Buffett on Stock Valuations

Here's a good description of how Warren Buffett viewed stock valuations, and how he was viewed more generally, back in the late 1990s.

Excerpt:

Buffett was skeptical of high-tech stocks and...warned of an overvalued market that was heading for trouble. In fact, at that famous summer gathering of media, technology and financial moguls at Sun Valley, Idaho, Warren Buffett was asked to give the concluding talk in July 1999. His remarks, though politely received, supported the view among the smart set that Buffett was out of touch with the "new paradigm" of high technology and ever-rising internet stock valuations.

Buffett's talk...delivered a message that most of his high-tech listeners and their financial sidekicks were not keen to hear. There was no "new paradigm," Buffett said. The market could only yield what the economy produced, and this market was way out of sync in that respect. The next seventeen years, he explained, might not look much better than the dismal 1964-to-1981 period when the Dow had gone exactly nowhere. 

At that time, many didn't really buy into what Buffett was saying would likely happen going forward. In fact, they were expecting far better results* and mostly just viewed him as someone who was simply justifying that he had missed out on the opportunity:

Much of Buffett's message that day was ignored and dismissed – until March 2000, when the "dot com" bubble began to implode. Yet for a time, Buffett was considered by the smart money as "out of it" and "losing his edge;" a guy who had missed the high-tech moment and was now rationalizing his mistake.

These two articles also help capture and summarize what Buffett said at Sun Valley not long before the "dot com" bubble reached peak levels:**

Buffett in Fortune - 1999

Warren Buffett "Preaches" to 1999's Internet Elite

Buffett's message was rather straightforward.

New paradigm?

Not at all.

Thanks to the past decade, stocks overall appear more or less in line with intrinsic value (that's the average...quite a few individual stocks are expensive while others are still cheap).

Though we're not yet seventeen years removed from that Sun Valley talk, Buffett said recently he now views the prospects for stocks favorably going forward. Stocks may have gone nowhere from 1964-1981, but it wasn't necessary to wait until the end of that period to start buying.

In other words, it was a great time to buy well before 1981 even though the market needed until then to finally put the highs of 1964 in the rear-view mirror.

At least it was for those with a long enough investment time horizon.

Adam

* A PaineWebber-Gallup poll done at that time revealed investors were expecting stocks to return something like 13-22% going forward.
** This was covered in Chapter 2 of 'The Snowball'.
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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 are never a recommendation to buy or sell anything.

Apple's $ 51 Billion Pile of Cash

With $ 51 billion of cash and investments on Apple's (AAPL) balance sheet, and an additional $ 4-5 billion/quarter showing up each quarter, there's plenty of speculation on how that growing pile of cash will be used. Here's what Steve Jobs said on the earnings conference call that only fueled that speculation:

"We strongly believe one or more strategic opportunities will come along we're in a unique position to take advantage of,"
and

"We don't let the cash burn a hole in the pocket or make stupid acquisitions. We'd like to continue to keep our powder dry because we think there are one or more strategic opportunities in the future."

Some examples of the recent speculation:

• Will Apple Buy Facebook?

• Speculation of Apple Acquisition Drives Sony Stock Price

• 7 Reasons for Apple to Acquire Adobe

• Apple May Acquire Sony, Adobe, or Disney

• Will Apple Acquire a Big Name?

• Apple to Buy Netflix?

I doubt that most or any of these larger acquisitions are wise or even necessary. It will be very interesting to watch if all that capital can be put to use productively in the coming years.

A nice 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.

Peter Lynch: Investing Principles

Some of the investing principles used by Peter Lynch:

• Never invest in any idea you can't illustrate with a crayon.

• The best stock to buy may be the one you already own.

• In business, competition is never as healthy as total domination.

• When even the analysts are bored, it's time to start buying.

Check out this more comprehensive list.

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.

Who'll Manage Berkshire's Billions?

Here's an article in Fortune on the man who is now apparently the lead candidate to manage at least some of Berkshire Hathaway's (BRKa) investments:

Today, a large Berkshire Hathaway mystery lifted when a Greenwich, Conn., hedge fund, Castle Point Capital Management, quietly advised its investors that the fund's managing partner, Todd Anthony Combs, would leave to join Berkshire at the end of the year.

Time will tell how significant this move proves to be.

Adam

Long BRKb

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

Below is a list of stocks I like* for my own portfolio at the right price.

From my point of view, the shares listed are attractive long-term investments below the prices I've indicated. Many of these have rallied 20-30% or even more so most have become too expensive for my taste.

Since creating this list none of the 20+ stocks is selling lower. It'd easier to invest right now if a few were cheaper.

Those below the dashed line are companies I like but prevailing prices have become too high. The objective, of course, is to buy them well below that price when the opportunity presents itself. So patience for now then decisiveness when there's an opportunity.

As always, the stocks in bold have two things in common. They are:

1) currently owned by Berkshire Hathaway (as of 6/30/10) and,
2) selling below the price that Warren Buffett paid in recent 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 (10-22-10)
JNJ/65.00/63.81
WFC/28.00/26.11
USB/24.00/23.59
---------------------

MHK/45.00/57.46

KFT/30.00/31.90
NSC/54.00/62.10
KO/55.00/61.61

COP/50.00/61.67
MCD/63.00/78.55
PM/45.00/58.13
PG/60.00/63.40
PEP/60.00/65.01
LOW/19.00/22.00
AXP/35.00/39.03
ADP/37.00/43.80
DEO/60.00/73.74
BRKb/68.00/83.34
MO/16.00/24.92
HANS/30.00/51.68
PKX/80.00/107.76
RMCF/6.00/9.50
(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 closed in early 2010.
  

The max price I'd pay takes into account an acceptable margin of safety**. That margin of safety differs for each company.

In other words, I believe these are intrinsically worth quite a bit more than the price I've listed 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 enough 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 is 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 accepting 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.

Buffett: Forget Gold, Buy Stocks

From an interview in Fortune with Warren Buffett earlier this week:

My first question, as I sit there on the couch in his office, is: "What about gold? Is this a classic bubble or what?"

"Look," he says, with his usual confident laugh. "You could take all the gold that's ever been mined, and it would fill a cube 67 feet in each direction. For what that's worth at current gold prices, you could buy all -- not some -- all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take?"

So what does he like?

Equities.

In a post two weeks ago I compared gold to productive assets. I was doing my best to make a very similar point about gold. Well, not surprisingly, Buffett's way of saying things is impressively concise compared to my own.

In the late 90s, before one of the worst decade for stocks was about to occur, Buffett was warning that equities were extremely overvalued and that performance going forward would be subpar.

Now, Buffett is bullish.

Adam

Related posts:
Gold vs Productive Assets
Grantham: Gold is "Last Refuge of the Desperate"
Why Buffett's Not a Big Fan of Gold

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.

Buffett on Manic-depressive Lemmings: Berkshire Shareholder Letter Highlights

From Warren Buffett's 1982 Berkshire Hathaway (BRKa) shareholder letter:

...while retained earnings over the years, and in the aggregate, have translated into at least equal market value for shareholders, the translation has been both extraordinarily uneven among companies and irregular and unpredictable in timing.

However, this very unevenness and irregularity offers advantages to the value-oriented purchaser of fractional portions of businesses. This investor may select from almost the entire array of major American corporations, including many far superior to virtually any of the businesses that could be bought in their entirety in a negotiated deal. And fractional-interest purchases can be made in an auction market where prices are set by participants with behavior patterns that sometimes resemble those of an army of manic-depressive lemmings.

The market makes it incredibly convenient to own shares in some of the best businesses in the world.

Market prices change dramatically based upon short-to-intermediate term events while intrinsic value changes little if at all. In fact, consider that a typical recession will make the best companies even better (ie. make them intrinsically more valuable by: streamlining operations, buying weaker competitors who can't handle the short-term economic stress, taking market share, making investments etc.) yet stock prices will almost always temporarily go down.

Adam

Long BRKb

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.

Buffett on Diversification

The following is from a Buffett partnership letter that was written in early 1966:*

"We diversify substantially less than most investment operations. We might invest up to 40% of our net worth in a single security under conditions coupling an extremely high probability that our facts and reasoning are correct with a very low probability that anything could drastically change the underlying value of the investment.

We are obviously following a policy regarding diversification which differs markedly from that of practically all public investment operations."

"...I am willing to concentrate quite heavily in what I believe to be the best investment opportunities recognizing very well that this may cause an occasional very sour year--one somewhat more sour, probably, than if I had diversified more. While this means our results will bounce around more, I think it also means that our long-term margin of superiority should be greater."

"It is worth pointing out that our performance in 1965 was overwhelmingly the product of five investment situations."

"All texts counsel 'adequate' diversification, but the ones who quantify 'adequate' virtually never explain how they arrive at their conclusion. Hence, for our summation on overdiversification, we turn to that eminent academician Billy Rose, who says, 'You've got a harem of seventy girls; you don't get to know any of them very well.'"

Those who might have somewhat less -- or a whole lot less -- investment skill plainly need more diversification. This necessitates a realistic assessment of capabilities and limits.

The Buffett partnership letters can be found here.

Adam

Related posts:
Munger & Buffett on Diversification - Part II
Munger & Buffett on Diversification

* Written in early 1966 by Warren Buffett to discuss the previous year's performance.

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.

Roubini Revelations & Prechter Plunges

From Jeffrey Saut's latest in Minyanville:

"...I think it's a mistake to get too bearish despite 'death crosses,' Hindenburg Omens, Roubini revelations, and Prechter plunges."

Read the full post.

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.

Coca-Cola's 3Q 2010 Earnings

With the 3Q conference call about to start at 9:30 am this morning, here's a quick summary of the latest Coca-Cola (KO) earnings report.

For the 3rd quarter ended October 1, 2010, net income grew to $ 2.055 billion from $ 1.896 billion driven by strong international volume growth. Quarterly revenue grew 5% to nearly $ 8.43 billion.

Earnings per share grew nearly 9% to 88 cents/share compared to the same period last year. Growth in earnings per share is closer to 12% when adjusting for one time charges primarily related to the CCE transaction.

Excerpt:

The Coca-Cola Company reports strong third quarter operating results, with volume increasing 5% in both the quarter and year-to-date, ahead of our long-term growth target and cycling 2% volume growth in the prior year quarter. Importantly, North America volume grew 2% in the quarter , building on our momentum in this key market as we continue to evolve our franchise system and integrate the acquisition of CCE’s North American business.

International volume increased 6% in the quarter. Eurasia and Africa volume grew 12% in the quarter , with broad-based growth across all business units and beverage categories, including 30% volume growth in Russia and double-digit growth in Turkey, Southern Eurasia and East and Central Africa. India achieved its 17 th consecutive quarter of volume growth despite record rainfall in the quarter and cycling very strong 37% growth in the prior year quarter. Pacific volume grew 11% in the quarter , cycling 6% growth in the prior year quarter. These results were supported by 12% growth in China, as well as growth of 11% in Japan, 19% in the Philippines and 13% in Korea. Latin America volume grew 4% in the quarter , cycling 7% growth in the prior year quarter, with Brazil volume up 13%. Mexico posted even volume results despite adverse weather and cycling 9% growth in the prior year quarter. Europe volume was slightly positive in the quarter, rounding to even , a sequential improvement supported by mid single-digit volume growth in France and the Nordic Region as well as volume growth in Great Britain, Germany and Northern Central Europe. These positive results were partially offset by continuing macro-economic pressures in South and Eastern Europe and the Adriatic Region.

Strong growth continued in countries with per capita consumption of Company brands less than 150 eight-ounce servings per year, with volume up 10% in the quarter and year-to-date in those countries.

According to Coca-Cola more share buybacks will be happening in the very near future. In fact, the company announced plans to buy back $ 2 billion of its stock by the end of this 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.