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What Would This Board Do


bmichaud
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I am looking at two companies right and am wondering how the board would approach this.

 

Company 1 is selling at 50% of net-net, and company 2 is selling at 76% of intrinsic value, has a 7.5% growth rate, and has a dividend/buyback yield of 4.9%.

 

Company 2 is clearly a stronger company but it is not the proverbial 50 cent dollar.

 

Does BPL-Buffett go for Company 1 and BRK-Buffett go for Company 2? What would board members go with?

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well for me i would go prob go with #1 assuming this net net is not burning cash and doesn't seem likely there will be any reason that it might start burning lots of cash soon. And assume there is enough trading volume. And assuming the management is not known for pissing away cash. And especially if there is some potential catalyst.

 

#2 sounds like a lot of large cap right now

 

:)

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The longer it takes for the net-net to reach full value, the greater the advantage to the better company. If it takes three years for both to reach full value, the net-net has a 26% IRR and the good co has a 22% IRR. At four yrs, the IRRs are 18.9% and 19.5%, respectively.

 

So without a catalyst, isn't the better co a better pick, and even more so considering you could allocate probably 3 times the amount to the good co (let's say 15%) as to the bad co (let's say 5%).

 

Just trying to reconcile the Buffett style of old with Buffett's current style. I am starting to believe there is not a huge difference, and that Buffett switching from cigar butts to great companies was not BECAUSE of using a greater amount of capital, but rather coincidental with using a greater amount of capital.

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Guest Bronco

I'll take the bait and just buy #2. 

 

"Clearly #2 is the stronger company".  That's it for me.  This isn't an I'm right, you're wrong thing - but that is what I would do. 

 

Most likely the net-net is a shit-shit.  Meaning unless I buy a Berkowitz style stake in the company, I may be net-net for a long time. 

 

Please keep in mind that I prefer stronger businesses in general and I am not as smart as others that can see the turnarounds before they happen.

 

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Bronco, I like your thinking. I think there is a place in a portfolio for small net-net positions like that, but I much prefer (and very much do) to load up on a wonderful company.

 

Take Radio Shack for example - it's been discussed recently, and just today it's up pretty big on takeout rumors, and something tells me it will at a decent amount above the current price - I just don't feel comfortable loading up on that, so I stick it in the 1% of capital LEAPS bucket.

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Guest Bronco

Clearly a risk / reward thing and maybe the net-net will produce bigger income but it also requires more work, intelligence, time and effort.  As someone that is fat, lazy and stupid - give me door #2.

 

 

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I would go with the best business because I try to only invest in quality businesses (if the companies that I invest in then go buy some deep value stuff, that's fine because they are better investors than I am). I only buy stuff I wouldn't mind owning for 10 years or more.

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