Can buying over-valued stocks be value investing?

[Gregmal]

41 minutes ago, John Hjorth said:

 

Then there is the relativity of investment process and attitude towards investing with regard to the time dimension, meant as 'change over time'.

 

I see you registered here on CoBF on 28^th September 2016, now more than 8 years ago. Eight years are so-so medium time-frame for an old bugger like me, 8 years for a relatively young person like you are 8 light years in time distance.

 

I personally did consider you in your early innings here on CoBF very transactional oriented, and ambitious, hungry to get ahead. Do you remember that you actually once posted here on CoBF about : 'Don't pay for even a a lawn mower cash on delivery, if you can't get a discount on it, unpaid bills pulling no interest before due according to payment terms are your float, - Hold on to your shares, and do not reduce the amount of cash you are able to buy stocks for!' Do you remember it?

 

Personally, I still remember running 'montly closings' on every last Saturday in every month in the last part of the accumulation phase ('14 and '15), being a PITA on The Lady of House by asking questions such as 'What have you spent, that is still not added as future payments in the bank interface?', to get totally anal about how much money is actually avaible for buying stocks, by anal [<- is this even  a word in English?] doing monthly liquidity forecasts.

LOL, totally. My life has changed very drastically in 8 years. Starting with the 8 year old I’m just getting back from the driving range with!

[SharperDingaan]

One of smartest things you can own is installed, working, and essential capital equipment; and the more that it costs to build the better (railroads, pipelines, tar sand facilities, etc.). Until it's built there will be all kinds of screaming around overspends, and periodic stock sell offs will generate opportunities; but once it's up & running, starts paying a dividend, and is past its payback period  .......

 

Every year inflation raises the replacement cost further, throughput and technology typically improve, depreciation steadily rolls off, and you end up with an industry controlling asset operating at essentially variable cost. The best that a competitor can do is buy out the asset and its accesses, then continue to operate it while also twinning it with a state-of-the-art replacement; even if the original is utter junk. That's one hell of a moat ..... and even monkey proof! 

 

Lot of o/g companies were built via serial acquisition paid for with stock, but few investors realise that it's a 3 phase process; growth via exploding share count (1-3 yrs?), post party collapse and share consolidation (1-3 yrs?), and pennies on the dollar acquisition via a debt to equity swap (1-2 yrs?). Everyone has heard the growth stories, maybe a few remember consolidation, but the debt to equity swaps?

 

Point? Look at today's darlings, wish them all the luck in the world .. then go shopping 5-6 years out. Or, which sectors were big 5-6 years ago ... and where are they today   

 

SD 

 

 

Edited Sunday at 03:45 PM by SharperDingaan

[John Hjorth]

1 hour ago, Gregmal said:

LOL, totally. My life has changed very drastically in 8 years. Starting with the 8 year old I’m just getting back from the driving range with!

 

Thank you for your [personal] confirmation here, Greg [ @Gregmal ],

 

What I really meant here, is to continously stay observant, situational flexible, 'non-frozen', 'and-ready-to-learn about-and-mentally-prepared-to-always-learn-new-interesting-stuff' to stay on top.

 

With the rigth mindset, there is always something to do, somewhere!

 

- To become a winner, one simply has to decide to become so! - And then do the work it requires! - Otherwise, nobody will never, ever get there! - Attitude, you know!

[dealraker]

It has been now well over 25 since 5 of us co-authored "The 12 Ways GE Misleads Investors."  It was a collaboration of a few of us over on a former Berk forum who got together both online and in the same physical space and put together our "master plan" of wisdom.  Some have asked me to slide that document over to them through the years and my reply is that I deleted my copies and won't spend one second looking for one for you to access.  Watching out for your own notoriety, over-playing a past victory that nobody cares about is stupid place to get stuck in life- yet so many do it anyways.

 

Took years for that GE setting to play out, we were wrong-as-rain and literally the laughing stock, those eps gains and even more pe gains.  A female poster on the Berk board back then, she's now managed money for quite some time (with results I could have conditioned you for...but those who like her writing style...well let's just say she puts Bloomstran to shame with her ability to gain-a-group of followers...despite...you know that sideline they all avoid...results) literally worshiped Jack and John (of the Cisco type) and wouldn't allow us to progress much with our fake news narrative.   Again as I've mentioned so many times, the thing that stands out here on COBF is that no poster controls the board, no one has dominance.  Other forums have cult like dominance by one or two posters and I have watched that theme lead to some god-awful investing.

 

Parsad is a genius as to constructing a forum model.  Said it before, I'll say it again.

 

When you are like me, old yet hanging around still, you feel quite alone iffin' you think about the past, you know that thing that no one learns from.  You watch those same money managers promote the "results" of their holdings and not their own outcomes via their funds...and even one "man-up" comment gets you over on the hate/delete thread.  Yet taking risks and making sometimes bold maybe right or wrong statements is the key to staying alive to thrive.  So one after another investor gets stuck with believing something...and down the road with years and years of a poor outcome is most often the case.  Wanting to get along sometimes has its costs.

 

This forum?  I limit myself to businesses and stocks.  Gregmal is my favorite, Spekulatius not far behind, and Parsad right there.  I may not agree, and I may strongly disagree, but there's no doubt what this trio is stating.  The disagreements and the lack of cohesion is/are troublesome to some, but to me this scrambled eggs of views is the very thing that makes the forum a blistering success.

 

Which gets me on down to the subject of today.  Overall stocks are not cheap.  A poster recently said something like, "I retired with investments worth 5 times what my home is worth."  I'm well over 100 times, so there's the reality of "none of this really counts" for me but I pretend it does anyway.  The TT is out and about and with things like industrial stocks, you know the ones T is going to make go from "good" to hype-successful, to me it seems the prices already suggest it has already happened.  The asset managers could not have had more success...and their stocks scream bloody murder "investors totally admire - actually worship - us."  The railroads can't grow their carloads and cuts for OR bragging along with inflation plus one "pricing" may one day prove to have run into a dead end.  T will, in my view, prove again as before that defense stocks aren't his run-up vehicle.  The  insurance brokers?  Oh my, Lord help  us find a "soft landing"  if there's any problems anywhere ever given their valuations.  Retail - that Lulu story....is a super-star's presentation, I am overwhelmed thinking about it although I did just buy Lulu for Angela.  Where's my Peter principal?  He wrote endlessly:  just buy....what you buy!

 

Yea, my stuff, the things I can grasp...don't look buyable.  And one of the guys we seem obsessed with, wild Bill?  He's noticed that near-60 Bruce has no wrinkles at all, that there's never-ever a negative word; that not once have we believers overpaid for anything...NEVER.   And we all know for certain, it has been rammed down our throats to ad nauseam, that interest rates are going DOWN.  The brook is going to run North Carolina mountains flood style...or so wild Bill must believe.  Else let's just say "he paid up dearly" ----- that is unless plan value actually comes forth for the first time ever.

 

My view of the brook is that it will have some serious issues one day, but Jack...excuse me....I mean Bruce...will need to go before it all works out properly.  12 Ways?  Nah, more like 100.

 

In the meantime, the two investors that I most admire most?  One word: Cash.  

 

(Note: As stated previously, Abbey was wrong from the very beginning yet had years and years of "success.") 

 

My morning rant.  

[73 Reds]

25 minutes ago, dealraker said:

It has been now well over 25 since 5 of us co-authored "The 12 Ways GE Misleads Investors."  It was a collaboration of a few of us over on a former Berk forum who got together both online and in the same physical space and put together our "master plan" of wisdom.  Some have asked me to slide that document over to them through the years and my reply is that I deleted my copies and won't spend one second looking for one for you to access.  Watching out for your own notoriety, over-playing a past victory that nobody cares about is stupid place to get stuck in life- yet so many do it anyways.

 

Took years for that GE setting to play out, we were wrong-as-rain and literally the laughing stock, those eps gains and even more pe gains.  A female poster on the Berk board back then, she's now managed money for quite some time (with results I could have conditioned you for...but those who like her writing style...well let's just say she puts Bloomstran to shame with her ability to gain-a-group of followers...despite...you know that sideline they all avoid...results) literally worshiped Jack and John (of the Cisco type) and wouldn't allow us to progress much with our fake news narrative.   Again as I've mentioned so many times, the thing that stands out here on COBF is that no poster controls the board, no one has dominance.  Other forums have cult like dominance by one or two posters and I have watched that theme lead to some god-awful investing.

 

Parsad is a genius as to constructing a forum model.  Said it before, I'll say it again.

 

When you are like me, old yet hanging around still, you feel quite alone iffin' you think about the past, you know that thing that no one learns from.  You watch those same money managers promote the "results" of their holdings and not their own outcomes via their funds...and even one "man-up" comment gets you over on the hate/delete thread.  Yet taking risks and making sometimes bold maybe right or wrong statements is the key to staying alive to thrive.  So one after another investor gets stuck with believing something...and down the road with years and years of a poor outcome is most often the case.  Wanting to get along sometimes has its costs.

 

This forum?  I limit myself to businesses and stocks.  Gregmal is my favorite, Spekulatius not far behind, and Parsad right there.  I may not agree, and I may strongly disagree, but there's no doubt what this trio is stating.  The disagreements and the lack of cohesion is/are troublesome to some, but to me this scrambled eggs of views is the very thing that makes the forum a blistering success.

 

Which gets me on down to the subject of today.  Overall stocks are not cheap.  A poster recently said something like, "I retired with investments worth 5 times what my home is worth."  I'm well over 100 times, so there's the reality of "none of this really counts" for me but I pretend it does anyway.  The TT is out and about and with things like industrial stocks, you know the ones T is going to make go from "good" to hype-successful, to me it seems the prices already suggest it has already happened.  The asset managers could not have had more success...and their stocks scream bloody murder "investors totally admire - actually worship - us."  The railroads can't grow their carloads and cuts for OR bragging along with inflation plus one "pricing" may one day prove to have run into a dead end.  T will, in my view, prove again as before that defense stocks aren't his run-up vehicle.  The  insurance brokers?  Oh my, Lord help  us find a "soft landing"  if there's any problems anywhere ever given their valuations.  Retail - that Lulu story....is a super-star's presentation, I am overwhelmed thinking about it although I did just buy Lulu for Angela.  Where's my Peter principal?  He wrote endlessly:  just buy....what you buy!

 

Yea, my stuff, the things I can grasp...don't look buyable.  And one of the guys we seem obsessed with, wild Bill?  He's noticed that near-60 Bruce has no wrinkles at all, that there's never-ever a negative word; that not once have we believers overpaid for anything...NEVER.   And we all know for certain, it has been rammed down our throats to ad nauseam, that interest rates are going DOWN.  The brook is going to run North Carolina mountains flood style...or so wild Bill must believe.  Else let's just say "he paid up dearly" ----- that is unless plan value actually comes forth for the first time ever.

 

My view of the brook is that it will have some serious issues one day, but Jack...excuse me....I mean Bruce...will need to go before it all works out properly.  12 Ways?  Nah, more like 100.

 

In the meantime, the two investors that I most admire most?  One word: Cash.  

 

(Note: As stated previously, Abbey was wrong from the very beginning yet had years and years of "success.") 

 

My morning rant.  

There is no one right way to succeed in investing.  The beauty of this board is that many here do well with vastly different, and even opposing viewpoints.  A prime example for me is cryptocurrencies.,  After considerable time reading some of the suggestions posted here by BTC proponents and also reading other materials, my views on Crypto being a greater fools bet has not changed.  That said, I can't argue against the enormous success achieved by early BTC buyers who saw something that I am not programmed to see.    One common denominator to successful investing is recognizing what does, in fact work for you.   Once you find a method, system, or area of interest that consistently produces desirable results, you've essentially hit the investing lottery.  The best advice I ever received was to ignore most everything that professional money managers tell you if such advice doesn't jive with what clicks for you.  Owning dozens and dozens of stocks, annual rebalancing, selling winners, etc.., are just some of the widely accepted "principles" that serve to put money in the pockets of money managers but don't work for me.  There is only one reason to go it alone - the belief that you can do better than money managers and/or near no cost index funds.  The fact that so many posters here appear to do better in so many different ways proves the point that it is not what you invest in that matters, but rather your understanding and ability to manage the investments that you own. 

[james22]

4 minutes ago, 73 Reds said:

One common denominator to successful investing is recognizing what does, in fact work for you.   Once you find a method, system, or area of interest that consistently produces desirable results, you've essentially hit the investing lottery.

 

I think that probably follows from recognizing you've only so much bandwidth.

 

Like students learning how to study, a method, system, or area of interest allows one to focus.

 

And that's what delivers results.

[ArminvanBuyout]

18 hours ago, Gregmal said:

More often than not the stocks people think and claim are overvalued tend to result in a hindsite outcome where the stock wasn’t overvalued and the observer was simply wrong and looking at the wrong metrics. 
 

Honestly, valuation is probably the last thing I look at when underwriting an investment. If everything else during the process is flawless, I’m much less concerned about valuations. Whereas there’s plenty of people whom buy abysmal businesses and assets because the PE looks good, and that more often than not tends to end in tears…

 

 

 

NVDA being the latest example, TSLA being a pre-COVID example

[jfan]

17 hours ago, SharperDingaan said:

Lot of o/g companies were built via serial acquisition paid for with stock, but few investors realise that it's a 3 phase process; growth via exploding share count (1-3 yrs?), post party collapse and share consolidation (1-3 yrs?), and pennies on the dollar acquisition via a debt to equity swap (1-2 yrs?). Everyone has heard the growth stories, maybe a few remember consolidation, but the debt to equity swaps?

@SharperDingaan this is a great example but the one thing I would add to this wrt to using a company's share price as a currency in this context, is that the when o/g commodity prices are up, their acquisition targets are also pricey, and hence at best a neutral but more likely value destructive due to expensiveness and bidding wars for the assets. It only makes sense if you can find cheap targets in preferably a fragmented market. 

1 hour ago, 73 Reds said:

After considerable time reading some of the suggestions posted here by BTC proponents and also reading other materials, my views on Crypto being a greater fools bet has not changed.  

@73 Reds Investing is very much like Yin & Yang, there is a balance between sticking to what works and being intellectually curious to learning new frameworks. What I feel I can learn from the Bill Millers, George Soros and the best traders out there  (not that I am one), is their ability to acquire, assimilate new information, and pivot and change their minds in the face of disconfirming evidence. Kudos to you for exploring new ideas.

52 minutes ago, ArminvanBuyout said:

NVDA being the latest example, TSLA being a pre-COVID example

@ArminvanBuyout I have not studied these companies in extensive detail to understand all their products and strategies, but what I would add is that these potential over-price high-tech businesses use their expensive shares to acquire human capital (maybe not other businesses), which at some point lead to 2 problems: 1) diseconomies of scale wrt to its growing workforce, 2) ever increasing need for higher share prices to keep their work force happy which at points in time could be too expensive for their productive value. I suppose at some time there will be a reckoning here as well as it did happen in the dot.com bubble, unless management is so good as to organize themselves to be continuously innovative and find new markets over time eg Amazon's Bezo days. 

 

Costco is an interesting thought as well wrt to its expensive share price and lack of increasing of their overall share count, obviously we know that this is a high quality business, I guess we can think of its heady stock price as an untapped resource that gives it optionality in the future.  

[73 Reds]

1 hour ago, ArminvanBuyout said:

NVDA being the latest example, TSLA being a pre-COVID example

Yep.  For me way back in the day the two stocks were Berkshire and MO.  Before discovering these stocks, and even for years after I tried all kinds of different investment strategies.  None of them worked and BRK and MO came to make perfect sense to me as ideal investments.  Later, MO lost its luster for legal issues and distrust in management but the characteristics I seek in owning such stocks back then remain the same today.  

[jfan]

7 minutes ago, 73 Reds said:

Before discovering these stocks, and even for years after I tried all kinds of different investment strategies.  

Curious, what did you try and why did you choose what you did?

[bizaro86]

44 minutes ago, jfan said:

@SharperDingaan this is a great example but the one thing I would add to this wrt to using a company's share price as a currency in this context, is that the when o/g commodity prices are up, their acquisition targets are also pricey, and hence at best a neutral but more likely value destructive due to expensiveness and bidding wars for the assets. It only makes sense if you can find cheap targets in preferably a fragmented market

 

One possibility here is CNQ. They are (imo) the best management team in Canada oils and are both cost conscious and capital allocation focused. They trade at a higher valuation because of that, and their stock drops less during downturns. The vast majority of the firm was built on opportunistic acquisitions. Now they tend to pay more with cash/debt and then paydown during the upcycle, but share issuance has been part of the model as well.

[73 Reds]

36 minutes ago, jfan said:

Curious, what did you try and why did you choose what you did?

Momentum investing, options, recommendations from newsletters I subscribed to, Value line (the information was good, recommendations not so much), trading for short term gains (sort of like day-trading before the concept was even coined).  Buffett's words hit me over the head like a good dose of common sense.  I tried to find something to argue or disagree with, but simply could not.  And when I came across MO, the lights went on - that's a stock I want to own.  Cheap product to make with high profit margins, a near monopoly, an industry endorsed by government with one of the strongest political lobbys ever, great advertising (everywhere!) with cool spokespersons, recession-proof, and very shareholder-friendly management.  What could go wrong, LOL? 

Edited Sunday at 05:16 PM by 73 Reds
extra word

[Blake Hampton]

"Intrinsic value is the number, that if you were all knowing about the future, and could predict all the cash that a business would give you between now and judgement day, discounted at the proper discount rate, that number is what the intrinsic value of a business is."

- Warren Buffett

 

Graham's Three Principles

• Value a stock as part of a business
• Expect volatility and profit from it (chapter 8 )
• Always invest with a margin of safety (chapter 20)

Edited Sunday at 06:08 PM by Blake Hampton

[Haryana]

On 11/23/2024 at 11:28 AM, John Hjorth said:

 

I'll steal that line!, @Haryana - Have you considered sending it to Chris Bloomstran? - No, - by futher consideration -, please don't - he will end up in an emergency room with an oxygen mask, if you did. 

Thank you for all that attention on my ignorable line. I hesitate to write them even here, leave alone sending them over there.

 

I looked up Chris Bloomstran, plan to read more of him later. 

[John Hjorth]

4 hours ago, Haryana said:

... I looked up Chris Bloomstran, plan to read more of him later. 

 

@Haryana,

 

We also have a separate topic in the 'Berkshire Hathaway' section of CoBF called 'Semper Augustus' where we talk about Chris Bloomstrans registered investment advisor firm, his performance, his behavior on X, and generally a place to talk bad about him and knock him down! [ ]

 

- - - o 0 o - - -

 

-Now back to topic.

[Saluki]

I think overpaying as a passive investor is much different than overpaying as a company acquiring an asset.  Why would you overpay for something unless you thought someone would pay more for it, even though it's not worth it.  That's psychology, not value investing, in my book. 

 

As a company, it's different because overpaying for something, like being the exclusive search provider for iPhones, is worth different amounts to Google than MSFT.   Apple gets 1/3 of Google's ad revenue from iphones, and MSFT offered them 100%, but Apple turned them down because the ads were so profitable on Google that they would need 150% of MSFT's ad revenue to match the income.  So was MSFT overpaying at 100% or underpaying? 

 

You make more money from a tall building in NYC than a short building, so why aren't all the buildings tall?  Because the cost of capital is different for different owners, and during different periods of time when interest rates are higher/lower, so someone might overbid for the same parcel you are bidding on because they can make more from it than you can.  The marginal buyer/seller always determines the price in an auction, not the average buyer/seller. 

 

If you have a business with big net operating loss tax carryforward, you may pay more for a business than someone else because that stream of income (from a mediocre business) is worth more to you than the other guy. 

[james22]

2 hours ago, Saluki said:

I think overpaying as a passive investor is much different than overpaying as a company acquiring an asset.  Why would you overpay for something unless you thought someone would pay more for it, even though it's not worth it.  That's psychology, not value investing, in my book. 

 

The passive investor, believing the market efficient enough, can't really overpay.