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If the market went down 10%+ what would you be buying?


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If the market went down 10%, I'd buy a cup of coffee and watch it for a while longer. 

 

I am in the camp that the broad market is overvalued by 30-40%, so a 10% decline does not provide much incentive to blindly buy equities.  On the other hand, going from bottom-up, some of the most attractive names that are discussed on this board are so ridiculously undervalued that a 10% haircut does not really change the decision making process either (ie, BAC, AIG, ELF and FFH are so cheap right now that an additional 10% off doesn't really change anything).

 

 

SJ

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10% is just a guideline, point being if market went down substantially what positions would you initiate? Please don't take the numbers literally.....

 

 

If the market had a serious haircut of ~30-40%, I'd love a chance to buy high quality very large-caps at "fair" value, so that would be like KO, WMT, JNJ, KFT, MMM, etc.  However, for most equities, I'd need a serious haircut to start a new position.  For now, I'm still snooping around for the few large-caps that are obviously trading with a good margin of safety...

 

 

SJ

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Has your snooping uncovered anything you're willing to share? I'm always on the lookout for large caps with a moat trading around fair value. Outside of AIG/BofA/Berkshire/Fairfax I'm having trouble finding any.

 

10% is just a guideline, point being if market went down substantially what positions would you initiate? Please don't take the numbers literally.....

 

 

If the market had a serious haircut of ~30-40%, I'd love a chance to buy high quality very large-caps at "fair" value, so that would be like KO, WMT, JNJ, KFT, MMM, etc.  However, for most equities, I'd need a serious haircut to start a new position.  For now, I'm still snooping around for the few large-caps that are obviously trading with a good margin of safety...

 

 

SJ

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AIG/BofA don't exactly have "wide moats"...they just decent businesses selling for cheap....FFH has no moat really, you're buying into Prem and his team's investment skills...their insurance operations are mediocre.

 

BRK is the only one that owns underlying businesses with wide moats.

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If we got a 10% correction, I would focus on sectors that have been crushed recently - I would look to buy more DELL as it would likely trade in the mid to low $8.00 range. FFH is back on my radar; would be great to re-establish a position below BV as insurance pricing hardens. LUK also looks interesting below $22 given its stock price and all the cash it has on hand.

 

I would love to get back into lots of other names (i.e. US banks etc) but it will take more than a 10% decline to get me excited.

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Has your snooping uncovered anything you're willing to share? I'm always on the lookout for large caps with a moat trading around fair value. Outside of AIG/BofA/Berkshire/Fairfax I'm having trouble finding any.

 

10% is just a guideline, point being if market went down substantially what positions would you initiate? Please don't take the numbers literally.....

 

 

If the market had a serious haircut of ~30-40%, I'd love a chance to buy high quality very large-caps at "fair" value, so that would be like KO, WMT, JNJ, KFT, MMM, etc.  However, for most equities, I'd need a serious haircut to start a new position.  For now, I'm still snooping around for the few large-caps that are obviously trading with a good margin of safety...

 

 

SJ

 

 

The ones you listed are good names.  Then there's the crowd that likes INTC, HPQ or DELL, but I'm pretty shy about tech.

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Not sure about HPQ/Dell, but INTC to me would be a high quality with current headwinds.

 

If you find a reason why they're not please state them.

 

Its difficult to find a leading high cash generating company at the current respective prices. keep in mind INTC is 10X the value of ARM (which receives a very high valuation).

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Not sure about HPQ/Dell, but INTC to me would be a high quality with current headwinds.

 

If you find a reason why they're not please state them.

 

Its difficult to find a leading high cash generating company at the current respective prices. keep in mind INTC is 10X the value of ARM (which receives a very high valuation).

 

Simply put, I see a contracting "economic moat" for Intel in the future. "Industry leading" position can be very ephemeral in this space.

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I think that's just the wrong way to look at it. Firms with declining moats can waste away their cash, and destroy value very quickly. I think it's a mistake to only look at it because it is "cheap"...rather you should focus on business model going into the future, that's where the margin of safety is. If you find strengths within Intel's business model that you feel will create value in the future, that is a different story.

 

Are you long INTC?

 

EDIT: I think MSFT is actually cheaper than INTC. It is trading at less than 10xFCFE, and you also have to take MSFT's 65B net cash pile into account.

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I think that's just the wrong way to look at it. Firms with declining moats can waste away their cash, and destroy value very quickly. I think it's a mistake to only look at it because it is "cheap"...rather you should focus on business model going into the future, that's where the margin of safety is. If you find strengths within Intel's business model that you feel will create value in the future, that is a different story.

 

Are you long INTC?

 

EDIT: I think MSFT is actually cheaper than INTC. It is trading at less than 10xFCFE, and you also have to take MSFT's 65B net cash pile into account.

 

Yes long INTC @ 24.75. almost 5% but look to add after more research. I think there is a balance between cheapness/quality. won't get into INTC here. you probably know more about the tech stuff than I do so its not worth me rehashing info and debating whether they can enter the mobile space and whether ARM will eat its lunch.

 

also your idea of margin of safety is not exactly correct. the margin of safety can come from 1) price 2) growth. I don't know what you mean by "margin of safety" by focusing on the business model. Please elaborate and give a quantitative example if possible. use MSFT since you own it, what is my margin of safety if I buy at $30.

 

 

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Basically what I think is that value investors tend to look at a large pile of liquid assets on the balance sheet as somewhat of a "backstop" - basically, "even if things get really bad, at least I'll be able to buy the cash and get the business for super cheap".

 

Or another way some value investors look at troubled firms is - "yeah sure the business has problems....but it's still really cheap."

 

I don't think that works here, as firms can very quickly destroy value and this margin of safety that might be apparent can evaporate. I think in businesses with rapidly changing technology, you should focus on buying good businesses that you expect will do well over the long term and are going to increase market share. But that's just IMO.

 

Say INTC FCFE drops to half its normalized value - say roughly 7.5B/annum...is this still a good value? That's what I think could be a realistic outcome - Intel simply shrinking into a smaller firm.

 

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I have alot of trouble with Intel.  My job as an investor is to make money buying and selling, or holding a stock.  Intel is stuck in a near permanent trading range.  I held it for a year or two about 7 years ago.  The Price and PE were, you guessed it: the same as today.  It doesn't even keep up to inflation.  I guess with the dividend you break even. 

 

I am having more and more trouble identifying anything with a moat these days.  I see the big US banks as having moats.  Actually, any of the worlds biggest banks.  Probably huge energy conglomerates, water and power utilities (not telcos), and perhaps the remaining railways.  As you mentioned above, frank, BRK is where you find the best moats: WFC, BAC, Midamerica, and BNSF. 

 

I put the big banks there because they went through a death spiral, being run horribly, and survived, and will thrive going forward.  World governments have helped, obviously.  If thats not a moat, what is?

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i hear you about INTC being range bound. keep in mind though if you're paying the same price for the same company as you did ten years ago, either 1) the company has made no progress (EPS flat/down) 2) company was valued higher by the street 3) fundamentals expected to deteriorate materially. if the third option is not true you got yourself a bargain.

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I think the concept of a moat is a little overblown, especially by beginning investors. IMHO very few businesses truly have economic moats, and yet many businesses do just fine. Coke is said to have an economic moat, but that doesn't mean Pepsi cannot do well...

 

The following is a summary of what I read on the internet:

In technology, the message seems to be "software replaces hardware" and basically specialized hardware providers are going to be replaced by generic boxes where software does the work. For example, a mechanical clock is replaced by an electronic clock - a box with a circuit in it, or a CRT TV replaced with a computer monitor - a box with a computer in it. I could find more examples, but I think the idea is that whenever you need specialized hardware to manipulate information, software will do that job in the future.

 

Intel's strength is that a lot of software is written for the x86 instruction set, but in the future it is likely more and more software will be independent of the processor platform...

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I think the concept of a moat is a little overblown, especially by beginning investors. IMHO very few businesses truly have economic moats, and yet many businesses do just fine. Coke is said to have an economic moat, but that doesn't mean Pepsi cannot do well...

 

The following is a summary of what I read on the internet:

In technology, the message seems to be "software replaces hardware" and basically specialized hardware providers are going to be replaced by generic boxes where software does the work. For example, a mechanical clock is replaced by an electronic clock - a box with a circuit in it, or a CRT TV replaced with a computer monitor - a box with a computer in it. I could find more examples, but I think the idea is that whenever you need specialized hardware to manipulate information, software will do that job in the future.

 

Intel's strength is that a lot of software is written for the x86 instruction set, but in the future it is likely more and more software will be independent of the processor platform...

 

How about this, I'll flip it around.  I could argue easily that every business that isn't going out of business has a moat.  There's a reason they are still in business, customer relationships, a key plant location.  A business with absolutely zero moat will be out of business soon as a competitor with the smallest semblance of a competitive advantage will take their customers.

 

I think investors blow competitive advantages out of proportion.  If you read a 10-k there's a section in there for competitive advantages, note how all companies are able to come up with something.  To investors some of these things seem phoney, like "the strength of our customer relationships", or "our customer service" or "our quality".  Seems like something that can be replicated.  I am not a professional investor, I've worked at real companies in the real world, and those things do exist.  I've seen a number of contracts walk from one client to another when a sales person leaves.  There are also tiny companies that seem to have no advantage, yet a sales person or CEO who knows everyone, and people use people they know.

 

Here's an interesting thought experiment, or a real one if you're so inclined.  Call up some of these moat companies and ask the CEO what makes their company better than competitors.  The answer they give might be much different than what an investor might give.  Does the CEO, the person with the most visibility know the future of their company?  Does the CEO know how to value it?

 

I've been thinking about this some recently.  Essentially a Buffett moat company is a leading company in industry.  You have the Coke and Pepsi companies, Exxon etc.  The truth is there is no secret sauce to their current success, they have one thing, inerta.  When a company is so big is just continues to roll forward.  Do you think that Exxon really has hired the 90,000 best and brightest?  All companies supposedly hire the best and brightest, at some point the next person hired isn't quite as bright and so on and so forth.

 

As for moats, I think the true ones are found in smaller growing companies.  I listened to an interview with the author of a book, Blueprint to a Billion recently.  He talked about companies that grew from $1m in revenue to $1b in revenue in 10-15 years.  These are the Starbucks, the McDonalds going from infancy stage to the industry leader.  To go from $1m to $1b a moat has to exist.

 

So the question to everyone who's looking for moats is this.  If you can get good at identifying a durable competitive advantage why are you investing in $10b companies that have limited growth.  Instead why not look at these tiny companies in a startup stage, if a moat exists you could make 100 or 200x your money rather than 15% a year.

 

Another question to anyone who's an expert on a business model and can somehow see into the future.  Why use that in investing, why not start a consulting business, or start a business to exploit it? 

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