The 13th Labour of Hercules

[mikazo]

Gio; this board member is interested!!! I feel like I'm sitting around a big table with my Many Italian friends drinking chianti, eating a big plate of spaghetti, loud debate going on. Arms and hands waving while points are made. Someone looking in might think there's going to be a fight. But it's always interesting and there are always new things learned. So please don't stop the open forums. If someone doesn't want to read they can just move on. Ron

 

+1 as well, keep the discussion going!

[giofranchi]

Gio; this board member is interested!!! I feel like I'm sitting around a big table with my Many Italian friends drinking chianti, eating a big plate of spaghetti, loud debate going on. Arms and hands waving while points are made. Someone looking in might think there's going to be a fight. But it's always interesting and there are always new things learned. So please don't stop the open forums. If someone doesn't want to read they can just move on. Ron

 

+1 as well, keep the discussion going!

 

Ok then, the PM I sent txlaw follows:

 

Hi txlaw,

first of all just few words on diversification: if 5 is good enough and other factors make me believe that a business is an 8, even if it is not very diversified, I acknowledge that, were it diversified, that same business could be a 9… Yet, I am happy with an 8 nonetheless. Vice versa, if other factors make me believe that business is a 3, and thanks to diversification it gets to be a 4, it still doesn’t reach the minimum required score… and I won’t invest.

 

Now, about “investing”, “trading “, and “knowing a business”… There is a reason why I use the words investing and trading: when you own a business for the long run, you must rely on the wealth that business is going to create through the years. If you buy it at a bargain price, that represents just an extra boost to your financial well being. Instead, if you keep buying below IV and selling at IV, you keep relying on mistakes made by the market, but very little on the long term wealth created by those businesses.

Anyway, I understand why using the words “investing” and “trading” might cause misunderstandings, so let’s say instead “to buy and hold” and “to buy below IV and sell at IV”.

Imo, “to buy and hold” you must know a business very well, because you must be able to continually reassess its future prospects, the wealth it is really going to generate in the future. And that is simply not easy to do! That’s why I am very skeptical when people say “I know 200 businesses!”. Of course, it has nothing to do with how many times you buy and sell the shares of a business… This is evident, isn’t it? I also understand that how much knowledge is required to buy and hold a business is subjective, it is different for each of us. To buy and hold for me means that, if the stock price were to fall 40%, I would be averaging down aggressively… and, to have the fortitude to do that, I know that I need a tremendous amount of conviction. That’s why I know I NEED all I have written and posted on the board.

Of course, it is just me! Instead, you might require a different level of knowledge, and still be very confident and calm buying and holding a business!

“To buy below IV and sell at IV”, instead, requires much less conviction about the future prospects of a business, don’t you agree? Wasn’t Mr. Graham of the same opinion?

 

Finally, about the insurance industry and the banking industry: I would split them both in two:

1) the gathering of assets,

2) the deploying of assets.

As far as 1) is concerned, I agree that the banking industry is safer: deposits are clearly safer than float. If 5 is good enough, I would give 7 to deposits and 4 to float.

But, in insurance it very much depends on the quality of the underwriting team. So, if you find a team that is very prudent, and constantly puts profitability in front of volume, that 4 might easily become 5 or even 6: that’s to say, good enough!

As far as 2) is concerned, I like much better all the assets in the hands of a very small group of talented people, who concentrate them in some very lucrative ideas, instead of having the assets scattered among dozens or hundreds of professionals, making thousands and thousands of small and medium sized loans. If 5 is good enough, I would give 7 to the use of float and 4 to the use of deposits.

Unfortunately, unlike 1), 2) is much less dependant on the quality of management: to make loans to families, to small and medium enterprises is just the nature of the banking industry, right?

In the end, imo there are some insurance companies (I agree! Very few of them!) which are good enough, with a score of 5 or higher, both in 1) and in 2). In banking, instead, while there might be a lot of examples with a score higher than 5 in 1), the banks which are also good enough in 2) are very rare.

That’s probably why we see great investors and entrepreneurs using insurance as the vehicle to compound their wealth, while instead it is much more difficult to find examples in banking!

 

 

He then answered me with very good counter arguments and I hope he will post his message as well. To that message I will now post some new comments.

 

giofranchi

[giofranchi]

Hi txlaw,

on the contrary, it is me who must apologize! I was the first one to say I don’t think anyone can know an organization like BAC very well, and it is clear instead that you strongly believe otherwise… So, I was not careful enough and it was me who provoked you… I am really sorry!

 

Now, let’s comment on this issue of IV… I agree with you that also the expression “to buy below IV and sell at IV” is somewhat misleading… the simple fact is IV is almost useless… because, though everyone seems to talk about IV, no one in the end uses or even calculates it.

Take, for instance, the net-net bargain idea of Mr. Graham, or the “replacement value” idea: they have nothing to do with IV… the only link they have to IV is that current assets minus total liabilities are probably worth much less than IV, and that replacement cost is probably much lower than IV.

Also people who are more interested in earnings power almost never calculate IV: how many times have you heard the expression: “I want growth for free”? As if to consider earnings at today’s level were a “safe” policy… Once again: either you know what you own or you don’t, there is no substitute for that.

Even when all your efforts are concentrated in trying to know what you own, very few people calculate IV: take, for instance, my calculation of the discounted present value of LRE future equity: that number clearly is not IV! Which kind of business sustain a ROE of 20% for almost 30 years, then disappears all of a sudden? Like I have assumed? It makes no sense, right?

In fact, people who concentrate all their efforts on knowing ever more deeply what they own usually are interested much more in the CAGR of their wealth, rather than in assigning a precise IV to their holdings.

Therefore, let me try this other expression: “to buy below a specific target price, and to sell when that target is reached”. But… I already know this one will be misleading too!!

 

If I have understood correctly, what you seem to be doing is something that I find very rare indeed: you really strive to calculate IV and you keep your holdings, until they reach “that” target. If this is the case, I am sure you must know all your holdings very well. But let me be clear: I think this is possible only because, as you have said, you run a very concentrated portfolio and because its turnover must be very low indeed! Once again let me use LRE as an example: I don’t expect to see LRE ever trade at IV! It follows that, to hold it until it gets to IV, I must hold it forever… Ok, that’s a little bit emphatic, but it conveys my idea well.

 

Your behavior is much different from the construction of a widely diversified portfolio of companies that are selling “below a specific target price”. When I misleadingly talked about trading, I was referring to the strategy of assembling a widely diversified portfolio of companies that are selling below a specific target price, with the goal to sell them as soon as that target is reached. Even if that target price generally grossly underestimate IV. I repeat: a very sound strategy to make a lot of money, but one which doesn’t require to know all the businesses involved very well.

 

So, in how many businesses can a person have great conviction? Well, as you have said, it depends on a lot of things. Personally, I am at work 12 hours each day (week-ends included) and in between the businesses I manage and the businesses I invest in I am already very busy! Of course, I see my circle of competence expanding over time… but not rapidly…

 

Finally, regarding BAC: I am sure Mr. Moynihan is doing a wonderful job, but:

 

For Malone the new merger was just too much to take. His critics of AT&T management were progressively more harsh. He believed that much of the core problem with the company was that the managers of AT&T were not owners. “A guy who rises to the top of a big corporation and owns none of it is much more interested in control than he is in economics. It is just the nature of humanity. A guy who owns his business is used to control. He never has to fight for control. What he has to fight for is economics. But a bunch of entrepreneurs find it much easier to collaborate and create economic value. They have something beyond control – they have economics,” he ruminated. Back in the day, Malone said later, any one director of TCI owned more company stock than the entire AT&T board. It was not complicated, he said: You’ve got to have some skin in the game.

--Cable Cowboy

 

Remember that I am a “guy who owns his business”, I am not a finance guy. And by “to own my business” I don’t mean that I must micromanage it… in fact, I never do! It means, instead, that I am the one to take all the “strategic decisions”, that I am the one to choose how its capital is used. If I cannot do that, to invest in a business, I require at least that there be another person, I admire and trust, who puts his/her interests and mine at the same level, and who does that job in my stead, possibly the same way I would have done it! Otherwise, I won't invest.

 

giofranchi

 

[Kraven]

Hi txlaw,

on the contrary, it is me who must apologize! I was the first one to say I don’t think anyone can know an organization like BAC very well, and it is clear instead that you strongly believe otherwise… So, I was not careful enough and it was me who provoked you… I am really sorry!

 

Now, let’s comment on this issue of IV… I agree with you that also the expression “to buy below IV and sell at IV” is somewhat misleading… the simple fact is IV is almost useless… because, though everyone seems to talk about IV, no one in the end uses or even calculates it.

Take, for instance, the net-net bargain idea of Mr. Graham, or the “replacement value” idea: they have nothing to do with IV… the only link they have to IV is that current assets minus total liabilities are probably worth much less than IV, and that replacement cost is probably much lower than IV.

Also people who are more interested in earnings power almost never calculate IV: how many times have you heard the expression: “I want growth for free”? As if to consider earnings at today’s level were a “safe” policy… Once again: either you know what you own or you don’t, there is no substitute for that.

Even when all your efforts are concentrated in trying to know what you own, very few people calculate IV: take, for instance, my calculation of the discounted present value of LRE future equity: that number clearly is not IV! Which kind of business sustain a ROE of 20% for almost 30 years, then disappears all of a sudden? Like I have assumed? It makes no sense, right?

In fact, people who concentrate all their efforts on knowing ever more deeply what they own usually are interested much more in the CAGR of their wealth, rather than in assigning a precise IV to their holdings.

Therefore, let me try this other expression: “to buy below a specific target price, and to sell when that target is reached”. But… I already know this one will be misleading too!!

 

If I have understood correctly, what you seem to be doing is something that I find very rare indeed: you really strive to calculate IV and you keep your holdings, until they reach “that” target. If this is the case, I am sure you must know all your holdings very well. But let me be clear: I think this is possible only because, as you have said, you run a very concentrated portfolio and because its turnover must be very low indeed! Once again let me use LRE as an example: I don’t expect to see LRE ever trade at IV! It follows that, to hold it until it gets to IV, I must hold it forever… Ok, that’s a little bit emphatic, but it conveys my idea well.

 

Your behavior is much different from the construction of a widely diversified portfolio of companies that are selling “below a specific target price”. When I misleadingly talked about trading, I was referring to the strategy of assembling a widely diversified portfolio of companies that are selling below a specific target price, with the goal to sell them as soon as that target is reached. Even if that target price generally grossly underestimate IV. I repeat: a very sound strategy to make a lot of money, but one which doesn’t require to know all the businesses involved very well.

 

So, in how many businesses can a person have great conviction? Well, as you have said, it depends on a lot of things. Personally, I am at work 12 hours each day (week-ends included) and in between the businesses I manage and the businesses I invest in I am already very busy! Of course, I see my circle of competence expanding over time… but not rapidly…

 

Finally, regarding BAC: I am sure Mr. Moynihan is doing a wonderful job, but:

 

For Malone the new merger was just too much to take. His critics of AT&T management were progressively more harsh. He believed that much of the core problem with the company was that the managers of AT&T were not owners. “A guy who rises to the top of a big corporation and owns none of it is much more interested in control than he is in economics. It is just the nature of humanity. A guy who owns his business is used to control. He never has to fight for control. What he has to fight for is economics. But a bunch of entrepreneurs find it much easier to collaborate and create economic value. They have something beyond control – they have economics,” he ruminated. Back in the day, Malone said later, any one director of TCI owned more company stock than the entire AT&T board. It was not complicated, he said: You’ve got to have some skin in the game.

--Cable Cowboy

 

Remember that I am a “guy who owns his business”, I am not a finance guy. And by “to own my business” I don’t mean that I must micromanage it… in fact, I never do! It means, instead, that I am the one to take all the “strategic decisions”, that I am the one to choose how its capital is used. If I cannot do that, to invest in a business, I require at least that there be another person, I admire and trust, who puts his/her interests and mine at the same level, and who does that job in my stead, possibly the same way I would have done it! Otherwise, I won't invest.

 

giofranchi

 

Gio,

 

2 quick points. 

 

One, I would agree with you that no one can really know a bank like BAC very well.  People who think they do are fooling themselves.  It all comes down to a few primary facts and the rest is virtually unknowable.  Just as an example, a derivatives book could take down a firm very quickly.  Something like the JPM situation is just a minor example of what could occur.  How would one know what the derivatives book is?  From the filings?  That's amusing since it changes on a minute by minute, second by second basis, so the "picture in time" from weeks or months earlier is virtually meaningless.  And even if someone had real time access to it, it's still meaningless since all valuations are guesstimates and assumptions anyway.  So this is 5-10 guys on a desk or 2 in NY and London.  What about the hundreds of other desks?  And this is just on the investment banking side.  No one, not Buffett, not the CEO, not someone reading a filing, has pure knowledge on a large bank.  Of course, the same could be said for many other institutions as well.

 

Second, in terms of IV, I think you're mistaken on that point.  Many people calculate it, myself included.  No, it's never exact, but that's where the "art" of investing comes in.

[txlaw]

Below is my PM to Gio in its entirety.

 

---------

 

Gio, forgive me if I get a bit heated in these discussions.  I just tend to believe quite strongly in what I'm saying and sometimes that comes out in a forceful manner.  Perhaps that's the lawyer coming out in me!

 

Hi txlaw,

first of all just few words on diversification: if 5 is good enough and other factors make me believe that a business is an 8, even if it is not very diversified, I acknowledge that, were it diversified, that same business could be a 9… Yet, I am happy with an 8 nonetheless. Vice versa, if other factors make me believe that business is a 3, and thanks to diversification it gets to be a 4, it still doesn’t reach the minimum required score… and I won’t invest.

 

I would agree with you said here.  I guess we simply disagree on where BAC belongs on the rating scale. 

 

I actually believe that BAC will be one of the best banking utilities to own going forward, and that's because of what Moynihan has been doing to clean the place up.  It's like getting to buy into WFC before people realize how great a deposit base it has, and how good they are at underwriting over the long cycles.

 

But that's what makes a market, I guess.

 

Now, about “investing”, “trading “, and “knowing a business”… There is a reason why I use the words investing and trading: when you own a business for the long run, you must rely on the wealth that business is going to create through the years. If you buy it at a bargain price, that represents just an extra boost to your financial well being. Instead, if you keep buying below IV and selling at IV, you keep relying on mistakes made by the market, but very little on the long term wealth created by those businesses.

Anyway, I understand why using the words “investing” and “trading” might cause misunderstandings, so let’s say instead “to buy and hold” and “to buy below IV and sell at IV”.

 

I guess I disagree with you because we're talking about publicly held companies that tend to retain their earnings, as opposed to distributing them.

 

To the extent that earnings are kept by a publicly held company and you have no control over the distribution of those retained earnings, you are always relying on what the market (or some private buyer) currently values your business at when it comes to ability to realize value.  And the only way to determine what the market will eventually value your business at (IV) is by relying on the wealth the company actually generates and the risk involved, with steep discounts to IV often being the key factor in "intelligent investing," as per Ben Graham, because you are building in a margin of safety.

 

So I see very little distinction between "buying and hold" and "buying under IV and selling at IV" when we talk about non-control investing. 

 

Imo, “to buy and hold” you must know a business very well, because you must be able to continually reassess its future prospects, the wealth it is really going to generate in the future. And that is simply not easy to do! That’s why I am very skeptical when people say “I know 200 businesses!”. Of course, it has nothing to do with how many times you buy and sell the shares of a business… This is evident, isn’t it? I also understand that how much knowledge is required to buy and hold a business is subjective, it is different for each of us. To buy and hold for me means that, if the stock price were to fall 40%, I would be averaging down aggressively… and, to have the fortitude to do that, I know that I need a tremendous amount of conviction. That’s why I know I NEED all I have written and posted on the board.

Of course, it is just me! Instead, you might require a different level of knowledge, and still be very confident and calm buying and holding a business!

“To buy below IV and sell at IV”, instead, requires much less conviction about the future prospects of a business, don’t you agree? Wasn’t Mr. Graham of the same opinion?

 

I would agree with you that you probably don't need as much conviction if you buy at a huge discount to IV, versus buying a business at a "fair" price, where error can cause you to lose quite a bit of money. 

 

However, simply because a fellow buys below IV and sells at IV, and doesn't need to have as much conviction, doesn't necessarily mean that he knows less about the business he owns than the "buy and hold" investor, especially if that fellow practices "focus investing."  IMO, one of the best approaches to wealth generation in the capital markets is to buy well below IV and to understand the business very well. 

 

As to knowing a large number of businesses, I think this depends on one's investing acumen and the time one has to put into understanding a biz.  WEB can keep track of and understand a crazy amount of businesses, and although he cannot write the checks on a daily basis (he doesn't even micromanage at his subsidiary businesses), I feel confident that he probably understands and knows these businesses better than most people on this board know and understand the businesses in their concentrated portfolios.

 

Now, one can never know as much about what's going on in a non-controlled biz as management, but this is the case for any capital markets investment.  Which is why you generally look for good to great management.  But the degree to which it is necessary to rely on management depends on the nature of the business (think, KO or PG or a simple utility) and the price you have paid.

 

Finally, about the insurance industry and the banking industry: I would split them both in two:

1) the gathering of assets,

2) the deploying of assets.

As far as 1) is concerned, I agree that the banking industry is safer: deposits are clearly safer than float. If 5 is good enough, I would give 7 to deposits and 4 to float.

But, in insurance it very much depends on the quality of the underwriting team. So, if you find a team that is very prudent, and constantly puts profitability in front of volume, that 4 might easily become 5 or even 6: that’s to say, good enough!

As far as 2) is concerned, I like much better all the assets in the hands of a very small group of talented people, who concentrate them in some very lucrative ideas, instead of having the assets scattered among dozens or hundreds of professionals, making thousands and thousands of small and medium sized loans. If 5 is good enough, I would give 7 to the use of float and 4 to the use of deposits.

Unfortunately, unlike 1), 2) is much less dependant on the quality of management: to make loans to families, to small and medium enterprises is just the nature of the banking industry, right?

In the end, imo there are some insurance companies (I agree! Very few of them!) which are good enough, with a score of 5 or higher, both in 1) and in 2). In banking, instead, while there might be a lot of examples with a score higher than 5 in 1), the banks which are also good enough in 2) are very rare.

That’s probably why we see great investors and entrepreneurs using insurance as the vehicle to compound their wealth, while instead it is much more difficult to find examples in banking!

 

I agree that the potential upside in utilizing insurance float is greater than utilizing sticky bank deposits (when I say "bank", I'm talking about commercial banks) because of: (1) the ability to have smaller teams controlling a great amount of leverage, and (2) the greater ability to concentrate the asset side in lucrative ideas.  So, yeah, I agree that's why the greats tend to use insurance companies as their compounding vehicles.

 

But, IMO, the dangers associated with underwriting insurance policies, even with small teams, is greater than having large dispersed teams underwriting bank loans in a diversified manner, and using sound banking principles.  (Remember, FFH almost went under because of the unforeseen dangers associated with their policy books.)  The key, though, is that I'm talking about sound banking, which tends to be what we call plain vanilla commercial banking. 

 

So banking, by its nature, can be a lot easier and safer than insurance even with a less competent team, and using far more professionals.  In fact, scale can be a big plus for banks.  And when you get a competent team in place (like at M&T bank or at WFC), banking can be an outstanding business.  That's why WEB once said he would be willing to put a large slug of his portfolio into WFC during the financial crisis.

 

However, banking will never have the same upside as the few outstanding insurance operations that exist in the world.

[giofranchi]

Second, in terms of IV, I think you're mistaken on that point.  Many people calculate it, myself included.  No, it's never exact, but that's where the "art" of investing comes in.

 

Hi Kraven,

I know you are extremely good at what you do, but even for you it must be a huge amount of work!

I think you run a portfolio of 50-60 securities, right? Please, correct me if I am wrong. And I guess your medium holding period is between 2 to 3 years, right? Let’s say 2.5 years. You have been investing for more or less 20 years now, right? So you must have already bought and sold something like (20 / 2.5) x 55 = 440 securities. Let’s say that you have bought and sold all those companies at least twice: that would bring the count down to 220 securities.

The single thought that you have studied 220 companies deeply enough, to get to a strong conviction about all the cash they will generate until they shut doors, gives me the headaches! ;D Moreover, what for? If they are selling for less than a reasonable target price, you already know that there might be a huge discount to IV… is it so useful to know exactly how huge that discount actually is?

 

giofranchi

 

[txlaw]

The only thing I would add is that part of the disagreement we are having may be a result of terminology.

 

When I say "know the business," I'm talking about understanding how the business works very well, as well as the risks involved.  One's degree of knowledge about what's going on at a business is variable and is always less for an OPMI.

 

As I mentioned in my PM, it's just not possible for anyone who is not management to know what's going on at a biz.  And when you have a large organization, especially with a large number of employees, even management doesn't know what's going on completely.  That's why you have policies that get put in place to protect against those risks, as well as a general ethos you try to instill in the corporate culture.

 

The London Whale incident is exactly the type of thing I'm talking about.  I had no idea what was going on at JPM's derivatives books.  And neither did Jamie Dimon, who is one of the best managers in the country, IMO.  Yet, after that blew over, I took the opportunity to invest in the JPM TARP warrants because I believe Dimon has put into place a system that will protect JPM even in the face of such financial disasters.

 

It's not simply about "understanding the business" when it comes to investing in JPM.  You must demand a MOS when investing in something like JPM, which I feel I have it, and you must also be confident in management.

[txlaw]

If I have understood correctly, what you seem to be doing is something that I find very rare indeed: you really strive to calculate IV and you keep your holdings, until they reach “that” target. If this is the case, I am sure you must know all your holdings very well. But let me be clear: I think this is possible only because, as you have said, you run a very concentrated portfolio and because its turnover must be very low indeed! Once again let me use LRE as an example: I don’t expect to see LRE ever trade at IV! It follows that, to hold it until it gets to IV, I must hold it forever… Ok, that’s a little bit emphatic, but it conveys my idea well.

 

Okay, one other thing for me to add.

 

I do run a very concentrated portfolio, but turnover is not necessarily low for me.  If I own a boatload of Level 3 at $1, which is ridiculously cheap, and it goes to $1.7, near IV, I will sell a substantial amount of it, and maybe all of it, only to buy at a later date if Mr. Market gives me the opportunity.  I may do this for portfolio reasons -- I don't want Level 3 to constitute the majority of my portfolio.  Or I may do this because of the opportunity cost of holding a biz that is close to IV, when I can buy another biz at 50 cents on the dollar.  And I even do this for tax purposes as well (harvesting tax losses and putting the proceeds into just as undervalued ideas).

 

I do tend to engage in some trading.

 

So I probably would not fit your definition of a long term holder.  But my main argument is that the "buy and hold" investor doesn't necessarily understand a biz better than the "buy below IV and sell at (or close to) IV" investor.

[Kraven]

Second, in terms of IV, I think you're mistaken on that point.  Many people calculate it, myself included.  No, it's never exact, but that's where the "art" of investing comes in.

 

Hi Kraven,

I know you are extremely good at what you do, but even for you it must be a huge amount of work!

I think you run a portfolio of 50-60 securities, right? Please, correct me if I am wrong. And I guess your medium holding period is between 2 to 3 years, right? Let’s say 2.5 years. You have been investing for more or less 20 years now, right? So you must have already bought and sold something like (20 / 2.5) x 55 = 440 securities. Let’s say that you have bought and sold all those companies at least twice: that would bring the count down to 220 securities.

The single thought that you have studied 220 companies deeply enough, to get to a strong conviction about all the cash they will generate until they shut doors, gives me the headaches! ;D Moreover, what for? If they are selling for less than a reasonable target price, you already know that there might be a huge discount to IV… is it so useful to know exactly how huge that discount actually is?

 

giofranchi

 

Gio, I currently have over 100 positions, but I am not sure exactly how many.  Some are small, tracker positions and illiquid stocks where I never got much of a fill.  I do this full time so it's not like I'm trying to squeeze it in in the evenings and on the weekends.  Remember that I invest primarily on a quantitative basis.  I let the numbers as I adjust them tell me what I need to know.  And they do.  If you listen, the numbers tell you a story that you can either believe or not.  So I look at however much I need to in order to reach a conclusion.  I have made determinations after looking at and adjusting for many many years worth of data and I've made decisions to move forward in 30 seconds after looking at one or 2 things. 

 

Sometimes I don't have an IV in mind other than the proverbial Graham knowing that a man is overweight without knowing his exact weight or the wonderfully dated knowing a woman is old enough to vote without knowing her age.  Without an IV in mind though its difficult to know when to sell.  Usually in those cases I'll sell after a "satisfactory" return, whatever that means to me at the time.  As I've said before, my investment approach is run like a grocery store.  I buy and sell inventory.  That's all stocks are to me - inventory.  Some people hang their stocks on a wall like they're beautiful artwork never to be touched by human hands again.  I treat my stocks like 12 packs of diet coke that are shoved against the wall bought at one price and available to be sold at another price.  So when a stock hits my buy price, assuming nothing has changed, I buy.  When it reaches IV (my sell price), or close to it, I sell.  That's it.  As Mr. Gekko said, don't get emotional about stocks.  I don't (or I try not to!).

[Kraven]

The only thing I would add is that part of the disagreement we are having may be a result of terminology.

 

When I say "know the business," I'm talking about understanding how the business works very well, as well as the risks involved.  One's degree of knowledge about what's going on at a business is variable and is always less for an OPMI.

 

As I mentioned in my PM, it's just not possible for anyone who is not management to know what's going on at a biz.  And when you have a large organization, especially with a large number of employees, even management doesn't know what's going on completely.  That's why you have policies that get put in place to protect against those risks, as well as a general ethos you try to instill in the corporate culture.

 

The London Whale incident is exactly the type of thing I'm talking about.  I had no idea what was going on at JPM's derivatives books.  And neither did Jamie Dimon, who is one of the best managers in the country, IMO.  Yet, after that blew over, I took the opportunity to invest in the JPM TARP warrants because I believe Dimon has put into place a system that will protect JPM even in the face of such financial disasters.

 

It's not simply about "understanding the business" when it comes to investing in JPM.  You must demand a MOS when investing in something like JPM, which I feel I have it, and you must also be confident in management.

 

Good points generally.

[Guest ajc]

Great thread.

[Guest longinvestor]

This is an excellent thread with great input from many.

 

Two things are paramount for me, when it comes to my investment dollar

1.  Understanding of the business - Enuff said here already

2. The jockey

 

Jockey

Jockey + Large Capital Allocator

Jockey + Large Capital Allocator + Value Investor

Jockey + Large Capital Allocator + Value Investor + 90+% Net worth in biz

Jockey + Large Capital Allocator + Value Investor + 90+% Net worth in biz + Transparent

Jockey + Large Capital Allocator + Value Investor + 90+% Net worth in biz + Transparent + 25 Year of 20% returns under first jockey

Jockey + Large Capital Allocator + Value Investor + 90+% Net worth in biz + Transparent + 50 Year of 20% returns under first jockey

Jockey + Large Capital Allocator + Value Investor + 90+% Net worth in biz + Transparent + 50 Year of 20% returns under first jockey + Mr. Market offers biz below IV

 

.....90% of my portfolio is in two jockeys' hands. I follow everything they say, report etc.  I avoid businesses whose jockeys belong somewhere at the top of the trait list, my own understanding of the business be damned. Also, I try very hard not to be a busy body in the name of value investing. Buy-and-hold does it for me. I simply trust that my investment will beat the index over the long term modestly. Not counting on anything more.

 

When a second jockey is in place I have enough trust that the first will have passed the baton along protecting my interests. I will revisit the investment 5 years after the second jockey takes over.

 

 

 

 

[rjstc]

This is an excellent thread with great input from many.

 

Two things are paramount for me, when it comes to my investment dollar

1.  Understanding of the business - Enuff said here already

2. The jockey

 

Jockey

Jockey + Large Capital Allocator

Jockey + Large Capital Allocator + Value Investor

Jockey + Large Capital Allocator + Value Investor + 90+% Net worth in biz

Jockey + Large Capital Allocator + Value Investor + 90+% Net worth in biz + Transparent

Jockey + Large Capital Allocator + Value Investor + 90+% Net worth in biz + Transparent + 25 Year of 20% returns under first jockey

Jockey + Large Capital Allocator + Value Investor + 90+% Net worth in biz + Transparent + 50 Year of 20% returns under first jockey

Jockey + Large Capital Allocator + Value Investor + 90+% Net worth in biz + Transparent + 50 Year of 20% returns under first jockey + Mr. Market offers biz below IV

 

.....90% of my portfolio is in two jockeys' hands. I follow everything they say, report etc.  I avoid businesses whose jockeys belong somewhere at the top of the trait list, my own understanding of the business be damned. Also, I try very hard not to be a busy body in the name of value investing. Buy-and-hold does it for me. I simply trust that my investment will beat the index over the long term modestly. Not counting on anything more.

 

When a second jockey is in place I have enough trust that the first will have passed the baton along protecting my interests. I will revisit the investment 5 years after the second jockey takes over.

 

Not bad. Of course you already knew you were going to get asked the question who. I'm guessing Brk & Luk?

[Guest longinvestor]

This is an excellent thread with great input from many.

 

Two things are paramount for me, when it comes to my investment dollar

1.  Understanding of the business - Enuff said here already

2. The jockey

 

Jockey

Jockey + Large Capital Allocator

Jockey + Large Capital Allocator + Value Investor

Jockey + Large Capital Allocator + Value Investor + 90+% Net worth in biz

Jockey + Large Capital Allocator + Value Investor + 90+% Net worth in biz + Transparent

Jockey + Large Capital Allocator + Value Investor + 90+% Net worth in biz + Transparent + 25 Year of 20% returns under first jockey

Jockey + Large Capital Allocator + Value Investor + 90+% Net worth in biz + Transparent + 50 Year of 20% returns under first jockey

Jockey + Large Capital Allocator + Value Investor + 90+% Net worth in biz + Transparent + 50 Year of 20% returns under first jockey + Mr. Market offers biz below IV

 

.....90% of my portfolio is in two jockeys' hands. I follow everything they say, report etc.  I avoid businesses whose jockeys belong somewhere at the top of the trait list, my own understanding of the business be damned. Also, I try very hard not to be a busy body in the name of value investing. Buy-and-hold does it for me. I simply trust that my investment will beat the index over the long term modestly. Not counting on anything more.

 

When a second jockey is in place I have enough trust that the first will have passed the baton along protecting my interests. I will revisit the investment 5 years after the second jockey takes over.

[/quote

 

Not bad. Of course you already knew you were going to get asked the question who. I'm guessing Brk & Luk?

 

Warren, Prem

[oddballstocks]

I'd take a page from Warren & Charlie's book and say muni's, but with rising rates and defaults...what's so wrong with cash!?

 

In addition...the article seems too paranoid. The Era of Uncertainty? I am almost certain that Americans will be eating hamburgers, drinking Coke, living in single family homes, commuting via car, using their phones, using medical care, burning fossil fuels to heat their home in the winter and using electricity to cool it in the summer, and watching TV in 10 years. What exactly, is so uncertain? Interest rates?

 

I can see it now, grandmothers everywhere in the sweltering heat exclaiming how they refuse to turn the central air on because interest rates are too high. Or my friends and family refusing to use their phones because of "macroeconomic uncertainty". Corporate profits are at all time highs, therefore I refuse to drink Coke. I'd like an RC Cola, please!

 

I'm late to this thread, but this is an awesome comment, you clearly have two feet in the real world. 

[giofranchi]

This is an excellent thread with great input from many.

 

Two things are paramount for me, when it comes to my investment dollar

1.  Understanding of the business - Enuff said here already

2. The jockey

 

Jockey

Jockey + Large Capital Allocator

Jockey + Large Capital Allocator + Value Investor

Jockey + Large Capital Allocator + Value Investor + 90+% Net worth in biz

Jockey + Large Capital Allocator + Value Investor + 90+% Net worth in biz + Transparent

Jockey + Large Capital Allocator + Value Investor + 90+% Net worth in biz + Transparent + 25 Year of 20% returns under first jockey

Jockey + Large Capital Allocator + Value Investor + 90+% Net worth in biz + Transparent + 50 Year of 20% returns under first jockey

Jockey + Large Capital Allocator + Value Investor + 90+% Net worth in biz + Transparent + 50 Year of 20% returns under first jockey + Mr. Market offers biz below IV

 

.....90% of my portfolio is in two jockeys' hands. I follow everything they say, report etc.  I avoid businesses whose jockeys belong somewhere at the top of the trait list, my own understanding of the business be damned. Also, I try very hard not to be a busy body in the name of value investing. Buy-and-hold does it for me. I simply trust that my investment will beat the index over the long term modestly. Not counting on anything more.

 

When a second jockey is in place I have enough trust that the first will have passed the baton along protecting my interests. I will revisit the investment 5 years after the second jockey takes over.

 

I would also add that I like to partner with someone who:

 

1) Takes the time, a lot of time!, to explain thoroughly and very clearly what he is doing and why. Always from a strategic point of view! I want to make sure I would be doing the same things, if I were in his stead.

 

2) Is still young enough to keep working as the chief strategist and capital allocator of his/her company for a very long time. As I have already said, to really understand the true reasons behind one person’s success is extremely difficult… too many variables involved… many of them clearly not knowable by the general public… so, a successor might do fine… but I like the founder much better!

 

3) Enjoys some competitive advantage: he/she might control whole businesses, which keep generating new cash for him/her to shrewdly deploy; he/she might have enough muscles to play an activist role in each venture he/she decides to pursue (this also means playing a strategic role: fix the management problem, then a new, better, more efficient management will micromanage all the operations); he/she might have some sort of cheap and safe leverage (insurance float, for instance).

 

4) Is at the helm of a company small enough to be effectively controlled and to have still much room to grow. I always put myself in his/her shoes: would I feel comfortable trying to control an organization with hundreds of billions in assets? Would I feel able to keep on growing its capital at a satisfactory compounded annual rate? The answers are: NO and NO.

 

giofranchi

 

[SharperDingaan]

Great thread. As we run our portfolio on a conventional business basis (not that different from Gio's), a few crumbs.

 

Cash. 1-5% to pay the bills & that's it. Cash for an investment is actually margin. Rack it up when you buy, pay it down when you sell. Holding 30% of a portfolio in cash is actually self-destructive; why are you not holding it in a long term bond paying interest - that you subsequently borrow against.

 

Supply/Demand. It is a grocery store - when it's hot everybody wants gelato, when it's cold they want coffee; nothing to do with the merits of gelato or coffee themselves. Sentiment is the supply/demand impact on your stock. Could just be the season, interest by new kinds of investor (momentum, investment guru, etc.), or a pretty skirt in the bull pen.

 

IV. It's nothing but a yardstick, & your best guess; everyone around you will have a different number. We're simply trying to buy cheap & sell at something a little less cheap. The more of the price discount we try to realize on, the more risk we take. For most folk, buying at 65c on the $, & selling at 85c on the $ - is more than adequate - especially when it is a rubber yardstick.

 

Quality. Selling fresh bananas is more profitable & less risky than selling old ones 3 days from the garbage can. Value investing is biased to old bananas. We just call the fresh bananas growth stocks & the old ones cigar butts!

 

SD

[giofranchi]

Cash. 1-5% to pay the bills & that's it. Cash for an investment is actually margin. Rack it up when you buy, pay it down when you sell. Holding 30% of a portfolio in cash is actually self-destructive; why are you not holding it in a long term bond paying interest - that you subsequently borrow against.

 

Hi SD,

What do you mean by long term bonds? 10 years? Well, if interest rates rise 100 basis points, I lose 10%… and rates have just risen more than 100 basis points in a matter of weeks…

 

Supply/Demand. It is a grocery store - when it's hot everybody wants gelato, when it's cold they want coffee; nothing to do with the merits of gelato or coffee themselves.

 

Ah… C’mon! You clearly are not aware of the powers of a really good coffee… Well, of course! The best coffee you can get is in a Starbucks… ;D ;D ;D If you ever come to Milan in winter, let me know! It is cold and everyone wants coffee, you are right, but I will let you taste the best cup of coffee in the whole city… And you will suddenly realize why everybody wants that coffee and not another one! ;)

 

giofranchi

 

[SharperDingaan]

What do you mean by long term bonds?

 

... Just has to be high quality & liquid, there is no intent to hold to maturity. The longer term is just to get a better rate than T-Bills, balanced against the uncertain possibility of an intervening rate rise.