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There is an interesting new book coming out next month called:

"The Warren Buffetts Next Door:

The World's Greatest Investors You've Never Heard Of and What You Can Learn From Them"

 

by Matthew Schifrin

Publisher: Wiley (November 9, 2010)

 

The Warren Buffetts Next Door - Amazon.com

http://www.amazon.com/Warren-Buffetts-Next-Door-Investors/dp/0470573783

 

The Warren Buffetts Next Door - Wiley.com

http://www.wiley.com/WileyCDA/WileyTitle/productCd-0470573783.html

 

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

 

 

Marketocracy Masters the "Warren Buffetts Next Door"

http://marketocracy.com/mds/wbnd.html

 

Mike Koza - Profile @ Marketocracy.com

10 years - Average Annual Return 30.2%

vs S&P 500 Return 0.8%

http://marketocracy.com/mds/wbnd_mike_koza.html

http://m100.marketocracy.com/mkoza_TGF/1performance/index.html

 

Jack Weyland - Profile @ Marketocracy.com

8 years - Average Annual Return 32.7%

vs S&P 500 Return 5.8%

http://marketocracy.com/mds/wbnd_jack_weyland.html

http://m100.marketocracy.com/jackweyland_VALUE/0overview/

 

Christopher Reese - Profile @ Marketocracy.com

10 years - Average Annual Return 23.6%

vs S&P 500 Return  0.2%

http://marketocracy.com/mds/wbnd_christopher_rees.html

http://m100.marketocracy.com/crees_10STX/1performance/

 

Chris Reese... Homepage - tenstocks.com

http://www.tenstocks.com/

http://covestor.com/ten-stocks/tenstocks

http://twitter.com/Tenstocksdotcom

 

 

 

 

 

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"Tap Your Inner Buffett" is a Forbes Magazine article about this new book.

 

Cheers!

 

The Forbes 400

Tap Your Inner Buffett

Matthew Schifrin, 09.24.10, 02:40 PM EDT

Forbes Magazine dated October 11, 2010

Years of digital innovation means you don't need an M.B.A. or hedge fund job to become a superstar investor.

 

http://www.forbes.com/forbes/2010/1011/rich-list-10-investing-digital-innovation-tap-inner-warren-buffett.html

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Have you guys looked at the portfolio turnovers (greater than 100% per year in 2 case) and the macro bets these guys have been making.  At some point these guys might just blow themselves up.  Another sidenote is the Meritocracy mutual fund that has these guys ideas in it is traling the market over the past 10 years.  Only some observations.  I would place some of the investors on this board way ahead of these guys.

 

Packer

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I enjoyed the free preview chapter: Vagabond value. The story of this investor is wild. I've attached it here.

 

 

 

 

Very interesting!  I have an important question for board members.  The (ex)vagabond uses a very simple method for estimating intrinsic value.  First, he determines what the no BS tangible BV/SH is.  This isn't exactly liquidation value with no worth given to the business, but close.  Then, he looks at historical earnings and normalizes them going forward to get annual normalized earnings with no speculative allowance for growth beyond what he can reasonably estimate for a few years as with a cyclical company.  Then, he capitalizes these normalized earnings at a conservative rate of, say,  ten times.  Finally, he adds the capitalized earnings to the tangible BV and presto! there's the IV.  

 

My question to board members is this:  is this good enough for getting a rough idea of IV?  

It seems to me that he should assign no value to the BV because he's mixing a DCF method of computing IV with a balance sheet method.  (although it still would be nice to have substantial tangible BV in case the business goes south or to make a more attractive acquisition).

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I enjoyed the free preview chapter: Vagabond value. The story of this investor is wild. I've attached it here.

 

 

 

 

Very interesting!  I have an important question for board members.  The (ex)vagabond uses a very simple method for estimating intrinsic value.  First, he determines what the no BS tangible BV/SH is.  This isn't exactly liquidation value with no worth given to the business, but close.  Then, he looks at historical earnings and normalizes them going forward about five years to get annual normalized earnings.  Then, he capitalizes these normalized earnings at a conservative rate of, say,  ten times.  Finally, he adds the capitalized earnings to the tangible BV and presto! there's the IV.  

 

My question to board members is this:  is this good enough for getting a rough idea of IV? 

It seems to me that he should assign no value to the BV because he's mixing a DCF method of computing IV with a balance sheet method.  (although it still would be nice to have some tangible BV in case the business goes south or to make a more attractive acquisition).

  I agree it is double counting, unless part of the TBV is not needed to run the business like say excess cash.
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I do exactly that based on Pabrais book. 10x earnings for a no growth business gives a 10% return to an owner which is an adequate return.

 

I dont take out BV, I add cash and depending on the situation may subtract debt. If the business is growing I will give it an 11, 12, 13, 14, up to 15x multiple depending on the growth.

 

I work with debt depending on the assets. If they are long lived with a strong business model then I ignore the debt (ATSG, SSW, basically REITs). If the debt can be paid off in 1 year worth of CF, I ignore it. If the debt is severe and basically is a significant part of the capital structure then I will subtract it or use a lower multiple (maybe 6-8). Very easy and works well. 10x FCF is fair value, I buy at 5X or so. Or 7x if its growing.

 

You are right though he is double counted. You either use earnings power or asset values, I dont think you can do both.

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It is double counting no doubt but I think we might be missing the context in which he is adding up the asset value and earning power value. Look at the example,

 

Here ’ s a basic explanation of how Rees determines value. Say

Rees fi nds a company with low debt and fi gures out that its tangible

asset value is $ 5 per share. If his estimate for forward earnings per

share was $0.10 he might apply a price - earnings multiple of 10 to

that. That would amount to $ 1 of future earnings value, so Chris

would simply add the two to get a $ 6 estimated fair value for the

stock. He would then seek to purchase it at a 50 percent discount

to that value, or $ 3. If the stock price was too high, he would simply

move on to the next candidate.

 

The earnings are 2% on the business tangible value. So he is estimating what the tangible value would be like a few years out and seeking to purchase at a discount to its eventual tangible value. If you think of it it is no different than removing any expected losses from the tangible value to arrive at an expected tangible value a little further out in the future. It would have made more sense if he is projecting the asset value say over 2-3 years rather than projecting out for 10 years (which is more like capitalizing earnings).

 

Vinod

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Just food for thought - is it double counting if in today's terms I have both the assets and the NPV of future earnings. 

 

The NPV of future earnings will include write-downs to certain assets - P,P&E for one. 

 

If I have cash of $1B and a yacht I rent for $100M per year (net of expenses), the IV of the company IMO is the $1B + the NPV of the $100M annual stream. 

 

I believe each situation needs to be reviewed individually, but I tend to value the IV of a company based on excess working capital + NPV of future earnings.  However, I think each situation needs to be reviewed differently.

 

For example, a movie theater may produce breakeven results, but if I can buy it for $10m and build a hotel on it, who knows?

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After reading the full report, I stand corrected:

Says Rees, “ I generally assign an estimated fair value on a company

based on the value of net tangible assets plus a ten multiple

on estimated forward run rate earnings. ”

 

This is nuts!

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Just food for thought - is it double counting if in today's terms I have both the assets and the NPV of future earnings. 

 

The NPV of future earnings will include write-downs to certain assets - P,P&E for one. 

 

If I have cash of $1B and a yacht I rent for $100M per year (net of expenses), the IV of the company IMO is the $1B + the NPV of the $100M annual stream. 

 

I believe each situation needs to be reviewed individually, but I tend to value the IV of a company based on excess working capital + NPV of future earnings.  However, I think each situation needs to be reviewed differently.

 

For example, a movie theater may produce breakeven results, but if I can buy it for $10m and build a hotel on it, who knows?

 

Yes. It is double counting.

 

Take another example, if you have a $1000 in your bank account that is paying 5% interest. Do you capitalize the interest and add back to your principle to get the total value?

 

Vinod

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Vinod - I'll admit, you lost me.

 

Are you suggesting my $1000 in the bank is only worth the NPV of the interest stream? (Don't answer, we know it is worth $1000).

 

You pick in your example the income and the asset generating the income as the only considerations.

 

I specifically stated in my comments and my example two assets - one cash and the other an income generating asset.  The cash in my example represents what I termed excess capital.

 

So if you were buying a business (corporation) with no liabilities and $1 B in cash and a yacht generating $100m per year in income, you would only pay the NPV of the income?  Of course, no one would sell to you.  I am suggesting the business is either worth $1B + the FMV of the yacht or $1B + the NPV of the earnings stream. 

 

To my stock pick of Loews in another thread - you must IMO value the businesses and add in the excess captial, which is easily identified as $3B or so in net cash.  If the company had $10B or $0B in net cash at the parent company, would you value the business the same?  Please lets hope not.

 

 

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Bronco

 

Sorry. I agree completely with you w.r.t the examples. What I was commenting on is your statement "is it double counting if in today's terms I have both the assets and the NPV of future earnings." I made the assumption that the future earnings are being produced by the same assets. In your examples that is not the case. The investor referred to in the article seem to be adding up both the asset and furture earnings from the same asset.

 

Vinod

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Vinod - I am guilty of writing/typing sloppily and too fast - no problem.

 

One of my favorite investment strategies is to look for the unrecognized / unrewarded assets (excess capital).

 

I think Apple is a safe bet in this regards b/c unless Jobs dies or gets sick, this company will have $100B in cash in a couple years.  What will the company be worth with $100B in cash and $20B in annual cash flows.

 

Outside of banks/financials/GE/etc...I wonder what the highest balance of cash has been for any US company?  Apple to challenge this?

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"One of my favorite investment strategies is to look for the unrecognized / unrewarded assets (excess capital)"

 

I very much like that as well. I find that excess cash is the best unrecognized asset to look at. I have not had much luck so far looking at unrecognized real estate value for instance.

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Unfortunately for us shleps, sometimes the unrecognized values may not get recognized unless some strong hands enter the picture.  Ackman and Lampert for example.

 

Buffett (in Lowenstein's book) buying the company trading less for the value of railroad certificates or bonds (I can't remember).

 

Loews is an example to me of a company that doesn't get recognized for its excess cash.  I believe before Highmount they had $6B and the valuations just got ridiculous.

 

Nathans is a stock with a ton of cash but like Microsoft (using Myths comments) - the allocation of it leaves something to be desired.

 

 

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Never mind excess cash.  I am still puzzling over the example provided in the document on Mr. Rees style.  What I am getting is that he determines intrinsic value to be between $10 and 16 for the example company.  He pays 6.50 or so. 

 

So, he determines the value he pays by taking the tangible book, adding projected normalized earnings for 10 years, and then he turns around and pays tangible book for the stock.  Seems a little perverse to me.  I am missing something or the example is really poor.

 

|Interesting person though.

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