Jump to content

you guys were right about ICO, LUK


Mandeep
 Share

Recommended Posts

Mandeep,

 

Leucadia could well be at 8$ today, I wouldn't think that it was a mistake to buy it at a higher price. The fact is, it's not because that a stock you own go up that you were right, and vice versa

 

Our focus has to stay on the intrinsic value of the businesses, not on their short term stock fluctuations, because if we fall in that trap the market will start to teach us instead of serve us.

 

Cheers!

Link to comment
Share on other sites

That's the big question. How do you determine the intrinsic value of a business? This confuses the hell out of me lol.

Buffett likes WFC at this level- its like 26 times earnings! Isn't that supposed to be expensive?

COP doesn't have cash, but he likes it.

 

I'm confused partner24. I have no idea where to start to do this "magic" calculation of under-valued vs. over-valued. hahah.

Are there books or anything you guys would recommend?

 

Right now, I'm just looking at P/E and past stock prices before the boom. I figure that great companies will at least be worth what they were in '01.

And I like to see how much cash they have. I like GE, Metlife, and Swiss - Re.

 

thanks bro and let me know.

Link to comment
Share on other sites

Mandeep, based on your comments I would read Intelligent Investor (by Ben Graham) before I bought or sold anymore stocks if I were you.

 

I like GE, Metlife, and Swiss - Re

 

While these may be great or bad investments, your initial investments should start with understandable firms... simple businesses that sell a simply product with simply accounting.  The above three have non of the above traits.

 

I don't mean to discourage you from learning about investing, but beware of how deep you get yourself in without first gaining a better understanding.  The stock market has not been known for its mercy.

 

And most of all, do not ever forget that buying stock in a company provides you a claim on the profits of the company after all creditors have been paid.  Assuming that Bank of America (etc) or some other highly levered company should be at least worth what it was 7 years ago may ignore the fact that if you are 9 parts debt to 1 part equity, it does not take much to make the stock a ZERO.  This is part of the reason why there was so much disagreement on companies like Wells Fargo etc during the downturn.  Banks (and any very leveraged entities) are very susceptible to economic downturns and liquidity events.

 

Don't confuse huge returns from leveraged companies in short order as a sign of skill.... it may be good luck at best... and stupidity rewarded by a wreckless government at best.

 

Good luck in your quest.  You have found a good place to learn and grow, but do not oversimplify the investment process or you will regret it... maybe not today but someday.

 

Thanks,

 

Ben

Link to comment
Share on other sites

Yes: Intelligent Investor, 3 year of accounting courses, 2 years of finance courses, introductory statistics, and some economics.

 

Also, WFC and COP are both large multinational corporations and not easily understood.  It may be easier to start with smaller businesses in an industry more easily understood than financials or commodities.  Financials are impossible for many to understand and commodities can be difficult as well, because future spot prices can be so difficult to forecast.

Link to comment
Share on other sites

I am gonna go along with suggesting you read the intelligent investor... The one with the commentary by Jason Zweig is one of my top 3 favorite books; without a doubt, it shaped my view of business/investment more than anything else. I remember reading it in some of my college classes, instead of listening to the lectures- despite the lower grades and strange looks that I got, it was totally worth it.

 

On another note, you should probably try to get away from using P/E ratios too. Earnings are, by and large, meaningless (Enron manipulated the shit out of their earnings-but not cash flow). I am not saying that cash flow or book accounting methods are the the end all be all, but certainly, earnings suck...  WFC, in the quarter ending dec 31st, had cash flow of almost 11 billion, but had an earnings loss of around 3 billion.

 

When calculating intrinsic value, you should look at companies you understand, and then figure out what you would be willing to pay for the business as a whole.

Link to comment
Share on other sites

hmm. I feel like this is not the time to buy small stuff that I understand, isn't this a once in a lifetime opty to buy great businesses cheaply?

I just got out of college last year and I thought it would just a great opty to buy what Buffet bought/buys at cheaper than he got it.

 

Can't I just learn the details during the next bull market? lol

 

Thanks for all your advice guys, appreciate it. Gotta study both accounting and intelligent investor.

Link to comment
Share on other sites

Something that may come as a surprise, is that Buffett has recognized that he has to buy worse deals than he did in the past, due the the huge amount of capital that he has to deploy... Back in the partnership days, he could compound at 50%, now, it is good if he does 20%.

 

There are a ton of good deals out there (at least in my opinion) that are even cheaper than what Buffett has been buying. Granted, they are super small companies, but still...

Link to comment
Share on other sites

Just curious, how do you know that the companies you named are great businesses if you don't know how to value a business?

 

I've recommended Ben Graham books but I've found that the writing style turns some people off. One of the Mohnish Pabrai books, I think The Dhando Investor, is an easy read and covers the same major concepts.

 

Link to comment
Share on other sites

I've recommended Ben Graham books but I've found that the writing style turns some people off. One of the Mohnish Pabrai books, I think The Dhando Investor, is an easy read and covers the same major concepts.

 

If people don't like Ben Graham's writing style, then how will they ever be able to get through a 10K? Let alone the full text of an 8K!

Link to comment
Share on other sites

I think the most important thing is that they show an interest and act on it on their own accord.  I've talked to hundreds and hundreds of people about Buffett and Ben Graham when they ask me about stocks and investing.  Yet, I only know of maybe two or three that actually went and bought a book on them or researched them on the internet.  And when someone does, I'm actually taken by surprise because I know it doesn't happen often. 

 

One of my brother's young friends knows I run a fund, and asked for some advice.  I discussed Buffett with him and Ben Graham.  I didn't think much of it afterwards, but a few weeks later, he came back to me with some more questions.  I found out he went out and bought two books on Buffett and The Intelligent Investor on his own.  I've probably said the same thing to a couple hundred people in the last two-three years, and no one has done that...yet here was a young man who did.  I'm much more willing to give him much more of my time! 

 

When I first started learning about Buffett, I heard recommendations about the Intelligent Investor.  I bought it, but it was difficult to get through in a first read, so I read other books and did other research.  I then went back to it and re-read it once my base of knowledge was a bit better...it was much easier to grasp.  Since then I've probably re-read it 10-12 times and referenced various passages on many, many occasions, but I did it on my own.  No one asked me to read it or struggle through it.  And I think that is the most important lesson for any investor...they have to have a real interest, otherwise they are wasting their time, as well as yours. 

 

Jimmy Pattison is a famous businessman in Vancouver, and he's acquired many businesses when people did not want them...very much like a value-investor.  He started his company with one car dealership 50 years ago, and today is worth about $4-5B with businesses in various sectors.  There is an old, legendary story of him firing the lowest producing salesperson at his auto dealership each month. 

 

One Christmas many, many years ago, he had to fire a salesman.  He explained the situation, and the employee broke down sobbing.  He explained that it was Christmas and his wife and children were expecting a cheerful holiday.  Jimmy broke down with him, and they both commisserated while they sobbed.  After they cried, he turned to the employee and said "I still have to let you go."  When asked years later why he did it, he explained that if he did not, he wouldn't be doing the employee any favors.  The employee would continue to struggle in an occupation he was not terribly good at, and he would continue to make low commissions.  By firing the employee, it forced him to look for alternative work where his talents may be better served, and he could better provide for his family.  In a twisted way, his logic is perfectly correct, even though perhaps he could have waited until after Christmas. 

 

The moral is, if someone has difficulty reading the Intelligent Investor, you probably aren't doing him or her any favors by steering them to some Robert Hagstrom book.  Cheers!

Link to comment
Share on other sites

Excellent advice - different perspectives - and illustrates there are many ways to be happy with investing outcome.

(And also many ways to end up unhappy...!)  I certainly agree regarding "The Intelligent Investor",

and actually prefer the version without Zweig footnotes because pure Graham is more tentative.

 

Two key concepts are margin of safety, and intrinsic value.

 

MOS and IV can be approached a couple of ways.  This is one suggestion:

 

"When calculating intrinsic value, you should look at companies you understand,

and then figure out what you would be willing to pay for the business as a whole."

 

MOS is increased by looking at companies you understand, ie depends on viewer!

 

It is also increased by limiting to companies which have a culture of making profits,

are competently run, have robust business model, not one-decade fad product, etc.

And MOS is increased if purchase at substantial discount to estimated IV.

MOS is decreased by over-indebtedness or funky accounting or insider skimming.

MOS is decreased by valuing business at peak of its cycle, eg commodity price.

MOS is increased by patience, prepare analysis of IV, then wait for a discount.

 

For IV, there are two approaches...

 

- What others would be willing to pay for the business as a whole.  P/E is useful

for that, especially if use normal-times earnings and expect return to normal.

Private business value, in other words.  Deducting all debt, preferred, other

entitlements which are ahead of the common shareholder.  Then expect some

discount (say 33 pct) before purchasing, to get MOS relative to other buyers

who may enter the stock market at a later date based on their IV estimates.

 

- What it is worth if it were a bond, temporarily ignoring risk of not being bond.

 

Eg, if company has normal earning power of 2.00/sh, no debt, and excess

cash of 2.00/sh whereas more usual financial structure would allow it to

carry say 4.00/sh of debt, then IV might be estimated at 19x 2.00/sh,

a P/E of 16x (bond-like rate of return), plus 3x for surplus cash plus debt

capacity.  IV estimate of $38 is not something to pay for the company;

rather it would be a max price to expect in a rational world, what would be

very advisable to sell at, if taxes on capital gains were not a consideration.

The point when one would definitely cross over from being an investor,

to being a speculator hoping that greater fools would bid stock higher.

 

I like this approach, as it tends to put debt and equity on equal footing.

The risk assessment is separated out from the valuation process; not to

ignore risk, rather to make it explicit separate aspect of the investigation.

Too much risk, just pass on "opportunity", look for something with less risk.

 

Then to require a very substantial discount to risk-free IV estimate, for MOS.

By "substantial", something like 75 pct is nice, at least 50 pct is necessary.

And if willing to wait patiently, have several companies evaluated in advance

and just wait until market comes along with next selloff, maybe 80-85 pct

discount will be offered.

 

Whatever you come up with, make it your own method, don't worry about

what others are doing.  Graham was always searching for new approaches,

one of the reasons he is such a great mentor.

Link to comment
Share on other sites

Parsad, You told my story.  I started with Lowenstein, and he talks about Warren reading the Intelligent Investor.  I had to order a copy, about 12 years ago.  Struggled with it the first time but I could grasp the key chapters Buffett mentions in the intro.  Did a zillion hours of other reading, went back and tried again.  It was much easier going.  Have since read much of Security Analysis (the bond and fixed portion was a bit dry so I leapt part and read the equities portion). 

 

Your comments on the hundreds and hundreds of people with whom you have discussed investing, and the few who have actually read the book is interesting, and rather telling.

 

Mandeep,  I will inject my person opinion here on the present state of megacap investing.  I am in no way claiming to be able to correctly value AXP, GE, or WFC.  That does not mean I cannot extrapolate that they were (WFC)/are (GE) dead cheap, or cheaper than dead.  An extimate of normalized earnings conservatively applied, and a low PE will show you that any one of the above and others are insanely cheap by any standards.  Could they get cheaper, of course... but so could anything else I have a better handle on.  Part of Ben Graham's margin of safety was some diversifcation.  Buffett didn't do this but I am not Buffett.  FFH does it as do most value investing fund managers.  The other advantage of the megacaps is that it is difficult to get stuck in a crappy position, unlike some other well analyzed microcaps I have held in the past. 

 

The alternative is to buy the shares of known value investors FFH, Markel, BRK, LUK, BAM.a when they are very cheap. 

 

Al.

Link to comment
Share on other sites

I found out he went out and bought two books on Buffett and The Intelligent Investor on his own.  I've probably said the same thing to a couple hundred people in the last two-three years, and no one has done that...yet here was a young man who did.  I'm much more willing to give him much more of my time!

 

One can think of this situation in reverse:

 

That the "hundreds and hundreds of people" who didn't delve into the investment Bibles are, in fact, acting only logically, knowing most of them will probably do better sticking to a long-term DCA index strategy. The other few, who buy the Bibles, passionately consume every word, and proceed to pick stocks, or run LPs for OPM, are probably, mostly, overconfident.

 

p.s. speaking of devotion (or LOVE per Gladwell's Outliers), there's a fascinating paragraph in the Snowball where WeB reveals the following interesting fact about his Security Analysis experience:

 

"The truth was that I knew the book even better than Dodd. I could quote from any part of it. At that time, literally, almost in those whole seven or eight hundred pages, I knew every example. I had just sopped it up."

 

Inspiration for all of the overconfidents out there...

Link to comment
Share on other sites

Sanjeev, that was a great post.  the story about that car salesman is heart-wrenching too, wow!

 

Mandeep,

I feel like this is not the time to buy small stuff that I understand, isn't this a once in a lifetime opty to buy great businesses cheaply?

The "once in a lifetime opty to buy great businesses cheaply" was two months ago.  Or rather, the "early 2009 once in a lifetime opty" was two months ago.  Just like all these "1 in 100 years events" seemingly tend to happen every 2-3 years, I find that there are quite a few "once in a lifetime opty" around.  Just in the 3-4 years that I've been active on this board (I joined among the very first but was a 'sleeper' early on), I've seen "once in a lifetime opty" a few times in FFH (around $100, then $150, then last year and recently again at $210...), once in Sino-Forest ($4 to $20+ in a couple of years), once in Quadra Mining ($8 to $28 in a year), once in Constellation last fall when it dipped briefly to $15 when Buffett offered to buy it for above $25...  I'm not even going to mention the other ones I didn't pay attention too and didn't play.

 

 

Don't worry about the "opty in a lifetime" that you just let slip.  Learn about investing, learn from some of the great posters here, and take it easy - new opportunities will come soon enough. Do like Buffett, wait for the fat pitches :)

 

 

Good luck!

Link to comment
Share on other sites

Sanj, my experience is very similar to yours... I find MANY people want to get better investing results. But they have NO interest in learning about value investing. Instead they are looking for a 'get rich quick' idea.

 

Makes me think of the old line: "when the student is ready, the teacher appears." Not the other way around.

 

When I managed a sales force I used to buy them a different investing book as a Christmas present every year (Intelligent Investor, One Up On Wall Street, Warren Buffet Way, Random Walk Down Wall Street etc). I would tell them "you beat me up over a $500 raise; learn how to save and invest and in 15 years your investments will earn you more than your salary". I know I made people more aware... not sure that many took my message to heart.

 

Perhaps because personal finance is not taught in schools perhaps it is a skill set that is hard for most people to pick up later in life... not sure. Or perhaps the answer is you either get it or you don't.

 

It is sad, really, that more people are not able to develop a financial skill set. I have started doing some fun stuff with my young kids to hopefully help them develop an interest in this stuff.

Link to comment
Share on other sites

I would tell them "you beat me up over a $500 raise; learn how to save and invest and in 15 years your investments will earn you more than your salary". I know I made people more aware... not sure that many took my message to heart.

 

That's priceless Viking and true. 

Link to comment
Share on other sites

By firing the employee, it forced him to look for alternative work where his talents may be better served, and he could better provide for his family.  In a twisted way, his logic is perfectly correct, even though perhaps he could have waited until after Christmas.

 

Sanjeev, remind me never to work for you!

Link to comment
Share on other sites

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
 Share

×
×
  • Create New...