Comments on Intelligent investing - Insights for investors to acquire more than what you pay.: Basics for a decent investor/money manager

Hi Daniel, Generally speaking, a good investor sh...

2009-07-13T06:47:18.925-07:00

Hi Daniel,

Generally speaking, a good investor should not be affected by the glamour of investing. The good investor will not seek to be in the spotlight, but if that investor turns out to be as good as Buffett, there's no way he could escape being obscure. Being in the spotlight have its disadvantage for it means more people will judge what you do, and then you in turn may get influence by noises. When there are many voices and noises, it is not easy to cut to the bone and get the few things that really counts.

Well just my thoughts.

Cheers

I thought of another trait that belongs in the "Ri...

2009-07-12T22:42:19.748-07:00

I thought of another trait that belongs in the "Right Person" category. It's the ability to thrive, and do your best work, in obscurity.

Some people do work better in spotlight situations: they're the life-of-the-party type. Since spotlight companies are usually overvalued, that kind of person is at a real disadvantage when it comes to buying and holding undervalued stocks - which are usually obscure. The wall-flower, the one-on-one'er, has a better shot if (s)he nails the other habits down.

thanks for responding to my comments. This sort of...

2009-07-11T21:26:05.743-07:00

thanks for responding to my comments. This sort of exchange helps me think more constructively about my own opinions.

Good point about the banks. I guess that was written on the wall maybe when the government was giving them money at 0% and all they had to do was do anything. But I'm not that knowledgeable about how they run those businesses.

Hi Daniel, Thank you for dropping by. Actually, y...

2009-07-11T03:23:11.470-07:00

Hi Daniel,

Thank you for dropping by. Actually, you are right that many rules don't sink in for us till we experience it personally. But on the other hand, we can capitalize by watching the mistakes committed by others so that we try as much as possible to curb our natural instinct which might otherwise lead us to committing mistakes unwittingly -we don't hope to learn a lesson by "peeing on an electric fence."

Hi Mark,

Thank you for your comments.

I think you are spot on on the intrinsic value where IV is doesn't change much only for those businesses with competitive durable advantage - like pg, jnj, kft, kelloggs. A lot of others business where it involves changes, the IV would change quite a bit because of its cyclical nature or unpredictability. Such businesses, it is difficult to derive their IV. Well, that's why my personal circle of competency is relatively small. I like predictable, stable business.

And yes, I totally agree the best time to buy is when you don't even need any DCF calculation because it is so cheap that any sensible investor can recognize. Two months back, personally, I think there was such opportunity. In march, a lot of banks are selling at 3 times or less of their earnings before tax and provision for losses. An example is Wells Fargo, it fell to less than $8. At $8, the company was selling at $34 billion. Its earnings before tax and provision for losses is estimated at about $35 to $40 billion. It was selling at a ridiculous valuation of less than 1 time of its Pretaxpreprovision earnings. The other is JPM, it fell to less than $15, market cap was $55 billion, pretaxpreprovision earnings is about $45 to $50 billion....goodness me, it is selling at 1.3 times pretax and provision earnings. That is madness. Any of the decent banks you value then from USB, PNC, AXP, people are valuing them less than 3 times.

After Buffett purchase of WPO, the price drops - if i remember correctly - by over 20%. After accumulating WPO stake, Berkshire ended up with less than 10% (unsure if correct but should be around there). The controlling interest still lies with the Graham family where Graham shares are A class which gives them more power in voting.

Personally, I think activist investor or not, does not really affects the business fundamentals. Over time, the business fundamentals are what guides the business value or market price. Whether Buffett invested in WPO or not, WPO price will rise to where it deserves to be. On the other hand, let's examine what happen to the original core business of BRK. BRK was in the textile mill business when Buffett purchase it. Buffett, even if he choses to be a Carl Icahn or Henry Kravis, he could never have turned around the textile business, for it has a declining business fundamental - something which WPO is facing today but not in the 1970s.

This year, we look at the car business, GM used to have an activist investor, Kirk Kerkorian. He couldn't turn the business fundamental around. Whether he make any money in his investment is secondary, if he had stayed with GM, his stake would be vanished.

The other is Ceberus investment in Chrysler. The equity are probably wiped out. So much for being an activist investor in any business with weak fundamentals.

Another thing is intrinsic value. You said in your...

2009-07-11T00:40:43.342-07:00

Another thing is intrinsic value. You said in your post that the business doesn't change over time. Atleast that is with durable competitive advantage type businesses that some value investors like.

The thing is stock prices change "but so does the business." Economic externalities and shifts in consumer demand that we can't predict except the greatest like Buffett happen and it blows to crap a discounted cash flow analysis or PE model or whatever you use.

I feel like the only or best time to invest in a big company is when the price is so cheap you don't need a DCF analysis. Like M Pabrai. but as i brought up in last comment all that is is a contrarian bet the fundamentals will turn. I've seen this strategy work a lot just by looking for moat companies distressed.

This worked well when we were in times of fantasy capital and economic growth. These days it is different i feel for most companies tied to the consumer. Though i would buy Amazon or Ebay for a pe of 4 in a heart beat but it isn't going to happen.

I think what im trying to say here is buying Amazon or whatever hypothetically at 60 even 50% of a gamble at intrinsic value is not a big enough margin of safety. I think most value managers and investors that buy stocks around fair valuation or slightly under "even with strong fundys" are juust gambling on what they cannot predict. I guess all of this is why I like Ben Graham stocks . bigger margin of safety bc it is just a contrarin bet pretty much. I wonder if value investors usually just aren't taking advantage of sector rotation.

I feel like the only good value investing is deep, deep contrarian investing bc things often have a way of turning around. I don't get these value people who think they have an edge bc Microsoft is at a tiny discount to their DCF. I think to succeed in this game you have to have huge winners and cut your losers. I don't think value investors do this well at all. That's why I'll only look for net-nets these days that can have huge upside.

good post. I studied Buffett a good bit to. His fr...

2009-07-11T00:11:52.042-07:00

good post. I studied Buffett a good bit to. His framework over of his career is solid I feel. I have been wondering though lately just how rational it is for us small retail investors to try and use his best framework.

His best investments like Washington Post about always happen right at the best time to be a contrarian. When the business itself is horrible. thing is though they always turn around because Buffett

takes some kind of control

over the company. With Washington Post he installed a shareholder friendly CEO etc. If I go and make a contrarian bet today without an activist investor it is likely I can get burned completely. So what I'm getting at is really how much of his success is as an investor vs an activist investor? Don't get me wrong I greatly admire him especially on the macro economics but I wonder about that question.

I suspect that many of these rules don't really si...

2009-07-10T22:42:35.614-07:00

I suspect that many of these rules don't really sink in until you try breaking them and get yourself into a spot as a result. Ending up "sadder but wiser" seems to give them the needed meaning.

As far as other ideas are concerned: I've found that ordering up a physical certificate squares our natural tendency to inertia with the value-investing perspective. If I have a certificate in my desk drawer, then I have to take some time out of my day - during business hours - to sell the thing. I have to make a physical trip to the brokerage house's security depository, and then wait some time for it to appear in my account before I could sell it.

If the stock's left in my account, I can easily enter in a sell order through the Internet. Selling a physical certificate, on the other hand, takes time and bother. Thus, I'm far less tempted to trade around.

I heard that the new American system is cumbersome and even more time-consuming, especially for a Canadian like me. Some time ago, I wanted to order a certificate up for an American issue but was dissuaded from doing so by the discount-broker agent I was talking to. He said that it would have taken about six weeks to enter the stock into my account, and that the discount brokerage does not recommend doing so. That disrecommendation made me back off, plus an advisory that I'd have no help with tax matters if I did so.

So, I left it in and traded it away later at a small profit. Had I insisted, though, I would have been sitting on a much larger profit - even if it would have taken me about six weeks to realize the gain.

Had things gone the other way, I might have been sitting on a loss. The delay factor, however, was a point in favour of ordering up. I would have had to wait about six weeks to sell any American stock I'd ordered up, so I would have to make very sure that I'd be going into the issue for solid long-term reasons. I couldn't flip it around.

I don't know how cumbersome the new scrip-registration system is for Americans; it may be as quick as next-day entry. If it's not, though, there's a blessing in disguise: even if you panic, it won't do any good because it may take weeks to get the stock in salable form. For me, anyway, it's like having the stock market closed for six weeks.

The only downside to this approach is seeing the company get wrecked for a previously unknown reason. This drawback, though, would make stop and think hard about going into any stock - which I should be doing anyhow.