Some notes taken at the 2012 Berkshire Hathaway (BRKa) Annual Shareholder Meeting:
WSJ's Deal Journal Live Blog
On Berkshire's Stock
"If we could have our way, we would have the stock trade once a year and Charlie and I would try to come up with the intrinsic value..."
On Current Valuation
"We've run Berkshire for 47 years. There have been four or five times where we thought it was significantly undervalued," he says. "The beauty of stocks is they do sell for silly prices from time to time. That's how Charlie and I have gotten rich."
Reuter's also provided this summary.
Reuters Highlights
On IBM (IBM), Google (GOOG), and Apple (AAPL)
"The chances of being way wrong in IBM are probably less, at least for us, than the chances of being way wrong in Google or Apple."
Morningstar also had a live blog for the event and what they found notable can be found here.
Also, check out these detailed notes taken by Peter Boodell, Portfolio Manager and Managing Partner, Boodell & Company Capital Management LLC.
Adam
Long BRKb, AAPL, and GOOG. No position in IBM.
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.
Thursday, May 10, 2012
Wednesday, May 9, 2012
Charlie Munger On "Rapid Trading By The Computer Geniuses"
The excerpt below is from an interview with Charlie Munger by CNBC's Becky Quick.
Becky asks him what he'd change if he were a "benevolent dictator".
His response:
"Well, take the rapid trading by the computer geniuses with the computer algorithms. Those people have all the social utility of a bunch of rats admitted to a granary. I never would have allowed the rats to get in the granary. I don't want the brilliant young men of America doting their lives at being rats in somebody else's granary. That's not my idea of the right way to run the republic. And if you let me write the laws, it wouldn't happen. But of course, nobody's going to do that."
When Buffett was asked what he thought about Charlie's comments he jokingly responded:
"Wishy-washy."
Also, earlier in the interview, Becky Quick mentioned that Michael Lewis recently said he thinks the Volcker rule is not enough, and that the rule needs way more teeth. In the interview, Charlie said he totally agrees with Michael Lewis.
Although, if he were making the rule he said he'd make Lewis "look like a piker". Check out the whole interview.
Adam
Warren Buffett on Squawk Box
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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.
Becky asks him what he'd change if he were a "benevolent dictator".
His response:
"Well, take the rapid trading by the computer geniuses with the computer algorithms. Those people have all the social utility of a bunch of rats admitted to a granary. I never would have allowed the rats to get in the granary. I don't want the brilliant young men of America doting their lives at being rats in somebody else's granary. That's not my idea of the right way to run the republic. And if you let me write the laws, it wouldn't happen. But of course, nobody's going to do that."
When Buffett was asked what he thought about Charlie's comments he jokingly responded:
"Wishy-washy."
Also, earlier in the interview, Becky Quick mentioned that Michael Lewis recently said he thinks the Volcker rule is not enough, and that the rule needs way more teeth. In the interview, Charlie said he totally agrees with Michael Lewis.
Although, if he were making the rule he said he'd make Lewis "look like a piker". Check out the whole interview.
Adam
Warren Buffett on Squawk Box
---
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.
Tuesday, May 8, 2012
Berkshire Hathaway: Net Buyer of Equities in 1st Quarter of 2012
From Berkshire Hathaway's (BRKa) latest 10-Q:
1Q 2012
Purchases of equity securities: $ 3.424 billion
Sales of equity securities: $ 834 million
Net = 2.590 billion
This is a substantial jump compared to a year ago.
1Q 2011
Purchases of equity securities: $ 834 million
Sales of equity securities: $ 9 million
Net = $ 825 million
Warren Buffett said yesterday on CNBC that they were buying two U.S. stocks and revealed both were issues that Berkshire already owns.
There were also some hints during the interview that Procter & Gamble (PG), a top five holding at the end of the 4th quarter 2011, may be one of the stocks being sold.
We should have a better idea specifically what Buffett and his two investment managers were buying when the 13F-HR is released later this month.
While the 1st quarter of 2011 wasn't an active quarter in terms of buying equities, the rest of the year certainly was.
More than $ 15.66 billion of equities was purchased while just $ 1.52 billion was sold. These numbers do not include the $ 5 billion investment in Bank of America preferred shares or the Lubrizol acquisition.
Based on some of Buffett's recent comments, it seems likely he'll continue to be fairly active.
Adam
1Q 2012
Purchases of equity securities: $ 3.424 billion
Sales of equity securities: $ 834 million
Net = 2.590 billion
This is a substantial jump compared to a year ago.
1Q 2011
Purchases of equity securities: $ 834 million
Sales of equity securities: $ 9 million
Net = $ 825 million
Warren Buffett said yesterday on CNBC that they were buying two U.S. stocks and revealed both were issues that Berkshire already owns.
There were also some hints during the interview that Procter & Gamble (PG), a top five holding at the end of the 4th quarter 2011, may be one of the stocks being sold.
We should have a better idea specifically what Buffett and his two investment managers were buying when the 13F-HR is released later this month.
While the 1st quarter of 2011 wasn't an active quarter in terms of buying equities, the rest of the year certainly was.
More than $ 15.66 billion of equities was purchased while just $ 1.52 billion was sold. These numbers do not include the $ 5 billion investment in Bank of America preferred shares or the Lubrizol acquisition.
Based on some of Buffett's recent comments, it seems likely he'll continue to be fairly active.
Adam
Monday, May 7, 2012
Buffett & Munger on Gold
This morning on CNBC, Warren Buffett offered his views on gold.
According to him, productive assets (and maybe even caves) have an advantage over the yellow metal.
As he has said on earlier occasions, Buffett believes since gold is not a productive asset that, over the long haul, it will not do as well as productive assets like farmland and stocks.*
Buffett added that gold buyers have it right to be concerned about the future value of paper money, but he thinks the strategy of buying gold to protect against that decline is the wrong one. From this CNBC article:
They have a "correct basic premise" that paper money will be worth less in coming years.
He disagrees with them on the strategy of buying gold to avoid that decline in value.
Buffett later added...
"They want everybody to be so scared they run to a cave with gold. Caves might be a better investment than gold. At least they're not producing new caves all the time."
Charlie Munger believes civilized people don't buy the yellow metal. In this separate interview on CNBC, he added:
"...I think civilized people don't buy gold, they invest in productive businesses."
It's certainly not at all wrong to expect that paper money will go down in value. In fact, paper money almost certainly will go down in value over time, much as it has been doing this past century or so.
(and, well, pretty much throughout financial history.)
It's just that the right productive assets (durable competitive advantages, capable management, conservatively financed) bought at the right price (comfortable margin of safety), at least in the long run, offer a fine way to protect against that seemingly inevitable decline in paper money, Well, at least for the investor with discipline, who can judge value well, and control emotions during market highs and lows.
Now, let's say gold does in the long run, in fact, perform better than the paper currencies (as it very well may).
To me, that's equivalent to voluntarily choosing to be the passenger of one of two sinking ships when there's a more seaworthy long-term alternative.
Best case, the satisfaction comes from having chosen the sinking ship that, under certain conditions, seems to be remaining afloat but may actually also taking on water, albeit more slowly.
The more seaworthy alternative, that being well-chosen productive assets (especially the more durable ones), not only can remain afloat but the better ones benefit from a rising tide that to some extent is their own making.
(By producing something useful and through reinvestment of the proceeds generated.)
A farm (especially one with some built in advantages, better yielding, well-located etc.) will still be a farm in a hundred years (assuming no development of it for other purposes) but its owner(s), and the world for that matter, will have benefited from everything it has produced over that time, plus what it's capable of producing from that point forward.
The value of what the farm produces each year will be sold at inflation-adjusted prices, of course, in whatever currency exists at that future time. So some inflation protection is built in. Also, technology has a good chance of continuing to enhance what that farm can yield per acre (better seeds, fertilizer, machinery etc.). Compounded over a long period of time, the growth in value of this activity is far from inconsequential. This works with partial ownership via marketable securities of the right businesses (as, of course, does outright ownership).**
In contrast, an ounce of gold will also just still be an ounce of gold in a hundred years, but will have produced nothing of use or value in all those intervening years for the owner(s), and will continue to produce nothing of value. Since gold is a nonproductive asset, its faith-based price depends on how the changing attitudes of buyers/sellers impact demand for it, and whether lots of the yellow stuff happens to be discovered over time.
To me, that seems a pretty daunting thing to effectively judge.
I can certainly see why many would want to bet that gold, over the long run, will be worth more than all the paper money that is being printed.
It just seems that there are more weaknesses and limits to this approach than some admit.
Adam
Related posts:
-Buffett on Productive Assets
-Buffett: Why Stocks Beat Gold
-Buffett: Why Stocks Beat Bonds
-Buffett on Gold, Farms, and Businesses
-Edison on Gold: Fictitious Value & Superstition
-Munger on Buying Gold
-Thomas Edison on Gold
-Grantham on Gold: The "Faith-based Metal"
-Buffett: Forget Gold, Buy Stocks
-Gold vs Productive Assets
-Grantham: Gold is "Last Refuge of the Desperate"
-Why Buffett's Not a Big Fan of Gold
* Whether it comes in the form of non-controlled ownership or controlled ownership. From partial, non-controlling ownership via marketable securities to total ownership (owned and operated outright) can work if the business is sound, reasonably well run, and bought with a margin of safety.
** Of course, in the real world the operator of a farm or any business may get caught up during speculative periods, overleverage their assets, and pay too much for expansion opportunities. So none of this works in a vacuum.
---
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.
According to him, productive assets (and maybe even caves) have an advantage over the yellow metal.
As he has said on earlier occasions, Buffett believes since gold is not a productive asset that, over the long haul, it will not do as well as productive assets like farmland and stocks.*
Buffett added that gold buyers have it right to be concerned about the future value of paper money, but he thinks the strategy of buying gold to protect against that decline is the wrong one. From this CNBC article:
They have a "correct basic premise" that paper money will be worth less in coming years.
He disagrees with them on the strategy of buying gold to avoid that decline in value.
Buffett later added...
"They want everybody to be so scared they run to a cave with gold. Caves might be a better investment than gold. At least they're not producing new caves all the time."
Charlie Munger believes civilized people don't buy the yellow metal. In this separate interview on CNBC, he added:
"...I think civilized people don't buy gold, they invest in productive businesses."
It's certainly not at all wrong to expect that paper money will go down in value. In fact, paper money almost certainly will go down in value over time, much as it has been doing this past century or so.
(and, well, pretty much throughout financial history.)
It's just that the right productive assets (durable competitive advantages, capable management, conservatively financed) bought at the right price (comfortable margin of safety), at least in the long run, offer a fine way to protect against that seemingly inevitable decline in paper money, Well, at least for the investor with discipline, who can judge value well, and control emotions during market highs and lows.
Now, let's say gold does in the long run, in fact, perform better than the paper currencies (as it very well may).
To me, that's equivalent to voluntarily choosing to be the passenger of one of two sinking ships when there's a more seaworthy long-term alternative.
Best case, the satisfaction comes from having chosen the sinking ship that, under certain conditions, seems to be remaining afloat but may actually also taking on water, albeit more slowly.
The more seaworthy alternative, that being well-chosen productive assets (especially the more durable ones), not only can remain afloat but the better ones benefit from a rising tide that to some extent is their own making.
(By producing something useful and through reinvestment of the proceeds generated.)
A farm (especially one with some built in advantages, better yielding, well-located etc.) will still be a farm in a hundred years (assuming no development of it for other purposes) but its owner(s), and the world for that matter, will have benefited from everything it has produced over that time, plus what it's capable of producing from that point forward.
The value of what the farm produces each year will be sold at inflation-adjusted prices, of course, in whatever currency exists at that future time. So some inflation protection is built in. Also, technology has a good chance of continuing to enhance what that farm can yield per acre (better seeds, fertilizer, machinery etc.). Compounded over a long period of time, the growth in value of this activity is far from inconsequential. This works with partial ownership via marketable securities of the right businesses (as, of course, does outright ownership).**
In contrast, an ounce of gold will also just still be an ounce of gold in a hundred years, but will have produced nothing of use or value in all those intervening years for the owner(s), and will continue to produce nothing of value. Since gold is a nonproductive asset, its faith-based price depends on how the changing attitudes of buyers/sellers impact demand for it, and whether lots of the yellow stuff happens to be discovered over time.
To me, that seems a pretty daunting thing to effectively judge.
I can certainly see why many would want to bet that gold, over the long run, will be worth more than all the paper money that is being printed.
It just seems that there are more weaknesses and limits to this approach than some admit.
Adam
Related posts:
-Buffett on Productive Assets
-Buffett: Why Stocks Beat Gold
-Buffett: Why Stocks Beat Bonds
-Buffett on Gold, Farms, and Businesses
-Edison on Gold: Fictitious Value & Superstition
-Munger on Buying Gold
-Thomas Edison on Gold
-Grantham on Gold: The "Faith-based Metal"
-Buffett: Forget Gold, Buy Stocks
-Gold vs Productive Assets
-Grantham: Gold is "Last Refuge of the Desperate"
-Why Buffett's Not a Big Fan of Gold
* Whether it comes in the form of non-controlled ownership or controlled ownership. From partial, non-controlling ownership via marketable securities to total ownership (owned and operated outright) can work if the business is sound, reasonably well run, and bought with a margin of safety.
** Of course, in the real world the operator of a farm or any business may get caught up during speculative periods, overleverage their assets, and pay too much for expansion opportunities. So none of this works in a vacuum.
---
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, May 4, 2012
Buffett Interviewed By Fox Business Network's Liz Claman
Heading into the weekend where Berkshire Hathaway's (BRKa) 2012 annual meeting will happen, Liz Claman of Fox Business Network got the chance to ask Warren Buffett some questions.
Here are some of Buffett's answers:
Whether Others Knew or Influenced Him In Buying IBM
"Well it was my idea, but if it doesn't work out we will say it was Charlie's. They [his other investment managers] did not know I was buying it. I don't tell them. Charlie didn't know I was buying it until I was way into it... maybe half way through. I don't talk to Ted [Weschler] and Todd [Combs] about what I am buying or selling or what they are buying or selling."
Buffett: It Was My Idea To Buy Tech Stocks
On Possibly Buying Facebook
"No. I kind of ventured quite a ways out to buy IBM. Facebook would be...my doctor would require a checkup then."
Will Buffett Buy Facebook?
On Whether The Federal Reserve Took The Right Steps
"The whole world was deleveraging and someone had to leverage up and it was only going to be the fed. So they did the right thing."
Buffett: The Fed Had To Act, Did Right Thing
Buffett added that there are side effects to all the monetary stimulus that's been poured into the economy but those effects are delayed. This likely means that the actions of the Federal Reserve in recent years is setting us up for inflation on a delayed basis down the road.
He also mentioned that home construction and related businesses had seen an uptick but only a very slight one.
Buffett: Housing-Related Businesses Are Doing Well
Here's a link to the 2012 Berkshire Visitors Guide.
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.
Here are some of Buffett's answers:
Whether Others Knew or Influenced Him In Buying IBM
"Well it was my idea, but if it doesn't work out we will say it was Charlie's. They [his other investment managers] did not know I was buying it. I don't tell them. Charlie didn't know I was buying it until I was way into it... maybe half way through. I don't talk to Ted [Weschler] and Todd [Combs] about what I am buying or selling or what they are buying or selling."
Buffett: It Was My Idea To Buy Tech Stocks
On Possibly Buying Facebook
"No. I kind of ventured quite a ways out to buy IBM. Facebook would be...my doctor would require a checkup then."
Will Buffett Buy Facebook?
On Whether The Federal Reserve Took The Right Steps
"The whole world was deleveraging and someone had to leverage up and it was only going to be the fed. So they did the right thing."
Buffett: The Fed Had To Act, Did Right Thing
Buffett added that there are side effects to all the monetary stimulus that's been poured into the economy but those effects are delayed. This likely means that the actions of the Federal Reserve in recent years is setting us up for inflation on a delayed basis down the road.
He also mentioned that home construction and related businesses had seen an uptick but only a very slight one.
Buffett: Housing-Related Businesses Are Doing Well
Here's a link to the 2012 Berkshire Visitors Guide.
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.
Thursday, May 3, 2012
Amazing Amazon
From this recent Barron's article:
Somebody needs to explain how Amazon.com's share valuation really works. Because, despite wondering about it for more than a decade, I still can't figure it out. First it was eyeballs. Then it was clicks. Then revenue-per-customer, then wallet-share and now gross margins. Price-earnings-ratios be damned.
I've made more than my fair share of comments about Amazon's (AMZN) baffling valuation.
It is and has been a stock I would not buy at even a fraction of current prices.
No interest whatsoever.
In a prior post, I wrote that it won't surprise me if Amazon continues the process of going from very overvalued to even more overvalued.*
I didn't write that because I had a specific view on the stock's future price action. In fact, I never have a view on where prices are going near-term or even intermediate-term for any stock. (My focus is, instead, always on price versus value and long-term effects.) It comes more from watching too many securities remain extremely expensive, for years at a time in enough cases, especially (but not limited to) during late 1990s and into the early 2000s (back then, it wasn't just tech stocks even if they grabbed most of the headlines). An overvalued stock can stay that way (and get even more so) for an extended period of time. The forces at work practically guarantees it will happen to certain securities from time to time.**
No bubble required.
So I think it's hardly surprising that Amazon's stock seems to continue defying economic gravity. Once valuation isn't anchored by annoying things like proven sound fundamentals (not hoped-for-someday-it-will-all-come-to-be fundamentals), it's a simple matter of whether there's a good story and enough short-term "votes" to prop up the shares.
Hope and enough money can keep a stock high that already seems weirdly disconnected from reality (and from the usual factors that govern valuation) for a very long time.
That doesn't mean Amazon is not a good business with favorable long-term prospects. It may or may not be. In the short or even intermediate term, future business prospects and near term stock price action often have little to do with one another. Occasionally, expensive looking stocks even justify their valuation and then some (and Amazon just may), but I'll let those smarter than I try to separate the pretenders from the real thing.
If you don't pay a premium for promise yet to be realized, you can't lose anything if that promise comes up short.
In contrast, pay a discount for the something proven and durable that can produce a nice risk-adjusted return even if nothing spectacular happens. Occasionally, they may even surprise with something unforeseeable on the upside. So they end up having some latent capacity to produce future returns.
When they disappoint or turn out to be somewhat less fundamentally sound than thought, the discount is there to provide a margin of safety (though things can certainly go badly even with a margin of safety).
Well, that's the only way I know how to invest.
I should point out that, while I don't care for Amazon's stock, it's hard to not be impressed by the company's willingness to pursue big things with longer term outcomes in mind. Lots of intrinsic value may be created but, because of the price paid, that doesn't mean returns -- even though they may be positive and possibly even substantial -- will be sufficient considering the risks. Margin of safety is a fundamental requirement for any investment. Well, at least it should be. At a minimum, that a nice margin of safety exists to protect the investor if things don't quite go as expected isn't, at least for me, at all clear. In other words, much would seem to need to go right just to get a decent investment result.
(Though some will no doubt trade it successfully in the coming years. I never have a view of such things.)
In fact, I will be surprised if Amazon doesn't end up doing very well as a business in the long run but, compared to alternatives, I won't be surprised if long-term investors in the stock (at least those who've bought recently and plan to own it for a very long time) do less well on a risk-adjusted basis.
Adam
No position in AMZN
Related posts:
Barron's on Bezos: Time to Reign in Amazon's CEO?
Amazon's Jeff Bezos On Inventing & Disrupting
Amazon Sells Kindle Fire Below Cost
Technology Stocks
* I have no idea whether or not enough per share intrinsic business value will eventually be created to justify higher equity prices. In fact, it's quite possible that Amazon may more than justify its valuation someday. Yet investment is not about valuation ultimately proving to be justified (or even being more than justified). It's about getting a satisfactory or better return considering risks and alternatives. So, in some ways, I think a better description of Amazon's stock may be difficult-to-value instead of overvalued. If I can't value something within a narrow enough range, it's pretty tough to decide how much of a discount to that value is needed to protect against future uncertainties. Others may, of course, find estimating Amazon's intrinsic value to be more doable. Those who think they can estimate the company's value (with a confidence that's warranted) will be better suited to invest in the shares than myself.
** This folly is of little benefit to those attempting to buy shares of understandable businesses at a discount with the idea of owning them for a very long time. On the other hand, those in the business of playing short-term price action likely feel otherwise.
---
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.
Somebody needs to explain how Amazon.com's share valuation really works. Because, despite wondering about it for more than a decade, I still can't figure it out. First it was eyeballs. Then it was clicks. Then revenue-per-customer, then wallet-share and now gross margins. Price-earnings-ratios be damned.
I've made more than my fair share of comments about Amazon's (AMZN) baffling valuation.
It is and has been a stock I would not buy at even a fraction of current prices.
No interest whatsoever.
In a prior post, I wrote that it won't surprise me if Amazon continues the process of going from very overvalued to even more overvalued.*
I didn't write that because I had a specific view on the stock's future price action. In fact, I never have a view on where prices are going near-term or even intermediate-term for any stock. (My focus is, instead, always on price versus value and long-term effects.) It comes more from watching too many securities remain extremely expensive, for years at a time in enough cases, especially (but not limited to) during late 1990s and into the early 2000s (back then, it wasn't just tech stocks even if they grabbed most of the headlines). An overvalued stock can stay that way (and get even more so) for an extended period of time. The forces at work practically guarantees it will happen to certain securities from time to time.**
No bubble required.
So I think it's hardly surprising that Amazon's stock seems to continue defying economic gravity. Once valuation isn't anchored by annoying things like proven sound fundamentals (not hoped-for-someday-it-will-all-come-to-be fundamentals), it's a simple matter of whether there's a good story and enough short-term "votes" to prop up the shares.
Hope and enough money can keep a stock high that already seems weirdly disconnected from reality (and from the usual factors that govern valuation) for a very long time.
That doesn't mean Amazon is not a good business with favorable long-term prospects. It may or may not be. In the short or even intermediate term, future business prospects and near term stock price action often have little to do with one another. Occasionally, expensive looking stocks even justify their valuation and then some (and Amazon just may), but I'll let those smarter than I try to separate the pretenders from the real thing.
If you don't pay a premium for promise yet to be realized, you can't lose anything if that promise comes up short.
In contrast, pay a discount for the something proven and durable that can produce a nice risk-adjusted return even if nothing spectacular happens. Occasionally, they may even surprise with something unforeseeable on the upside. So they end up having some latent capacity to produce future returns.
When they disappoint or turn out to be somewhat less fundamentally sound than thought, the discount is there to provide a margin of safety (though things can certainly go badly even with a margin of safety).
Well, that's the only way I know how to invest.
I should point out that, while I don't care for Amazon's stock, it's hard to not be impressed by the company's willingness to pursue big things with longer term outcomes in mind. Lots of intrinsic value may be created but, because of the price paid, that doesn't mean returns -- even though they may be positive and possibly even substantial -- will be sufficient considering the risks. Margin of safety is a fundamental requirement for any investment. Well, at least it should be. At a minimum, that a nice margin of safety exists to protect the investor if things don't quite go as expected isn't, at least for me, at all clear. In other words, much would seem to need to go right just to get a decent investment result.
(Though some will no doubt trade it successfully in the coming years. I never have a view of such things.)
In fact, I will be surprised if Amazon doesn't end up doing very well as a business in the long run but, compared to alternatives, I won't be surprised if long-term investors in the stock (at least those who've bought recently and plan to own it for a very long time) do less well on a risk-adjusted basis.
Adam
No position in AMZN
Related posts:
Barron's on Bezos: Time to Reign in Amazon's CEO?
Amazon's Jeff Bezos On Inventing & Disrupting
Amazon Sells Kindle Fire Below Cost
Technology Stocks
* I have no idea whether or not enough per share intrinsic business value will eventually be created to justify higher equity prices. In fact, it's quite possible that Amazon may more than justify its valuation someday. Yet investment is not about valuation ultimately proving to be justified (or even being more than justified). It's about getting a satisfactory or better return considering risks and alternatives. So, in some ways, I think a better description of Amazon's stock may be difficult-to-value instead of overvalued. If I can't value something within a narrow enough range, it's pretty tough to decide how much of a discount to that value is needed to protect against future uncertainties. Others may, of course, find estimating Amazon's intrinsic value to be more doable. Those who think they can estimate the company's value (with a confidence that's warranted) will be better suited to invest in the shares than myself.
** This folly is of little benefit to those attempting to buy shares of understandable businesses at a discount with the idea of owning them for a very long time. On the other hand, those in the business of playing short-term price action likely feel otherwise.
---
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, May 2, 2012
Buffett: Intrinsic Value vs Book Value - Part II
A follow up to this recent post...
Buffett: Intrinsic Value vs Book Value
From Warren Buffett's latest Berkshire Hathaway (BRKa) shareholder letter:
...we don't enjoy cashing out partners at a discount, even though our doing so may give the selling shareholders a slightly higher price than they would receive if our bid was absent. When we are buying, therefore, we want those exiting partners to be fully informed about the value of the assets they are selling.
At our limit price of 110% of book value*, repurchases clearly increase Berkshire's per-share intrinsic value. And the more and the cheaper we buy, the greater the gain for continuing shareholders. Therefore, if given the opportunity, we will likely repurchase stock aggressively at our price limit or lower. You should know, however, that we have no interest in supporting the stock and that our bids will fade in particularly weak markets. Nor will we buy shares if our cash-equivalent holdings are below $20 billion. At Berkshire, financial strength that is unquestionable takes precedence over all else.
Buffett, in the Berkshire Hathaway owner's manual, uses a college education to help explain the difference between book value and intrinsic value:
You can gain some insight into the differences between book value and intrinsic value by looking at one form of investment, a college education. Think of the education's cost as its "book value." If this cost is to be accurate, it should include the earnings that were foregone by the student because he chose college rather than a job.
For this exercise, we will ignore the important non-economic benefits of an education and focus strictly on its economic value. First, we must estimate the earnings that the graduate will receive over his lifetime and subtract from that figure an estimate of what he would have earned had he lacked his education. That gives us an excess earnings figure, which must then be discounted, at an appropriate interest rate, back to graduation day. The dollar result equals the intrinsic economic value of the education.
Some graduates will find that the book value of their education exceeds its intrinsic value, which means that whoever paid for the education didn't get his money's worth. In other cases, the intrinsic value of an education will far exceed its book value, a result that proves capital was wisely deployed. In all cases, what is clear is that book value is meaningless as an indicator of intrinsic value.
Berkshire's stock is currently selling at more than a 120% of book value. Well, at least what book value was at the end of the 4th quarter of 2012.
Book value is almost certainly higher now.
So stock repurchases at this time aren't going to happen, but it wouldn't take much of a drop in price (or increase in book value) for them to be buyers.
What Buffett specifically means when he says "we will likely repurchase stock aggressively" will be worth keeping an eye on if the stock price falls below 110% of per-share book value again.
Adam
Long position in BRKb established at less than recent prices
* 110% of the book value or a 10% premium over the book value. It's been described both ways in different publications.
---
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: Intrinsic Value vs Book Value
From Warren Buffett's latest Berkshire Hathaway (BRKa) shareholder letter:
...we don't enjoy cashing out partners at a discount, even though our doing so may give the selling shareholders a slightly higher price than they would receive if our bid was absent. When we are buying, therefore, we want those exiting partners to be fully informed about the value of the assets they are selling.
At our limit price of 110% of book value*, repurchases clearly increase Berkshire's per-share intrinsic value. And the more and the cheaper we buy, the greater the gain for continuing shareholders. Therefore, if given the opportunity, we will likely repurchase stock aggressively at our price limit or lower. You should know, however, that we have no interest in supporting the stock and that our bids will fade in particularly weak markets. Nor will we buy shares if our cash-equivalent holdings are below $20 billion. At Berkshire, financial strength that is unquestionable takes precedence over all else.
Buffett, in the Berkshire Hathaway owner's manual, uses a college education to help explain the difference between book value and intrinsic value:
You can gain some insight into the differences between book value and intrinsic value by looking at one form of investment, a college education. Think of the education's cost as its "book value." If this cost is to be accurate, it should include the earnings that were foregone by the student because he chose college rather than a job.
For this exercise, we will ignore the important non-economic benefits of an education and focus strictly on its economic value. First, we must estimate the earnings that the graduate will receive over his lifetime and subtract from that figure an estimate of what he would have earned had he lacked his education. That gives us an excess earnings figure, which must then be discounted, at an appropriate interest rate, back to graduation day. The dollar result equals the intrinsic economic value of the education.
Some graduates will find that the book value of their education exceeds its intrinsic value, which means that whoever paid for the education didn't get his money's worth. In other cases, the intrinsic value of an education will far exceed its book value, a result that proves capital was wisely deployed. In all cases, what is clear is that book value is meaningless as an indicator of intrinsic value.
Berkshire's stock is currently selling at more than a 120% of book value. Well, at least what book value was at the end of the 4th quarter of 2012.
Book value is almost certainly higher now.
So stock repurchases at this time aren't going to happen, but it wouldn't take much of a drop in price (or increase in book value) for them to be buyers.
What Buffett specifically means when he says "we will likely repurchase stock aggressively" will be worth keeping an eye on if the stock price falls below 110% of per-share book value again.
Adam
Long position in BRKb established at less than recent prices
* 110% of the book value or a 10% premium over the book value. It's been described both ways in different publications.
---
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.
Tuesday, May 1, 2012
Stocks to Watch
Here's an update to the list of common stocks I've said previously I like* for my own portfolio at the right price.
For the stocks mentioned on April 9, 2009 (as part of the Six Stock Portfolio but also later added in the original Stocks to Watch), the total return is 122 percent compared to 72 percent total return for the SPDR S&P 500 (SPY) over the same time frame.
For the stocks mentioned on July 21, 2009, the total return is 77 percent compared to 54 percent total return for the SPDR S&P 500 over the same time frame.
For the stocks mentioned on December 17, 2009, the total return is 58 percent compared to 33 percent total return for the SPDR S&P 500 over the same time frame.
(Naturally, dividends are included in that total return calculation for all the above stocks and for the S&P 500 so it is an apples-to-apples comparison.)
Combined, these stocks are up roughly 88 percent since each was first mentioned in those three separate posts a few years back.
Even though the group has done substantially better than the S&P 500, the performance so far doesn't mean a whole lot just yet.
First, I think a few years or so is still too short a time frame to gauge relative performance.
Second, returns need be looked at in the context of risks.
Having said that, I've liked these not only because I expect them to do well over the very long haul, but also because I think that -- if bought at the lower prices that many of these were available not too long ago -- the returns could be accomplished at lower risk.
The substantial moves higher in many of these stocks only makes it harder to accumulate more shares (or for the companies to implement buybacks) below intrinsic value. So there's little reason to be thrilled about the higher prices.
To me, the shares listed were attractive buys as long-term investments only when they could be bought lower than the maximum price I have indicated in earlier Stocks to Watch posts.
Since they were first mentioned, there were plenty of chances to do just that.
Not now.
Unfortunately, now most have become too expensive to buy or, at least, are borderline at best.
Some things to consider:
For the stocks mentioned on April 9, 2009 (as part of the Six Stock Portfolio but also later added in the original Stocks to Watch), the total return is 122 percent compared to 72 percent total return for the SPDR S&P 500 (SPY) over the same time frame.
For the stocks mentioned on July 21, 2009, the total return is 77 percent compared to 54 percent total return for the SPDR S&P 500 over the same time frame.
For the stocks mentioned on December 17, 2009, the total return is 58 percent compared to 33 percent total return for the SPDR S&P 500 over the same time frame.
(Naturally, dividends are included in that total return calculation for all the above stocks and for the S&P 500 so it is an apples-to-apples comparison.)
Combined, these stocks are up roughly 88 percent since each was first mentioned in those three separate posts a few years back.
Even though the group has done substantially better than the S&P 500, the performance so far doesn't mean a whole lot just yet.
First, I think a few years or so is still too short a time frame to gauge relative performance.
Second, returns need be looked at in the context of risks.
Having said that, I've liked these not only because I expect them to do well over the very long haul, but also because I think that -- if bought at the lower prices that many of these were available not too long ago -- the returns could be accomplished at lower risk.
The substantial moves higher in many of these stocks only makes it harder to accumulate more shares (or for the companies to implement buybacks) below intrinsic value. So there's little reason to be thrilled about the higher prices.
To me, the shares listed were attractive buys as long-term investments only when they could be bought lower than the maximum price I have indicated in earlier Stocks to Watch posts.
Since they were first mentioned, there were plenty of chances to do just that.
Not now.
Unfortunately, now most have become too expensive to buy or, at least, are borderline at best.
Naturally, my objective was to always buy these significantly below the maximum prices I've previously indicated when the opportunity presented itself. The prices that were made available by stressed markets in recent years allowed that to be largely accomplished.
The stocks on this list are fine businesses (some better than others, of course) and, in my view, if bought well and held for a long enough period were likely to create solid returns for shareholders.
For the most part the window to buy has closed on the vast majority of these stocks.
Those that were bought well when the discounts to value existed will be held by me long-term as the businesses compound in value.
As always, my intent is to hold long-term unless 1) the economic moat is damaged, 2) prospects were misjudged, 3) valuation gets extreme, and 4) occasionally when a substantial mispricing of another asset presents itself and the capital is needed for it.
For the most part the window to buy has closed on the vast majority of these stocks.
Those that were bought well when the discounts to value existed will be held by me long-term as the businesses compound in value.
As always, my intent is to hold long-term unless 1) the economic moat is damaged, 2) prospects were misjudged, 3) valuation gets extreme, and 4) occasionally when a substantial mispricing of another asset presents itself and the capital is needed for it.
Some things to consider:
- These stocks are intended to remain very stable over time with few additions or deletions. I think of it differently than the Six Stock Portfolio. Unlike that portfolio, I use Stocks to Watch as a list of quality businesses to monitor and, over a longer period of time, buy 5 to 10 of the stocks based upon what becomes available at the biggest discount to intrinsic value in the market. After that, the intent is to hold these indefinitely as long-term investments.
- In contrast, I established the Six Stock Portfolio in April 2009 as an example of some quality stocks that could be bought relatively quickly (at prevailing market prices back then) and held long-term. No trading required unless one of the conditions noted above warrants a sale. Otherwise, this concentrated portfolio exists to reject the idea that trading rapidly in and out of different securities is necessary to create above average returns. Basically, owning shares of quality businesses -- those with durable economics that increase intrinsically in value at an attractive rate over time -- bought initially at the right price trumps excessive trading.
- A term used frequently by analysts is a "price target". I never have one. To me, investor returns should be driven by the core economics of the businesses they own compounding in value, ideally over a very long time, not some unique talent to jump in and out of the stock at the right moment. The ownership period of shares in a sound business can be indefinite when bought at a fair price. Again, my sell behavior is influenced by the conditions noted above.
(i.e. Permanent damage to the economic moat, misjudgments, extreme mispricings, opportunity costs etc.)
The bottom line is that these are all intended to be long-term investments. A ten year horizon or longer. No trades here.
- In contrast, I established the Six Stock Portfolio in April 2009 as an example of some quality stocks that could be bought relatively quickly (at prevailing market prices back then) and held long-term. No trading required unless one of the conditions noted above warrants a sale. Otherwise, this concentrated portfolio exists to reject the idea that trading rapidly in and out of different securities is necessary to create above average returns. Basically, owning shares of quality businesses -- those with durable economics that increase intrinsically in value at an attractive rate over time -- bought initially at the right price trumps excessive trading.
- A term used frequently by analysts is a "price target". I never have one. To me, investor returns should be driven by the core economics of the businesses they own compounding in value, ideally over a very long time, not some unique talent to jump in and out of the stock at the right moment. The ownership period of shares in a sound business can be indefinite when bought at a fair price. Again, my sell behavior is influenced by the conditions noted above.
(i.e. Permanent damage to the economic moat, misjudgments, extreme mispricings, opportunity costs etc.)
The bottom line is that these are all intended to be long-term investments. A ten year horizon or longer. No trades here.
Stock|Price @ 1st Mention|Recent Price|Total Return**
JNJ | 59.49 | 65.10 |20%
WFC | 19.61 | 33.42 | 76% - 1st mention 4/09/09
USB | 18.27 | 32.17 | 83%
MHK| 38.62 | 67.02 | 74%
COP | 43.50 | 71.63 | 83% - Price is prior to PSX spin-off
PM | 37.71 | 89.51 | 171% - 1st mention 04/09/09
PG | 55.49 | 63.64 | 26%
PEP | 52.10 | 66.00 | 39% - 1st mention 04/09/09
LOW | 20.32 | 31.47 | 65% - 1st mention 04/09/09
AXP | 18.83 | 60.21 |238% - 1st mention 04/09/09
ADP | 35.72 | 55.62 | 70%
DEO | 45.54 | 101.12 | 146% - 1st mention 04/09/09
BRKb| 59.50 | 80.45 | 35%
MO | 17.33 | 32.21 | 121%
MNST| 14.58 | 65.00 |346% - HANS changed to MNST and split 2-1
PKX | 93.63 | 83.25 | -5.0%
RMCF| 8.29 | 9.54 | 30%
(Splits, spinoffs, and similar actions inevitably will occur going forward. Will adjust as necessary to make meaningful comparisons.)
It'd be safer and easier to invest right now if more of these stocks were selling at a discount to value. As I've mentioned many times in the past, not only does it allow the investor time to accumulate more shares below intrinsic value, the company itself can use excess free cash flow to do the same.
PKX has obviously been the worst performing stock but there are, of course, other laggards.
"When companies with outstanding businesses and comfortable financial positions find their shares selling far below intrinsic value in the marketplace, no alternative action can benefit shareholders as surely as repurchases." - Warren Buffett in 1984 Berkshire Hathaway Shareholder Letter
PKX has obviously been the worst performing stock but there are, of course, other laggards.
It's tough to be enthusiastic about some of the businesses that have struggled to create intrinsic value as of late (JNJ, PEP, PG come to mind). The laggard stock performance doesn't bother me (that's, of course, beneficial in the long run), but the problems they've had in their businesses certainly does.
It's also tough to be thrilled about MNST (though the 346 percent return since it was mentioned is nice) as its stock price has moved into speculative price territory. The level of overvaluation makes it most likely the first voluntary sell candidate since I started this.
It's also tough to be thrilled about MNST (though the 346 percent return since it was mentioned is nice) as its stock price has moved into speculative price territory. The level of overvaluation makes it most likely the first voluntary sell candidate since I started this.
The maximum price I was willing to pay and noted in prior Stocks to Watch posts took into account an acceptable margin of safety.***
That margin of safety differs for each company.
In other words, I believed these were intrinsically worth quite a bit more than the max price I was willing to pay. I also believe most of these companies generally have favorable long-term economics (i.e. the best of them have high and durable return on capital) and, as a result, intrinsic values will increase over the long haul. Of course, I may be misjudging the core economics and that margin of safety could provide insufficient protection against a loss.
Though I could easily be wrong, at the right price I consider these stocks appropriate for my own portfolio (i.e. not for someone else's) given my understanding of the downside risks and potential rewards.
So these don't make sense for others unless they do their own research and reach their own similar conclusions.
That margin of safety differs for each company.
In other words, I believed these were intrinsically worth quite a bit more than the max price I was willing to pay. I also believe most of these companies generally have favorable long-term economics (i.e. the best of them have high and durable return on capital) and, as a result, intrinsic values will increase over the long haul. Of course, I may be misjudging the core economics and that margin of safety could provide insufficient protection against a loss.
Though I could easily be wrong, at the right price I consider these stocks appropriate for my own portfolio (i.e. not for someone else's) given my understanding of the downside risks and potential rewards.
So these don't make sense for others unless they do their own research and reach their own similar conclusions.
Even if some are not wildly overvalued, most of these stocks are too expensive to buy right now. The margin of safety too narrow for my money. There has been no shortage of chances to buy these at a discount to value in the not too distant past.
That was the time to act.
The risk of missing the chance to own a well understood investment when a fair price is available (error of omission) can be more costly than suffering a short-term paper loss (though, due to loss aversion, many focus much more on the latter).
Hopefully, at least some of these will get cheap again. Considering the outperformance, I'd be surprised if these stocks did all that well in the intermediate term. I'm hopeful they will not.
That was the time to act.
The risk of missing the chance to own a well understood investment when a fair price is available (error of omission) can be more costly than suffering a short-term paper loss (though, due to loss aversion, many focus much more on the latter).
Hopefully, at least some of these will get cheap again. Considering the outperformance, I'd be surprised if these stocks did all that well in the intermediate term. I'm hopeful they will not.
Here are some thoughts on errors of omission by Warren Buffett from an article in The Motley Fool.
"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
In other words, not buying what's 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 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.
In any case, the record has been plain to see since I first mentioned the above stocks on this blog. If it turns out I've made dumb decisions it will be obvious over the long haul.
The objective is good long-term results at lower risk accomplished with minimal trading.
For me, performance during a down market and tough economy matters more. Truly good businesses should become stronger in a tough economic environment. Having said that, I am not tempted to trade from "defensive" to "cyclical" stocks (or anything similar to that approach) depending on the market environment. Too much trading leads to unnecessary mistakes. This is about part ownership of businesses. I'll let others play the trading game as I believe this approach will do just fine in the long run (even if it offers a little less excitement).
Some may think it's time to add some new Stocks To Watch. Well, the above list already offers plenty of alternatives for me to consider. Keeping the list short allows one to really get to know what they own or might want to own some day. Some patience and discipline is required.
In fact, if anything, I'd like to have fewer on the list.
In any case, I'm certainly not expecting all that many will find this way of thinking about investment to be of much interest.
As I mentioned above, these are simply the stocks I like for my own portfolio. In other words, I have no opinion whatsoever as to which stocks others should own.
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 total return includes dividends and is based upon the closing prices on the date first mentioned compared to yesterday's closing price. 1st mention of each stock was 07/21/09 unless otherwise noted. Removed from the list a while back was BNI; a stock I liked up to $ 80/share. It was bought out by Berkshire Hathaway for $ 100/share in late 2009. Deal closed in early 2010. BNI's stock price when 1st mentioned was $ 74.80. So it ended up being a ~34% return in a relatively short amount of time which was easily greater than the S&P 500.
*** The required margin of safety is naturally larger for a bank than for something like KO. When I make a mistake and substantially misjudge a company's economics, 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.
In other words, not buying what's 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 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.
In any case, the record has been plain to see since I first mentioned the above stocks on this blog. If it turns out I've made dumb decisions it will be obvious over the long haul.
The objective is good long-term results at lower risk accomplished with minimal trading.
For me, performance during a down market and tough economy matters more. Truly good businesses should become stronger in a tough economic environment. Having said that, I am not tempted to trade from "defensive" to "cyclical" stocks (or anything similar to that approach) depending on the market environment. Too much trading leads to unnecessary mistakes. This is about part ownership of businesses. I'll let others play the trading game as I believe this approach will do just fine in the long run (even if it offers a little less excitement).
Some may think it's time to add some new Stocks To Watch. Well, the above list already offers plenty of alternatives for me to consider. Keeping the list short allows one to really get to know what they own or might want to own some day. Some patience and discipline is required.
In fact, if anything, I'd like to have fewer on the list.
In any case, I'm certainly not expecting all that many will find this way of thinking about investment to be of much interest.
As I mentioned above, these are simply the stocks I like for my own portfolio. In other words, I have no opinion whatsoever as to which stocks others should own.
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 total return includes dividends and is based upon the closing prices on the date first mentioned compared to yesterday's closing price. 1st mention of each stock was 07/21/09 unless otherwise noted. Removed from the list a while back was BNI; a stock I liked up to $ 80/share. It was bought out by Berkshire Hathaway for $ 100/share in late 2009. Deal closed in early 2010. BNI's stock price when 1st mentioned was $ 74.80. So it ended up being a ~34% return in a relatively short amount of time which was easily greater than the S&P 500.
*** The required margin of safety is naturally larger for a bank than for something like KO. When I make a mistake and substantially misjudge a company's economics, 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.
Monday, April 30, 2012
Buybacks Take A Smarter Tack
Here's a Wall Street Journal article on the recent share buyback behavior of companies in the S&P 500 index. Apparently, companies did plenty of buying when the market was low then backing off as it rallied.
Wall Street Journal: Buybacks Take A Smarter Tack
The fact is companies do not always get this right. The article also points out that buybacks were at record levels as the market was peaking back in 2007. Yet, once stock prices fell dramatically, the buyback activity dropped off quite a bit.
Substantial corrections can happen (and have happened) where shares in general never fall to an unattractive valuation. So I'd be cautious about considering a large generalized drop in market prices, in combination with aggressive buyback activity, to be a reliable indication that shares are being bought back cheap.
A big drop certainly increases the probability that shares are at bargain valuations but hardly assures it.
For too many stocks, even near the bottom of some of the corrections (including larger ones in the past decade or so), the market price relative to intrinsic value provided insufficient or no margin of safety. Having said that, this most recent time there seemed to be quite a few bargains made available by market conditions in the third quarter of last year.
So, at least in this instance, many companies seemed to be getting it more right than wrong.
Effectively executed buyback programs usually have management (and a Board of Directors) who 1) provides a clear indication, through words and past actions, that they know what their shares are likely worth and 2) a track record of buying back shares more often than not when:
- the discount to intrinsic value is substantial,
- the business itself is in a comfortable financial position, and
- other more attractive investing opportunities are not on the horizon.
For long-term investors, large corrections in market prices are always a welcome thing to see. It often creates an environment where the price of individual shares become very attractive compared to intrinsic value.
Long-term investors can naturally take the opportunity to buy more shares when they're at a discount to value, but it's nice to know that management is likely to intelligently do the same with excess cash.
It's good to see the recent buyback pattern but, at least to me, it's not sufficient to look at what companies as a group are doing with buybacks. The track record is just too mixed. Instead, I'd rather look at the buyback behavior of a specific company, especially one that I happen to know its specific strength and challenges very well.
For frequent readers of the blog, of course, this is ground that's been covered on a number of previous occasions.
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 are never a recommendation to buy or sell anything.
Wall Street Journal: Buybacks Take A Smarter Tack
The fact is companies do not always get this right. The article also points out that buybacks were at record levels as the market was peaking back in 2007. Yet, once stock prices fell dramatically, the buyback activity dropped off quite a bit.
Substantial corrections can happen (and have happened) where shares in general never fall to an unattractive valuation. So I'd be cautious about considering a large generalized drop in market prices, in combination with aggressive buyback activity, to be a reliable indication that shares are being bought back cheap.
A big drop certainly increases the probability that shares are at bargain valuations but hardly assures it.
For too many stocks, even near the bottom of some of the corrections (including larger ones in the past decade or so), the market price relative to intrinsic value provided insufficient or no margin of safety. Having said that, this most recent time there seemed to be quite a few bargains made available by market conditions in the third quarter of last year.
So, at least in this instance, many companies seemed to be getting it more right than wrong.
Effectively executed buyback programs usually have management (and a Board of Directors) who 1) provides a clear indication, through words and past actions, that they know what their shares are likely worth and 2) a track record of buying back shares more often than not when:
- the discount to intrinsic value is substantial,
- the business itself is in a comfortable financial position, and
- other more attractive investing opportunities are not on the horizon.
For long-term investors, large corrections in market prices are always a welcome thing to see. It often creates an environment where the price of individual shares become very attractive compared to intrinsic value.
Long-term investors can naturally take the opportunity to buy more shares when they're at a discount to value, but it's nice to know that management is likely to intelligently do the same with excess cash.
It's good to see the recent buyback pattern but, at least to me, it's not sufficient to look at what companies as a group are doing with buybacks. The track record is just too mixed. Instead, I'd rather look at the buyback behavior of a specific company, especially one that I happen to know its specific strength and challenges very well.
For frequent readers of the blog, of course, this is ground that's been covered on a number of previous occasions.
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 are never a recommendation to buy or sell anything.
Friday, April 27, 2012
Yacktman 1st Quarter 2012 Update
Below is the 10-year performance through 03/31/12 of the funds that Donald Yacktman and his team manage:
The Yacktman Fund (YACKX) had a cumulative 10-year return of 180.24%.*
The Yacktman Focused Fund (YAFFX) did even better returning a cumulative 197.09% over the past 10 years.
For a comparison, the S&P 500 was up 49.72% over the same time frame.
Approximately 41 percent of the Yacktman Focused Fund portfolio is in the top 5 stocks.
Approximately 34 percent of the Yacktman Fund portfolio is in the top 5 stocks.
From their 1st Quarter 2012 Letter:
Consumer Staples
We think the combination of predictability, quality, and valuation of companies like Procter & Gamble, PepsiCo, Clorox, and Coca Cola is especially important in a time when we perceive many significant risks in the world.
Old Tech
Microsoft [was] the top contributor to fund results in the first quarter, appreciating more than 20%, though we believe the stock remains inexpensive at less than 10 times our expectation of 2012 earnings when adjusting for net of the cash on the balance sheet. While HP struggled, we think the shares are remarkably inexpensive and the management team has improved significantly since Meg Whitman became CEO.
In this Barron's interview from a little over a year ago, Donald Yacktman had this to say about the investing business:
This business boils down to what you buy and what you pay for it. The market level is incidental to us.
In the interview, he also talks about how inexpensive high-quality companies are compared to what he's seen over the years.
Unfortunately some (though certainly not all) of the high-quality companies he is referring to are much more expensive now.
I've mentioned this before, but it's worth noting again that the annual turnover of the portfolios managed by Yacktman and his team is typically under 10 percent.
In fact, they are often well under that 10 percent number.
According to Morningstar, lately it has been more like 2 to 3 percent.
Impressively low.
It's always good to see someone producing above average returns by paying the right price for sound businesses that compound over time in value.
I'll take that approach over some special aptitude for trading any day.
Adam
Established long positions in PG, PEP, KO, and MSFT at much lower prices. Have no intention to buy any of these near current prices. Also, have established a position in HPQ near its recent price.
* From the letter: The performance data quoted for The Yacktman Fund and The Yacktman Focused Fund represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that the investor's shares, when redeemed, may be worth more or less than their original cost. The current performance may be higher or lower than the performance data quoted.
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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 never a recommendation to buy or sell anything.
The Yacktman Fund (YACKX) had a cumulative 10-year return of 180.24%.*
The Yacktman Focused Fund (YAFFX) did even better returning a cumulative 197.09% over the past 10 years.
For a comparison, the S&P 500 was up 49.72% over the same time frame.
These funds are very similar but the more concentrated of the two funds, as the name suggests, is the Yacktman Focused Fund.
Top 5 Holdings of The Yacktman Focused Fund
1 Procter & Gamble (PG)
4 Microsoft (MSFT)
5 Sysco (SYY)
Approximately 41 percent of the Yacktman Focused Fund portfolio is in the top 5 stocks.
Approximately 34 percent of the Yacktman Fund portfolio is in the top 5 stocks.
From their 1st Quarter 2012 Letter:
Consumer Staples
We think the combination of predictability, quality, and valuation of companies like Procter & Gamble, PepsiCo, Clorox, and Coca Cola is especially important in a time when we perceive many significant risks in the world.
Old Tech
Microsoft [was] the top contributor to fund results in the first quarter, appreciating more than 20%, though we believe the stock remains inexpensive at less than 10 times our expectation of 2012 earnings when adjusting for net of the cash on the balance sheet. While HP struggled, we think the shares are remarkably inexpensive and the management team has improved significantly since Meg Whitman became CEO.
In this Barron's interview from a little over a year ago, Donald Yacktman had this to say about the investing business:
This business boils down to what you buy and what you pay for it. The market level is incidental to us.
In the interview, he also talks about how inexpensive high-quality companies are compared to what he's seen over the years.
Unfortunately some (though certainly not all) of the high-quality companies he is referring to are much more expensive now.
I've mentioned this before, but it's worth noting again that the annual turnover of the portfolios managed by Yacktman and his team is typically under 10 percent.
In fact, they are often well under that 10 percent number.
According to Morningstar, lately it has been more like 2 to 3 percent.
Impressively low.
It's always good to see someone producing above average returns by paying the right price for sound businesses that compound over time in value.
I'll take that approach over some special aptitude for trading any day.
Adam
Established long positions in PG, PEP, KO, and MSFT at much lower prices. Have no intention to buy any of these near current prices. Also, have established a position in HPQ near its recent 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.
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