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What Buffett style investing means to this board


Guest Bronco
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Just curious.  Since this is partially a BRK board, I thought I would bring up the topic.  To me, Buffett looks for the following types of businesses:

 

1) Durable, Competitive Advantage

2) Strong Return on Equity

3) History (10 years) of increasing revenues and earnings

4) Business that is understandable

5) Business where future trends will benefit that business

 

I'm doing this off the top of my head, so forgive me if I miss some criteria.

 

Once these businesses are identified - they should be valued. 

 

Next, these businesses should be purchased if the stock price is well below intrinsic (calculated) value.

 

 

It is easy to identify some of these types of businesses - JNJ, Krafts, P&G - companies that BRK has big stakes in.

 

Anyone have any interesting ideas with 1) Buffett style businesses and 2) FMV is much less than intrinsic value?

 

 

 

 

 

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A few points:

 

  • In your analysis, you are specifically talking about the latter stages of Buffett's career.   Remember none of us here has to deploy billions of dollars of capital.  So, you might adopt his earlier style, which would be more appropriate; the earlier partnership activities included arbitrage. (See partnership letters)
  • Apropos to what you wrote, remember management is critical to the "latter Buffett" investing style.
  • Although, you might be implying it, specifically once you have assessed the intrinsic value, you need to have a margin of safety.

 

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A few points:

 

  • In your analysis, you are specifically talking about the latter stages of Buffett's career.   Remember none of us here has to deploy billions of dollars of capital.  So, you might adopt his earlier style, which would be more appropriate; the earlier partnership activities included arbitrage. (See partnership letters)
  • Apropos to what you wrote, remember management is critical to the "latter Buffett" investing style.
  • Although, you might be implying it, specifically once you have assessed the intrinsic value, you need to have a margin of safety.

 

 

I think alot of people forget this. There are about 4 different Buffett's - I like to focus on the younger more broke Buffett because thats a bit closer to myself, though he was far richer then I at my age. Buying $10,000 of Coke and holding for 20 years, isnt going to make me much money.

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Myth - I agree with you and the other poster on the different faces of Buffett - but there are many examples of Buffett buying and holding - Geico, National Indemnity, Coke as you mentioned, Amex, See's, etc...  Some of these are wholly owned, some are not. 

 

But to buy and hold - what if you bought Dr Pepper at $20 and held for 20 years?  Or bought Amex at $15 and held for 20 years?  Will Energizer become the next P&G (not yet IMO).  But this is the kind of discussion I was trying to develop on the site. 

 

I would think many on this board are passive investors and can't buy enough stock to make change.  So if I buy stock in Nathan's, I can't force management to allocate capital more efficiently (with all their cash).  Buffett in his day could. 

 

So maybe to focus the subject matter - does anyone have investment ideas using the more "traditional" or publicized Buffett approach?

 

 

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I think alot of people forget this. There are about 4 different Buffett's - I like to focus on the younger more broke Buffett because thats a bit closer to myself, though he was far richer then I at my age. Buying $10,000 of Coke and holding for 20 years, isnt going to make me much money.

 

I don't think it is as clear cut as that.

 

For example, you bought Coke in 1980 and sold in 2000 you'd have almost 4,343% return. More recently, buying AZO (838%) in 2000 or MCD (455% -- not counting dividends) in 2002/2003 would have been phenomenal investments. In pretty much all instances, there was a kind of paradigm shift in how the company was run to emphasize metrics like ROIC and shareholder value which paid off immensely to stockholders. In all of these instances because of the long holding period you would have benefited from lower taxes as well.

 

So there is a big difference between just buying and holding a stock, hoping to collect a dividend versus making a calculated investment based on a shift in how the company is being run. I feel like Buffett does the latter quite a bit, or at least with Coca-Cola.

 

So to me, if you can spot a company that is already cheap, high quality, and following a shift like some of the above mentioned businesses -- why not buy and hold for 20 years? I think in general, it is a good idea to study what's gone on at those companies so that hopefully in the future you can recognize the same pattern as it comes up in a different form.

 

For me, I try to invest in a variety of companies where the investment horizon varies. Some stuff I hold because of a catalyst that should unlock value in 6 months. Other stuff I could see holding for years.                                           

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Oh I have no problem with buy and hold. I hope to keep  3- 4 of my positions for years and when I buy back FFH will have owned it or its subs for 3 years except for the last 4 month.

 

My issue is with those who see Buffett buying giant large cap companies, and wanting to copy him thinking thats how he built his wealth. If you can find something growing, with a great ROIC, and at a decent price then by all means buy and hold. Its what I would do, and hope to do with something like LRE, FFH, Loews, and other stocks.

 

I just think people draw the wrong message. They read a book, see Buffett speak, then go buy Coke or Walmart and think they are done for the day. I think its a great move if you want 10% - 15%, but one has to realize its hard to build wealth when starting from a small base and only getting 10% a year.

 

If you have decades, or a decent sized base then those numbers should work out.

 

----

 

I think buy and hold vs churn and burn is a straw man. You buy at below IV, and sell when it becomes overvalued. Buffett has never regretted this and has publicly regretted buying and holding some issues. These days the IV reached from buying and holding for Buffett is that others will sell to him. So he has to buy and hold certain issues.

 

I hope LRE trades at BV for the next 20 years, then gets revalued to 1.5 to 2 BV allowing me to sell. I also hope they dont go down due to a large cat or mismanagement. If this happens with a yearly return of 20% I will be a happy man, and will likely add each year. If they hit 2x BV before, I will sell and hope to rebuy on a rainy day (it always rains at some point).

 

Buy cheap, sell dear. Whether its 2 days or 20 years. The skill is whats cheap and whats dear. One mans one night stand, is another mans wife. Its up to you to figure it out.

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Myth - I totally agree with what you are saying.  The trick is finding the next Walmarts and JNJ's.  That is why I mention something like an Energizer - could it be the next P&G at an early age?  Not yet, but I am watching.

 

Or buy JNJ real cheap and unload when fully priced.  But that isn't buy and hold.

 

Just trying to generate some Buffett conversation and more idea generation.  Personally, I am only holding one stock but always looking for ideas on companies I don't know about it (i.e. Power Corp of Canada is an interesting idea I learned from here).

 

 

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Great post Tariq - I agree - but what are your (and everyone's) ideas for the next AZO, CMG, etc...

 

 

I am really trying to focus on good companies, good businesses, competitive advantages, good management teams (as someone mentioned), room for growth, etc..... 

 

Stock ideas anyone that meet this list of criteria, regardless of price?

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I found it surprising that the majority of BRK's wealth was from a few investments. I think CM mentioned that in his recent presentation at the U of Michigan law school.

 

I have no such fat pitches that come to my mind at the moment but would love to hear from others, especially very long term investments that can return >1000%.

 

Good thread Bronco.

 

By the way Bronco, is L the only stock you currently own?

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Great post Tariq - I agree - but what are your (and everyone's) ideas for the next AZO, CMG, etc...

 

 

I am really trying to focus on good companies, good businesses, competitive advantages, good management teams (as someone mentioned), room for growth, etc..... 

 

Stock ideas anyone that meet this list of criteria, regardless of price?

 

I think the key is to identify companies that are in the best of their class and hope that something comes along which knocks the price down, at least temporarily.

 

Look at what happened to Fuchs Petrolub. They are the world's leading independent manufacturer of lubricants, they have a great operator in place -- third generation of the Fuchs family (they owned 25% of stock, were using buybacks as well). They are honest, capable, and incentivized to make sure shareholder value grows.

 

http://highway6.com/images/66462904591544e379e9ca1accb6611d.png

 

But during the crisis the stock cratered, falling below $30. Sales did drop temporarily, but the company was really misunderstood (they can actually pass on costs when prices rise) and at the time with low analyst coverage and people thought they were too exposed to the autos market (they aren't). The company was debt free and traded at something close to 5-6x normalized FCF.

 

The business had never had a loss in its 75 year history. But investors still panicked and the price tanked. Anyone who bought at the lows was richly rewarded, it closed above $80 today...

 

I would much rather buy companies like Fuchs when they hit their lows than go dumpster diving with net-nets where I might have to deal with dying business models and incompetent management teams.

 

So going forward I think the key is to just become very familiar with great businesses (large and small) and monitor the events there closely. Try to look for signs of potential margin expansion  or change that could improve the businesses as well.

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I much prefer to find a great company at a good price then a good company at a great price for two reasons:

 

-I don't have infinite amount of time to spend researching companies. So locking up capital in a great company saves me the reinvestment task.

-It saves me a lot of friction costs as well.

 

One the high quality stocks I own besides FFH and BRK, is RCH.TO. It tanked like all others in 2008 but great companies have a way of making money. It's operated by a very talented owner/manager, has no debt, ROE in the 15-20%. It's a great consolidator in a very fragmented market so the growing opportunities are vast.

 

No matter what the quality is, I won't ever pay more then 14 times earnings.

I'm currently keeping a close eye on MFC, this is getting close to my spot price. It would be nice to buy this one under TBV.

 

BeerBaron

 

 

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Biaggio - yes, L is it for me.  But that doesn't make me a genius, maybe on the contrary - fat, lazy or stupid.  But I hope I am right with L over time.

 

Tariq - I agree 100% - great points.  My only criticism of your post is how can one invest with someone named Fuchs.  Recipe for disaster?

 

Beerbaron - same comments as Tariq - I agree - finding great businesses first is the key - the right price just takes patience.  I will look at RCH, even though I am in the U.S. and somewhat ignorant to Canada's great companies (but learning).

 

 

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I think that EBIX has this sort of potential and is still at a "reasonable price". I have posted about it a few times here along with others. Price/ fair value is not as low as it was a couple of months ago, but the forward valuation is quite low. They are building an awesome moat, have high quality management, all business trends moving in the right direction, and they grew substantially during the recession. The CEO is actually a big fan of Warren Buffett and sometimes refers to his rationale in interviews.

 

If EBIX is not the main player in this sector (enterprise insurance software/ SAAS) in five years, it seems likely that someone else will be the major player because of the way that insurance exchanges work (network effect, etc.), and there is nobody else that is really even doing what EBIX is doing now.

 

 

 

 

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For me anyone of my holdings could be a long term holding. The trick is IV must grow faster then the share price appreciation (taking into account the tax hit), and has to appear sustainable.

 

I think this is more likely when companies feature owner managers and / or skilled capital allocators. This can also happen when the company is permanently cheap and Management buys back shares (similar to Ls) or fairly valued and the Management pays a consistent dividend.

 

I could see myself holding the names below for quite a while.

 

Seaspan Corporation SSW

Winthrop Realty Trust FUR

Lancashire Holdings LCSHF

Lowes Corporation L

Frontier Communication FTR

 

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"I'm currently keeping a close eye on MFC, this is getting close to my spot price. It would be nice to buy this one under TBV"

 

I had a look a few weeks ago. Though have not read in detail latest right downs, are you concerned with recurrent right downs recently + coming to market for more debt (though at low rates it might have been a bargain)?

 

I thought if market had a melt up this would be a good holding.

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For me anyone of my holdings could be a long term holding. The trick is IV must grow faster then the share price appreciation (taking into account the tax hit), and has to appear sustainable.

 

I think this is more likely when companies feature owner managers and / or skilled capital allocators. This can also happen when the company is permanently cheap and Management buys back shares (similar to Ls) or fairly valued and the Management pays a consistent dividend.

 

I could see myself holding the names below for quite a while.

 

Seaspan Corporation SSW

Winthrop Realty Trust FUR

Lancashire Holdings LCSHF

Lowes Corporation L

Frontier Communication FTR

 

 

Myth, if you would be so kind, what's your thesis on SSW and FTR in a paragraph or 2? 

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"I'm currently keeping a close eye on MFC, this is getting close to my spot price. It would be nice to buy this one under TBV"

 

I had a look a few weeks ago. Though have not read in detail latest right downs, are you concerned with recurrent right downs recently + coming to market for more debt (though at low rates it might have been a bargain)?

 

I thought if market had a melt up this would be a good holding.

 

Well, it's funny how everybody lets Buffet get away with S&P Puts and think he made a great deal but they shoot MFC for not buying those puts. Obviously if it's good deal for Buffett then it's a bad deal for the others. So by not taking buying any overprices hedges MFC might be doing the right thing. Whos cares if their earnings will be lumpy, what counts is the total return. MFC is a great franchise and it should not trade a Graham prices.

 

As for the debt, they can aford it at the current rates. Again, nobody complained about FFH preferred offering so why would we complain about MFC.

 

BeerBaron

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One the high quality stocks I own besides FFH and BRK, is RCH.TO. It tanked like all others in 2008 but great companies have a way of making money. It's operated by a very talented owner/manager, has no

 

 

What's the ownership for executives with RCH? I tried looking through Sedar, but didn't have much luck.

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One the high quality stocks I own besides FFH and BRK, is RCH.TO. It tanked like all others in 2008 but great companies have a way of making money. It's operated by a very talented owner/manager, has no

 

 

What's the ownership for executives with RCH? I tried looking through Sedar, but didn't have much luck.

 

Canadian Insider information is found on www.sedi.ca

Attached is a PDF of the shares ownership. I also remember seiing a presentation that shoed that 60% of RCH employees own shares.

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Well, it's funny how everybody lets Buffet get away with S&P Puts and think he made a great deal but they shoot MFC for not buying those puts. Obviously if it's good deal for Buffett then it's a bad deal for the others. So by not taking buying any overprices hedges MFC might be doing the right thing. Whos cares if their earnings will be lumpy, what counts is the total return. MFC is a great franchise and it should not trade a Graham prices.

 

As for the debt, they can aford it at the current rates. Again, nobody complained about FFH preferred offering so why would we complain about MFC.

 

BeerBaron

 

Sorry Beerbaron, I was thinking of the possible right downs  for their U.S. Long-Term Care Insurance (LTCI) market (I thought it was an announcement by the Co, but apparently an analysts opinion, I found it here just now -Manulife facing headwinds- at http://www.theglobeandmail.com/globe-investor/investment-ideas/features/eye-on-equities/manulife-facing-headwinds/article1741464/

I thought I had read something similar elsewhere as well but can t remember where I saw it)

 

In a previous thread MFC discussed, and I was asking if MFC could have a embedded/intrinsic value of $25/share...I would love to buy ~ current price but am worried about other right downs. At the same time I know that we won t get such a great price if there was nothing to worry about. May be a great buy if you're convinced that it is a good/great business.

 

I like your philosophy of buying great prices at good price.

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Myth, if you would be so kind, what's your thesis on SSW and FTR in a paragraph or 2? 

 

http://seekingalpha.com/article/229332-five-offbeat-ways-to-generate-10-yields?source=email

 

I was reading an article from the Fool which sums up FTR - 10% Idea #3 -- Rural Telecoms

Interest in telecoms is mostly confined to the major companies like AT&T (NYSE: T) and Verizon (NYSE: VZ), but I've found rich yields and a compelling story in a largely ignored part of the telecom sector -- rural landline phone companies. These quaint relics of an earlier age throw off huge cash flow and pay healthy dividends. Some, such as Frontier Communications (NYSE: FTR), have yielded up to 14% at some points this year (the yield is now around 9%).

 

The rural areas these companies serve are too small to interest the big cable and wireless companies. As a result, there is little price competition. You might expect their revenue to be shrinking, but that's not the case. The reason is broadband Internet service. Yes, customers are shedding landlines in favor of cellular service, but they are also signing up for broadband. For most of these companies, broadband is only a tiny fraction of their revenue base, so there are still plenty of growth opportunities to continue powering yields.

 

-----

 

Verizon sold some rural lines to FTR in a company changing move. There is a good thread on the board with good background info in it. They also have a few good analyst presentations on the website. http://cornerofberkshireandfairfax.ca/forum/index.php?topic=2886.0

 

Basically they generate 20% FCF after growth capex. They have alot of debt, but currently all excess cash flow is going to owners and to repay debt. You get 10% while you wait and the debt is reduced by 10% which you should get back in deleveraging appreciation. Management seems sharp, but I have only known them for 1 quarter, (they said all the right things during the GS presentations).

 

If they deliver synergies and broadband covers the disconnections then we should get 20% a year. I am hoping this is the baseline.

 

If they bring the legacy lines from Verizon up to their metrics which are much better then we get even more. If it fails, then ......  I could see myself owning for a while if they grow the div and the performance holds up.

 

----------------

 

SSW was posted by JEast who has made me quite a bit of money (not alot for you guys but a decent percentage return) in this and a few other ideas. Its best to look at it like a floating REIT. The ships are long lived assets and they have basically removed risk from the business (outside of operating risks). Everything is hedged or fixed and the contracts are long in nature with the charters. The fleet is growing and the business model has been stress tested in 2008. If things go right they will -- Seaspan should generate at least $2 of CF in 2011. When all ships are delivered they will generate $300 million in distributable cash flow. SSW can be purchased for $740 million (a bit dated, I think its closer to $1 billion now), but will have some dilution. At a 7.5% - 10% FCF yield we get a stock price of $20-$25 vs. $10 today.

 

If things go wrong and the world falls apart then of course. We loose.

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Re MFC:

 

Most people would look at the quarter/quarter change in the S&P500,TOPIX,TSX, & the US 10yr treasury. Multiply the deltas by the sensitivities quoted in the last MD&A, & you get a nice surprize.

 

Assume the LTCI loss is around the 900M expected, which just happens to be the MTM proceeds. If 1B+ in MTM suddenly showed up?, or the loss was actually lower than expected?, what might you expect to occurr?

 

SD

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