Jump to content

Recommended Posts

Posted

This thread has really made me think.  It makes some very good points and has really changed some of my ideas about investing.  Just as an example, I recently found a couple stocks that I am positive are 8 or 9 baggers, but I've throw them back.  They're guppies!  I only focus on stocks that are AT LEAST 10 baggers now.  If my money won't increase 10x, I don't want to hear about it.  I want to be a super investor too, after all.  I just cleaned out my office and threw away anything dealing with Ben Graham (the real one, not the board guru), Schloss, Cundill, Brandes and Donald Smith.  They are worthless.  I mean, come on, they find things that have perhaps 50-100% potential upside.  Guys, get out of the sandbox, we only deal with 10 baggers.

 

Ben, I wonder why you bother replying to him while he obviously was not interested in a well-intended discussion. Parsad should close this one. Waste of time.

Posted

Baoxiaodao,

 

I second the thread should be closed.  Many, many holdings have the potential to increase 10x over a great enough time period. Some great investors hold ten baggers because they have a lot of money to invest and it is often hard to find better investments than the ones they already hold. Great investors do sell their long term holdings when more attractive offerings become available. Ex. Cundill selling much of their Berkshire holdings over the summer because he saw better opportunities...

 

Ben,

 

I understand that you like Level 3, but I think it is pretty safe to say that you are married to the company. The stock was selling for over $100 back in 2000 and hasn't gone up since its spectacular fall in 2002. The real Ben Graham said in the short term the market is a voting machine and over the long term is a weighing machine. The market, over the past 11 years, seems pretty certain that Level 3 is is worth much less than $100 or even the $20 dollars (10 bagger from today) it fell through in  2001. I agree with you that their assets are worth a lot of money but they cannot seem to make money off their assets and continue to head further and further into debt. How much is their network worth in liquidation? Right now it needs to be worth at least 10 billion to pay back their stock holders and debtors. Reading the LVLT thread it seems their network is priceless, but no one will pay for it and they cannot get enough people to use it to make any money. Right now you are speculating HD content over the web is going to save LVLT. One day the lines will be filled but I don't know if it will be LVLT that holds the rights any longer. The market seems to be pricing LVLT as very speculative because the company holding a priceless asset is only worth 3 billion...

Posted

 

This thread started out as an offline discussion with BenGraham.

 

In the exchange, I mentioned that I took Warren's suggestion to "invest as though you're working from a 20 punch card" very seriously

 

Of course, hardly anyone does this.

 

In itself, that's interesting. The greatest investor in history tells the world, over and over, that the secret to success is 20 punches, and the world ignores him. Absolutely ignores him. Even his most ardent supporters ignore that part of the catechism.

 

If your approach is based on 20 punches, then you'll naturally look for ideas that have the potential for quite a bit of growth, thus the thread on 10 baggers.

 

It appears that some of the more indignant posters are unfamiliar with the charms of 10, 20, 30 and 100 baggers.

 

 

 

 

 

Posted

 

This thread started out as an offline discussion with BenGraham.

 

In the exchange, I mentioned that I took Warren's suggestion to "invest as though you're working from a 20 punch card" very seriously

 

Of course, hardly anyone does this.

 

In itself, that's interesting. The greatest investor in history tells the world, over and over, that the secret to success is 20 punches, and the world ignores him. Absolutely ignores him. Even his most ardent supporters ignore that part of the catechism.

 

If your approach is based on 20 punches, then you'll naturally look for ideas that have the potential for quite a bit of growth, thus the thread on 10 baggers.

 

It appears that some of the more indignant posters are unfamiliar with the charms of 10, 20, 30 and 100 baggers.

 

My guess is that most investors on this board enjoy the process of managing money either professionally or individually. If this is in fact the case (as it is with myself), then we can agree that the essence of what makes managing money so rewarding is the challenge of not only finding attractive securities but also fighting natural human emotion associated with investing (Buffett is 80 years old and still quotes Ben Graham's axioms for fighting Mr. Market). I find Buffett's "20-punch card" a very unfulfilling way to invest if one finds the process to be the most rewarding part of the investment process. I don't need to own 50 companies BY ANY MEANS in order to have my competitive desire to find undervalued securities fulfilled, but sitting back and finding ONE new idea every two or three years throughout a 50-year investment lifetime, at least in my opinion, sounds very unrewarding. And of course this assumes what you are investing in is in fact that elusive 10-bagger.

 

Perhaps others here have the confidence in themselves to put their entire net worth in a single entity that will return 10 times their money over ten years for a 26% CAGR - I certaintly do not....I would rather try to put together a portfolio of 10 to 15 securities/special situations that will compound at 20 to 30% per annum, much like our beloved Warren Buffett did back in his BPL days.

 

If Buffett truly stuck to his 20-punch card theme, he would not trade in and out of his personal portfolio, and he would put BRK's entire equity portfolio into Coke, WFC, and WMT.

 

LVLT may in fact return 10 times from here over the next ten years - and while I love the enthusiasm surrounding the potential for all digital content ever created in the world to be streamed over LVLT's "fat pipes", I would posit that LVLT would not, UNDER ANY CIRCUMSTANCES, comprise the entire portfolio for any of the Super Investors mentioned on this thread that currently hold it.

Posted

 

This thread started out as an offline discussion with BenGraham.

 

In the exchange, I mentioned that I took Warren's suggestion to "invest as though you're working from a 20 punch card" very seriously

 

Of course, hardly anyone does this.

 

In itself, that's interesting. The greatest investor in history tells the world, over and over, that the secret to success is 20 punches, and the world ignores him. Absolutely ignores him. Even his most ardent supporters ignore that part of the catechism.

 

If your approach is based on 20 punches, then you'll naturally look for ideas that have the potential for quite a bit of growth, thus the thread on 10 baggers.

 

It appears that some of the more indignant posters are unfamiliar with the charms of 10, 20, 30 and 100 baggers.

 

I completely agree.  This is potentially one of the most important threads.  Most of what we do is typical Ben Graham buy well below IV and sell as IV is approached.  However, when a rare bird like Geico can be snatched well below IV with a franchise that can reliably compound returns at a high rate for decades, it would be shortsighted to sell it when it reaches IV because the taxes will cancel out the gains that could be made from a long term hold that continues to compound at a high rate without losing a large amount of capital to taxation.

 

This doesn't mean that a long term compounding machine should never be sold.  Not selling Coke at a PE of 50 was a mistake.  But buying Geico or Sees at a PB of 3 and continuing to hold as their franchise is unimpaired is very smart.  :)

Posted

It appears that some of the more indignant posters are unfamiliar with the charms of 10, 20, 30 and 100 baggers.

 

Conversely, the "many bagger proponents" may not be understanding that the devil is in the details.  Nobody in their right mind would turn down a known 10, 20, 30, or 100 bagger.  The critical questions are:

 

(1) over what time frame will the many bags materialize, and

(2) how confident are you in the bag quantity

 

I don't think I've ever seen something that I think is reliably worth, after discounting future cash flows, 10 times more than the market price.  I would count myself supremely fortunate if I stumble upon something that is reliably worth 3X-5X current price.  None of that is to say the same security won't eventually be a 100 bagger, it's just that you probably won't ever see that dollar selling for a penny.

 

Take Berkshire: it's been a glorious super bagger over the past few decades.  But if you were to evaluate it at any slice of time over the past 40 years, I'm guessing it rarely ever sold for less than 50% of intrinsic value.

 

I really liked Buffett's punchcard line the first time I heard it.  But the more I thought about it, I decided it would cause unnecessary (in my opinion) paralysis.  Why? Because it forces me to determine, in advance, what companies will be around in 20 years to reliably offer the 30X returns or whatever.  That's really hard to do, and may be something only Buffet can do.

 

Instead I try and look for dollars that I think are selling for 50 cents.

Posted

 

This thread started out as an offline discussion with BenGraham.

 

In the exchange, I mentioned that I took Warren's suggestion to "invest as though you're working from a 20 punch card" very seriously

 

Of course, hardly anyone does this.

 

In itself, that's interesting. The greatest investor in history tells the world, over and over, that the secret to success is 20 punches, and the world ignores him. Absolutely ignores him. Even his most ardent supporters ignore that part of the catechism.

 

If your approach is based on 20 punches, then you'll naturally look for ideas that have the potential for quite a bit of growth, thus the thread on 10 baggers.

 

It appears that some of the more indignant posters are unfamiliar with the charms of 10, 20, 30 and 100 baggers.

 

You're taking Buffett too literally.  Buffett also said he doesn't believe in debt.  Buffett also said you should avoid leverage.  Yet Buffett uses both debt and other forms of leverage.  Buffett was just trying to make a point about being selective.  Buffett himself has probably bought more than 20 different securities in the last 1-2 years, much less a lifetime.

Posted

The returns of a 10 bagger over 10 years is about 26% compounded annually. So if you could fill your portfolio with that, those very tax efficient returns would be yours.

 

But how many tries would it take to get a 10 bagger? How many would you be holding for 10 years only to see a 2 or 3 bagger? How many times would you capture a 7 or 8 bagger only to see it hit a bump and go bankrupt or become a shell of it's former self.  Indeed it almost happened to FFH and Geico at one point. The returns start to go down unless you are freaky good.

 

This thread is full of hinsight and survivorship bias IMHO. A strategy of trying for 10 baggers isn't pragmatic. A strategy of holding great companies as long as they stay great and keep growing is a better strategy, but hoping for some arbitrary multiple of your investment is not practical at all.

 

And furthermore those who wish to pursue other, more balance sheet reversion to the mean type strategies, or whatever else, can be very successful.

Posted

Re Buffett punch card,

 

Everytime I see him mention that he is usually addressing college students or a group of people ignorant of advanced value investing or security analysis. He obviously doesn't live by that and probably doesn't believe it. He made his best returns in the partnership days by trading more and doing shorter term things like arbitrage and liquidations.

 

In fact I remember at the last shareholder meeting Munger remarked that he likes to make his money by owning businesses forever rather than trading around little pieces of paper, and Buffett remarked something like, "Well they are both pretty fun."

 

I think he is just trying to instill long term thinking in those who've just been pounded by an MBA program, or those who shouldn't don't know much about stocks and shouldn't be doing much investing anyways, other than super long term indexing or just choosing a few great companies and holding forever.

 

Warren Buffett can be like a holy text, everyone interprets it differently and everyone thinks they are right.

Posted

It appears that some of the more indignant posters are unfamiliar with the charms of 10, 20, 30 and 100 baggers.

 

Conversely, the "many bagger proponents" may not be understanding that the devil is in the details.  Nobody in their right mind would turn down a known 10, 20, 30, or 100 bagger.  The critical questions are:

 

(1) over what time frame will the many bags materialize, and

(2) how confident are you in the bag quantity

 

I don't think I've ever seen something that I think is reliably worth, after discounting future cash flows, 10 times more than the market price.  I would count myself supremely fortunate if I stumble upon something that is reliably worth 3X-5X current price.  None of that is to say the same security won't eventually be a 100 bagger, it's just that you probably won't ever see that dollar selling for a penny.

 

Take Berkshire: it's been a glorious super bagger over the past few decades.  But if you were to evaluate it at any slice of time over the past 40 years, I'm guessing it rarely ever sold for less than 50% of intrinsic value.

 

I really liked Buffett's punchcard line the first time I heard it.  But the more I thought about it, I decided it would cause unnecessary (in my opinion) paralysis.  Why? Because it forces me to determine, in advance, what companies will be around in 20 years to reliably offer the 30X returns or whatever.  That's really hard to do, and may be something only Buffet can do.

 

Instead I try and look for dollars that I think are selling for 50 cents.

 

I've held a few baggers and you're spot on with the discount to IV at any given time.  When I purchased at most I thought a 50% discount existed, as I waited for the gap to close the company grew, margins expanded and my returns grew with it.  I didn't know I was buying a 8 bagger or 10 bagger.  I thought I was buying something at a nice current discount, further as the company grew I was unable to see the future compounding either.  At many times during the runs I considered selling thinking I've made 3x my money and the stock is seeming to get ahead of itself.  I've trimmed positions but still hold these two stocks, they both have great competitive advantages and are well run growing companies.

 

I didn't plan this, it just happened.  I'm hoping over the rest of my investing lifetime I'll be lucky enough to hold a few more companies like this.  If you would have asked me ahead of time the 8x and 10x I would have NEVER guessed would grow like that.  Instead I would have guessed some investments that I made that either lost money or squeaked out marginally better gains than the market would be the 10x bagger.  Speaking of overconfidence the few stocks I swore would triple or more have all lost me money, I no longer chase mirages like that.  I just keep looking for 50c dollars, eventually one of those dollars might grow into a Jefferson, or maybe a Lincoln, if I'm lucky a Hamilton or Jackson.

Posted

Ahhhh....that's better. The discussion is much more fruitful when it's civil.

 

Several riffs, in no particular order:

 

There are many routes to heaven. The best route is the one that's best for your abilities and your personality. When Warren talks about having the right "temperament" the implication is that 20 punches isn't right for everyone. There's a reason so few investors follow anything like it. (Though I "think" Ted has done something along these lines.) 20 punches is haaaaard because it's so dependent on a circle of competence (COC) and it's not easy to develop one.

 

If you're a beginning investor, you don't have a COC. That's because it takes a great deal of time, and effort and experience to cultivate one. It's no coincidence that so many of Warren's investments are inside a few basic circles. Coke is candy in a can. WFC, MHT, BAC are all riffs off his initial investments in the Illinois National Bank (good) and the Bank of McHenry (bad..though I'm working from memory). Ajit's operation is an outgrowth of his investments in National Indemnity, Home & Auto, and a host of other little insurance operations. Sun Newspapers led to WPO, and CCB, etc. I could go on, but you get the point. His experience with the "wholly owned" businesses created the COC. It's hard to develop anything comparable when you're standing on the outside of the industry.

 

When you're starting out, you're best doing cigar butts, and low P/E, and other ideas that don't presume a COC. that's something you build up over time.

 

One of my better investments is a 40-bagger that was six years in the making. Every day for six years, I worked for 5 or 6 hours learning about the industry and had ZERO to show for my efforts. Not a single investment. More than once, people wondered if I was wasting my time. Hell, I wondered if I was wasting my time, but soldiered on. As things turned out, one good idea came out of it (and two bad) but the package was quite satisfactory.

 

Try this exercise: look at Warren's investments in terms of how much of Berkshire's book he invested in them. If he puts about 25% into the investment, it's a punch. He would have done this with WPO, but Mrs. Graham asked him to stop buying. He did do it with GEC, GF, CCB, KO and BNI. He did it even more if you do the calculation with Associated Stories and Blue Chip. When you look at his investments this way, you'll see that the better part of his excess return is from these "punches." Most of his other investments are trips to the driving range.

 

WRT the comment about BRK not being priced below IV, here's a second exercise that is a little contradictory: compare BRK to the "piggyback." The exercise is this: Imagine that Warren calls you and says "Bob, I'm buying (fill in the stock) today because it's a fifty cent dollar." Do you buy BRK or the piggyback? I did the calculation about 15 or 20 years ago, and BRK almost always beat the piggyback. As I recall FRE was one of only two ideas that beat an equal amount invested in Berkshire. The whole world was trying to piggyback his ideas, and they would have almost always been better off just buying BRK. My point here is that people didn't "get" Berkshire well enough to see this.

 

It's hard to spot stocks that "might" give you 10x over 10 or 15 years. It's even harder to spot them if your eyes aren't open to whether the ideas you're considering are capable of delivering that return. You only have a sense of what's possible when the idea falls inside a COC.

 

 

That's enough for now.

 

 

 

 

Posted

namecsw,

 

You have fair points generally, but I'm not sure about this:

 

 

WRT the comment about BRK not being priced below IV, here's a second exercise that is a little contradictory: compare BRK to the "piggyback." The exercise is this: Imagine that Warren calls you and says "Bob, I'm buying (fill in the stock) today because it's a fifty cent dollar." Do you buy BRK or the piggyback? I did the calculation about 15 or 20 years ago, and BRK almost always beat the piggyback. As I recall FRE was one of only two ideas that beat an equal amount invested in Berkshire. The whole world was trying to piggyback his ideas, and they would have almost always been better off just buying BRK. My point here is that people didn't "get" Berkshire well enough to see this.

 

 

Comparing BRK to the "piggyback" isn't really a rebuttal to the statement that BRK itself was never less than a 50 cent dollar.  Further, it seems obvious to me that there's at least two reasons for owning BRK instead of the piggyback: (1) the leverage provided by the float, and (2) private acquisitions.

 

If you look at returns of the piggyback with similar leverage, I'd be interested to see the numbers.

Posted

Ahhhh....that's better. The discussion is much more fruitful when it's civil.

 

Several riffs, in no particular order:

 

There are many routes to heaven. The best route is the one that's best for your abilities and your personality. When Warren talks about having the right "temperament" the implication is that 20 punches isn't right for everyone. There's a reason so few investors follow anything like it. (Though I "think" Ted has done something along these lines.) 20 punches is haaaaard because it's so dependent on a circle of competence (COC) and it's not easy to develop one.

 

If you're a beginning investor, you don't have a COC. That's because it takes a great deal of time, and effort and experience to cultivate one. It's no coincidence that so many of Warren's investments are inside a few basic circles. Coke is candy in a can. WFC, MHT, BAC are all riffs off his initial investments in the Illinois National Bank (good) and the Bank of McHenry (bad..though I'm working from memory). Ajit's operation is an outgrowth of his investments in National Indemnity, Home & Auto, and a host of other little insurance operations. Sun Newspapers led to WPO, and CCB, etc. I could go on, but you get the point. His experience with the "wholly owned" businesses created the COC. It's hard to develop anything comparable when you're standing on the outside of the industry.

 

When you're starting out, you're best doing cigar butts, and low P/E, and other ideas that don't presume a COC. that's something you build up over time.

 

One of my better investments is a 40-bagger that was six years in the making. Every day for six years, I worked for 5 or 6 hours learning about the industry and had ZERO to show for my efforts. Not a single investment. More than once, people wondered if I was wasting my time. Hell, I wondered if I was wasting my time, but soldiered on. As things turned out, one good idea came out of it (and two bad) but the package was quite satisfactory.

 

Try this exercise: look at Warren's investments in terms of how much of Berkshire's book he invested in them. If he puts about 25% into the investment, it's a punch. He would have done this with WPO, but Mrs. Graham asked him to stop buying. He did do it with GEC, GF, CCB, KO and BNI. He did it even more if you do the calculation with Associated Stories and Blue Chip. When you look at his investments this way, you'll see that the better part of his excess return is from these "punches." Most of his other investments are trips to the driving range.

 

WRT the comment about BRK not being priced below IV, here's a second exercise that is a little contradictory: compare BRK to the "piggyback." The exercise is this: Imagine that Warren calls you and says "Bob, I'm buying (fill in the stock) today because it's a fifty cent dollar." Do you buy BRK or the piggyback? I did the calculation about 15 or 20 years ago, and BRK almost always beat the piggyback. As I recall FRE was one of only two ideas that beat an equal amount invested in Berkshire. The whole world was trying to piggyback his ideas, and they would have almost always been better off just buying BRK. My point here is that people didn't "get" Berkshire well enough to see this.

 

It's hard to spot stocks that "might" give you 10x over 10 or 15 years. It's even harder to spot them if your eyes aren't open to whether the ideas you're considering are capable of delivering that return. You only have a sense of what's possible when the idea falls inside a COC.

 

 

That's enough for now.

 

Was Apple about twelve years ago the 40 bagger you mentioned?  I mention this because I almost bought a substantial amount for the size of my portfolio when it was a bargain by value investing criteria, but did not because my understanding of their product development process under the renewed leadership of Jobs was superficial, not profound.

Posted

"Was Apple about twelve years ago the 40 bagger you mentioned?"

 

I bought some when it was in double digit but sold way prematurely (wish I hadn't).

 

In hind sight it is so obvious.

 

At the same time I have had a lot of round trips when I didnt sell soon enough.

 

Its what makes it fun + challenging.

 

 

Posted

namecsw,

 

You have fair points generally, but I'm not sure about this:

 

 

WRT the comment about BRK not being priced below IV, here's a second exercise that is a little contradictory: compare BRK to the "piggyback." The exercise is this: Imagine that Warren calls you and says "Bob, I'm buying (fill in the stock) today because it's a fifty cent dollar." Do you buy BRK or the piggyback? I did the calculation about 15 or 20 years ago, and BRK almost always beat the piggyback. As I recall FRE was one of only two ideas that beat an equal amount invested in Berkshire. The whole world was trying to piggyback his ideas, and they would have almost always been better off just buying BRK. My point here is that people didn't "get" Berkshire well enough to see this.

 

 

Comparing BRK to the "piggyback" isn't really a rebuttal to the statement that BRK itself was never less than a 50 cent dollar.  Further, it seems obvious to me that there's at least two reasons for owning BRK instead of the piggyback: (1) the leverage provided by the float, and (2) private acquisitions.

 

If you look at returns of the piggyback with similar leverage, I'd be interested to see the numbers.

 

 

I don't disagree with your main points, and you touch on something interesting.

 

What I was trying to point out, inartfully, was that Warren thought he was buying a 50 cent dollar with great promise when he bought WPO. And, of course, he was right. The Post was stunningly cheap in relation to what it would ultimately be worth.

 

BRK, however, was even cheaper and was the much better performer. BRK is up between 1,000 and 2,000 fold since the Post purchase. The Post is up much less, say 140 fold.

 

When you estimate the IV of a business, you put a ruler on a trend. Back in 1973, there wasn't much of a trend on which to put the ruler. In fact, the BRK trend was crappy, so it would have been hard to argue that BRK was a dollar selling for 50 cents.

 

The 50 cent dollar gives you one extra double over your time horizon. (You get the growth in the business, plus one extra double when the market price approaches IV). That extra double is at the core of value investing, and the reason value investors out-perform most other approaches.

 

If you purchased BRK in the '70s or '80s, you got MORE than one extra double on your investment, so BRK was often/always priced at less than half of its intrinsic value.

 

HOWEVER, an investor couldn't have "seen" how the extra doubles were going to materialize, so the extra double(s) weren't visible and BRK wasn't a visible 50 cent dollar where you could easily put a ruler on the trend.

 

In other words, if you're saying BRK wasn't often a VISIBLE 50 cent dollar, we're in complete agreement.

 

 

 

 

 

 

 

 

 

 

 

 

Posted

Guys, thanks for the posts. I enjoyed reading them.

 

Over the years, I found out that by requiring a very high return in a conservative scenario you would gain in the following aspects:

 

1. A potentially large gain.

2. Big margin of safety.

3. Avoid doing things that does not make sense or are not worth doing at all.

 

#3 is the most important to me. Many years ago, a friend told me that I have eyes for value. However, my hands are itching all the time. I changed from A to B to C only to see them double or triple again in a few years when the current purchase sinks. Well, it still happens all the time.

 

I set my bar very high, which is 40% per year over three years in conservative scenarios, not because I really want to make 40%. What I am trying to tell myself is that there are just so many things interesting there and I have to pick my spot. So far, it had worked great to me.

 

I dunno any of you had the same problems like mine. Just my 2 cents.

Posted

40% annualized return as a bar for each investment would stop me from ever investing in anything. I have yet to find a stock I would be reasonably sure could give me that kind of return. In the last two years I have spotted three stocks which I was reasonably sure* could get me 20% for a couple of years.

 

*barring deflation/other macro risks and/or company specific black swan events

Posted

40% annualized return as a bar for each investment would stop me from ever investing in anything. I have yet to find a stock I would be reasonably sure could give me that kind of return. In the last two years I have spotted three stocks which I was reasonably sure* could get me 20% for a couple of years.

 

*barring deflation/other macro risks and/or company specific black swan events

 

It really depends on where you'd look for those things. I am not talking about things that appear on VIC. Because if those smart guys noticed it, the bargain is no more.

 

I bought AMA.ax and CMI.ax at 1-2x normalized earnings. It turned out to be great investments.

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
×
×
  • Create New...