Daniel T. Henry, CFO of American Express, speaking about competition on the earnings call last week:
...we have had the premium space for a very long time and the conversation of competitors wanting to move into our space was true 10 years ago as it is today. I mean it's a set of customers that everybody wants to have and so they work hard to achieve that. Now if we stand still you know they would move right past us and take our customers. But we are diligent in terms of thinking about how we can improve the value proposition in our products. You can see that in the way we've built our membership rewards for instance, to continue to make it a premium program. You know we continue to be extremely diligent on servicing because servicing is a very, very important aspect. You may have seen that we were rated #1 in customer service by J. D. Power. And that's really a reflection of the fact that we've always viewed servicing to be very important. So we know that the competition is coming after us. We're aware of that. And we will continue to be diligent.
You know if you look at you know the actual data, for instance if you look at average spending of our cardmembers compared to the competition, you know it's significantly higher today. It was significantly higher five years ago and that really has not eroded over that time. So I think we've been successful.
American Express was able to earn over $ 500 million in the quarter in this depressed environment.
Unless their is another shock to the global economic system, those earning should normalize over the next 18 months with just a minor uptick in billed business and reduced default rates.
Here's the transcript for the Q3 2009 conference call.
Here's the slide presentation used on that call.
Adam
Long position in AXP
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Monday, October 26, 2009
Wednesday, October 21, 2009
Buffett Munger Paradox
"I think the (new) top guy won't be as smart as Warren. But it's silly to complain: 'What kind of world is this that gives me Warren Buffett for 40 years and then some bastard comes along who's worse?'" [Laughter] - Charlie Munger at the Wesco 2004 Annual Meeting
Check out this post on Buffett and Munger from a good blog focused on psychology and finance.
An excerpt:
...at the heart of this enduring relationship is a curious paradox. When asked to identify the most important factor in his financial success Buffett replies with a single word: "focus". Munger, on the other hand, extols the need for investors to develop a broad education in which to ground their investment activities.
These comments from Charlie seem to reinforce the point:
"Warren is one of the best learning machines on this earth. The turtles who outrun the hares are learning machines. If you stop learning in this world, the world rushes right by you. Warren was lucky that he could still learn effectively and build his skills, even after he reached retirement age. Warren's investing skills have markedly increased since he turned 65. Having watched the whole process with Warren, I can report that if he had stopped with what he knew at earlier points, the record would be a pale shadow of what it is." - Charlie Munger at the Wesco 2007 Annual Meeting
"It is true that Warren had a touch of brain block from working under Ben Graham and making a ton of money – it's hard to switch from something that's worked so well. But if Charlie Munger had never lived, the Buffett record would still be pretty much what it is." - Charlie Munger at the Wesco 2004 Annual Meeting
"It's hard to believe that he's getting better with each passing year. It won't go on forever, but Warren is actually improving. It's remarkable: Most almost-72-year-old men are not improving, but Warren is." - Charlie Munger at the Wesco 2003 Annual Meeting
"I think there's some mythology in this idea that I've been this great enlightener of Warren. He hasn't needed much enlightenment." - Charlie Munger at the Berkshire Hathaway 2003 Annual Meeting
Berkshire Hathaway's investments in China and Korea (PetroChina and POSCO) in recent years are good examples of the expansion of their "circle of competence".
So maybe it's a focus on what's already within your circle of competence at any point in time, combined with Munger's tendency to seek a broader multi-disciplinary approach to expand that "circle".
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.
An excerpt:
...at the heart of this enduring relationship is a curious paradox. When asked to identify the most important factor in his financial success Buffett replies with a single word: "focus". Munger, on the other hand, extols the need for investors to develop a broad education in which to ground their investment activities.
These comments from Charlie seem to reinforce the point:
"Warren is one of the best learning machines on this earth. The turtles who outrun the hares are learning machines. If you stop learning in this world, the world rushes right by you. Warren was lucky that he could still learn effectively and build his skills, even after he reached retirement age. Warren's investing skills have markedly increased since he turned 65. Having watched the whole process with Warren, I can report that if he had stopped with what he knew at earlier points, the record would be a pale shadow of what it is." - Charlie Munger at the Wesco 2007 Annual Meeting
"It is true that Warren had a touch of brain block from working under Ben Graham and making a ton of money – it's hard to switch from something that's worked so well. But if Charlie Munger had never lived, the Buffett record would still be pretty much what it is." - Charlie Munger at the Wesco 2004 Annual Meeting
"It's hard to believe that he's getting better with each passing year. It won't go on forever, but Warren is actually improving. It's remarkable: Most almost-72-year-old men are not improving, but Warren is." - Charlie Munger at the Wesco 2003 Annual Meeting
"I think there's some mythology in this idea that I've been this great enlightener of Warren. He hasn't needed much enlightenment." - Charlie Munger at the Berkshire Hathaway 2003 Annual Meeting
Berkshire Hathaway's investments in China and Korea (PetroChina and POSCO) in recent years are good examples of the expansion of their "circle of competence".
So maybe it's a focus on what's already within your circle of competence at any point in time, combined with Munger's tendency to seek a broader multi-disciplinary approach to expand that "circle".
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Monday, October 19, 2009
Ackman on ADP
Here are some comments from Bill Ackman, managing partner at Pershing Square Capital, on his purchase of shares in Automatic Data Processing (ADP). He bought 7.258 million shares of the stock during the 2nd quarter of 2009. This was his largest purchase during that quarter representing over 11% of his holdings. I've mentioned in previous posts that I like ADP at the right price.
From his latest quarterly letter:
ADP is a high-quality business that trades at a meaningful discount to its intrinsic value due to the near-term effects of the economic downturn. We view ADP as three separate businesses: (1) a payroll processor that has been impacted by rising unemployment and a spike in the corporate default rate, (2) a client fund account that holds money on behalf of its customers ("float") which has shown declining earnings as low interest rates and recent wage deflation reduce float balances, and (3) a dealer services business that has been impacted by the unprecedented turmoil facing the U.S. automotive industry. As the U.S. economy stabilizes, we believe the headwinds facing ADP will become tailwinds. Given the operating leverage inherent in ADP's business model, ADP’s earnings should accelerate as it approaches its normalized earnings potential.
ADP's business has numerous attractive qualities: (1) given the low capital outlays required to run the business, it generates cash flow in excess of reported earnings, (2) its dominant market share and global franchise afford it with meaningful pricing power, (3) it possesses one of the few truly Triple-A balance sheets in the world, (4) the company has additional avenues for growth as it has yet to fully penetrate the global payroll/tax market and has a valuable suite of "beyond payroll" product offerings that it can cross-sell into its existing client base, and (5) it will benefit from higher interest and tax rates (higher taxes lead to greater float balances). We also respect management’s focus on shareholder value. Over the last four years, ADP has spent about $5 billion repurchasing more than 20% of its outstanding shares and paid more than $2 billion in dividends. The combination of a high quality dominant business, shareholder friendly management, and an attractive price in our experience typically leads to a good investment outcome.
Bill Ackman also built a meaningful position (over 6%) in McDonald's (MCD) during the quarter.
Here is the complete letter.
Adam
Long position in ADP
---
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.
From his latest quarterly letter:
ADP is a high-quality business that trades at a meaningful discount to its intrinsic value due to the near-term effects of the economic downturn. We view ADP as three separate businesses: (1) a payroll processor that has been impacted by rising unemployment and a spike in the corporate default rate, (2) a client fund account that holds money on behalf of its customers ("float") which has shown declining earnings as low interest rates and recent wage deflation reduce float balances, and (3) a dealer services business that has been impacted by the unprecedented turmoil facing the U.S. automotive industry. As the U.S. economy stabilizes, we believe the headwinds facing ADP will become tailwinds. Given the operating leverage inherent in ADP's business model, ADP’s earnings should accelerate as it approaches its normalized earnings potential.
ADP's business has numerous attractive qualities: (1) given the low capital outlays required to run the business, it generates cash flow in excess of reported earnings, (2) its dominant market share and global franchise afford it with meaningful pricing power, (3) it possesses one of the few truly Triple-A balance sheets in the world, (4) the company has additional avenues for growth as it has yet to fully penetrate the global payroll/tax market and has a valuable suite of "beyond payroll" product offerings that it can cross-sell into its existing client base, and (5) it will benefit from higher interest and tax rates (higher taxes lead to greater float balances). We also respect management’s focus on shareholder value. Over the last four years, ADP has spent about $5 billion repurchasing more than 20% of its outstanding shares and paid more than $2 billion in dividends. The combination of a high quality dominant business, shareholder friendly management, and an attractive price in our experience typically leads to a good investment outcome.
Bill Ackman also built a meaningful position (over 6%) in McDonald's (MCD) during the quarter.
Here is the complete letter.
Adam
Long position in ADP
---
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, October 14, 2009
Rail Time Indicators
The American Association of Railroads (AAR) puts out the Rail Time Indicators report monthly.
Here is a link to the latest report.
The 1st chart shows that when the economy was going strong (in '06, '07, and even part of '08) average weekly US rail car loads seem to hover around ~325,000 +/- 10,000. During this recession it bottomed out in May at approximately 245,000. It has been higher since that month with the latest (September) average weekly rail car loads at just over 276,000. So things have improved but are no where near back to the run rate we had before the financial crisis.
From the report:
Average weekly carloads on U.S. railroads in September 2009 (276,137) were 2,900 less than in August 2009. All or most of that decline can probably be attributed to severe flooding in the Southeast which shut down some rail lines for a period in September.
Average weekly US rail intermodal traffic (accounted for separately from the numbers above) has also been improving since May.
The average weekly intermodal count on U.S. railroads in September 2009 was 198,647 trailers and containers, up 2,600 units from August 2009 and the highest since November 2008. The last three weeks of September were the three highest-volume intermodal weeks of 2009 for U.S. freight railroads.
I've included the AAR Rail Time Indicators in the links section. The page has both monthly and weekly reports on it.
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.
Here is a link to the latest report.
The 1st chart shows that when the economy was going strong (in '06, '07, and even part of '08) average weekly US rail car loads seem to hover around ~325,000 +/- 10,000. During this recession it bottomed out in May at approximately 245,000. It has been higher since that month with the latest (September) average weekly rail car loads at just over 276,000. So things have improved but are no where near back to the run rate we had before the financial crisis.
From the report:
Average weekly carloads on U.S. railroads in September 2009 (276,137) were 2,900 less than in August 2009. All or most of that decline can probably be attributed to severe flooding in the Southeast which shut down some rail lines for a period in September.
Average weekly US rail intermodal traffic (accounted for separately from the numbers above) has also been improving since May.
The average weekly intermodal count on U.S. railroads in September 2009 was 198,647 trailers and containers, up 2,600 units from August 2009 and the highest since November 2008. The last three weeks of September were the three highest-volume intermodal weeks of 2009 for U.S. freight railroads.
I've included the AAR Rail Time Indicators in the links section. The page has both monthly and weekly reports on it.
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.
Tuesday, October 13, 2009
Capital Misallocation
So after the last decade of bubbles and other capital destroying behavior we get this Wall Street Journal article.
Apparently, high-frequency trading is on the rise.
According to the article, there is now an increased focus by money managers on the short-term.
It also points out money managers have increased short term focus much of it related to heightened interest in high-frequency trading. This extremely rapid form of trading now makes up roughly two-thirds of the volume in equities.
For equities, over the past 30 years or so, we've gone from an average holding period measured in years to an average holding period measured in months. The rise of high-frequency trading sure isn't going to help reverse that trend.
Recently, Buffett and Bogle and 25 others signed a letter with the title Overcoming Short-termism, calling for new incentives to discourage short-term trading practices in favor of long-term investing. Less casino capital; more patient capital. It appears to have been all but ignored so far.
In fact, at least based upon the Wall Street Journal article, the response of Wall Street seems to be the exact opposite of what the letter recommends. From the letter:
"Risk-taking is an essential underpinning of our capitalist system, but the consequences to the corporation, and the economy, of high-risk strategies designed exclusively to produce high returns in the short-run is evident in recent market failures."
The letter goes on to say that "market incentives to encourage patient capital, is likely to be the most effective mechanism to encourage long-term focus by investors. Capitalism is a powerful economic and societal force which, if properly directed, can have a hugely beneficial impact on society at all levels. By enlisting natural market forces and establishing incentives for market actors to modify their respective behaviors..."
To me, the Wall Street Journal article on high-frequency trading says, in effect, that the instincts of many on Wall Street is to completely ignore the spirit of that letter. They're now engaging in strategies that involve even more hyperactive short-term trading.
The Seinfeld episode where George Costanza finally implements an effective strategy to overcome his innately terrible instincts comes to mind. The title of that episode happens to be "The Opposite".
Well, those with similarly ineffective instincts might learn a thing or two from the episode.
"If every instinct you have is wrong, then the opposite would have to be right." - Jerry Seinfeld speaking to George in "The Opposite"
So maybe instead it's time for some on Wall Street to adopt George's strategy.
"A job with the New York Yankees! This has been the dream of my life ever since I was a child, and it's all happening because I'm completely ignoring every urge towards common sense and good judgment I've ever had. This is no longer just some crazy notion, Elaine, Jerry. This is my religion." - George Costanza Speaking to Elaine Benes and Jerry Seinfeld in "The Opposite"
Who knows, it just might work.
It's not just instincts, of course.
Much of this problem is systemic and cultural.
Adam
Related post: Buffett & Bogle: Overcoming Short-termism
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.
Apparently, high-frequency trading is on the rise.
According to the article, there is now an increased focus by money managers on the short-term.
It also points out money managers have increased short term focus much of it related to heightened interest in high-frequency trading. This extremely rapid form of trading now makes up roughly two-thirds of the volume in equities.
For equities, over the past 30 years or so, we've gone from an average holding period measured in years to an average holding period measured in months. The rise of high-frequency trading sure isn't going to help reverse that trend.
Recently, Buffett and Bogle and 25 others signed a letter with the title Overcoming Short-termism, calling for new incentives to discourage short-term trading practices in favor of long-term investing. Less casino capital; more patient capital. It appears to have been all but ignored so far.
In fact, at least based upon the Wall Street Journal article, the response of Wall Street seems to be the exact opposite of what the letter recommends. From the letter:
"Risk-taking is an essential underpinning of our capitalist system, but the consequences to the corporation, and the economy, of high-risk strategies designed exclusively to produce high returns in the short-run is evident in recent market failures."
The letter goes on to say that "market incentives to encourage patient capital, is likely to be the most effective mechanism to encourage long-term focus by investors. Capitalism is a powerful economic and societal force which, if properly directed, can have a hugely beneficial impact on society at all levels. By enlisting natural market forces and establishing incentives for market actors to modify their respective behaviors..."
To me, the Wall Street Journal article on high-frequency trading says, in effect, that the instincts of many on Wall Street is to completely ignore the spirit of that letter. They're now engaging in strategies that involve even more hyperactive short-term trading.
The Seinfeld episode where George Costanza finally implements an effective strategy to overcome his innately terrible instincts comes to mind. The title of that episode happens to be "The Opposite".
Well, those with similarly ineffective instincts might learn a thing or two from the episode.
"If every instinct you have is wrong, then the opposite would have to be right." - Jerry Seinfeld speaking to George in "The Opposite"
So maybe instead it's time for some on Wall Street to adopt George's strategy.
"A job with the New York Yankees! This has been the dream of my life ever since I was a child, and it's all happening because I'm completely ignoring every urge towards common sense and good judgment I've ever had. This is no longer just some crazy notion, Elaine, Jerry. This is my religion." - George Costanza Speaking to Elaine Benes and Jerry Seinfeld in "The Opposite"
Who knows, it just might work.
It's not just instincts, of course.
Much of this problem is systemic and cultural.
Adam
Related post: Buffett & Bogle: Overcoming Short-termism
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
An update of the stocks I like* for my own portfolio at the right price.
Considering the extent of the rally in stocks it's difficult to buy anything right now. In the spring, almost all of the stocks on this list were below (in some cases well below) the highest price I'd be willing to pay.
Stocks under the dashed line have become too expensive for me.
Unfortunately, most of the stocks are now below that line.
Kraft (KFT) has been held back by it's bid for Cadbury (CBY).
Coca-Cola (KO) is becoming expensive fast.
I have increased what I'd pay for MHK and HANS.
As always, the stocks in bold have two things in common. They are:
1) currently owned by Berkshire Hathaway (as of 6/30/09) and,
2) selling below the price that Warren Buffett paid in the past few years.
There are several other Berkshire Hathaway holdings on this list but they don't have the 2nd thing going for them.
These are all intended to be long-term investments. A ten year horizon or longer. No trades here.
Stock/Max Price I'd Pay/Recent Price(10-12-09)
JNJ/65.00/62.53 - Buffett paid approx $ 62
KFT/30.00/26.19 - Buffett paid approx $ 33
USB/24.00/23.02 - Buffett paid approx $ 31
KO/55.00/54.79
PG/60.00/57.50
---------------------
PEP/60.00/60.92
COP/50.00/51.36 - Buffett paid approx $ 82
AXP/35.00/35.08
WFC/28.00/30.28 - Buffett paid approx $ 32
BNI/80.00/82.01 - Buffett paid approx $ 75
ADP/37.00/40.04
DEO/60.00/61.54
PM/45.00/50.45
BRKb/3000/3280
MO/16.00/18.12
LOW/19.00/21.01
MHK/45.00/47.72
HANS/30.00/37.17
PKX/80.00/105.57
RMCF/6.00/8.89
(Splits, spinoffs, and similar actions inevitably will occur going forward. Will adjust as necessary to make meaningful comparisons.)
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 max price I've indicated in this post and in prior Stocks to Watch posts. I also believe most of these companies generally have favorable long-term economics (i.e. the best of them have high and durable ROC) and, as a result, intrinsic values will grow 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.
Many stocks have rallied so the risk of paying more than necessary in the short-term is there.
Yet, another risk, of course, is missing a stock entirely because it continues to rally. There is no perfect answer to this. The risk of missing something you like when a fair price is available (error of omission) can 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 real (error of commission).
Bottom line: There is no perfect answer to this problem. When highly confident that a great business is available at a fair price it's important to accumulate enough while the window of opportunity exists. Sometimes ignoring the risk of short-term losses is necessary to make sure a meaningful stake is acquired.
Adam
* This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here are never a recommendation to buy or sell anything and should never be considered specific individualized investment advice. In general, intend to remain long the above stocks (at least those that at some point became cheap enough to buy) unless market prices become significantly higher than intrinsic value, core business economics become materially impaired, prospects turn out to have been misjudged, or opportunity costs become high.
** The required margin of safety is naturally larger for a bank than for something like KO. When I make a mistake and misjudge a company's economics in a major way, the margin of safety may still not be sufficient. Judging the durability of the economics correctly matters most. If the economics remain intact but the stock goes down that is a very good thing in the long run.
Considering the extent of the rally in stocks it's difficult to buy anything right now. In the spring, almost all of the stocks on this list were below (in some cases well below) the highest price I'd be willing to pay.
Stocks under the dashed line have become too expensive for me.
Unfortunately, most of the stocks are now below that line.
Kraft (KFT) has been held back by it's bid for Cadbury (CBY).
Coca-Cola (KO) is becoming expensive fast.
I have increased what I'd pay for MHK and HANS.
As always, the stocks in bold have two things in common. They are:
1) currently owned by Berkshire Hathaway (as of 6/30/09) and,
2) selling below the price that Warren Buffett paid in the past few years.
There are several other Berkshire Hathaway holdings on this list but they don't have the 2nd thing going for them.
These are all intended to be long-term investments. A ten year horizon or longer. No trades here.
Stock/Max Price I'd Pay/Recent Price(10-12-09)
JNJ/65.00/62.53 - Buffett paid approx $ 62
KFT/30.00/26.19 - Buffett paid approx $ 33
USB/24.00/23.02 - Buffett paid approx $ 31
KO/55.00/54.79
PG/60.00/57.50
---------------------
PEP/60.00/60.92
COP/50.00/51.36 - Buffett paid approx $ 82
AXP/35.00/35.08
WFC/28.00/30.28 - Buffett paid approx $ 32
BNI/80.00/82.01 - Buffett paid approx $ 75
ADP/37.00/40.04
DEO/60.00/61.54
PM/45.00/50.45
BRKb/3000/3280
MO/16.00/18.12
LOW/19.00/21.01
MHK/45.00/47.72
HANS/30.00/37.17
PKX/80.00/105.57
RMCF/6.00/8.89
(Splits, spinoffs, and similar actions inevitably will occur going forward. Will adjust as necessary to make meaningful comparisons.)
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 max price I've indicated in this post and in prior Stocks to Watch posts. I also believe most of these companies generally have favorable long-term economics (i.e. the best of them have high and durable ROC) and, as a result, intrinsic values will grow 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.
Many stocks have rallied so the risk of paying more than necessary in the short-term is there.
Yet, another risk, of course, is missing a stock entirely because it continues to rally. There is no perfect answer to this. The risk of missing something you like when a fair price is available (error of omission) can 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 real (error of commission).
Bottom line: There is no perfect answer to this problem. When highly confident that a great business is available at a fair price it's important to accumulate enough while the window of opportunity exists. Sometimes ignoring the risk of short-term losses is necessary to make sure a meaningful stake is acquired.
Adam
* This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here are never a recommendation to buy or sell anything and should never be considered specific individualized investment advice. In general, intend to remain long the above stocks (at least those that at some point became cheap enough to buy) unless market prices become significantly higher than intrinsic value, core business economics become materially impaired, prospects turn out to have been misjudged, or opportunity costs become high.
** The required margin of safety is naturally larger for a bank than for something like KO. When I make a mistake and misjudge a company's economics in a major way, the margin of safety may still not be sufficient. Judging the durability of the economics correctly matters most. If the economics remain intact but the stock goes down that is a very good thing in the long run.
Wednesday, October 7, 2009
Nebraska Furniture Mart
"One question I always ask myself in appraising a business is how I would like, assuming I had ample capital and skilled personnel, to compete with it. I'd rather wrestle grizzlies than compete with Mrs. B and her progeny. They buy brilliantly, they operate at expense ratios competitors don't even dream about, and they then pass on to their customers much of the savings. It’s the ideal business - one built upon exceptional value to the customer that in turn translates into exceptional economics for its owners." - Warren Buffett in the 1983 Letter
Fishing Tackle
"I think the reason why we got into such idiocy in investment management is best illustrated by a story that I tell about the guy who sold fishing tackle. I asked him, 'My God, they're purple and green. Do fish really take these lures?' And he said, 'Mister, I don't sell to fish.'
Investment managers are in the position of that fishing tackle salesman. They're like the guy who was selling salt to the guy who already had too much salt. And as long as the guy will buy salt, why they'll sell salt. But that isn't what ordinarily works for the buyer of investment advice." - Charlie Munger at USC Business School in 1994
Investment managers are in the position of that fishing tackle salesman. They're like the guy who was selling salt to the guy who already had too much salt. And as long as the guy will buy salt, why they'll sell salt. But that isn't what ordinarily works for the buyer of investment advice." - Charlie Munger at USC Business School in 1994
Monday, October 5, 2009
Mandelbrot
"What you read in most financial theory textbooks bears almost no resemblance to what you actually see on most trading floors." - Benoit Mandelbrot
The book, "The (Mis)Behavior of Markets", by Benoit Mandelbrot came out 5 years ago. Mandelbrot is best known as the father of fractal geometry but has been interested in coming up with a better model to explain markets.
Here's a link to a review of the book.
The first big breakthrough was made by another Frenchman, Louis Bachelier, at the turn of the twentieth century, but his ideas were never given credit during his lifetime. After the Second World War, his work was rediscovered at a time when mathematical finance was gaining prominence as a field of study. Soon, a variety of tools were developed to help financiers: Portfolio Theory, the Capital Asset Pricing Model, and the Black-Scholes equation.
According to Mandelbrot, all this work is fundamentally flawed...
I have not read the book but am always interested in how other academic disciplines view finance and economics. While skeptical that Mandelbrot has come up with something that can be used in a practical sense by an investor, I think it's worthwhile to try and better understand the flaws that might exist within modern finance theory.
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.
The book, "The (Mis)Behavior of Markets", by Benoit Mandelbrot came out 5 years ago. Mandelbrot is best known as the father of fractal geometry but has been interested in coming up with a better model to explain markets.
Here's a link to a review of the book.
The first big breakthrough was made by another Frenchman, Louis Bachelier, at the turn of the twentieth century, but his ideas were never given credit during his lifetime. After the Second World War, his work was rediscovered at a time when mathematical finance was gaining prominence as a field of study. Soon, a variety of tools were developed to help financiers: Portfolio Theory, the Capital Asset Pricing Model, and the Black-Scholes equation.
According to Mandelbrot, all this work is fundamentally flawed...
I have not read the book but am always interested in how other academic disciplines view finance and economics. While skeptical that Mandelbrot has come up with something that can be used in a practical sense by an investor, I think it's worthwhile to try and better understand the flaws that might exist within modern finance theory.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Thursday, October 1, 2009
The Wealth and Poverty of Nations
From the book The Wealth and Poverty of Nations:
"...no ex-colonies have done so well as (South) Korea and Taiwan, where annual growth rates per head from 1950 to 1973 exceeded those of the advanced industrial nations (Japan itself accepted). This achievement reflects in my opinion the culture of these societies: the family structure, work values, sense of purpose. (I say this even though many economists do not accord importance to culture, which cannot be measured and, for these experts, just gets in the way of good ideas.)" - David S. Landes in The Wealth and Poverty of Nations
Reminds me of this...
"Anyone has to be flabbergasted by Japan's recession, which has endured for 10 years, despite interest rates below 1%. The government is playing all the monetary games, but it's not working. If you had described this situation to Harvard economists, they would have said it's impossible. Yet at the same time, there's an asset bubble in Hong Kong. Why? Because Japan and China are two vastly different cultures."
"This is a classic example of why, to be a successful investor, one must draw from many disciplines. Imagine an economist standing up at a meeting of economists and giving my explanation. It wouldn't be politically correct! But the tools of economics don't explain what's going on." - Charlie Munger at the 2000 Wesco Meeting
and this...
"You've got a complex system and it spews out a lot of wonderful numbers that enable you to measure some factors. But there are other factors that are terribly important, [yet] there's no precise numbering you can put to these factors. You know they're important, but you don't have the numbers. Well practically everybody (1) overweighs the stuff that can be numbered, because it yields to the statistical techniques they're taught in academia, and (2) doesn't mix in the hard-to-measure stuff that may be more important." - Charlie Munger in a 2003 UC Santa Barbara Speech
There's sometimes too much emphasis on what's easily measurable over what, though tough to quantify, matters more.
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.
"...no ex-colonies have done so well as (South) Korea and Taiwan, where annual growth rates per head from 1950 to 1973 exceeded those of the advanced industrial nations (Japan itself accepted). This achievement reflects in my opinion the culture of these societies: the family structure, work values, sense of purpose. (I say this even though many economists do not accord importance to culture, which cannot be measured and, for these experts, just gets in the way of good ideas.)" - David S. Landes in The Wealth and Poverty of Nations
Reminds me of this...
"Anyone has to be flabbergasted by Japan's recession, which has endured for 10 years, despite interest rates below 1%. The government is playing all the monetary games, but it's not working. If you had described this situation to Harvard economists, they would have said it's impossible. Yet at the same time, there's an asset bubble in Hong Kong. Why? Because Japan and China are two vastly different cultures."
"This is a classic example of why, to be a successful investor, one must draw from many disciplines. Imagine an economist standing up at a meeting of economists and giving my explanation. It wouldn't be politically correct! But the tools of economics don't explain what's going on." - Charlie Munger at the 2000 Wesco Meeting
and this...
"You've got a complex system and it spews out a lot of wonderful numbers that enable you to measure some factors. But there are other factors that are terribly important, [yet] there's no precise numbering you can put to these factors. You know they're important, but you don't have the numbers. Well practically everybody (1) overweighs the stuff that can be numbered, because it yields to the statistical techniques they're taught in academia, and (2) doesn't mix in the hard-to-measure stuff that may be more important." - Charlie Munger in a 2003 UC Santa Barbara Speech
There's sometimes too much emphasis on what's easily measurable over what, though tough to quantify, matters more.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
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