How much and how fast will it go back up?

[Guest JackRiver]

Parsad

 

That's unfortunate that you would sell Fairfax at 2x book considering you have such a low cost basis.  I presume that after selling you would look to buy back at a lower multiple of book, but what multiple?  1.5x?  1x?  And if it's 1x what if it never gets back there, or what if it gets back to 1x but book value has grown so that it is at a value greater than when you sold at 2x? 

 

I'm assuming an excellent business so I don't want to give people the impression that I'm suggesting these notions be applied to any and all stocks.  I firmly believe it's an outright fools folly to sell an excellent business just because you are offered a rich price, and I think Buffett and Munger would agree with me.  I think selling an excellent business at a rich price with the belief that you can pick up another excellent business at a cheap price is a very slippery slope fraught with problems. 

 

Yours

 

Jack River

[scorpioncapital]

"I think selling an excellent business at a rich price with the belief that you can pick up another excellent business at a cheap price is a very slippery slope fraught with problems.  "

 

How is selling an excellent business at a rich price any different than buying an excellent business at a cheap price? If we actively look for cheap prices, why not actively look for expensive prices?

 

 

[Guest JackRiver]

If I correct that and say, "seemingly rich price," will that help?

 

Furthermore, I think I somewhat address your question in my previous posts.  That identifying over valuation in an excellent business is not as easy as people might believe.  Look, clearly I understand there is a price that most all of us would agree is just too much, say if someone offered to pay you 1 trillion dollars for your stake in Berkshire, but given the realm of offers or better still, given the extreme of offers that we are likely to see, let's say 200% over valued, I still believe you shouldn't sell.

 

I guess it's not so obvious that I'm drawing a distinction between the ability or skill set necessary to identify overvaluation versus undervaluation.  I think the two concepts are not opposite sides of the same coin, but maybe you can give me a universal example that will prove my thinking flawed. 

 

Yours

 

Jack River

[Parsad]

Parsad

 

That's unfortunate that you would sell Fairfax at 2x book considering you have such a low cost basis.  I presume that after selling you would look to buy back at a lower multiple of book, but what multiple?  1.5x?  1x?  And if it's 1x what if it never gets back there, or what if it gets back to 1x but book value has grown so that it is at a value greater than when you sold at 2x?

 

I've probably done that at least ten times in the last seven years...both in my own portfolio, CMC's corporate portfolio and in MPIC's portfolios.  Not necessarily selling the whole investment, but certainly portions at higher prices only to buy it back cheaper.  And not even at 2 times book.  

 

The last time we did that was just in November when we sold all of our Fairfax only to buy other investments at dirt cheap prices.  We purchased in the money call options on the shares we sold for a 3% premium, which was paid back by the dividend in January when we exercised them and got our shares back.  Our partners may have paid LT capital gains on that investment, but we made considerably more on that capital when we invested it and it allowed us to keep our lead on the markets.  If we had stayed pat, we would have lost ground as Fairfax shares finally fell this year after the 1st Q report.  We ended up buying back more of our shares at cheaper prices.

 

We've done that with Overstock on several occasions.  With Wells Fargo three times over the last year and a half.  As well as Berkshire Hathaway.  Each time, we've made anywhere from 20-30% to 300-400%.  As much as we love Prem, Warren, etc., we don't fall in love with the stock.  

 

I'm assuming an excellent business so I don't want to give people the impression that I'm suggesting these notions be applied to any and all stocks.  I firmly believe it's an outright fools folly to sell an excellent business just because you are offered a rich price, and I think Buffett and Munger would agree with me.  I think selling an excellent business at a rich price with the belief that you can pick up another excellent business at a cheap price is a very slippery slope fraught with problems.  

 

Actually it does apply to all stocks.  The stock market gives you this opportunity.  For many investors, it is pure folly because they treat it with a casino mentality.  We don't do that, but we operate within a fairly strict mandate of buying below our estimate of intrinsic value and then averaging out as we approach it or go over.   Sometimes we even take into consideration the economic environment and make a calculated decision to sell...as we did with Wells Fargo.  Generally though, the investments we do make, we are content to hold the stock for the long-run.  It's just that we don't necessarily have to.  The point is that something cheaper always comes along with investing...always!  Cheers!  

[Guest misterstockwell]

Phil Fisher is rolling over in his grave reading this thread.

[Guest JackRiver]

Parsad

 

Let me ask you this, what's your average annual return over the past 5 years.  I only ask because when I read your post it sounds like you are compounding money at a very high rate yet at the same time you say "allowed us to keep our lead on the markets," but the markets are down big and if your strategy was really working as flawlessly as you suggest you should be easily trouncing the markets.

 

Now, the above and your reply to me is a mute point.  I'm debating what's the best logical strategy once you have identified an excellent business at a cheap price, and you counter argue with a few deft trades over a relatively short time span.  In addition to that, I'm not sure if Fairfax should be considered an excellent business.  And again, I don't think you can apply the point of my previous posts to an average business or poor business.  Individually, the poor or average business and even just a good business does not lend themselves to a long enough run which is needed to prove out my points.  Meaning the lack of durable competitive advantages is non existent or little existent in these types of businesses and therefore the high rates of returns over decades has a much lower probability of playing out.  With the excellent business at a cheap price decades of high average annual returns is a given (assumed).  I think it would have been better if you had countered me with an index.  At least with an index like the S&P 500 you get the high probability of longevity that is required.

 

Also, you are making the mistake of not only using a small data set, but also during a period of generally lower prices with massive volatility.  I suspect that if you were confronted with a moderately rising market for a long stretch, the results would have been very different.  Though I will acknowledge that individually stocks are usually pretty volatile over a 12 month period.

 

Also, Fairfax and Overstock where or are two heavily manipulated stocks.  Instinctively I want to say that they aren't good test for what you are advocating.  I'll give that some more thought.

 

Lastly, you say, "something cheaper always comes along with investing."  I don't know what that means.  You've got to define that better.  I want to say it's a flawed assertion, but I don't know what you're trying to say.  Your statement is a relative statement and it will take many many decades to prove it out.  Let me clarify that.  I assume an excellent business will be one that will continue as such for many many decades.  You say you can always find something cheaper, but if it is "not" an excellent business you can't, within a high probability, even hold out that it will be around 10 years from now let alone decades.  But to prove out your notion of a cheaper price you need it to run as long as the excellent business, and as I've defined an excellent business there is a very low probability that your cheaper priced business can make the same long run.

 

Sorry, one last thing, if you are not dealing with an excellent business or even a good business, it is not at all easy to say I know what it's worth therefore I can trade around that value.  You can't do that.  It's impossible to use this strategy successfully long term with poor or average businesses.  The reality is is that nobody knows what a poor or average business is worth.  It's unknowable, therefore you don't have an advantage over other market participants.  Unless your telling me you have a device to figure out the average price "guesses" of the other market participants.

 

Yours

 

Jack River

 

 

 

 

 

[Guest JackRiver]

Phil Fisher is rolling over in his grave reading this thread.

 

Why do you say that?

 

Yours

 

Jack River

[JAllen]

I generally just try and own the stocks that are cheapest with good managers that I'm not going to lose money investing in.  I think that Sanjeev said that if they had to they would own the stocks that they have bought for the long term.

 

My personal opinion is that holding positions for the long-term (i.e >5 years) should be left with those with very large pools of capital and that smaller money should attempt to beat the market by greater than your 10-12% plus taxes of 35% (although that wouldn't be the average tax rate) implying a >15% annual return.  Also, another risk of super long term holds is that events that might have 5% probability (ex: railroad reregulation) will happen if they do indeed have the 5% probability.  Owning stocks for the 3-36 months drastically reduces these risks.  I suspect that for long term holds might increase the tendency to fall in love (or overlook or understimate potential risks) with the stock. 

 

I generally own a few core positions and have other stocks with less optimal management but might be cheaper or have immediate catalysts. 

 

Is 10-12% growth for BNI your prediction Jack?  You still haven't told us the reason why BNI is better than UP.  I would appreciate learning your thoughts about it.

 

 

 

 

[Parsad]

Parsad

 

Let me ask you this, what's your average annual return over the past 5 years.  I only ask because when I read your post it sounds like you are compounding money at a very high rate yet at the same time you say "allowed us to keep our lead on the markets," but the markets are down big and if your strategy was really working as flawlessly as you suggest you should be easily trouncing the markets.

 

Jack, if I provide you any numbers, would that actually change your mind?  Of course not!  Buying quality businesses and holding them for long periods of time while beating the markets, is actually significantly harder than buying modest or poor businesses at a significant discount to their underlying asset value.  Other than many of the firms we always hear about, time tests the metal of virtually any business.  There are only a handful that will exist for any young investor's investment horizon.

 

Now, the above and your reply to me is a mute point.  

 

Well, that's what I figured.

 

I'm debating what's the best logical strategy once you have identified an excellent business at a cheap price, and you counter argue with a few deft trades over a relatively short time span.  In addition to that, I'm not sure if Fairfax should be considered an excellent business.  And again, I don't think you can apply the point of my previous posts to an average business or poor business.  Individually, the poor or average business and even just a good business does not lend themselves to a long enough run which is needed to prove out my points.  Meaning the lack of durable competitive advantages is non existent or little existent in these types of businesses and therefore the high rates of returns over decades has a much lower probability of playing out.  With the excellent business at a cheap price decades of high average annual returns is a given (assumed).  I think it would have been better if you had countered me with an index.  At least with an index like the S&P 500 you get the high probability of longevity that is required.

 

If my intention was to match the index, then you are correct.  I would simply buy and hold the index.  My goal isn't to match the index, but surpass it.  In regards to quality businesses, how can you propose that Fairfax is not one or that Coca-cola is?  Isn't Fairfax's compounded return since inception on par, if not better than Coca-cola's first 23 years?  Your subset of quality businesses that have durable competitive advantages becomes incredibly small using the characteristics you describe.  There is a whole other world outside of those businesses where significant inefficiencies can be exploited.

 

Also, you are making the mistake of not only using a small data set, but also during a period of generally lower prices with massive volatility.  I suspect that if you were confronted with a moderately rising market for a long stretch, the results would have been very different.  Though I will acknowledge that individually stocks are usually pretty volatile over a 12 month period.

 

Actually the data that supports the Graham philosophy is significantly longer than Fisher's.  In fact, Buffett's greatest returns came from his partnership days and early Berkshire when he was buying entire businesses utilizing insurance float.  While the Washington Post and Geico had certain competitive advantages that would last for a long time, I bet you virtually any investor today (including Buffett acolytes) would not have been able to say that for certain.  Especially during the period when Buffett bought them and they were under tremendous pressure and turmoil.  Both businesses almost went under at the time.

 

Also, Fairfax and Overstock where or are two heavily manipulated stocks.  Instinctively I want to say that they aren't good test for what you are advocating.  I'll give that some more thought. 

 

Generally, stocks become undervalued due to fear or manipulation.  What about WFC and BRK that I mentioned?  Are they being manipulated.  What about all the distressed debt I've bought in the last few months?  Their yield is around 25-28% till maturity.  In fact, two tranches mature in another month and a half, where the annualized yield would be about 24% over four months.  These businesses have enough cash to pay off all their 2009 and 2010 maturities and the certainty of recouping our investment is probably about 99.9%.  Their competitive advantages play no part in the analysis.

 

Lastly, you say, "something cheaper always comes along with investing."  I don't know what that means.  You've got to define that better.  I want to say it's a flawed assertion, but I don't know what you're trying to say.  Your statement is a relative statement and it will take many many decades to prove it out.  Let me clarify that.  I assume an excellent business will be one that will continue as such for many many decades.  You say you can always find something cheaper, but if it is "not" an excellent business you can't, within a high probability, even hold out that it will be around 10 years from now let alone decades.  But to prove out your notion of a cheaper price you need it to run as long as the excellent business, and as I've defined an excellent business there is a very low probability that your cheaper priced business can make the same long run.

 

For example, much of the Wells Fargo we bought at $9.50 two weeks ago, we sold out at $17.  That cash is sitting there and will be deployed into something we think will be under the same sort of pressure or more likely deeply distressed.  Markets don't go up linearly.  They bob and weave!  Our partners do not have the stomach when volatility hits the way it did last year or early this year.  We have to temper that volatility by buying cheap and selling dear.  A 50% drop doesn't even make us blink twice in our corporate portfolio, but it does for some of our investment partners, so we have to manage the funds with market risk as a consideration. 

 

Sorry, one last thing, if you are not dealing with an excellent business or even a good business, it is not at all easy to say I know what it's worth therefore I can trade around that value.  You can't do that.  It's impossible to use this strategy successfully long term with poor or average businesses.  The reality is is that nobody knows what a poor or average business is worth.  It's unknowable, therefore you don't have an advantage over other market participants.  Unless your telling me you have a device to figure out the average price "guesses" of the other market participants.

 

Jack, it's not about some sort of trading range.  Often we'll look at a business' current liquidity relative to their total debt...a net-net.  We love those things and have been able to find several in this environment.  It's easy to buy a business (good or bad) when you subtract all their debt from their cash and receivables and it is still trading at half that value.  We buy things we like when people are panicking, and then we are out by the time they start to get giddy about it.  Sometimes we aren't out completely.  We average in and we'll average out, so we may hold a little or alot of any one business at any given time.  But it is completely predicated on their valuation...getting in cheap below liquidation value/intrinsic value and selling out as prices rise close to liquidation value/intrinsic value.  Cheers! 

 

[Guest JackRiver]

pof4520

 

It's like you guys are talking right through me.

 

Anyway, with regards to BNI and for those of you who don't know, I recently suggested that there are two things about BNI that makes it better than UNP.  I said I wouldn't say what they are, but it's funny you should ask again, recently the CEO alluded to one of the two at a presentation.

 

Sorry for being so lame about this.

 

FYI I don't believe greater railroad regulation is a negative (risk) in the long run, but I understand why others would see it that way.

 

Yours

 

Jack River

[Guest misterstockwell]

Phil Fisher is rolling over in his grave reading this thread.

 

Why do you say that?

 

Yours

 

Jack River

 

Jack--go read his book--it's the best investing guide ever written

[Guest JackRiver]

Parsad  sorry I'm going to take these out of order.

 

* You are kind of all over the place and at the same time talking right through my points.  Look, I'm trying to make the case that you should never sell an excellent business purchased at a cheap price even if offered a rich price for it.  My assertion does not imply that an excellent business is the only way to make money or beat the market, it's not, but I am asserting that an investor would be foolish to give up this excellent business to attempt some other investment operation.  

 

Summed up, an excellent business that has been purchased at a cheap price is the most optimal investment operation an investor can achieve in the long run.  I'm not debating whether it's easy or hard to find an excellent business at a cheap price and besides, you only need to find one in your investment career, the sooner the better  ;D.

 

* Now, with regards to my comments about an index.  The point I was trying to make was that one could argue that if given a sufficient premium price on your excellent business, that those proceeds could then be channeled into an index.  Point being that both the index and an excellent business will allow for a consistent long run operation.  Any investment operation short of replacing your excellent business with an index will give rise to questions pertaining to longevity of the that alternative operation.  Remember my point is that an excellent business purchased at a cheap price will provide you both longevity and high returns per year (i'm sorry i used 10 to 12 percent, I thought I was being conservative.  One would hope the excellent business purchased at a cheap price would imply higher than that, but it's relative anyway, that is, if the excellent business purchased at a cheap price produces 10% per year then that implies that the average business will offer less.)

 

* You say generally stocks become undervalued due to fear or manipulation.  I disagree, stocks become undervalued mainly due to fixations on short term issues at the expense of longer term dynamics.

 

* But seriously, what's your 5 year average annual returns.  I'm not asking this to be pokey, there is a point even if it's mute to my original thesis.

 

* What are Fairfax's durable competitive advantages.  Higher than average returns over a long period is a necessary result of durable competitive advantages, but high returns, exclusively, does not necessarily point to durable competitive advantages.

 

* You say, "Buying quality businesses and holding them for long periods of time while beating the markets, is actually significantly harder than buying modest or poor businesses at a significant discount to their underlying asset value.  Other than many of the firms we always hear about, time tests the metal of virtually any business.  There are only a handful that will exist for any young investor's investment horizon."

 

I disagree.  Unless you have the ability to actually purchase enough shares without driving the price up on yourself and resting control of the business in the hopes of liquidating the assets at a sufficient price to those with a more efficient use or making use yourself of the assets more efficiently, then buying businesses in todays world at discounts to underlying assets is a recipe to suffer the ills of managements that will suck out whatever value remains in those assets (before you get a chance to salvage them).  If you don't have enough money to buy control, its a dangerous operation.  Also, your point is somewhat limited in that you are talking about liquidation value and turn arounds.  I'm sure as you say there are ample opportunities to do this, but I again get back to my point, I would not give up an excellent business purchased at a cheap price to partake in this.  

 

* I didn't mention anything about Graham and Fisher so I'm not sure if you are talking to me.  The data set I referred to was that you provided of your more recent investment experience trading in and out of a few companies successfully.  

 

* I'm not sure about your Geico and WPO examples nor am I sure about their relevance to my points.  As to investors identifying their completive advantages, I think some would and some wouldn't, but as you suggest, most would not buy.   They would have fixated on the then more recent troubles at the expense of the long term.  Buffett even suggest that others where fully aware of the value of WPO, but there belief that the market was going lower kept them out.  

 

* You say, "For example, much of the Wells Fargo we bought at $9.50 two weeks ago, we sold out at $17.  That cash is sitting there and will be deployed into something we think will be under the same sort of pressure or more likely deeply distressed.  Markets don't go up linearly.  They bob and weave!  Our partners do not have the stomach when volatility hits the way it did last year or early this year.  We have to temper that volatility by buying cheap and selling dear.  A 50% drop doesn't even make us blink twice in our corporate portfolio, but it does for some of our investment partners, so we have to manage the funds with market risk as a consideration."

 

Again, not relevant to the points I was making, but also, this doesn't even make sense.  As you say, once you deploy the money (buy a stock) how is it that you control the other shareholders to guarantee the avoidance of a 50% drop?  Forgive me if this sounds a bit like "channeling stocks to win."  I know you've read Bill Miller's piece on buying at the bottom and selling at the top (and let's stick to his point and overlook his results) and I wrote something along those lines in another thread (post), so does it not in the least seem to you that this is what you are trying to do?  What's the value of Wells Fargo?  From your post you seem to imply it's somewhere in between 9.50 and 17, is that so?  A 50% drop does not make you blink twice, that sounds like something Buffett would say.  If he's the best, are you suggesting you are as confident in your abilities as he, or that some level of willful ignorance is bliss?  I think I'm as smart as the next guy and luckily i've never had a 50% drop in a position, but 20% and I'm back at the drawing table checking that I didn't miss something.  I blink.  Twice.

 

To your last point, okay on the liquidation value, I partially addressed that above and am not objecting to it but mainly it has nothing to do with my previous posts, but as for your notions of intrinsic value, that's a little problematic.  What you think a business is worth is not the same as intrinsic value.  What you think intrinsic value is is not the same as the real intrinsic value.  If you follow what I'm saying then you'll realize that your notions of intrinsic value must by default be a guess.  It may be a good thoughtful guess, but a guess implies imprecision and imprecision implies a range that gets summed up by its midpoint in the context of intrinsic value estimates by investors.  Short of short term risk free securities, intrinsic value estimates are always a range and the longer you go out the wider that range tends to get.   Other aspects of the investment will vary that range as well, but there is always a range from the standpoint of the analyst/investor.  He/she after all can not predict the future exactly, but they can make an educated/probabilistic guess.  My point is that your probability of sustaining exceptional returns long term using the methods you describe are low.  Not to say you can't do it.  Just that the probability is low.  You are practicing a masked form of market timing, and their are too many variables that, as they have worked in your favor, can also as easily work against you.

 

BTW, why did you get into Wells Fargo at 9.50?  Why not 10.50?  Or 11.50?  

 

Sorry for the long post, it's just that here I am describing why one should not leave there wife if they think she's as close to perfect for them as they can find, and out come replies to my post that there are other fish in the sea.  As if I didn't know that and besides it's missing the point.

 

yours

 

Jack River

[Guest JackRiver]

Phil Fisher is rolling over in his grave reading this thread.

 

Why do you say that?

 

Yours

 

Jack River

 

Jack--go read his book--it's the best investing guide ever written

 

I'm sure I'm guilty of this too, but why is it that investors always assume the other guy lives under a rock.  It's particularly acute with Graham/Buffett types. 

 

I've read the book.  I was hoping you would elaborate some. 

 

Yours

 

Jack River

[JAllen]

Jack,

 

Apologies.  I didn't remember you saying you wouldn't tell us what those two things are.

 

 

[Guest ericopoly]

Why is it a secret Jack?  This isn't an illiquid penny stock that you are having trouble accumulating.

[Guest JackRiver]

One of them I'm certain of and the other less so.

 

It's the other less so that's causing me to hold back, and the "certain one" is alluded to by Rose in a recent presentation.  If you have general knowledge about BNI (maybe some other indirect pre knowledge would help also) and you don't already know what I'm talking about, there is a good chance it will jump out at you.  I've looked at a lot of discussion (analysis) on BNI and I have not seen these mentioned.

 

It's one of those things that's so obvious it alludes most people.  It's right in front of your eyes if you look. As far as I'm concerned this is Coke part 2 for Buffett, and that something is amiss should be obvious given how Buffett has taken on this position.  I think most will understand he pulled a fake out with the other rails and that he has been collecting BNI shares ever since.  Given that the openly discussed positives also apply to UNP and that UNP is for christ sake right on top of Buffett in Omaha, logic would suggest something else substantial. I'm telling you, he's collecting again.  He even went as far as writing puts.  Right!

 

Sorry for being such an illusive faker about this.  I feel like a con man.  Please stop asking me.  Maybe just assume I'm full of it.

 

Yours

 

Jack River

[prevalou]

anyway it doesn't matter.

Buffett bought Coca Cola but Pepsico made the same performance long term, he bought Freddie Mac but Fannie Mae was a copycat too and at the end their competitive advantage were wiped out.

[Parsad]

Parsad  sorry I'm going to take these out of order.

 

* You are kind of all over the place and at the same time talking right through my points.  Look, I'm trying to make the case that you should never sell an excellent business purchased at a cheap price even if offered a rich price for it.  My assertion does not imply that an excellent business is the only way to make money or beat the market, it's not, but I am asserting that an investor would be foolish to give up this excellent business to attempt some other investment operation.

 

Not saying that I would necessarily sell every business I own for any rich price, but why would this be foolish? 

 

Summed up, an excellent business that has been purchased at a cheap price is the most optimal investment operation an investor can achieve in the long run.  I'm not debating whether it's easy or hard to find an excellent business at a cheap price and besides, you only need to find one in your investment career, the sooner the better  .

 

Not necessarily optimal.  Perhaps more efficient, but not necessarily more optimal.  Peter Lynch had 1500 stocks in the Magellan Fund at one point.  We don't invest like that...we don't hold more than 10-12 ideas maximum.  But optimal is not the appropriate word for what you are describing.

 

* Now, with regards to my comments about an index.  The point I was trying to make was that one could argue that if given a sufficient premium price on your excellent business, that those proceeds could then be channeled into an index.  Point being that both the index and an excellent business will allow for a consistent long run operation.  Any investment operation short of replacing your excellent business with an index will give rise to questions pertaining to longevity of the that alternative operation.  Remember my point is that an excellent business purchased at a cheap price will provide you both longevity and high returns per year (i'm sorry i used 10 to 12 percent, I thought I was being conservative.  One would hope the excellent business purchased at a cheap price would imply higher than that, but it's relative anyway, that is, if the excellent business purchased at a cheap price produces 10% per year then that implies that the average business will offer less.)

 

If you are aiming for 10-12 percent, then your method of looking for quality businesses at undervalued prices will hit your mark over the long-term.  Unfortunately, or perhaps fortunately, we aren't aiming for 10-12 percent. 

 

* You say generally stocks become undervalued due to fear or manipulation.  I disagree, stocks become undervalued mainly due to fixations on short term issues at the expense of longer term dynamics.

 

That's what I said...short-term issues result in the fear.  Many stocks are also manipulated.     

 

* What are Fairfax's durable competitive advantages.  Higher than average returns over a long period is a necessary result of durable competitive advantages, but high returns, exclusively, does not necessarily point to durable competitive advantages.

 

I think this is semantics.  Some would argue the same thing about Buffett, but I believe anyone would be a fool to do that. 

 

* You say, "Buying quality businesses and holding them for long periods of time while beating the markets, is actually significantly harder than buying modest or poor businesses at a significant discount to their underlying asset value.  Other than many of the firms we always hear about, time tests the metal of virtually any business.  There are only a handful that will exist for any young investor's investment horizon."

 

I disagree.  Unless you have the ability to actually purchase enough shares without driving the price up on yourself and resting control of the business in the hopes of liquidating the assets at a sufficient price to those with a more efficient use or making use yourself of the assets more efficiently, then buying businesses in todays world at discounts to underlying assets is a recipe to suffer the ills of managements that will suck out whatever value remains in those assets (before you get a chance to salvage them).  If you don't have enough money to buy control, its a dangerous operation.  Also, your point is somewhat limited in that you are talking about liquidation value and turn arounds.  I'm sure as you say there are ample opportunities to do this, but I again get back to my point, I would not give up an excellent business purchased at a cheap price to partake in this.

 

But this is exactly the way Buffett made his fortune.  The competitive advantages at the Washington Post are only apparent to investors like you or me, because it had Katherine Graham at the helm.  Otherwise the Washington Post would have been a has-been.  Geico's apparently easily discernable competitive advantages are only visible because Jack Byrne saved it, and then Tony Nicely and Lou Simpson grew it. 

 

If I asked you to find me fifteen great businesses with durable competitive advantages twenty years ago, you would have almost certainly included Kodak, Boeing, AT&T, Bethlehem Steel, GM, Goodyear, Phillip Morris & Sears.  Yet the world has changed enormously in that span, and the competitive advantages of these businesses have been decimated.  Or the costs related to their operations destroyed shareholder value like Phillip Morris.  Those are just some of the hugely successful businesses that had their world turned upside down over the last decade or two.  America thrives because it's citizens are terrific at destroying competitive advantages of other businesses.  Why do you think both Google and Microsoft came from the U.S.?  Or Amazon and Ebay.  Nothing is impossible in the U.S.   

 

* I'm not sure about your Geico and WPO examples nor am I sure about their relevance to my points.  As to investors identifying their completive advantages, I think some would and some wouldn't, but as you suggest, most would not buy.   They would have fixated on the then more recent troubles at the expense of the long term.  Buffett even suggest that others where fully aware of the value of WPO, but there belief that the market was going lower kept them out.

 

Well that's exactly right.  I would say that perhaps one investor in a hundred would have recognized any durable competitive advantage in those two businesses when they were in turmoil.  And only one in 250 would have actually acted on their instincts and invested.  Roughly the same ratio as those that actually attach themselves to the value investing fraternity.

 

* You say, "For example, much of the Wells Fargo we bought at $9.50 two weeks ago, we sold out at $17.  That cash is sitting there and will be deployed into something we think will be under the same sort of pressure or more likely deeply distressed.  Markets don't go up linearly.  They bob and weave!  Our partners do not have the stomach when volatility hits the way it did last year or early this year.  We have to temper that volatility by buying cheap and selling dear.  A 50% drop doesn't even make us blink twice in our corporate portfolio, but it does for some of our investment partners, so we have to manage the funds with market risk as a consideration."

 

Again, not relevant to the points I was making, but also, this doesn't even make sense.  As you say, once you deploy the money (buy a stock) how is it that you control the other shareholders to guarantee the avoidance of a 50% drop?  Forgive me if this sounds a bit like "channeling stocks to win."  I know you've read Bill Miller's piece on buying at the bottom and selling at the top (and let's stick to his point and overlook his results) and I wrote something along those lines in another thread (post), so does it not in the least seem to you that this is what you are trying to do?  What's the value of Wells Fargo?  From your post you seem to imply it's somewhere in between 9.50 and 17, is that so?  A 50% drop does not make you blink twice, that sounds like something Buffett would say.  If he's the best, are you suggesting you are as confident in your abilities as he, or that some level of willful ignorance is bliss?  I think I'm as smart as the next guy and luckily i've never had a 50% drop in a position, but 20% and I'm back at the drawing table checking that I didn't miss something.  I blink.  Twice.

 

Why do you presume that I would even entertain such a thought of comparing myself to Buffett.  I think when people do this, they actually create an antagonistic environment for posts, because you are automatically putting people on the defensive.  Probably better to approach it differently.

 

I've had quite a few stocks drop 50% or more on me.  Hell, Fairfax in 2003 dropped 70% on me!  If our analysis continues to make sense, we continue to buy and average down.  If we think we made a mistake, we sell and take the loss.

 

To your last point, okay on the liquidation value, I partially addressed that above and am not objecting to it but mainly it has nothing to do with my previous posts, but as for your notions of intrinsic value, that's a little problematic.  What you think a business is worth is not the same as intrinsic value.  What you think intrinsic value is is not the same as the real intrinsic value.  If you follow what I'm saying then you'll realize that your notions of intrinsic value must by default be a guess.  It may be a good thoughtful guess, but a guess implies imprecision and imprecision implies a range that gets summed up by its midpoint in the context of intrinsic value estimates by investors.  Short of short term risk free securities, intrinsic value estimates are always a range and the longer you go out the wider that range tends to get.   Other aspects of the investment will vary that range as well, but there is always a range from the standpoint of the analyst/investor.  He/she after all can not predict the future exactly, but they can make an educated/probabilistic guess.  My point is that your probability of sustaining exceptional returns long term using the methods you describe are low.  Not to say you can't do it.  Just that the probability is low.  You are practicing a masked form of market timing, and their are too many variables that, as they have worked in your favor, can also as easily work against you.

 

How can you be so sure?  How can you say that with such exactitude and certainty?  Or is it that is just what you believe, and anything else is not possible.  Keep an open mind.

 

BTW, why did you get into Wells Fargo at 9.50?  Why not 10.50?  Or 11.50?

 

We've bought WFC on several occasions.  This time we happened to choose $9.50 as our execution price.  We bought WFC $20 2011 call options at higher prices (around the $15 range down to $11)...which we still hold.  We decided that the stock at $9.50 was one of the silliest valuations we had seen in this era and the odds were in our favor that this was an inefficiency.  So we bought a considerable amount of stock.  We have WFC's intrinsic value pegged significantly higher than what we sold the shares at.  But we don't get greedy.  We average in and we average out. 

 

During the same discussion a couple of weeks ago, we also mentioned that we thought GE's price was equally ludicrous.  We bought a ton of GE 2011 call options and some equity.  We continue to hold those.  As the price rises to intrinsic value, we will average out.  If it drops further, we will buy alot more.  It's not nearly as complicated as you make it seem. 

 

Sorry for the long post, it's just that here I am describing why one should not leave there wife if they think she's as close to perfect for them as they can find, and out come replies to my post that there are other fish in the sea.  As if I didn't know that and besides it's missing the point.

 

Jack, if I owned all of See's Candy (or at least 51%), I wouldn't ever sell it for any amount of money.  But I don't.  If I can't own a controlling interest in any public equity, then there is no guarantee that any excess future cash flows will be allocated in the fashion I would like to see. 

 

As much as I love Warren Buffett, Prem Watsa or Sardar Biglari, they are always going to do things that aren't exactly what I would have done.  On most occasions, their result will be far better than mine.  But there is always the possibility that one event or investment that I don't agree with could take down the ship...think GenRe (derivatives exposure), TIG & C&F, or nearly 100% of capital into SNS. 

 

All three are exceptional investors that are far better than I could ever be, but each did something that jeopardized the entire business.  Whether you like it or not, unless you control the business, you will always be at the whim and mercy of a manager.  If you are fortunate, they will be quality managers like the three I described above or many others out there.  If you are unfortunate, then you are done...competitive advantages be damned! 

 

We average out of investment positions to prevent that possibility.  We aren't going to let an investment run and account for 40-50% of the fund, which would be completely devastating to our partners if that manager makes a horrible mistake.  Look at the catastrophes we've seen last year...many people thought AIG and Bear Stearns were impenetratable. 

 

As lovely as "buy and hold quality businesses at cheap prices" sounds, the average investor cannot handle the volatility.  And forget about the average investor.  I bet only perhaps ten out of 100 diehard Buffett disciples can handle it.  Take a look at how so many value investors were panicking in the last year.  You said yourself that you've never had a stock fall 50%...well Berkshire fell almost 50% in the last year.  For many hardened Berkshire shareholders that is too much, and they've been immersed in the Buffett culture. 

 

Cheers!

[Rabbitisrich]

JackRiver makes an interesting point when he focuses on Sanjeev's WFC trade. This market rewards certain bad behaviors like trading out of undervalued stocks as a bet against further volatility. That may not be the case with Sanjeev's sale, but I've been guilty of it. In fact, this year marks the third time since 2006 that I've purchased FFH under $240, and each time I've waited until the price fell further than the last time I started buying. I've sold around $310 on the hope of capturing market declines. And I've done it with the full realization, that over time, this strategy will probably leave a lot of money on the table, or in the IRS' coffers.

 

There's a reason Warren Buffett is unique. Pavlov has nothing on a frothy market.

[Guest misterstockwell]

 

I'm sure I'm guilty of this too, but why is it that investors always assume the other guy lives under a rock.  It's particularly acute with Graham/Buffett types. 

 

I've read the book.  I was hoping you would elaborate some. 

 

Yours

 

Jack River

 

Fisher would never sell a stock for the reasons described above. He wasn't a trader. He bought companies with unique growth prospects, and held them for a very long time--50 years in the case of MOT. About the in and out trading described above, he said "it became increasingly apparent to me how silly these activities were." With taxes in some states getting up to over 40%, you have to assume some "mad skillz" in trading to overcome the tax penalty. Fisher gave three reasons to sell stock in a great company:

1)when you make a mistake in your original purchase and things are not as you believed

2)when a company no longer qualifies under the 15 points Fisher used to originally evaluate a company

3)when a more attractive investment arises

 

As he says, "If the job has been correctly done when a common stock is purchased, the time to sell it is---almost never."

 

Trading is trading, investing is something else altogether.

 

[tooskinneejs]

"Fisher would never sell a stock for the reasons described above. He wasn't a trader. He bought companies with unique growth prospects, and held them for a very long time--50 years in the case of MOT. About the in and out trading described above, he said "it became increasingly apparent to me how silly these activities were." With taxes in some states getting up to over 40%, you have to assume some "mad skillz" in trading to overcome the tax penalty. Fisher gave three reasons to sell stock in a great company:

1)when you make a mistake in your original purchase and things are not as you believed

2)when a company no longer qualifies under the 15 points Fisher used to originally evaluate a company

3)when a more attractive investment arises

 

As he says, "If the job has been correctly done when a common stock is purchased, the time to sell it is---almost never."

 

Trading is trading, investing is something else altogether."

 

Maybe I'm making inappropriate inferences, but it sounds like some posters here espouse comparing price and value when making purchase decisions but then ignoring price and value relationships at all times after the purchase has been made.  I'm not sure I follow the logic in that method of operation.  Investing is, at it's most basic level, about getting more in value than you pay in price.  It would follow that this goal should apply not just to purchases but also to sales.  Just as with purchases, sometimes you can receive more in value by selling a security than you in essence "pay" by continuing to hold it.

 

And I take serious exception to the theory that holding securities a long time, in and of itself, makes one a "true investor."  If the market price of a security reaches your estimate of its intrinsic value in a week from the date of purchase rather than in five years, why not capture that full intrinsic value today and redeploy your capital to other securities where price and value disparities exist.  To me, holding fully priced securities with no price/value disparity and, therefore, no margin of safety does not make one a "true investor."

 

Just to be clear, I'm not suggesting that investors should frequently buy and sell to capture small price changes.  I'm simply saying that ignoring all price/value relationships after the date of purchase is not a logical investing method.  And neither is continuing to hold a security just because its price met your value estimate "too quickly."

[Guest misterstockwell]

It all comes down to whether you are buying a stock, or a business. If you are confident of the business you are buying into, why worry about the vascillations above and below "intrinsic value" that will always occur as the business grows? You stand to make far more over a long time with very low taxes if you monitor the business, and not the tick by tick. It's just one way of doing things. This business allows any number of players to make a profit in any number of ways. Fisher's way worked for him(and continues to work for me), and others have their way of investing. I was just expanding on my comment about Fisher's method.

[Parsad]

It all comes down to whether you are buying a stock, or a business. If you are confident of the business you are buying into, why worry about the vascillations above and below "intrinsic value" that will always occur as the business grows? You stand to make far more over a long time with very low taxes if you monitor the business, and not the tick by tick. It's just one way of doing things. This business allows any number of players to make a profit in any number of ways. Fisher's way worked for him(and continues to work for me), and others have their way of investing. I was just expanding on my comment about Fisher's method.

 

You can do that with your own personal account, but not if you are managing other people's money.  Take a look at all of the value investors who have gotten completely hammered in the last year.  Many are complete Graham/Buffett/Fisher acolytes, who had impeccable track records and hold investments for the long term. 

 

Now they've done exactly what many of you are espousing (which I espouse as well...in theory), which would not have been a problem if they were looking after their own capital, since they can handle extreme volatility.  But suddenly when half your fund is being redeemed and you have to generate liquidity, Buffett, Graham and Fisher go out the window because you are hooped...either close the fund, or liquidate and hurt remaining partners. 

 

So in theory, buying and holding quality businesses at great prices is efficient and ideal...but static behaviour is not as easily translated to pools of public capital in distressed periods like we witnessed.  Investors don't care about management philosophy when they are panicking about their retirement funds.  Cheers!   

[Guest misterstockwell]

But I do manage money for others  ;D

[Parsad]

Stock, I'm guessing you were probably not down 50% like many other value managers in 2008.  And if you weren't, did you achieve that result without hedging, shorting or market puts?  Was it done simply by being long on quality businesses at great prices for the long-term?  And having 50% in Fairfax doesn't count.   ;D  Cheers!