Munger Posted March 6, 2011 Author Share Posted March 6, 2011 "No prob. I believe the original poster has held greater than 75% cash since early 2010." "I dont think top companies like Coke or Kraft will ever hit 5x Future Cash Flow. Based on your prior posts it appears that that is what you are waiting for." These statements are not true. Always difficult to understand why someone would choose to lie about another person. Link to comment Share on other sites More sharing options...
Myth465 Posted March 6, 2011 Share Posted March 6, 2011 .... I see your point and you see mine. We will just have to agree to disagree, but thats what makes a market. Happy investing. "No prob. I believe the original poster has held greater than 75% cash since early 2010." "I dont think top companies like Coke or Kraft will ever hit 5x Future Cash Flow. Based on your prior posts it appears that that is what you are waiting for." These statements are not true. Always difficult to understand why someone would choose to lie about another person. http://cornerofberkshireandfairfax.ca/forum/index.php?topic=2856.0 I think the articles premise is correct and there is nothing I disagree with. But you are anchored to your position, thus no one will be able to convince you otherwise, facts be damned. How could I be anchored in my opinion if you agree with the analysis/facts? And if Coca Cola trades (or a company the equivalent) trades down to 5x earnings, I will be buying hand over fist. As will I. Enjoy the wait though. I would like to hear an investment idea from Munger. Its obvious he is very intelligent and has soaked up a ton of information but how does all that make him a better investor. It doesn't even have to be something that is available today it can be a hypothetical scenario within a reasonable range of today's market. But saying "I will buy KO @ 5x FCF" is a complete pipe dream as if everything plays out in the fashion Munger proposes KO will have a lot of shitty quarters and so the 5X he will be attributing will have to be for past cash flows which he will be unsure if they will ever return. So again this is not a practical investment thesis. A selection of prior topics discussed by the Original Poster. Hussman slams QE2 All the negative news Reconciling the two Buffetts... The Fed is Completely Insane Prem and the not so cheery outlook Re: Buffett on Inflation and Stocks (Part 1) Charlie Munger on US Economy: Pain Not Over ---- I am not that bright, but I see a theme. Anyway I have said my piece and probably a bit more. As I said prior the market is probably a bit ahead of itself and one of these days you will be less wrong and more right. Also you were right, I stand corrected. It looks like your cash was around 50% and you said earnings not cash flow. Congrats, I never had the best of memories. :) Link to comment Share on other sites More sharing options...
bmichaud Posted March 6, 2011 Share Posted March 6, 2011 "I see your point and you see mine. We will just have to agree to disagree, but thats what makes a market. Happy investing." Agreed. Best of luck! Link to comment Share on other sites More sharing options...
Munger Posted March 6, 2011 Author Share Posted March 6, 2011 "No prob. I believe the original poster has held greater than 75% cash since early 2010." "I dont think top companies like Coke or Kraft will ever hit 5x Future Cash Flow. Based on your prior posts it appears that that is what you are waiting for." I repeat -- these statements are not true. Always difficult to understand why someone would choose to lie about another person. I stand by all of my previous statements, including those in the link provided by Myth. And I firmly stand by the comment that I would buy Coke hand over fist at 5x earnings. Never did I say that I'm waiting for Coke to trade at 5x earnings. And importantly, if Coke ever traded down to 5x earnings, I would have the cash to buy (and Buffett would as well). The common theme in my posts has been the need to demand a wide margin of safety for many of the reasons cited by Klarman. It is up to each individual to determine how wide that margin of safety should be for their investment approach. I am very happy with my results. Myth -- I'm rooting for you...honestly hope you make a lot of money investing. Link to comment Share on other sites More sharing options...
merkhet Posted March 6, 2011 Share Posted March 6, 2011 I must be misunderstanding this discussion, because I'm a little confused. The OP linked to a Seth Klarman article stating that (paraphrased here) given the surfeit of risk currently in the system, it would be prudent to require a large margin of safety. (If I remember correctly, Seth has very recently stated that he's more worried now than he has ever been in his entire career.) Seth's statements don't necessarily mean that there are no cheap investments around. You can find value in such companies as JNJ and WMT if you're shopping in Seth's weight class or various other companies as well. I believe what Seth is saying is that if you previously demanded a 40% discount to intrinsic value, it may be prudent for you to demand a 50% discount to intrinsic value for the current environment. (i.e. increase your baseline for your margin of safety) What's wrong with that? Link to comment Share on other sites More sharing options...
Myth465 Posted March 7, 2011 Share Posted March 7, 2011 Myth -- I'm rooting for you...honestly hope you make a lot of money investing. Actually thanks for the post. I think I will take your and Prems warnings and plan to begin selling a few things on Monday. I hope to pay off all and any outstanding short term debts I may have, cover my March ATSG call options, and have 10% - 20% cash left over. Its tough selling things you really like, but I think I will sleep much better and will be better positioned for whatever the market throws up. I think Pabrai had the best ideas on MOS in relation to cash - to me this makes much more since then holding cash based on the market value. I would like to hold cash in the following percentages / market conditions - 0%-2% (Market Undervalued), 5-10% (Market Fairly Valued), 10-20% ( Market Overvalued). When cash falls below 10% investment ideas need to have 3x upside. For cash to fall below 5% investments should have 4x to 5x upside. Anyway thanks again. Link to comment Share on other sites More sharing options...
Rabbitisrich Posted March 7, 2011 Share Posted March 7, 2011 IMO, if I purchase an asset that does not generate cash flow, then in order to generate a return on my investment, I am relying on the price action of the asset. Whether that price action is dependent on fear (i.e. gold), demand for RE development (land), or industrial output (oil), I consider depending on the price action of the asset to be speculation. There are obviously varying degrees of intelligent speculation - I would much rather speculate by purchasing a barrel of oil versus an ounce of gold b/c the demand for oil (industrial use) is far more tangible than the demand for gold (fear). But the fact of the matter is that both are considered speculation. I find that definition of speculation to be too broad for my purposes. It equates bets based upon greater fools to bets on rational incentives. Someone playing the greater fool angle is relying upon an actor who, in turn, relies upon an even greater fool. A land developer, on the other hand, counts upon rational business incentives that should be realizable in a stable market. During the period in which both actors are holding the asset, they seem superficially indistinguishable, but time will differentiate them. If you analyze their returns, you should see differing factors, where the greater fool benefits from momentum, and the land developer benefits from expected cash flows. Link to comment Share on other sites More sharing options...
alertmeipp Posted March 7, 2011 Share Posted March 7, 2011 guys, for a defensive play, is FFH better or Cash better? Link to comment Share on other sites More sharing options...
Myth465 Posted March 7, 2011 Share Posted March 7, 2011 guys, for a defensive play, is FFH better or Cash better? Depends on your goal. Both will let you sleep easy. I think FFH will decline with the market, even though its IV will be going higher. I would prefer cash because it would allow me to buy FFH and other securities at a deep discount. FFH is well protected though and would also be able to buyback or buy other assets at a deep discount. Link to comment Share on other sites More sharing options...
Hawks Posted March 7, 2011 Share Posted March 7, 2011 I am somewhat surprised re some of the posts here which seem to be suggesting it is time to be a little more defensive (at least that is my interpretation). Even Myth said he might take some off the table. It is almost like a turnaround in thinking may (or may not) be occurring on this Board compared to only 7-10 days ago. I normally don't post much at all (prefer to be like a sponge and take in all the insightful info that members post here). But last week under the post "Too much risk, lessons not learned", I commented that I had decided to go to a mostly cash position. Some replies to that decision were: "overly dramatic", "fighting the last war", "aren't investing", "return on cash is low". You know what? After reading a number of the postings here "Re: Seth Klarman", maybe I wasn't too far off base after all (or at least I felt a little more comfortable). Could be dead wrong, but interesting how thinking ebbs and flows. And also, really depends upon each person's circumstances and objectives. Mine may be very different from those who were somewhat skeptical of my decision. And that's ok with me. Because everyone here has to sort it out for themselves and feel comfortable with all that. What a great Board this is. Link to comment Share on other sites More sharing options...
twacowfca Posted March 7, 2011 Share Posted March 7, 2011 "No prob. I believe the original poster has held greater than 75% cash since early 2010." "I dont think top companies like Coke or Kraft will ever hit 5x Future Cash Flow. Based on your prior posts it appears that that is what you are waiting for." I repeat -- these statements are not true. Always difficult to understand why someone would choose to lie about another person. I stand by all of my previous statements, including those in the link provided by Myth. And I firmly stand by the comment that I would buy Coke hand over fist at 5x earnings. Never did I say that I'm waiting for Coke to trade at 5x earnings. And importantly, if Coke ever traded down to 5x earnings, I would have the cash to buy (and Buffett would as well). The common theme in my posts has been the need to demand a wide margin of safety for many of the reasons cited by Klarman. It is up to each individual to determine how wide that margin of safety should be for their investment approach. I am very happy with my results. Myth -- I'm rooting for you...honestly hope you make a lot of money investing. I think "lying" means or implies intentional misstatement. Link to comment Share on other sites More sharing options...
S2S Posted March 7, 2011 Share Posted March 7, 2011 I find that definition of speculation to be too broad for my purposes. It equates bets based upon greater fools to bets on rational incentives. Someone playing the greater fool angle is relying upon an actor who, in turn, relies upon an even greater fool. A land developer, on the other hand, counts upon rational business incentives that should be realizable in a stable market. During the period in which both actors are holding the asset, they seem superficially indistinguishable, but time will differentiate them. If you analyze their returns, you should see differing factors, where the greater fool benefits from momentum, and the land developer benefits from expected cash flows. Yes. A "value investor" would be naive to assume he's the only party that cares to assess the economic value of the asset in question. More often than not, the buyer / E&P company / land developer has modeled future cash flows extensively. Then again, NAV estimates are only as good as the underlying assumptions, among which price of the underlying commodity is of chief importance. Someone had equated buying shares in commodity producers to making a macro bet - I agree with that as well. Link to comment Share on other sites More sharing options...
bmichaud Posted March 7, 2011 Share Posted March 7, 2011 "I find that definition of speculation to be too broad for my purposes. It equates bets based upon greater fools to bets on rational incentives. Someone playing the greater fool angle is relying upon an actor who, in turn, relies upon an even greater fool. A land developer, on the other hand, counts upon rational business incentives that should be realizable in a stable market. During the period in which both actors are holding the asset, they seem superficially indistinguishable, but time will differentiate them. If you analyze their returns, you should see differing factors, where the greater fool benefits from momentum, and the land developer benefits from expected cash flows." I would agree with that. Though I think my main point is to convey the difference between investing $1b into a piece of land and never selling it versus buying $1b worth of KO stock and never selling it. One throws off cash and the other does not; so in order to generate a return on the non-cash generating asset, you MUST rely on the price action. And like I said, there are varying degrees of intelligent investing/speculation. However you want to define it, solely relying on the price action of an asset is more speculative than relying on cash flows. Link to comment Share on other sites More sharing options...
bmichaud Posted March 7, 2011 Share Posted March 7, 2011 "Yes. A "value investor" would be naive to assume he's the only party that cares to assess the economic value of the asset in question." Yes the other party is thoroughly analyzing the FCFs of the asset, but think about what XOM and CVX are paying for these nat gas properties - there has to be an element of desperation to replace reserves bc the prices they are paying do not make sense based on the underlying cash flows. So CHK and SD look good on implied NAV based on recent JV transactions, but without a sound basis for those transactions (I.e. Rational cash flow assumptions), an investment based on implied NAV is highly speculative (at least in my mind). Link to comment Share on other sites More sharing options...
Myth465 Posted March 7, 2011 Share Posted March 7, 2011 "Yes. A "value investor" would be naive to assume he's the only party that cares to assess the economic value of the asset in question." Yes the other party is thoroughly analyzing the FCFs of the asset, but think about what XOM and CVX are paying for these nat gas properties - there has to be an element of desperation to replace reserves bc the prices they are paying do not make sense based on the underlying cash flows. So CHK and SD look good on implied NAV based on recent JV transactions, but without a sound basis for those transactions (I.e. Rational cash flow assumptions), an investment based on implied NAV is highly speculative (at least in my mind). LOL. You underestimate XOM, They are only the largest company in the world (definitely within the top 5), but what do they know. Lets just put $4 in the price column and take that out into when the reserves run out. Also CHK converted their gas to cash, not JV but cash. But ya anyone paying more than $4 gas is speculating ;D. If I bought XTO I would be overpaying. XOM can create new gas markets. they are the 10,000 pound gorilla and they are in it for the long haul not 1 - 2 years. Its not for me, but I dont have Congressmen and Senators on the payroll lol. With that said I agree with Rabbitisrich. There is a bit of naiveness and inmo arrogance here. To me its much better to say I dont get something, or I cant see the value, or its in the too hard pile then to assume the whole world is speculating (unless of course the whole world is speculating :)). Link to comment Share on other sites More sharing options...
bmichaud Posted March 7, 2011 Share Posted March 7, 2011 Again, never said XOM and CVX are speculating. I said it is speculation to invest in CHK assuming the oil majors continue to pay the prices they have been paying. I love XOM - they just have the ability to sit on low NG prices for a long while. In my mind the majors are over paying for NG properties when they could go acquire all of CHK at a price well below the JV transaction-implied NAV. XOM could buy CHK at a 30% premium to today's prices and still acquire it for less than the JV-implied value is. This debate has spiraled IMO. I was merely trying to define speculation as buying an asset that requires someone paying a higher price for in order to obtain a return on that investment versus something that throws off cash flow. Simple as that. And like we concluded before, we can agree to disagree. Link to comment Share on other sites More sharing options...
merkhet Posted March 8, 2011 Share Posted March 8, 2011 But last week under the post "Too much risk, lessons not learned", I commented that I had decided to go to a mostly cash position. Some replies to that decision were: "overly dramatic", "fighting the last war", "aren't investing", "return on cash is low". I think that might have been a knee-jerk reaction to seeing you write 98% to 99% cash. I didn't comment on that thread, but I think the sense was that you were trying to top-tick the market -- which is not to say that was your actual intent. FWIW, I'm currently about 66% in cash and likely on my way to 85% in cash, but that's largely a function of the fact that I was 10% in cash up until a few weeks ago when many of my positions started hitting their fair value marks. Since I've been expanding my margin of safety requirement to 50% from 40% (to compensate for increased risk), I'm not seing a lot of value out there, so my portfolio will likely remain cash heavy for the immediate future. Link to comment Share on other sites More sharing options...
ERICOPOLY Posted March 8, 2011 Share Posted March 8, 2011 And I firmly stand by the comment that I would buy Coke hand over fist at 5x earnings. Never did I say that I'm waiting for Coke to trade at 5x earnings. And importantly, if Coke ever traded down to 5x earnings, I would have the cash to buy (and Buffett would as well). Buffett originally paid about 14x when he made his famous $1b investment: http://www.fwallstreet.com/article/24-buffett-coca-cola-1988-now-i-get-it If KO gets to 5x it will either be because they'll be facing a class action lawsuit for knowingly poisoning people (and I wouldn't want to take Coke's side in that one), or it will be a general market panic and other companies will be perhaps selling for 1x or less. Link to comment Share on other sites More sharing options...
mpauls Posted March 10, 2011 Share Posted March 10, 2011 Look, just buy companies like Emergent Group (back in early December), and move on with life. Link to comment Share on other sites More sharing options...
Myth465 Posted March 10, 2011 Share Posted March 10, 2011 Thanks again for the warning. Just wise I sold a bit more lol. Link to comment Share on other sites More sharing options...
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