Renoirs. They are not looking at it as a business.

 

Yes, there are various arguments that Amazon is masking its profits, etc., etc. but from a very simple point of view, this would be how you can view whether your analysis on a company was right or wrong. If you owned the whole damn thing, how would you have done?

[topofeaturellc]

 

 

Me too, but I'll also have more respect for someone who does their own thinking than a BuffetBitch who takes every word that comes out of our favorite friend's mouth as purer truth than the laws of nature. When you think for yourself, you give yourself a chance to improve. When you follow like a blind sheep, you stay a blind sheep. 

 

If there is one thing I bite my tongue about, its this.  If I do my work on something and like it, it pleases me to see people I know and understand in the name.  But I'd never even crack a 10-k or an AR for something just because someone I think is smarter than me owns it.

 

[merkhet]

Me too, but I'll also have more respect for someone who does their own thinking than a BuffetBitch who takes every word that comes out of our favorite friend's mouth as purer truth than the laws of nature. When you think for yourself, you give yourself a chance to improve. When you follow like a blind sheep, you stay a blind sheep.

 

I pass by a lot of people that hang out on street corners in DC who "[do] their own thinking," but that doesn't necessarily mean that their thinking is correct. (Or maybe the statute in Washington Circle really is following that dude around... who knows.)

 

Buffett's not always right (he mentioned he should have bought the common stock of Harley-Davidson, for instance, rather than lend them money at a fixed percentage) but he's more often right than wrong. That's not being a "Buffet[t]Bitch" -- it's just playing the odds.

 

I guess what I'm trying to say is that it's not a false dichotomy here. It's not "do your own thinking" or "be a sheep." There are grays in-between.

[Palantir]

 

 

Your actual return.

Think about it this way. In 2004, Amazon was worth $20 billion. Let's assume that you bought the entire company for $20 billion. Over the course of the decade, you would have pocketed something along the order of $5 billion -- so a quick back of the envelope calculation shows that you would have earned a compounded at around 2.5% over the course of the decade.

 

 

Untrue. On the other hand if you had bought its stock, your actual return would be 800% thoroughly justifying by a wide margin your original long case. An accounting construction like earnings is a very poor measure of your investment.

[topofeaturellc]

Me too, but I'll also have more respect for someone who does their own thinking than a BuffetBitch who takes every word that comes out of our favorite friend's mouth as purer truth than the laws of nature. When you think for yourself, you give yourself a chance to improve. When you follow like a blind sheep, you stay a blind sheep.

 

I pass by a lot of people that hang out on street corners in DC who "[do] their own thinking," but that doesn't necessarily mean that their thinking is correct. (Or maybe the statute in Washington Circle really is following that dude around... who knows.)

 

Buffett's not always right (he mentioned he should have bought the common stock of Harley-Davidson, for instance, rather than lend them money at a fixed percentage) but he's more often right that wrong. That's not being a "Buffet[t]Bitch" -- it's just playing the odds.

 

Your ability to pick which names he's right and wrong on isn't going to be substantially different from your ability to pick good and bad idea from the cheapest 20% of stocks ranked on P/B.  I'm actually pretty sure its worse.

[merkhet]

 

 

Your actual return.

Think about it this way. In 2004, Amazon was worth $20 billion. Let's assume that you bought the entire company for $20 billion. Over the course of the decade, you would have pocketed something along the order of $5 billion -- so a quick back of the envelope calculation shows that you would have earned a compounded at around 2.5% over the course of the decade.

 

The fact that the company is currently trading at 8x what it was trading in 2004 is because people are looking at Amazon the same way they look at Renoirs. They are not looking at it as a business.

 

 

Untrue. On the other hand if you had bought its stock, your return would be 800%. An accounting construction like arnings is a very poor measure of your investment.

 

I can't tell if you actually don't understand or if you're trolling at this point.

[merkhet]

^I can't understand whether you are literate at this point. Seriously, you are using net earnings to value AMZN?

 

Good lord, what part of back-of-the-envelope calculation has managed to fly over your head? Or perhaps you completely missed the following language from the same post you conveniently truncated:

 

Yes, there are various arguments that Amazon is masking its profits, etc., etc. but from a very simple point of view, this would be how you can view whether your analysis on a company was right or wrong. If you owned the whole damn thing, how would you have done?

 

Reading comprehension is important. Especially if you're going to try to question someone's literacy, no?

[Palantir]

Try to see the point. You are assuming that your metric of earnings growth is the "correct" metric, whereas the market value is the "wrong" metric.  This is something that you have not established - why the market is wrong about AMZN, and now you are presenting it as a fact.

[ERICOPOLY]

But I'd never even crack a 10-k or an AR for something just because someone I think is smarter than me owns it.

 

I'm totally the opposite.  I feel like by starting out with the set of names a guy like Buffett has been interested in, I'll have a less polluted lake to swim in.  It doesn't seem like a good idea to me to ignore his behavior and instead look over every stock in the market and only go with the names that I think are best (instead of peeking at the list of stocks that a few shrewd investors own).  I'm aware of his experience and wisdom and... more importantly, mine!

[topofeaturellc]

But I'd never even crack a 10-k or an AR for something just because someone I think is smarter than me owns it.

 

I'm totally the opposite.  I feel like by starting out with the set of names a guy like Buffett has been interested in, I'll have a less polluted lake to swim in.  It doesn't seem like a good idea to me to ignore his behavior and instead only go with the names that I think are best.  I'm aware of his experience and wisdom and... more importantly, mine!

 

I'm not saying a random process. I'm just saying if you put all of Buffett's investments (including the bond deals and what not) on a piece of paper and selected one at random the chances are pretty good that it would underperform a name selected similarly from the cheapest 20% of the market that is investible to you and me.

 

 

[yadayada]

 

I have done no analysis and I never said that I did. I was just pointing out that your argument is results-oriented. If you put $1000 on black and win with roulette, did you make an 'indisputably' correct decision? No - you were just lucky. To judge the decision you have to focus on the business, not the stock price. Hence the CYNK reference.

 

You said, "The fact that a stock goes up after you decline to buy it doesn't mean your analysis was wrong".

 

Ok, then what shows this analysis is wrong or right?

Two points

1) Its antithetical to value investing to believe that market price moves validate or invalidate the research you did.

2) It doesn't really matter if your thesis was incorrect on something you didn't buy.  Its almost never worth rehashing it.

 

The reality is that value investing will always miss some great ideas. You have to be comfortable with that. 

 

I would never buy AMZN and I can't possibly fathom how someone who calls themselves a value investor as I conceive value investing could buy the shares. But that's ok.

 

Me too, but I'll also have more respect for someone who does their own thinking than a BuffetBitch who takes every word that comes out of our favorite friend's mouth as purer truth than the laws of nature. When you think for yourself, you give yourself a chance to improve. When you follow like a blind sheep, you stay a blind sheep.

 

problem is, he is almost always right. Never do something just because he says it, but if he does or does not do something, you should think twice about it. Guy is extremely smart. Problem here is, this is a ideal buffett stock if it really was cheap, but he knows more then almost anyone on this forum about their position with his experience, and apparantly he does not like it. So who am I to say then that I think he is wrong?

[ERICOPOLY]

But I'd never even crack a 10-k or an AR for something just because someone I think is smarter than me owns it.

 

I'm totally the opposite.  I feel like by starting out with the set of names a guy like Buffett has been interested in, I'll have a less polluted lake to swim in.  It doesn't seem like a good idea to me to ignore his behavior and instead only go with the names that I think are best.  I'm aware of his experience and wisdom and... more importantly, mine!

 

I'm not saying a random process. I'm just saying if you put all of Buffett's investments (including the bond deals and what not) on a piece of paper and selected one at random the chances are pretty good that it would underperform a name selected similarly from the cheapest 20% of the market that is investible to you and me.

 

Perhaps you are right about that -- if randomly selected.

[merkhet]

Try to see the point. You just assume that your metric of earnings growth is the "correct" metric, whereas the market value is the "wrong" metric.  Notwithstanding the fact that you have not established why the market is wrong about AMZN, and now you are passing it off as a fact.

 

I'm using earnings growth as a proxy for owner's earnings or free cash flow. I am using owner's earnings or free cash flow as a variable for the implicit DCF that goes into a valuation. I am using John Burr Williams' "The Theory of Investment Value" as the "correct" formula for valuation. What part of that line of reasoning do you find objectionable?

 

We've spoken about lottery tickets before (http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/what-are-your-least-favorite-investing-quotes/msg182034/#msg182034) Just because something randomly drops a bunch of money in your lap doesn't make your decision to invest in it correct. The question is a priori decision-making not post-hoc rationalization.

 

Also, for some reason beyond my comprehension, you seem to think the burden of proof is on me to prove that the market is wrong. Why is the burden of proof not on you to prove that the market is right? And how would you go about doing so?

 

The market is not always right. See The Dot-Com Bubble, The Ensuing Crash from the Dot-Com Bubble, The Run-Up to the Financial Crisis, the Ensuing Crash from the Financial Crisis. Etc.

[writser]

Try to see the point. You just assume that your metric of earnings growth is the "correct" metric, whereas the market value is the "wrong" metric.  Notwithstanding the fact that you have not established why the market is wrong about AMZN, and now you are passing it off as a fact.

 

If you use the market price to judge a stock - what are you comparing? Price with price. So what's your analysis? Nothing. Was CYNK a better company at a $10 billion valuation than at $10 million? You don't know if you don't look at the underlying business - you are speculating. Please quit the nitpicking, all Merkhet is trying to explain to you is, if you had bought Amazon for $20 billion, how much cash would roughly have ended up in your bank account after a decade? Probably less than $160 billion. Seen from that perspective (I would say the value perspective) Amazon wasn't a 800% return investment. What the stock did in the meantime is irrelevant for that analysis. Do you really not understand this line of reasoning?

 

Also, if the market is 'right' about Amazon, why did you buy it? Risk-adjusted return would not beat the market ..

[rranjan]

Try to see the point. You are assuming that your metric of earnings growth is the "correct" metric, whereas the market value is the "wrong" metric.  This is something that you have not established - why the market is wrong about AMZN, and now you are presenting it as a fact.

 

Most wide moat companies fluctuate in price by 40-50% in 1-2 years. Do you think that their business value keep changing by 40-50%?

[Guest Dazel]

Myself

[randomep]

Why is it a tough market?  I just ran a screen for companies in France selling below 85% of book value with an ROE > 10%, there are 20.  I can run the same screen around the world and probably come up with 30 good investment candidates, sure it's not 200 or 2000, but to those willing to turn over rocks I think there are great opportunities out there.

 

I just ran my screen, there are 682 companies worldwide that are selling for less than 75% of BV with ROE's above 15%.  Maybe half of those results are junk, so 321 names that are potential purchases, it seems like there's a lot of opportunity...

 

I agree with you oddballstocks, I can own 2 life insurance companies which are trading at no more than 65% book. And they don't have a lot of annuity exposure. That's just an example.

 

But how do you think of the market today, as compared with another era, say the 70's, or the 80's? I have no sense of perspective there, I am not that old.  I guess I could read old newspapers like WEB does.

 

 

[investor-man]

Dazel

[Liberty]

Your actual return.

 

Think about it this way. In 2004, Amazon was worth $20 billion. Let's assume that you bought the entire company for $20 billion. Over the course of the decade, you would have pocketed something along the order of $5 billion -- so a quick back of the envelope calculation shows that you would have earned a compounded at around 2.5% over the course of the decade.

 

The fact that the company is currently trading at 8x what it was trading in 2004 is because people are looking at Amazon the same way they look at Renoirs. They are not looking at it as a business.

 

Yes, there are various arguments that Amazon is masking its profits, etc., etc. but from a very simple point of view, this would be how you can view whether your analysis on a company was right or wrong. If you owned the whole damn thing, how would you have done?

 

For the sake of argument, what if you had bought all of amazon for $20bn in 2004 and sold it to a private buyer in 2014. How much do you think they'd be ready to pay for it?

 

What if you had bought it all in 2004 for $20bn and had stopped all investments in growth and just tried to maximize FCF as fast as possible. How much money do you think you could have taken out of it in 10 years?

 

One step further: In scenario 2, let's say that after maximizing FCF instead of growth for 10 years you sold it all to a private buyer. How much do you think they'd be willing to pay for it, and is that more than what they'd pay in scenario 1?

 

I have no idea how to answer these questions, but if I was trying to value the company, I'd be thinking about that kind of stuff and not just how much actual FCF they actually made in the past 10 years and putting a multiple on that.

[randomep]

 

Investor-man

[merkhet]

Your actual return.

 

Think about it this way. In 2004, Amazon was worth $20 billion. Let's assume that you bought the entire company for $20 billion. Over the course of the decade, you would have pocketed something along the order of $5 billion -- so a quick back of the envelope calculation shows that you would have earned a compounded at around 2.5% over the course of the decade.

 

The fact that the company is currently trading at 8x what it was trading in 2004 is because people are looking at Amazon the same way they look at Renoirs. They are not looking at it as a business.

 

Yes, there are various arguments that Amazon is masking its profits, etc., etc. but from a very simple point of view, this would be how you can view whether your analysis on a company was right or wrong. If you owned the whole damn thing, how would you have done?

 

For the sake of argument, what if you had bought all of amazon for $20bn in 2004 and sold it to a private buyer in 2014. How much do you think they'd be ready to pay for it?

 

What if you had bought it all in 2004 for $20bn and had stopped all investments in growth and just tried to maximize FCF as fast as possible. How much money do you think you could have taken out of it in 10 years?

 

One step further: In scenario 2, let's say that after maximizing FCF instead of growth for 10 years you sold it all to a private buyer. How much do you think they'd be willing to pay for it, and is that more than what they'd pay in scenario 1?

 

I have no idea how to answer these questions, but if I was trying to value the company, I'd be thinking about that kind of stuff and not just how much actual FCF they actually made in the past 10 years and putting a multiple on that.

 

I don't disagree with you even a little, and yet I think you are missing the forest for the trees. I gave a simplistic answer to Palantir in response to his theory that "the market has AMZN right" purely because the stock has gone up 800%. I was not giving an answer as to how to actually value Amazon.

 

If I wanted to value it thoroughly, I would do everything that you've listed here. Importantly, it wouldn't matter to me one whit whether the stock price had gone up 800% in the last decade or fallen by 80% in the last decade. The movement of the stock price is irrelevant.