A collection of quotes said or written at some point during this calendar year.
"A light-weight vehicle with a small carbon footprint using alternative energy and renewable resources to operate in a sustainable way– When I was a kid, we called it a Schwinn." - P.J O'Rourke Speaking at the Cato Forum
"What Wall Street does is package luck and sell it as skill." - Dan Solin on CNBC
"There's no reason to have a system where every young man has $8 billion to play with and buy whatever he wants. It's incredibly stupid. It's absolutely crazy. If I were in charge, I'd take away everything from banks that wasn't boring. Completely shut down [credit default swaps] 100%. What's the harm in this? The world worked just fine without them. We don't need an economy that resembles a vast poker tournament." - Charlie Munger at the 2009 Wesco Meeting
"A man does not deserve huge amounts of pay for creating tiny spreads on huge amounts of money. Any idiot can do it. And, as a matter of fact, many idiots do it." - Charlie Munger at the 2009 Wesco Meeting
"I remember the $0.05 hamburger and a $0.40-per-hour minimum wage, so I've seen a tremendous amount of inflation in my lifetime. Did it ruin the investment climate? I think not." - Charlie Munger at the 2009 Wesco Meeting
"The world will adapt to higher oil prices, because it has to. It won't be the end of the world. Even at $200 a barrel, we'd be fine. People would adapt. We have an enormous power to adapt." - Charlie Munger at the 2009 Wesco Meeting
"I can't tell you how surprised, even embarrassed I was to get the Nobel Prize in chemistry. Yes, I had passed the dreaded chemistry A-level for 18-year-olds back in England in 1958. But did they realize it was my third attempt? And, yes, I will take this honor as encouragement to do some serious thinking on the topic. I will also invest the award to help save the planet. Perhaps that was really the Nobel Committee’s sneaky motive, since there are regrettably no green awards yet. Still, all in all, it didn't seem deserved." - Jeremy Grantham in the 3Q09 Letter
"Rational expectations and the efficient market hypothesis are as dead as dodos, yet their baleful and painful influence lives on..." - Jeremy Grantham in the 3Q09 Letter
"Yes, of course every country needs a basic financial system to function effectively with letters of credit, deposits, and check writing facilities, etc. But as you move beyond that it is worth remembering that every valued job created by financial complexity is paid for by the rest of the real economy, and talent is displaced from real production, as symbolized by all of the nuclear physicists on prop trading desks." - Jeremy Grantham in the 3Q09 Letter
"Our model is a seamless web of trust that's deserved on both sides. That's what we're aiming for. The Hollywood model where everyone has a contract and no trust is deserved on either side is not what we want at all." - Charlie Munger at the 2009 Berkshire Hathaway Meeting
"We don’t want relationships that are based on contracts. I can’t really think of a formal contract that we have. We have understandings about bonus arrangements with various managers. We have different arrangements because all the businesses are different. We don’t try to hold people by contracts and it wouldn't work. We basically don't like engaging in them." - Warren Buffett at the 2009 Berkshire Hathaway Meeting
"If you have a 150 IQ, sell 30 points to someone else. You need to be smart, but not a genius. What's most important is inner peace; you have to be able to think for yourself. It’s not a complicated game." - Warren Buffett at the 2009 Berkshire Hathaway Meeting
"We don't try to pick bottoms. To sit around and not do something sensible because you think there might be something better…. doesn't make sense. Picking bottoms is not our game. Pricing is our game. And that's not so difficult. Picking bottoms is, I think, impossible." - Warren Buffett at the 2009 Berkshire Hathaway Meeting
Happy New Year,
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Thursday, December 31, 2009
Wednesday, December 30, 2009
Behavioral Bias
Here is a good post summarizing some of the many forms of behavioral bias. The biases covered include:
An excerpt:
"Unfortunately academic approaches which aim to replicate market behavior by tweaking efficient market models often don't translate well to the harsh, Darwinian world of real finance where people need to use these ideas to make money. Typically the models work right up to the point they don't, when they fail catastrophically."
This stuff is useful beyond improving investing results.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
- Overconfidence
- Hindsight Bias
- Loss aversion
- Regret
- Anchoring
An excerpt:
"Unfortunately academic approaches which aim to replicate market behavior by tweaking efficient market models often don't translate well to the harsh, Darwinian world of real finance where people need to use these ideas to make money. Typically the models work right up to the point they don't, when they fail catastrophically."
This stuff is useful beyond improving investing results.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Monday, December 28, 2009
Highly Probables: Berkshire Shareholder Letter Highlights
Warren Buffett wrote the following in the 1996 Berkshire Hathaway (BRKa) shareholder letter:
Of course, Charlie and I can identify only a few inevitables, even after a lifetime of looking for them. Leadership alone provides no certainties: Witness the shocks some years back at General Motors, IBM and Sears, all of which had enjoyed long periods of seeming invincibility. Though some industries or lines of business exhibit characteristics that endow leaders with virtually insurmountable advantages, and that tend to establish Survival of the Fattest as almost a natural law, most do not. Thus, for every inevitable, there are dozens of impostors, companies now riding high but vulnerable to competitive attacks. Considering what it takes to be an inevitable, Charlie and I recognize that we will never be able to come up with a Nifty Fifty or even a Twinkling Twenty. To the inevitables in our portfolio, therefore, we add a few "highly probables."
In the letter, he refers to Coca-Cola (KO) and Gillette (now part of Procter & Gamble:PG) as "The Inevitables".
Adam
Long BRKb, KO, and PG
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Of course, Charlie and I can identify only a few inevitables, even after a lifetime of looking for them. Leadership alone provides no certainties: Witness the shocks some years back at General Motors, IBM and Sears, all of which had enjoyed long periods of seeming invincibility. Though some industries or lines of business exhibit characteristics that endow leaders with virtually insurmountable advantages, and that tend to establish Survival of the Fattest as almost a natural law, most do not. Thus, for every inevitable, there are dozens of impostors, companies now riding high but vulnerable to competitive attacks. Considering what it takes to be an inevitable, Charlie and I recognize that we will never be able to come up with a Nifty Fifty or even a Twinkling Twenty. To the inevitables in our portfolio, therefore, we add a few "highly probables."
In the letter, he refers to Coca-Cola (KO) and Gillette (now part of Procter & Gamble:PG) as "The Inevitables".
Adam
Long BRKb, KO, and PG
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Saturday, December 26, 2009
The Daily Journal
Charlie Munger has been Chairman of The Daily Journal (DJCO) since 1977 and his legal firm controls 41% of the company. It is thinly traded but is one of the few profitable news organizations. This article in TheStreet.com gives a quick overview of DJCO's success.
The Daily Journal has avoided the problems afflicting other news organizations by targeting niches, such as lawyers and readers in small communities in California. This tactic has lead to a profitable mix that capitalizes on the weak coverage of local news on the Web. The company also provides specialized information and software to courts.
The company's operating results have been phenomenal. Its return on equity of 28% and net margin of 22% leave the New York Times and Washington Post in the dust. - TheStreet.com
Daily Journal Prints Cash: Under the Radar
So the business is doing well. At least it is in the context of that industry's troubles. What I find even more interesting is that at the start of this year the company had around $ 22 million of cash and equivalents (mostly in US Treasuries). In fact, for most of the past decade the company had remained cautiously positioned with investments. Around March, approximately $ 20 million of those investments in US Treasuries were converted to common stocks. Those equity investments are now worth $ 54 million with another $ 8 million of cash on the balance sheet...and still no debt (~$ 6 million of the $ 8 million of cash currently on the balance sheet as of 9/30/09 is from FCF generated this year). So as of 9/30/09 approximately $ 62 million of the company's $ 80 million market value is represented by cash and stocks.
One could easily argue that of the great investors who've been around a while Charlie and the DJCO team have had the best year.
Also, if you think DJCO has a decent future right now...that $ 5 million+ in FCF DJCO is generating can be bought for around $ 18 million ($ 80 million market value minus $ 62 million in cash and stocks).
Slightly more than 3.5 Price/FCF. I'm guessing that the portfolio is a pretty sound one considering who is in charge. Whether the business has good future prospects is not as clear but the margin of safety appears to be there.
Adam
No position in DJCO
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
The Daily Journal has avoided the problems afflicting other news organizations by targeting niches, such as lawyers and readers in small communities in California. This tactic has lead to a profitable mix that capitalizes on the weak coverage of local news on the Web. The company also provides specialized information and software to courts.
The company's operating results have been phenomenal. Its return on equity of 28% and net margin of 22% leave the New York Times and Washington Post in the dust. - TheStreet.com
Daily Journal Prints Cash: Under the Radar
So the business is doing well. At least it is in the context of that industry's troubles. What I find even more interesting is that at the start of this year the company had around $ 22 million of cash and equivalents (mostly in US Treasuries). In fact, for most of the past decade the company had remained cautiously positioned with investments. Around March, approximately $ 20 million of those investments in US Treasuries were converted to common stocks. Those equity investments are now worth $ 54 million with another $ 8 million of cash on the balance sheet...and still no debt (~$ 6 million of the $ 8 million of cash currently on the balance sheet as of 9/30/09 is from FCF generated this year). So as of 9/30/09 approximately $ 62 million of the company's $ 80 million market value is represented by cash and stocks.
One could easily argue that of the great investors who've been around a while Charlie and the DJCO team have had the best year.
Also, if you think DJCO has a decent future right now...that $ 5 million+ in FCF DJCO is generating can be bought for around $ 18 million ($ 80 million market value minus $ 62 million in cash and stocks).
Slightly more than 3.5 Price/FCF. I'm guessing that the portfolio is a pretty sound one considering who is in charge. Whether the business has good future prospects is not as clear but the margin of safety appears to be there.
Adam
No position in DJCO
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Thursday, December 17, 2009
"Stock-Renters"
"...we have this huge amount of investors in the market or, rent-a-stock, stock-renters in the market compared to stock owners." - John Bogle on CNBC
Yesterday morning on CNBC, John Bogle referred to the following quote from John Maynard Keynes:
"Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done." - John Maynard Keynes in Chapter 12 of The General Theory of Employment, Interest and Money
Bogle went on to say that one of the biggest risks going forward is what he sees as the unfortunate, and in his view very damaging triumph of speculation over investing. In the video, he goes on to say that the problem is the ongoing trend toward speculators in the market (what he calls the "stock-renters") and away from owners with long-term returns in mind (Bogle points out that the amount of speculative activity is measurably higher now than it was even in 1929).
To me, it makes sense that you end up with more price distortions in the market like we've had this past decade with so many "renters" participating. An owner of something is more likely to be grounded by intrinsic value. A renter will naturally focus on short term price movement even if that price is extremely decoupled from reality.
"Long ago, Ben Graham taught me that 'Price is what you pay; value is what you get.'" - Warren Buffett in the 2008 Berkshire Hathaway Shareholder Letter
If a larger and larger percent of market participants are not grounded in value, and instead focused on price action, doesn't it seem probable that the result will be more stocks becoming mispriced relative to intrinsic value? Would GE and Coca Cola have been selling at 50+ times earnings in the late 90's or Cisco at 100x during the internet bubble (never mind all the internet bubble stocks that made even Cisco at 100x earnings look cheap) if fewer participants were in the "stock-renting" business?
The emergence of the market technicians could be seen as cause or symptom depending on your point of view. Either way, technicians do not see any point to fundamental analysis. It's all in the charts (technical analysis is not new but it is certainly prevalent). Algorithms that are designed to profit from "ownership" of a stock for mere seconds care nothing about value. With fewer participants focused upon value the frequent and widespread mispricing of assets seems inevitable.
In Bogle's book, The Battle for the Soul of Capitalism, he said the following:
"When we should be teaching young students about long-term investing and the magic of compound interest, the stock-picking contests offered by our schools are in fact teaching them about short-term speculation."
Charlie Munger has expressed similar views.
"There's no reason to have a system where every young man has $ 8 billion to play with and buy whatever he wants. It's incredibly stupid. It's absolutely crazy. If I were in charge, I'd take away everything from banks that wasn't boring. Completely shut down [credit default swaps] 100%. What's the harm in this? The world worked just fine without them. We don't need an economy that resembles a vast poker tournament." - Charlie Munger at the 2009 Wesco Shareholder Meeting
For me, large price distortions in the stock market has got to hurt the real economy. Some may ask when Coca-Cola* was selling at 50+ times earnings in the late 90's what's the harm? Well, significant mispricings can lead to distortions in the capital allocation process. Mispriced assets leading to misallocated capital. This might prevent, or at least delay, capital from getting somewhere else where it'd be more useful for economic development. Those misallocated dollars in Coca-Cola (or Cisco, GE, and just about any internet stock at the time), for example, might instead be used to help some entrepreneur get a good idea, in a timely way, off the ground that ultimately would create wealth and jobs.
Obviously, the problem is not that the money disappears in this example. Someone's is always on the other side of the trade. It's just a very inefficient way to do the business of capital allocation and development. You end up with certain industries overcapitalized -- maybe resulting in overcapacity/excess supply -- while others with merit don't get off the ground or are delayed.
The process becomes truly destructive is when lots of fresh capital goes into a bunch of internet startups with little merit while more useful things don't get funded sufficiently or at all.
In the late 1990s, plenty of market participants, professional or not, were buying overvalued shares of Coca-Cola, GE, Cisco. Even worse, some were buying things like Pets.com. We've also just recently experienced an enormous speculative housing bubble followed by a commodity bubble.
The markets have always been a bit manic in nature. It swings -- more than occasionally -- from excessive exuberance to excessive fear. That's not going to change.
It's just that, in its current form, it seems designed to amplify that tendency.
Adam
Long stocks mentioned
* Coca-Cola was most certainly overpriced -- selling at a price that far exceeded per share intrinsic value -- in the late 1990s. Today, at the very least Coca-Cola's intrinsic value has, give or take, caught up to its stock price.
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Yesterday morning on CNBC, John Bogle referred to the following quote from John Maynard Keynes:
"Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done." - John Maynard Keynes in Chapter 12 of The General Theory of Employment, Interest and Money
Bogle went on to say that one of the biggest risks going forward is what he sees as the unfortunate, and in his view very damaging triumph of speculation over investing. In the video, he goes on to say that the problem is the ongoing trend toward speculators in the market (what he calls the "stock-renters") and away from owners with long-term returns in mind (Bogle points out that the amount of speculative activity is measurably higher now than it was even in 1929).
To me, it makes sense that you end up with more price distortions in the market like we've had this past decade with so many "renters" participating. An owner of something is more likely to be grounded by intrinsic value. A renter will naturally focus on short term price movement even if that price is extremely decoupled from reality.
"Long ago, Ben Graham taught me that 'Price is what you pay; value is what you get.'" - Warren Buffett in the 2008 Berkshire Hathaway Shareholder Letter
If a larger and larger percent of market participants are not grounded in value, and instead focused on price action, doesn't it seem probable that the result will be more stocks becoming mispriced relative to intrinsic value? Would GE and Coca Cola have been selling at 50+ times earnings in the late 90's or Cisco at 100x during the internet bubble (never mind all the internet bubble stocks that made even Cisco at 100x earnings look cheap) if fewer participants were in the "stock-renting" business?
The emergence of the market technicians could be seen as cause or symptom depending on your point of view. Either way, technicians do not see any point to fundamental analysis. It's all in the charts (technical analysis is not new but it is certainly prevalent). Algorithms that are designed to profit from "ownership" of a stock for mere seconds care nothing about value. With fewer participants focused upon value the frequent and widespread mispricing of assets seems inevitable.
In Bogle's book, The Battle for the Soul of Capitalism, he said the following:
"When we should be teaching young students about long-term investing and the magic of compound interest, the stock-picking contests offered by our schools are in fact teaching them about short-term speculation."
Charlie Munger has expressed similar views.
"There's no reason to have a system where every young man has $ 8 billion to play with and buy whatever he wants. It's incredibly stupid. It's absolutely crazy. If I were in charge, I'd take away everything from banks that wasn't boring. Completely shut down [credit default swaps] 100%. What's the harm in this? The world worked just fine without them. We don't need an economy that resembles a vast poker tournament." - Charlie Munger at the 2009 Wesco Shareholder Meeting
For me, large price distortions in the stock market has got to hurt the real economy. Some may ask when Coca-Cola* was selling at 50+ times earnings in the late 90's what's the harm? Well, significant mispricings can lead to distortions in the capital allocation process. Mispriced assets leading to misallocated capital. This might prevent, or at least delay, capital from getting somewhere else where it'd be more useful for economic development. Those misallocated dollars in Coca-Cola (or Cisco, GE, and just about any internet stock at the time), for example, might instead be used to help some entrepreneur get a good idea, in a timely way, off the ground that ultimately would create wealth and jobs.
Obviously, the problem is not that the money disappears in this example. Someone's is always on the other side of the trade. It's just a very inefficient way to do the business of capital allocation and development. You end up with certain industries overcapitalized -- maybe resulting in overcapacity/excess supply -- while others with merit don't get off the ground or are delayed.
The process becomes truly destructive is when lots of fresh capital goes into a bunch of internet startups with little merit while more useful things don't get funded sufficiently or at all.
In the late 1990s, plenty of market participants, professional or not, were buying overvalued shares of Coca-Cola, GE, Cisco. Even worse, some were buying things like Pets.com. We've also just recently experienced an enormous speculative housing bubble followed by a commodity bubble.
The markets have always been a bit manic in nature. It swings -- more than occasionally -- from excessive exuberance to excessive fear. That's not going to change.
It's just that, in its current form, it seems designed to amplify that tendency.
Adam
Long stocks mentioned
* Coca-Cola was most certainly overpriced -- selling at a price that far exceeded per share intrinsic value -- in the late 1990s. Today, at the very least Coca-Cola's intrinsic value has, give or take, caught up to its stock price.
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Stocks to Watch
Here is an update of stocks I like* for my own portfolio at the right price.
Those under the dashed line are businesses I like but prevailing prices have become too expensive. Some are just barely above but the objective should be, of course to buy them well below.
Unfortunately, most of the stocks are now below that line.
Kraft (KFT) continues to be held back by it's bid for Cadbury (CBY) so it's price has remained reasonable.
I've added NSC and MCD to the list. Neither are great bargains right now but NSC is a good alternative to BNI and MCD is one of the great global franchises. I've removed BNI from the list due to Berkshire Hathaway's pending acquisition.
As always, the stocks in bold have two things in common. They are:
1) currently owned by Berkshire Hathaway (as of 9/30/09) and,
2) selling below the price that Warren Buffett paid in the past few years.
There are several other Berkshire Hathaway holdings on this list but they don't have the 2nd thing going for them.
These are all intended to be long-term investments. A ten year horizon or longer. No trades here.
Stock/Max Price I'd Pay/Recent Price (12-16-09)
JNJ/65.00/64.80 - Buffett paid ~$ 62
KFT/30.00/27.15 - Buffett paid ~$ 33
USB/24.00/22.09 - Buffett paid ~$ 31
WFC/28.00/25.84 - Buffett paid ~$ 32
MCD/63.00/62.42
NSC/54.00/52.86
---------------------
COP/50.00/50.86 - Buffett paid ~$ 82...sold some shares at a loss
MHK/45.00/47.37
PG/60.00/62.16
PEP/60.00/60.68
KO/55.00/58.42
AXP/35.00/41.27
ADP/37.00/42.89
DEO/60.00/68.88
PM/45.00/50.08
BRKb/3000/3309
MO/16.00/19.63
LOW/19.00/23.69
HANS/30.00/36.33
PKX/80.00/128.24
RMCF/6.00/8.02
(Splits, spinoffs, and similar actions inevitably will occur going forward. Will adjust as necessary to make meaningful comparisons.)
Stocks removed from list:
In other words, I believe these are intrinsically worth quite a bit more than the max price I've indicated in this post and in prior Stocks to Watch posts. I also believe most of these companies generally have favorable long-term economics (i.e. the best of them have high and durable ROC) and, as a result, intrinsic values will increase over time. Of course, I may be wrong about the core economics and that margin of safety could provide insufficient protection against a loss. Still, a year from now I would expect to be willing to pay more for many of these based upon each company's intrinsic value growth over that time frame.
Some of these stocks have rallied quite a bit compared to not too long ago. So they're more difficult to buy with a sufficient margin of safety. Still, that doesn't mean the risk of missing something you like when a fair price is available (error of omission) won't ultimately be more costly than suffering a short-term paper loss.
Here are some thoughts on errors of omission by Warren Buffett from an article in The Motley Fool.
And also...
"During 2008 I did some dumb things in investments. I made at least one major mistake of commission and several lesser ones that also hurt... Furthermore, I made some errors of omission, sucking my thumb when new facts came in." - Warren Buffett's 2008 Annual Letter to Shareholders
In other words, not buying what's still attractively valued to avoid short-term paper losses is far from a perfect solution with your best long-term investment ideas.
To me, if an investment was initially bought at a fair price, and is likely to increase substantially in intrinsic value over 20 years, it makes no sense to be bothered by a temporary paper loss. Of course, make a misjudgment on the quality of a business and that paper loss becomes a real one (error of commission).
There is no perfect answer to this problem. When highly confident that a great business is available at a fair price it's important to accumulate enough while the window of opportunity exists.
Sometimes ignoring the risk of short-term losses is necessary to make sure a meaningful stake is acquired.
Adam
* This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here are never a recommendation to buy or sell anything and should never be considered specific individualized investment advice. In general, intend to remain long the above stocks (at least those that at some point became cheap enough to buy) unless market prices become significantly higher than intrinsic value, core business economics become materially impaired, prospects turn out to have been misjudged, or opportunity costs become high.
** The required margin of safety is naturally larger for a bank than for something like KO. When I make a mistake and misjudge a company's economics in a major way, the margin of safety may still not be sufficient. Judging the durability of the economics correctly matters most. If the economics remain intact but the stock goes down that is a very good thing in the long run.
Those under the dashed line are businesses I like but prevailing prices have become too expensive. Some are just barely above but the objective should be, of course to buy them well below.
Unfortunately, most of the stocks are now below that line.
Kraft (KFT) continues to be held back by it's bid for Cadbury (CBY) so it's price has remained reasonable.
I've added NSC and MCD to the list. Neither are great bargains right now but NSC is a good alternative to BNI and MCD is one of the great global franchises. I've removed BNI from the list due to Berkshire Hathaway's pending acquisition.
As always, the stocks in bold have two things in common. They are:
1) currently owned by Berkshire Hathaway (as of 9/30/09) and,
2) selling below the price that Warren Buffett paid in the past few years.
There are several other Berkshire Hathaway holdings on this list but they don't have the 2nd thing going for them.
These are all intended to be long-term investments. A ten year horizon or longer. No trades here.
Stock/Max Price I'd Pay/Recent Price (12-16-09)
JNJ/65.00/64.80 - Buffett paid ~$ 62
KFT/30.00/27.15 - Buffett paid ~$ 33
USB/24.00/22.09 - Buffett paid ~$ 31
WFC/28.00/25.84 - Buffett paid ~$ 32
MCD/63.00/62.42
NSC/54.00/52.86
---------------------
COP/50.00/50.86 - Buffett paid ~$ 82...sold some shares at a loss
MHK/45.00/47.37
PG/60.00/62.16
PEP/60.00/60.68
KO/55.00/58.42
AXP/35.00/41.27
ADP/37.00/42.89
DEO/60.00/68.88
PM/45.00/50.08
BRKb/3000/3309
MO/16.00/19.63
LOW/19.00/23.69
HANS/30.00/36.33
PKX/80.00/128.24
RMCF/6.00/8.02
(Splits, spinoffs, and similar actions inevitably will occur going forward. Will adjust as necessary to make meaningful comparisons.)
Stocks removed from list:
- BNI - I liked purchasing BNI up to $ 80/share. It was bought out by Berkshire Hathaway for $ 100/share in late 2009. Deal should close early 2010.
In other words, I believe these are intrinsically worth quite a bit more than the max price I've indicated in this post and in prior Stocks to Watch posts. I also believe most of these companies generally have favorable long-term economics (i.e. the best of them have high and durable ROC) and, as a result, intrinsic values will increase over time. Of course, I may be wrong about the core economics and that margin of safety could provide insufficient protection against a loss. Still, a year from now I would expect to be willing to pay more for many of these based upon each company's intrinsic value growth over that time frame.
Some of these stocks have rallied quite a bit compared to not too long ago. So they're more difficult to buy with a sufficient margin of safety. Still, that doesn't mean the risk of missing something you like when a fair price is available (error of omission) won't ultimately be more costly than suffering a short-term paper loss.
Here are some thoughts on errors of omission by Warren Buffett from an article in The Motley Fool.
And also...
"During 2008 I did some dumb things in investments. I made at least one major mistake of commission and several lesser ones that also hurt... Furthermore, I made some errors of omission, sucking my thumb when new facts came in." - Warren Buffett's 2008 Annual Letter to Shareholders
In other words, not buying what's still attractively valued to avoid short-term paper losses is far from a perfect solution with your best long-term investment ideas.
To me, if an investment was initially bought at a fair price, and is likely to increase substantially in intrinsic value over 20 years, it makes no sense to be bothered by a temporary paper loss. Of course, make a misjudgment on the quality of a business and that paper loss becomes a real one (error of commission).
There is no perfect answer to this problem. When highly confident that a great business is available at a fair price it's important to accumulate enough while the window of opportunity exists.
Sometimes ignoring the risk of short-term losses is necessary to make sure a meaningful stake is acquired.
Adam
* This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here are never a recommendation to buy or sell anything and should never be considered specific individualized investment advice. In general, intend to remain long the above stocks (at least those that at some point became cheap enough to buy) unless market prices become significantly higher than intrinsic value, core business economics become materially impaired, prospects turn out to have been misjudged, or opportunity costs become high.
** The required margin of safety is naturally larger for a bank than for something like KO. When I make a mistake and misjudge a company's economics in a major way, the margin of safety may still not be sufficient. Judging the durability of the economics correctly matters most. If the economics remain intact but the stock goes down that is a very good thing in the long run.
Wednesday, December 16, 2009
Airlines: A Tough Business
Airlines have had a fairly brutal half century or so. It has just been a difficult business to be in for a whole bunch of reasons. Here are just some of the many problems:
From an article in The Onion:
In its ongoing effort to cut transportation costs and boost profits, United Airlines announced Tuesday that it was exploring the feasibility of herding them into planes and stacking them like cordwood from floor to ceiling.
"After much trial and error, we've found the most efficient way to stack them is to start with a base of large ones, then put down a layer of medium ones, then fill up all the holes with the smaller ones," operations manager Gary Brown said. "The really tiny ones are great for cramming up in the corners."
That's, at the very least, a novel approach to solving a difficult problem.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
- Capital intensiveness
- High fixed costs resulting in excessive operating leverage
- Unpredictable fuel expenses that airlines have little control over
- Fuel expenses typically make up a substantial portion (~20-30%) of an airline's cost structure with potential spikes beyond that level
- Minimal to no pricing power
- Overcapacity
- Excessive debt (financial leverage)
From an article in The Onion:
In its ongoing effort to cut transportation costs and boost profits, United Airlines announced Tuesday that it was exploring the feasibility of herding them into planes and stacking them like cordwood from floor to ceiling.
That's, at the very least, a novel approach to solving a difficult problem.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Friday, December 11, 2009
AOL Goes Public...Again
A little less than 10 years ago AOL's market value was, unbelievably, over $ 160 billion. Once combined with Time Warner the market value of the 2 companies was over $ 300 billion.
AOL went public again today and is trading at around $ 23/share. At that price the company is currently valued at $ 2.4 billion...a 98.5% drop in value since back when it acquired Time Warner.
The funny thing is AOL may finally be fairly valued now though I certainly wouldn't touch it (At today's price AOL is probably selling at 5-6x current earnings...whether just a fraction of those earning will be around in 5 years is the question). So best case it's a cigar butt.
What a difference a decade makes.
When AOL bid to buy Time Warner who in either boardroom or within the senior leadership was thinking about Google?
From this MarketWatch article:
...few were even aware that a 70-person startup called Google had set out to show small advertisements alongside Internet search results. Just five years later, Google Inc. itself had become a heavyweight on the scene and it purchased a 5% stake in AOL from Time Warner, at a price of $1 billion. Four years after that, however, Google sold the stake back to a chastened Time Warner for $283 million, while maintaining control of the inner workings of AOL's search engine through a partnership.
Back in 2000 when AOL was valued at over $ 160 billion the company was earning approximately $ 1 billion per year giving it a PE of ~160. So, as an investor, you were paying $ 160 to buy $ 1 of earnings for a company with a suspect economic moat.
The contrast of AOL at the time with Google today is significant. Google will earn over $ 7 billion this year and is in a position to grow that substantially in coming years. So while Google's $185 billion market value is slightly higher than AOL's at the time, it's earning capacity is already 7x higher and looks more durable. It also has $ 22 billion of cash with no debt. Now that may not be cheap...but a case can certainly be made for that price in my view.
Most importantly, at least for now, Google appears to have a wide economic moat. Now whether that moat will become wider or shrink over time is much more difficult to judge considering how fast the world they operate in changes. Still, I wouldn't bet against them over the short to medium run.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
AOL went public again today and is trading at around $ 23/share. At that price the company is currently valued at $ 2.4 billion...a 98.5% drop in value since back when it acquired Time Warner.
The funny thing is AOL may finally be fairly valued now though I certainly wouldn't touch it (At today's price AOL is probably selling at 5-6x current earnings...whether just a fraction of those earning will be around in 5 years is the question). So best case it's a cigar butt.
What a difference a decade makes.
When AOL bid to buy Time Warner who in either boardroom or within the senior leadership was thinking about Google?
From this MarketWatch article:
...few were even aware that a 70-person startup called Google had set out to show small advertisements alongside Internet search results. Just five years later, Google Inc. itself had become a heavyweight on the scene and it purchased a 5% stake in AOL from Time Warner, at a price of $1 billion. Four years after that, however, Google sold the stake back to a chastened Time Warner for $283 million, while maintaining control of the inner workings of AOL's search engine through a partnership.
Back in 2000 when AOL was valued at over $ 160 billion the company was earning approximately $ 1 billion per year giving it a PE of ~160. So, as an investor, you were paying $ 160 to buy $ 1 of earnings for a company with a suspect economic moat.
The contrast of AOL at the time with Google today is significant. Google will earn over $ 7 billion this year and is in a position to grow that substantially in coming years. So while Google's $185 billion market value is slightly higher than AOL's at the time, it's earning capacity is already 7x higher and looks more durable. It also has $ 22 billion of cash with no debt. Now that may not be cheap...but a case can certainly be made for that price in my view.
Most importantly, at least for now, Google appears to have a wide economic moat. Now whether that moat will become wider or shrink over time is much more difficult to judge considering how fast the world they operate in changes. Still, I wouldn't bet against them over the short to medium run.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Thursday, December 10, 2009
$ 2 Million -----> $ 2 Trillion
The following are excerpts from Charlie Munger's Turning $ 2 Million into $ 2 Trillion.
It is 1884 in Atlanta. You are brought, along with twenty others like you, before a rich and eccentric Atlanta citizen named Glotz.
Effectively, it is an explanation of psychological factors and other forces that helped to make the Coca-Cola Company what it is.
Glotz offers to invest $2 million, yet take only half the equity, for a Glotz charitable foundation, in a new corporation organized to go into the non-alcoholic beverage business and remain in that business only, forever. Glotz wants to use a name that has somehow charmed him: Coca-Cola.
The other half of the new corporation's equity will go to the man who most plausibly demonstrates that his business plan will cause Glotz's foundation to be worth a trillion dollars 150 years later, in the money of that later time, 2034, despite paying out a large part of its earnings each year as a dividend. This will make the whole new corporation worth $2 trillion, even after paying out many billions of dollars in dividends.
You have fifteen minutes to make your pitch. What do you say to Glotz?
And here is my solution, my pitch to Glotz, using only the helpful notions and what every bright college sophomore should know.
Check out the full post to see Charlie's approach.
Adam
Munger: Practical Thought About Practical Thought?
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
It is 1884 in Atlanta. You are brought, along with twenty others like you, before a rich and eccentric Atlanta citizen named Glotz.
Effectively, it is an explanation of psychological factors and other forces that helped to make the Coca-Cola Company what it is.
Glotz offers to invest $2 million, yet take only half the equity, for a Glotz charitable foundation, in a new corporation organized to go into the non-alcoholic beverage business and remain in that business only, forever. Glotz wants to use a name that has somehow charmed him: Coca-Cola.
The other half of the new corporation's equity will go to the man who most plausibly demonstrates that his business plan will cause Glotz's foundation to be worth a trillion dollars 150 years later, in the money of that later time, 2034, despite paying out a large part of its earnings each year as a dividend. This will make the whole new corporation worth $2 trillion, even after paying out many billions of dollars in dividends.
You have fifteen minutes to make your pitch. What do you say to Glotz?
And here is my solution, my pitch to Glotz, using only the helpful notions and what every bright college sophomore should know.
Check out the full post to see Charlie's approach.
Adam
Munger: Practical Thought About Practical Thought?
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Wednesday, December 9, 2009
Ackman on McDonald's
One of the great global franchise businesses is McDonald's (MCD). Yesterday, they reported some disappointing same store sales results for November. While that indicates some problems in the short run, I don't think it changes the long-term attractiveness of the business (though the news has the potential to bring the stock into a more attractive valuation range).
MCD has solid returns on capital that will likely improve over time and a durable wide moat.
Below is an excerpt of Bill Ackman's (Pershing Square Capital Management) recent take on MCD from his 2Q09 letter:
McDonald's makes money in principally two ways: first, by collecting an approximate 14%+ share of its franchisees' revenues for the use of McDonald’s brand...and second, by generating operating profits from a portfolio of company-operated stores.
Then later added...
McDonald's brand royalty business is one of the greatest businesses in the world because it generates an annuity-like revenue stream which can grow without the requirement for meaningful investment of capital from the company. Because the company's revenue share comes from more than 32,000 different stores spread around the globe, it is an inherently stable, currency-hedged, inflation-protected stream of cash flow.
Despite its business quality and dominant global market position, McDonald's stock trades at only about 13 times multiple of 2010 earnings, a price which we believe does not adequately reflect the company’s fair value.
MCD has attractive long-term prospects and a reasonable valuation (reasonable but certainly not cheap). It's currently selling at around $ 60/share and should earn at least $ 4.30/share in 2010. As far as global franchises go I still prefer the likes of Coca-Cola, Pepsi and Diageo but McDonald's should do very well in the coming decades.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
MCD has solid returns on capital that will likely improve over time and a durable wide moat.
Below is an excerpt of Bill Ackman's (Pershing Square Capital Management) recent take on MCD from his 2Q09 letter:
McDonald's makes money in principally two ways: first, by collecting an approximate 14%+ share of its franchisees' revenues for the use of McDonald’s brand...and second, by generating operating profits from a portfolio of company-operated stores.
Then later added...
McDonald's brand royalty business is one of the greatest businesses in the world because it generates an annuity-like revenue stream which can grow without the requirement for meaningful investment of capital from the company. Because the company's revenue share comes from more than 32,000 different stores spread around the globe, it is an inherently stable, currency-hedged, inflation-protected stream of cash flow.
Despite its business quality and dominant global market position, McDonald's stock trades at only about 13 times multiple of 2010 earnings, a price which we believe does not adequately reflect the company’s fair value.
MCD has attractive long-term prospects and a reasonable valuation (reasonable but certainly not cheap). It's currently selling at around $ 60/share and should earn at least $ 4.30/share in 2010. As far as global franchises go I still prefer the likes of Coca-Cola, Pepsi and Diageo but McDonald's should do very well in the coming decades.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
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