Mason Hawkins of Longleaf Partners expects equities to do very well versus fixed income in the coming years. Below, he states that stocks will generate annual returns in the mid-teens over the next five years. If he's right, at that rate of return stocks would double in that time frame.
From the Longleaf Partners 2Q Letter:
Equities offer a superior opportunity for investors today, particularly compared to fixed income. The earnings yield of the S&P 500 based on 2011 projected EPS is 9.4%. If adjusted for the approximately $100 of cash imbedded in the S&P, the operating earnings yield increases to 10.4%. The numbers are slightly more attractive overseas. Based on 2011 estimates, the EAFE Index earnings yield is 9.8%. If earnings grow organically from today’s depressed levels at only 5% per year (a rate that does not require the reinvestment of earnings because of current excess capacity), and even if the P/E ratio remains below the long-term average, an investor’s five year average annual return will be in the mid-teens.
By contrast, corporate bonds with fixed, taxable coupons yield much less than the growing, after-tax coupon that companies produce.
The letter includes a table comparing corporate earnings yields to corporate bond yields* at bear market lows since 1932.
When stocks have been at their lowest levels, earnings yields have been an average of 2.8% higher than Aa2 bond yields. At the beginning of July earnings yields are 4.3% above debt yields or almost twice stocks’ relative attractiveness to bonds at bear market lows. We have rarely witnessed this much disparity in the benefits of being an owner of a growing coupon versus being a lender to a fixed one.
Almost a decade ago, the earnings yield or inverse price/earnings on many quality stocks** was around 3% while corporate bonds were yielding over 7%. Today, it's not difficult to find stocks with 9% plus earnings yields compared to corporate bonds that are currently yielding less than 6%.
A complete reversal.
Adam
* Long-term corporates.
** Back then, the DJIA components collectively were more reasonably priced than the S&P 500 with an earnings yield of 5.6%. Many stocks had earnings yields of 3% or even much lower in the early 2000s. For example, the S&P 500 earnings yield was ~3% but the NASDAQ's earnings yield was...well...clearly much lower than that during the tech bubble.
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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.
Thursday, July 29, 2010
Wednesday, July 28, 2010
Grantham on "The Greatest-Ever Failure of Economic Theory"
From Jeremy Grantham's essay Finance Goes Rogue:
"I have not been a great fan of the theory of rational expectations – the belief in cold, rational, calculating homo sapiens; indeed, I believe it to be the greatest-ever failure of economic theory, which goes a long way toward explaining how completely useless economists were at warning us of the approaching crisis (with a half handful of honorable exceptions). But it would be a better world if their false assumptions were actually accurate ones: if only information flowed freely, were processed efficiently, and were available equally on both sides of every transaction, we would indeed live in a more efficient and probably better world."
System design should be based upon what occurs in the real world instead of an imaginary one with flawed assumptions of how market participants actually tend to behave.
Adam
Related posts:
-Friends & Romans
-Superinvestors: Galileo vs The Flat Earth
-Max Planck: Resistance of the Human Mind
Related article:
-Finance Goes Rogue
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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.
"I have not been a great fan of the theory of rational expectations – the belief in cold, rational, calculating homo sapiens; indeed, I believe it to be the greatest-ever failure of economic theory, which goes a long way toward explaining how completely useless economists were at warning us of the approaching crisis (with a half handful of honorable exceptions). But it would be a better world if their false assumptions were actually accurate ones: if only information flowed freely, were processed efficiently, and were available equally on both sides of every transaction, we would indeed live in a more efficient and probably better world."
System design should be based upon what occurs in the real world instead of an imaginary one with flawed assumptions of how market participants actually tend to behave.
Adam
Related posts:
-Friends & Romans
-Superinvestors: Galileo vs The Flat Earth
-Max Planck: Resistance of the Human Mind
Related article:
-Finance Goes Rogue
---
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, July 27, 2010
Lowe's Free Cash Flow
Here's a The Motley Fool article on the quality of Lowe's (LOW) free cash flow (FCF). Lowe's has produced much more FCF over the past 12 months than net income.
Looking at cash flow can help to gauge the earnings quality of a company but also has its limits. From the article:
All Cash Is Not Equal
Unfortunately, the cash flow statement isn't immune from nonsense, either. That's why it pays to take a close look at the components of cash flow from operations, to make sure that the cash comes from high-quality sources. They need to be real and replicable in the upcoming quarters, rather than being offset by continual cash outflows that don't appear on the income statement...
Some of Lowe's current FCF comes down to pulling back on CapEx during the recession. It will be interesting to see what happens as the housing market and economy as a whole improves.
You can see from the chart in the article that FCF was much less than net income from 2006-2009 when they were investing more heavily in store growth. Does that mean they had lower quality FCF in the past? Probably not, but difficult to know as it depends on the long-term return they get from those investments in new stores. Some CapEx maintains and refreshes stores, distribution, and related capabilities while the rest is to expand. They've simply pulled back on the expansion portion for now. Lowe's plans to open ~40-45 new stores this year compared to 115 new stores back in 2008.
I also addressed the FCF (and valuation) of Amazon (AMZN) and eBay (EBAY) in this post from earlier this year.
Check out the full article.
Adam
Long position in LOW and EBAY
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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.
Looking at cash flow can help to gauge the earnings quality of a company but also has its limits. From the article:
All Cash Is Not Equal
Unfortunately, the cash flow statement isn't immune from nonsense, either. That's why it pays to take a close look at the components of cash flow from operations, to make sure that the cash comes from high-quality sources. They need to be real and replicable in the upcoming quarters, rather than being offset by continual cash outflows that don't appear on the income statement...
Some of Lowe's current FCF comes down to pulling back on CapEx during the recession. It will be interesting to see what happens as the housing market and economy as a whole improves.
You can see from the chart in the article that FCF was much less than net income from 2006-2009 when they were investing more heavily in store growth. Does that mean they had lower quality FCF in the past? Probably not, but difficult to know as it depends on the long-term return they get from those investments in new stores. Some CapEx maintains and refreshes stores, distribution, and related capabilities while the rest is to expand. They've simply pulled back on the expansion portion for now. Lowe's plans to open ~40-45 new stores this year compared to 115 new stores back in 2008.
I also addressed the FCF (and valuation) of Amazon (AMZN) and eBay (EBAY) in this post from earlier this year.
Check out the full article.
Adam
Long position in LOW and EBAY
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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.
Art of the Extreme Forecast
Here is an article in the Wall Street Journal by Jason Zweig on why it pays to say something extreme if you are in the prediction business. He starts out mentioning the prediction earlier by Robert Prechter earlier this month that the Dow Jones Industrial Average will drop below 1,000 within six years.
An extreme forecast doesn't merely grab your attention; ironically, it may strike you as even more convincing than a moderate prediction. A classic psychological experiment at the University of Michigan showed that 54% of people preferred an extreme prediction about stock prices to a more-temperate one. They apparently believed that a forecaster must have high confidence and a solid rationale in order to justify making a dramatic prediction. So, while Dow 1000 may or may not be a good forecast, it isn't bad marketing for newsletters...
The more extreme predictions tend to be popular at turning points. Zweig points out that the book "Dow 36,000 hit the best seller list around the year 2000. The article also points out that for Dow 1,000 (a 90% drop) to happen earnings would have to collapse and price to earnings would have to drop to record lows.
One of the examples given is Pfizer. What would it take for it to trade 90% lower? Earnings would have to contract 70% and it would have to sell at a price/earnings of 2.3.
Zweig also points out that if Coca-Cola ever fell to a PE of 5, Warren Buffett would buy the whole company pretty quickly.
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 extreme forecast doesn't merely grab your attention; ironically, it may strike you as even more convincing than a moderate prediction. A classic psychological experiment at the University of Michigan showed that 54% of people preferred an extreme prediction about stock prices to a more-temperate one. They apparently believed that a forecaster must have high confidence and a solid rationale in order to justify making a dramatic prediction. So, while Dow 1000 may or may not be a good forecast, it isn't bad marketing for newsletters...
The more extreme predictions tend to be popular at turning points. Zweig points out that the book "Dow 36,000 hit the best seller list around the year 2000. The article also points out that for Dow 1,000 (a 90% drop) to happen earnings would have to collapse and price to earnings would have to drop to record lows.
One of the examples given is Pfizer. What would it take for it to trade 90% lower? Earnings would have to contract 70% and it would have to sell at a price/earnings of 2.3.
Zweig also points out that if Coca-Cola ever fell to a PE of 5, Warren Buffett would buy the whole company pretty quickly.
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, July 26, 2010
More on Forecasters
"Forecasts may tell you a great deal about the forecaster, they tell you nothing about the future." – Warren Buffett in the 1980 Berkshire Hathaway Shareholder Letter
Friday, July 23, 2010
American Express 2Q 2010 Earnings
Looks like some pretty good results from American Express (AXP). The Stock is not extremely cheap right now but the business continues to perform well.
Earnings topped $ 1.017 billion compared to $ 337 million in the same quarter a year ago. The improvement in earnings comes down to the fact that billed business is coming back post-recession and a continuing improvement in credit quality. This rate of increase in earnings obviously won't continue as it is a normalization coming out of a recession more than anything else.
Some comments from Ken Chenault, chairman and chief executive officer:
"Cardmember spending rose 16 percent and improved credit indicators continued the year-long trend that began last spring," said Kenneth I. Chenault, chairman and chief executive officer.
"Spending rose across all segments with the largest increases coming from corporate cards, cards issued by our bank partners, charge cards and premium co-brand products where many cardmembers tend to pay in full each month."
CNBC: American Express Posts Earnings Above Expectations
TheStreet.com: AmEx Tops Wall Street Profit View
Also, AmEx CFO Daniel Henry discussed the impact of new regulations on the business in yesterday's American Express Q2 Conference Call. Here's an excerpt from the call:
As we've discussed in prior quarters, the impact from the CARD Act within yield is significant. However, we have worked to mitigate it through repricing activities over recent quarters. Our objective is to migrate back to the historical yield level of 9%. We believe our pricing is appropriate and reflects the necessary revenues for our business. But uncertainty does exist regarding the impact of the look-back or regulatory review required on a go-forward basis.
Staying with the CARD Act, we do not expect the revised late fee rules, which will be implemented in August, to have a material impact. We believe the CARD Act is more significant for us than financial reform due to the nature of our business model, which is not impacted by many aspects of the reform. With regard to financial reform legislation, we support the general principle of financial stability and consumer protection underlying the legislation. However, there clearly are costs associated with it. Many of the aspects will play out over time, giving us the ability to adopt to the changing marketplace.
While other industry participants have discussed details regarding debit pricing risk pursuant to the Durbin amendment, our charge card and credit cards are not directly impacted by the potential debit pricing adjustments. With regard to discounting, while merchants have long had the ability to provide discounts for payment of cash and check, the additional ability of merchants to discount price for payments with debit cards versus credit cards creates some additional uncertainty. However, based on our commitment to deliver high-quality customers and services to merchants, we are confident in our ability to adapt to the changing environment.
Despite the noise it remains quite a good business.
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.
Earnings topped $ 1.017 billion compared to $ 337 million in the same quarter a year ago. The improvement in earnings comes down to the fact that billed business is coming back post-recession and a continuing improvement in credit quality. This rate of increase in earnings obviously won't continue as it is a normalization coming out of a recession more than anything else.
Some comments from Ken Chenault, chairman and chief executive officer:
"Cardmember spending rose 16 percent and improved credit indicators continued the year-long trend that began last spring," said Kenneth I. Chenault, chairman and chief executive officer.
"Spending rose across all segments with the largest increases coming from corporate cards, cards issued by our bank partners, charge cards and premium co-brand products where many cardmembers tend to pay in full each month."
CNBC: American Express Posts Earnings Above Expectations
TheStreet.com: AmEx Tops Wall Street Profit View
Also, AmEx CFO Daniel Henry discussed the impact of new regulations on the business in yesterday's American Express Q2 Conference Call. Here's an excerpt from the call:
As we've discussed in prior quarters, the impact from the CARD Act within yield is significant. However, we have worked to mitigate it through repricing activities over recent quarters. Our objective is to migrate back to the historical yield level of 9%. We believe our pricing is appropriate and reflects the necessary revenues for our business. But uncertainty does exist regarding the impact of the look-back or regulatory review required on a go-forward basis.
Staying with the CARD Act, we do not expect the revised late fee rules, which will be implemented in August, to have a material impact. We believe the CARD Act is more significant for us than financial reform due to the nature of our business model, which is not impacted by many aspects of the reform. With regard to financial reform legislation, we support the general principle of financial stability and consumer protection underlying the legislation. However, there clearly are costs associated with it. Many of the aspects will play out over time, giving us the ability to adopt to the changing marketplace.
While other industry participants have discussed details regarding debit pricing risk pursuant to the Durbin amendment, our charge card and credit cards are not directly impacted by the potential debit pricing adjustments. With regard to discounting, while merchants have long had the ability to provide discounts for payment of cash and check, the additional ability of merchants to discount price for payments with debit cards versus credit cards creates some additional uncertainty. However, based on our commitment to deliver high-quality customers and services to merchants, we are confident in our ability to adapt to the changing environment.
Despite the noise it remains quite a good business.
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.
Yacktman 2Q 2010 Letter
Some excerpts from the most recent Yacktman quarterly letter:
High Quality Holdings
It surprises some that we have achieved such strong outperformance while having large weightings in well-known stocks like Coca-Cola, PepsiCo, Pfizer, and Microsoft, as these companies are not exactly undiscovered or underfollowed.
We strive to be as objective as possible in evaluating all opportunities, and if the best businesses in the world are available at compelling valuations we are willing to own big positions in them. We sleep well at night knowing that dominant, well capitalized companies purchased at attractive valuations should produce solid results over time, even in a world with an extreme amount of uncertainty.
We are also willing to own lower quality businesses, but we have to project a meaningfully higher expected rate of return on the investment. Currently, we think most of the best values are in the highest quality companies.
Well-established, Slowly Changing Markets
We like businesses that sell products in well-established, slowly changing markets like beverage, household products, personal care, and food. These "consumer staple" products typically sell at low price points and are consumed and repurchased frequently.
Category leaders like Coca-Cola in soft drinks or Tide in laundry detergents may continue their dominance for generations, making it easier to predict the future prospects of these businesses. We are extremely confident that Clorox will be the leader in bleach sales in 10 years, while we are less certain about who will be the dominant seller of cell phones even a few years from now.
Yacktman's largest positions include: Coca-Cola, NewsCorp, Pepsi, Clorox, Pfizer.
On Pepsi
Frito Lay, the most valuable division of PepsiCo, is the dominant snack chip company in the world. This business has significantly higher market share than any of its competitors, and its dominant market share produces substantially higher margins than most other packaged food companies. Strong distribution and innovation have allowed Frito Lay to grow faster than other large food companies.Outside of snack chips, PepsiCo has a collection of solid businesses including Pepsi, Tropicana, Quaker Oats, and Gatorade.
On Coca-Cola
Coca-Cola products account for nearly 3% of beverage consumption around the world. Increased per capita consumption and global expansion have driven more than a century of growth. Today, Coca-Cola is primarily an international company; the stagnant North American business is a minority of operating profits. Due to a strong presence in key emerging markets, we expect Coca-Cola's growth will continue for a long time in the future.
Yacktman and his team have a very solid long-term track record.
Adam
With the exception of NewsCorp and Clorox, long positions in each stock mentioned.
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.
High Quality Holdings
It surprises some that we have achieved such strong outperformance while having large weightings in well-known stocks like Coca-Cola, PepsiCo, Pfizer, and Microsoft, as these companies are not exactly undiscovered or underfollowed.
We strive to be as objective as possible in evaluating all opportunities, and if the best businesses in the world are available at compelling valuations we are willing to own big positions in them. We sleep well at night knowing that dominant, well capitalized companies purchased at attractive valuations should produce solid results over time, even in a world with an extreme amount of uncertainty.
We are also willing to own lower quality businesses, but we have to project a meaningfully higher expected rate of return on the investment. Currently, we think most of the best values are in the highest quality companies.
Well-established, Slowly Changing Markets
We like businesses that sell products in well-established, slowly changing markets like beverage, household products, personal care, and food. These "consumer staple" products typically sell at low price points and are consumed and repurchased frequently.
Category leaders like Coca-Cola in soft drinks or Tide in laundry detergents may continue their dominance for generations, making it easier to predict the future prospects of these businesses. We are extremely confident that Clorox will be the leader in bleach sales in 10 years, while we are less certain about who will be the dominant seller of cell phones even a few years from now.
Yacktman's largest positions include: Coca-Cola, NewsCorp, Pepsi, Clorox, Pfizer.
On Pepsi
Frito Lay, the most valuable division of PepsiCo, is the dominant snack chip company in the world. This business has significantly higher market share than any of its competitors, and its dominant market share produces substantially higher margins than most other packaged food companies. Strong distribution and innovation have allowed Frito Lay to grow faster than other large food companies.Outside of snack chips, PepsiCo has a collection of solid businesses including Pepsi, Tropicana, Quaker Oats, and Gatorade.
On Coca-Cola
Coca-Cola products account for nearly 3% of beverage consumption around the world. Increased per capita consumption and global expansion have driven more than a century of growth. Today, Coca-Cola is primarily an international company; the stagnant North American business is a minority of operating profits. Due to a strong presence in key emerging markets, we expect Coca-Cola's growth will continue for a long time in the future.
Yacktman and his team have a very solid long-term track record.
Adam
With the exception of NewsCorp and Clorox, long positions in each stock mentioned.
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, July 22, 2010
The Herd Instinct: Correlation Soars
Here's a Wall Street Journal article on how much more correlated stocks have become recently.
In a nutshell the article says:
Flock-like behavior is a reflection of the growing influence of investors using strategies to buy and sell large blocks of stocks.
Instead of picking individual stocks they trade in and out of the market using broad index ETFs.
Trading in exchange-traded funds means more stocks are likely to move in the same direction on any given day.
Correlation is on the rise which can be annoying to those who are buying individual stocks.
The average correlation since 1980 has been 44%.
Last week it surpassed its 2008 high of 79% and hit 81% (the highest level since the 1987 crash).
Here's my take. Lets say you want to buy a good business like Coca-Cola (KO). After you accumulate enough share at an attractive price, lets assume the correlation caused by the rapid fire trading of baskets of stocks described above occurs. In time, lets also say that these highly correlated daily price movements of KO with other stocks (some with clearly inferior economics) causes it to become mispriced. This would only be a bad thing if your investment horizon was a short one because...
With patience it can be used to enhance long-term returns.
Adam
Long KO
* In the context of investing for the long-term this is really just noise. If you look at this in a broader context, these swings from bubble to compressed valuations likely means a significant misallocation of capital is occurring. Allow it to persist and it will hurt the real economy and might, all else equal, cause living standards to improve at a reduced rate.
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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.
In a nutshell the article says:
Flock-like behavior is a reflection of the growing influence of investors using strategies to buy and sell large blocks of stocks.
Instead of picking individual stocks they trade in and out of the market using broad index ETFs.
Trading in exchange-traded funds means more stocks are likely to move in the same direction on any given day.
Correlation is on the rise which can be annoying to those who are buying individual stocks.
The average correlation since 1980 has been 44%.
Last week it surpassed its 2008 high of 79% and hit 81% (the highest level since the 1987 crash).
Here's my take. Lets say you want to buy a good business like Coca-Cola (KO). After you accumulate enough share at an attractive price, lets assume the correlation caused by the rapid fire trading of baskets of stocks described above occurs. In time, lets also say that these highly correlated daily price movements of KO with other stocks (some with clearly inferior economics) causes it to become mispriced. This would only be a bad thing if your investment horizon was a short one because...
- At one extreme, if KO happened to stay cheap for a number of years both you as an investor and the company (using its own FCF) will be given the opportunity to buy more shares at that below intrinsic value price over time (increasing long-term returns).
- At the other extreme, if the multiple of price to FCF becomes exceptionally high (think Coca-Cola in late 90s with 50 plus multiple), it allows the sale of shares at prices clearly well above intrinsic value (also increases returns).
With patience it can be used to enhance long-term returns.
Adam
Long KO
* In the context of investing for the long-term this is really just noise. If you look at this in a broader context, these swings from bubble to compressed valuations likely means a significant misallocation of capital is occurring. Allow it to persist and it will hurt the real economy and might, all else equal, cause living standards to improve at a reduced rate.
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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.
Wednesday, July 21, 2010
Earnings Reports: Coca-Cola, Wells Fargo, & U.S. Bancorp
Several key earnings reports were released this morning of stocks that combined represent over 40% of Berkshire Hathaway's equity portfolio. I have not reviewed the reports in detail yet but at first glance each looks solid or better.
Coca-Cola (KO)
Coke Tops Estimates as Volume Rises
Wells Fargo (WFC)
TheStreet.com: Wells Fargo Trounces Wall Street Profit View
US Bancorp (USB)
US Bancorp Reports Record Q2 Revenue
American Express (AXP), another large position (top five) of Berkshire Hathaway, will release their quarterly earnings tomorrow.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Coca-Cola (KO)
Coke Tops Estimates as Volume Rises
Wells Fargo (WFC)
TheStreet.com: Wells Fargo Trounces Wall Street Profit View
US Bancorp (USB)
US Bancorp Reports Record Q2 Revenue
American Express (AXP), another large position (top five) of Berkshire Hathaway, will release their quarterly earnings tomorrow.
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, July 20, 2010
Concentrated Positions in Outstanding Businesses: Berkshire Shareholder Letter Highlights
An excerpt, on buying worthwhile amounts of a stock when attractively priced, from Warren Buffett's 1978 Berkshire Hathaway (BRKa) shareholder letter:
We get excited enough to commit a big percentage of insurance company net worth to equities only when we find (1) businesses we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) priced very attractively. We usually can identify a small number of potential investments meeting requirements (1), (2) and (3), but (4) often prevents action. For example, in 1971 our total common stock position at Berkshire's insurance subsidiaries amounted to only $10.7 million at cost, and $11.7 million at market. There were equities of identifiably excellent companies available - but very few at interesting prices. (An irresistible footnote: in 1971, pension fund managers invested a record 122% of net funds available in equities - at full prices they couldn’t buy enough of them. In 1974, after the bottom had fallen out, they committed a then record low of 21% to stocks.)
The past few years have been a different story for us. At the end of 1975 our insurance subsidiaries held common equities with a market value exactly equal to cost of $39.3 million. At the end of 1978 this position had been increased to equities (including a convertible preferred) with a cost of $129.1 million and a market value of $216.5 million. During the intervening three years we also had realized pre-tax gains from common equities of approximately $24.7 million. Therefore, our overall unrealized and realized pre-tax gains in equities for the three year period came to approximately $112 million. During this same interval the Dow-Jones Industrial Average declined from 852 to 805. It was a marvelous period for the value-oriented equity buyer.
We continue to find for our insurance portfolios small portions of really outstanding businesses that are available, through the auction pricing mechanism of security markets, at prices dramatically cheaper than the valuations inferior businesses command on negotiated sales.
This program of acquisition of small fractions of businesses (common stocks) at bargain prices, for which little enthusiasm exists, contrasts sharply with general corporate acquisition activity, for which much enthusiasm exists. It seems quite clear to us that either corporations are making very significant mistakes in purchasing entire businesses at prices prevailing in negotiated transactions and takeover bids, or that we eventually are going to make considerable sums of money buying small portions of such businesses at the greatly discounted valuations prevailing in the stock market. (A second footnote: in 1978 pension managers, a group that logically should maintain the longest of investment perspectives, put only 9% of net available funds into equities - breaking the record low figure set in 1974 and tied in 1977.)
We are not concerned with whether the market quickly revalues upward securities that we believe are selling at bargain prices. In fact, we prefer just the opposite since, in most years, we expect to have funds available to be a net buyer of securities. And consistent attractive purchasing is likely to prove to be of more eventual benefit to us than any selling opportunities provided by a short-term run up in stock prices to levels at which we are unwilling to continue buying.
Our policy is to concentrate holdings. We try to avoid buying a little of this or that when we are only lukewarm about the business or its price. When we are convinced as to attractiveness, we believe in buying worthwhile amounts.
If prevailing share prices continue to get even cheaper for businesses with favorable long-term economics that's a good thing. At least it is for any investor interested in taking the approach that Buffett outlines above.
There's a sugar high to buying something and watching it immediately go up. Unfortunately, you often end up with the quantity of "an eyedropper" instead of a meaningful amount. Though it takes some patience, I prefer building large positions in outstanding companies in the current environment over any other.
It's easier to ends up with a bigger position at a better price even if favorable results may, for a time, be less than obvious and require some patience.
Adam
Long BRKb
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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.
We get excited enough to commit a big percentage of insurance company net worth to equities only when we find (1) businesses we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) priced very attractively. We usually can identify a small number of potential investments meeting requirements (1), (2) and (3), but (4) often prevents action. For example, in 1971 our total common stock position at Berkshire's insurance subsidiaries amounted to only $10.7 million at cost, and $11.7 million at market. There were equities of identifiably excellent companies available - but very few at interesting prices. (An irresistible footnote: in 1971, pension fund managers invested a record 122% of net funds available in equities - at full prices they couldn’t buy enough of them. In 1974, after the bottom had fallen out, they committed a then record low of 21% to stocks.)
The past few years have been a different story for us. At the end of 1975 our insurance subsidiaries held common equities with a market value exactly equal to cost of $39.3 million. At the end of 1978 this position had been increased to equities (including a convertible preferred) with a cost of $129.1 million and a market value of $216.5 million. During the intervening three years we also had realized pre-tax gains from common equities of approximately $24.7 million. Therefore, our overall unrealized and realized pre-tax gains in equities for the three year period came to approximately $112 million. During this same interval the Dow-Jones Industrial Average declined from 852 to 805. It was a marvelous period for the value-oriented equity buyer.
We continue to find for our insurance portfolios small portions of really outstanding businesses that are available, through the auction pricing mechanism of security markets, at prices dramatically cheaper than the valuations inferior businesses command on negotiated sales.
This program of acquisition of small fractions of businesses (common stocks) at bargain prices, for which little enthusiasm exists, contrasts sharply with general corporate acquisition activity, for which much enthusiasm exists. It seems quite clear to us that either corporations are making very significant mistakes in purchasing entire businesses at prices prevailing in negotiated transactions and takeover bids, or that we eventually are going to make considerable sums of money buying small portions of such businesses at the greatly discounted valuations prevailing in the stock market. (A second footnote: in 1978 pension managers, a group that logically should maintain the longest of investment perspectives, put only 9% of net available funds into equities - breaking the record low figure set in 1974 and tied in 1977.)
We are not concerned with whether the market quickly revalues upward securities that we believe are selling at bargain prices. In fact, we prefer just the opposite since, in most years, we expect to have funds available to be a net buyer of securities. And consistent attractive purchasing is likely to prove to be of more eventual benefit to us than any selling opportunities provided by a short-term run up in stock prices to levels at which we are unwilling to continue buying.
Our policy is to concentrate holdings. We try to avoid buying a little of this or that when we are only lukewarm about the business or its price. When we are convinced as to attractiveness, we believe in buying worthwhile amounts.
If prevailing share prices continue to get even cheaper for businesses with favorable long-term economics that's a good thing. At least it is for any investor interested in taking the approach that Buffett outlines above.
There's a sugar high to buying something and watching it immediately go up. Unfortunately, you often end up with the quantity of "an eyedropper" instead of a meaningful amount. Though it takes some patience, I prefer building large positions in outstanding companies in the current environment over any other.
It's easier to ends up with a bigger position at a better price even if favorable results may, for a time, be less than obvious and require some patience.
Adam
Long BRKb
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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.
Monday, July 19, 2010
Buffett: Outer Scorecard vs Inner Scorecard
"If the world couldn't see your results, would you rather be thought of as the world's greatest investor but in reality have the world's worst record? Or be thought of as the world's worst investor when you were actually the best?"
Those who answer the latter have an inner scorecard. They'll have the ability to be a true contrarian, ignoring the world's judgment and focusing on long-term results.
Link
Those who answer the latter have an inner scorecard. They'll have the ability to be a true contrarian, ignoring the world's judgment and focusing on long-term results.
Link
Stocks to Watch
Below is a list of stocks I like* for my own portfolio at the right price.
From my point of view, the shares listed are attractive long-term investments below the prices I've indicated. None are a screaming buy right now but the recent deep correction in the stock market has created some opportunities.
Those below the dashed line are companies I like but prevailing prices have become too high. Several are just barely above or below the highest price I'm willing to pay. The objective, of course, is to buy them well below that price whenever possible.
As always, the stocks in bold have two things in common. They are:
1) currently owned by Berkshire Hathaway (as of 3/31/10) and,
2) selling below the price that Warren Buffett paid in recent years.
There are several other Berkshire Hathaway holdings on this list but they don't have the 2nd thing going for them.
These are all intended to be long-term investments. A ten year horizon or longer. No trades here.
Stock/Max Price I'd Pay/Recent Price (7-19-10)
JNJ/65.00/59.63 - Buffett paid ~$ 60 but has sold off some shares
KFT/30.00/28.81 - Buffett paid ~$ 33...sold some shares recently
NSC/54.00/53.36
KO/55.00/52.37
WFC/28.00/26.24 - Buffett paid ~$ 22 overall, but purchases in recent yrs ~ $ 32
USB/24.00/23.03 - Buffett paid ~$ 31
MHK/45.00/43.80
---------------------
COP/50.00/51.85 - Buffett paid ~$ 73...some shares sold at a loss
MCD/63.00/69.94
PM/45.00/49.67
PG/60.00/61.99
PEP/60.00/62.45
LOW/19.00/19.93
AXP/35.00/41.38
ADP/37.00/40.63
DEO/60.00/68.00
BRKb/68.00/77.10
MO/16.00/21.26
HANS/30.00/41.09
PKX/80.00/99.99
RMCF/6.00/9.36
(Splits, spinoffs, and similar actions inevitably will occur going forward. Will adjust as necessary to make meaningful comparisons.)
Stocks removed from list:
In other words, I believe these are intrinsically worth quite a bit more than the max price I've indicated in this post and in prior Stocks to Watch posts. I also believe most of these companies generally have favorable long-term economics (i.e. the best of them have high and durable ROC) and, as a result, intrinsic values will increase over time. Of course, I may be wrong about the core economics and that margin of safety could provide insufficient protection against a loss. Still, a year from now I would expect to be willing to pay more for many of these based upon each company's intrinsic value growth over that time frame.
Some of these stocks have rallied quite a bit compared to not too long ago. So they're more difficult to buy with a sufficient margin of safety. Still, that doesn't mean the risk of missing something you like when a fair price is available (error of omission) won't ultimately be more costly than suffering a short-term paper loss.
Here are some thoughts on errors of omission by Warren Buffett from an article in The Motley Fool.
And also...
"During 2008 I did some dumb things in investments. I made at least one major mistake of commission and several lesser ones that also hurt... Furthermore, I made some errors of omission, sucking my thumb when new facts came in." - Warren Buffett's 2008 Annual Letter to Shareholders
In other words, not buying what's still attractively valued to avoid short-term paper losses is far from a perfect solution with your best long-term investment ideas.
To me, if an investment was initially bought at a fair price, and is likely to increase substantially in intrinsic value over 20 years, it makes no sense to be bothered by a temporary paper loss. Of course, make a misjudgment on the quality of a business and that paper loss becomes a real one (error of commission).
There is no perfect answer to this problem. When highly confident that a great business is available at a fair price it's important to accumulate enough while the window of opportunity exists.
Sometimes accepting the risk of short-term losses is necessary to make sure a meaningful stake is acquired.
Adam
* This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here are never a recommendation to buy or sell anything and should never be considered specific individualized investment advice. In general, intend to remain long the above stocks (at least those that at some point became cheap enough to buy) unless market prices become significantly higher than intrinsic value, core business economics become materially impaired, prospects turn out to have been misjudged, or opportunity costs become high.
** The required margin of safety is naturally larger for a bank than for something like KO. When I make a mistake and misjudge a company's economics in a major way, the margin of safety may still not be sufficient. Judging the durability of the economics correctly matters most. If the economics remain intact but the stock goes down that is a very good thing in the long run.
From my point of view, the shares listed are attractive long-term investments below the prices I've indicated. None are a screaming buy right now but the recent deep correction in the stock market has created some opportunities.
Those below the dashed line are companies I like but prevailing prices have become too high. Several are just barely above or below the highest price I'm willing to pay. The objective, of course, is to buy them well below that price whenever possible.
As always, the stocks in bold have two things in common. They are:
1) currently owned by Berkshire Hathaway (as of 3/31/10) and,
2) selling below the price that Warren Buffett paid in recent years.
There are several other Berkshire Hathaway holdings on this list but they don't have the 2nd thing going for them.
These are all intended to be long-term investments. A ten year horizon or longer. No trades here.
Stock/Max Price I'd Pay/Recent Price (7-19-10)
JNJ/65.00/59.63 - Buffett paid ~$ 60 but has sold off some shares
KFT/30.00/28.81 - Buffett paid ~$ 33...sold some shares recently
NSC/54.00/53.36
KO/55.00/52.37
WFC/28.00/26.24 - Buffett paid ~$ 22 overall, but purchases in recent yrs ~ $ 32
USB/24.00/23.03 - Buffett paid ~$ 31
MHK/45.00/43.80
---------------------
COP/50.00/51.85 - Buffett paid ~$ 73...some shares sold at a loss
MCD/63.00/69.94
PM/45.00/49.67
PG/60.00/61.99
PEP/60.00/62.45
LOW/19.00/19.93
AXP/35.00/41.38
ADP/37.00/40.63
DEO/60.00/68.00
BRKb/68.00/77.10
MO/16.00/21.26
HANS/30.00/41.09
PKX/80.00/99.99
RMCF/6.00/9.36
(Splits, spinoffs, and similar actions inevitably will occur going forward. Will adjust as necessary to make meaningful comparisons.)
Stocks removed from list:
- BNI - I liked purchasing BNI up to $ 80/share. It was bought out by Berkshire Hathaway for $ 100/share in late 2009. Deal closed in early 2010.
In other words, I believe these are intrinsically worth quite a bit more than the max price I've indicated in this post and in prior Stocks to Watch posts. I also believe most of these companies generally have favorable long-term economics (i.e. the best of them have high and durable ROC) and, as a result, intrinsic values will increase over time. Of course, I may be wrong about the core economics and that margin of safety could provide insufficient protection against a loss. Still, a year from now I would expect to be willing to pay more for many of these based upon each company's intrinsic value growth over that time frame.
Some of these stocks have rallied quite a bit compared to not too long ago. So they're more difficult to buy with a sufficient margin of safety. Still, that doesn't mean the risk of missing something you like when a fair price is available (error of omission) won't ultimately be more costly than suffering a short-term paper loss.
Here are some thoughts on errors of omission by Warren Buffett from an article in The Motley Fool.
And also...
"During 2008 I did some dumb things in investments. I made at least one major mistake of commission and several lesser ones that also hurt... Furthermore, I made some errors of omission, sucking my thumb when new facts came in." - Warren Buffett's 2008 Annual Letter to Shareholders
In other words, not buying what's still attractively valued to avoid short-term paper losses is far from a perfect solution with your best long-term investment ideas.
To me, if an investment was initially bought at a fair price, and is likely to increase substantially in intrinsic value over 20 years, it makes no sense to be bothered by a temporary paper loss. Of course, make a misjudgment on the quality of a business and that paper loss becomes a real one (error of commission).
There is no perfect answer to this problem. When highly confident that a great business is available at a fair price it's important to accumulate enough while the window of opportunity exists.
Sometimes accepting the risk of short-term losses is necessary to make sure a meaningful stake is acquired.
Adam
* This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here are never a recommendation to buy or sell anything and should never be considered specific individualized investment advice. In general, intend to remain long the above stocks (at least those that at some point became cheap enough to buy) unless market prices become significantly higher than intrinsic value, core business economics become materially impaired, prospects turn out to have been misjudged, or opportunity costs become high.
** The required margin of safety is naturally larger for a bank than for something like KO. When I make a mistake and misjudge a company's economics in a major way, the margin of safety may still not be sufficient. Judging the durability of the economics correctly matters most. If the economics remain intact but the stock goes down that is a very good thing in the long run.
Friday, July 16, 2010
Dr. Doom's Deputy
Here's a recent headline from CNBC from an article on Nouriel Roubini's (Dr. Doom) deputy.
World at Risk of Folding in on Itself: Deputy Doom
A bit apocalyptic sounding. Wouldn't put this at the top of a reading list but it's not tough to guess what someone with the nickname Dr. Doom or Deputy Doom might think. Basically, it's that the world is doing badly and even if things seem to be getting better it's actually still pretty bad and probably gonna get worse.
The global economy is at risk of folding in on itself unless policy makers face up to the threats of inflation inflexibility and exchange-rate inflexibility, according to Arun Motianey, director of fixed income strategy at Roubini Global Economics.
Few forecasters pay the bills saying something moderate.
Check out the full article.
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.
World at Risk of Folding in on Itself: Deputy Doom
A bit apocalyptic sounding. Wouldn't put this at the top of a reading list but it's not tough to guess what someone with the nickname Dr. Doom or Deputy Doom might think. Basically, it's that the world is doing badly and even if things seem to be getting better it's actually still pretty bad and probably gonna get worse.
The global economy is at risk of folding in on itself unless policy makers face up to the threats of inflation inflexibility and exchange-rate inflexibility, according to Arun Motianey, director of fixed income strategy at Roubini Global Economics.
Few forecasters pay the bills saying something moderate.
Check out the full article.
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.
Liquid Assets
One year after the recession began total corporate liquid assets dipped to $ 1.4 trillion in 4Q 2008...
...in the five quarters since (through the first quarter of this year), total liquid assets increased dramatically to $1.8 trillion (an increase of $400 billion) while liquid assets as a percent of total corporate assets—on a market value basis—increased from 5% to 7%.
That means that seven cents of every dollar of total corporate assets (the sum of the market value of its capital structure consisting of short- and long-term debt plus shareholder equity) is now invested in the equivalent of a corporate "piggy bank" as opposed to investments in its long-term productive capital (expected to earn a return in excess of a company's cost of capital).
Check out the full article.
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.
...in the five quarters since (through the first quarter of this year), total liquid assets increased dramatically to $1.8 trillion (an increase of $400 billion) while liquid assets as a percent of total corporate assets—on a market value basis—increased from 5% to 7%.
That means that seven cents of every dollar of total corporate assets (the sum of the market value of its capital structure consisting of short- and long-term debt plus shareholder equity) is now invested in the equivalent of a corporate "piggy bank" as opposed to investments in its long-term productive capital (expected to earn a return in excess of a company's cost of capital).
Check out the full article.
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, July 15, 2010
Grantham: Gold is "Last Refuge of the Desperate"
Jeremy Grantham offered some thoughts on gold back in May:
"I hate gold. It does not pay a dividend, it has no value, and you can't work out what it should or shouldn't be worth...It is the last refuge of the desperate."
Critics of gold certainly aren't limited to Grantham.
Warren Buffett, for example, isn't a huge fan of gold. In fact, even Thomas Edison long ago offered some thoughts on gold -- and it wasn't exactly positive -- back in his day.
Having said that, I realize there are many believers in gold as protection against the seemingly inevitable degradation of paper currencies over time and other potential risks.
Adam
Related post:
-Why Buffett's Not a Big Fan of Gold
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
"I hate gold. It does not pay a dividend, it has no value, and you can't work out what it should or shouldn't be worth...It is the last refuge of the desperate."
Critics of gold certainly aren't limited to Grantham.
Warren Buffett, for example, isn't a huge fan of gold. In fact, even Thomas Edison long ago offered some thoughts on gold -- and it wasn't exactly positive -- back in his day.
Having said that, I realize there are many believers in gold as protection against the seemingly inevitable degradation of paper currencies over time and other potential risks.
Adam
Related post:
-Why Buffett's Not a Big Fan of Gold
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Wednesday, July 14, 2010
Buffett on Buying Stocks vs Making Acquisitions: Berkshire Shareholder Letter Highlights
Though they serve as a great basis for a business education, not everyone has the time to read all the Berkshire Hathaway (BRKa) letters. Even if you read them there's a lot to absorb and learn to put to use. I like to go back and re-read individual sections as a refresh. I ran (re-ran?) across this excerpt of Warren Buffett's thoughts on buying individual stocks vs buying a controlling interest in a business.
From the 1977 Berkshire Hathaway shareholder letter:
Our experience has been that pro-rata portions of truly outstanding businesses sometimes sell in the securities markets at very large discounts from the prices they would command in negotiated transactions involving entire companies. Consequently, bargains in business ownership, which simply are not available directly through corporate acquisition, can be obtained indirectly through stock ownership. When prices are appropriate, we are willing to take very large positions in selected companies, not with any intention of taking control and not foreseeing sell-out or merger, but with the expectation that excellent business results by corporations will translate over the long term into correspondingly excellent market value and dividend results for owners, minority as well as majority.
The emotional nature of the market, from fear to exuberance, creates opportunities. You don't see the same kinds of disconnects in valuation in privately negotiated transactions. Be prepared and in a position to act when Mr. Market's more fearful moments are playing out.
Adam
Long BRKb
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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.
From the 1977 Berkshire Hathaway shareholder letter:
Our experience has been that pro-rata portions of truly outstanding businesses sometimes sell in the securities markets at very large discounts from the prices they would command in negotiated transactions involving entire companies. Consequently, bargains in business ownership, which simply are not available directly through corporate acquisition, can be obtained indirectly through stock ownership. When prices are appropriate, we are willing to take very large positions in selected companies, not with any intention of taking control and not foreseeing sell-out or merger, but with the expectation that excellent business results by corporations will translate over the long term into correspondingly excellent market value and dividend results for owners, minority as well as majority.
The emotional nature of the market, from fear to exuberance, creates opportunities. You don't see the same kinds of disconnects in valuation in privately negotiated transactions. Be prepared and in a position to act when Mr. Market's more fearful moments are playing out.
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.
Tuesday, July 13, 2010
Fortune Tellers
"We've long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children." – Warren Buffett
On Forecasting
Attempting to predict the future gets in the way of a relatively simple (simple...but not easy) task: judging the value of an individual business.
"People have always had this craving to have someone tell them the future. Long ago, kings would hire people to read sheep guts. There's always been a market for people who pretend to know the future. Listening to today's forecasters is just as crazy as when the king hired the guy to look at the sheep guts. It happens over and over and over." - Charlie Munger at the 2004 Berkshire Hathaway Shareholder Meeting*
Predicting the future is difficult to do consistently well.
John Kenneth Galbraith put it this way:
"Economists make predictions because they're asked, not because they know."
Valuing a business is necessarily imprecise. Still, with some homework and sound analysis, it's possible to figure out what a business you understand is likely to be worth -- within a range -- and how that value may change over the long run.
It's possible to develop the discipline to always buy with a sufficient margin of safety.
You just have to teach yourself to ignore daily price fluctuations and the noise of forecasters.
Adam
* Found under Notes from 2004 Annual Meeting.
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.
"People have always had this craving to have someone tell them the future. Long ago, kings would hire people to read sheep guts. There's always been a market for people who pretend to know the future. Listening to today's forecasters is just as crazy as when the king hired the guy to look at the sheep guts. It happens over and over and over." - Charlie Munger at the 2004 Berkshire Hathaway Shareholder Meeting*
Predicting the future is difficult to do consistently well.
John Kenneth Galbraith put it this way:
"Economists make predictions because they're asked, not because they know."
Valuing a business is necessarily imprecise. Still, with some homework and sound analysis, it's possible to figure out what a business you understand is likely to be worth -- within a range -- and how that value may change over the long run.
It's possible to develop the discipline to always buy with a sufficient margin of safety.
You just have to teach yourself to ignore daily price fluctuations and the noise of forecasters.
Adam
* Found under Notes from 2004 Annual Meeting.
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.
Doug Kass: Fear & Forecasts
Markets move from emotional high to low but long-term investing results come down to the quality of individual stocks you own and the price you pay. The opportunity to buy businesses well below their intrinsic value comes when fear is pervasive.
Influential market and economic forecasters sometimes keep investors from making prudent long-term purchases (or worse...cause some to sell low) because they magnify fears during a crisis (take your pick - banking, sovereign debt, oil spills, war etc). There will always be another crisis and the time to build positions is often when it feels pretty awful.
The gloomiest forecasts became the loudest in early 2009...just when buying was the most prudent.
Yet it felt great to buy from 1998-2000 when prevailing prices were high (bad time to buy).
It's never obvious until after the fact.
Those in the business of making forecasts learned long ago it is profitable (if you want to sell books or newsletters) to make an extraordinary claim about the future. Ordinary claims don't sell.
Quality analysis and judgment matters. Charlie Munger calls professional forecasters "sheep gut readers"* (in reference to kings who once hired forecasters to interpret sheep guts to predict the future). Pretty useless.
Good businesses have thrived, producing high returns for investors, over the decades as the world went from one crisis to the next.
Having said that, the reason I am posting a recent article written by Doug Kass is not because he may be right in his forecast. It's because, among forecasters, Kass tends to have solid contrarian judgment and little tendency toward hyperbole. Kass also seems to avoid the perma-bear or perma-bull syndrome found among many forecasters.
Excerpt:
For a rough parallel, he said, go all the way back to England and the collapse of the South Sea Bubble in 1720, a crash that deterred people "from buying stocks for 100 years," he said. This time, he said, "If I'm right, it will be such a shock that people will be telling their grandkids many years from now, 'Don't touch stocks.'
--New York Times interview with Bob Prechter
On cue, the New York Times Jeff Sommer prominently interviewed Bob Prechter in Sunday's Business section. The Elliott Wave devotee is forecasting a DJIA "well below 1,000 in the next five or six years."
Prechter's comments are a classic example of Roubini-like hyperbole. As I have often written, both perma-bulls and perma-bears are attention-getters, not money-makers. Avoid their views like plagues. I do. Those views might make for juicy headlines, but they are not typically substantiated by rigorous analysis. Importantly, their views rarely prove accurate or value-added. - Doug Kass
I never have a strong opinion of the market direction. If the market gives me a good price on a stock I buy. It was easy to see we were in an extreme bubble based upon price vs intrinsic value of most equities in the late 1990s...but I still didn't try to figure out what the overall market was going to do. I just didn't buy the clearly overvalued stuff.
My interest is in buying good businesses with long-term competitive advantages at fair prices. That's it.
Charlie Munger and Warren Buffett have said they ignore market forecasts. They make money buying quality businesses at the right price and mostly owning them for a long time.
Adam
* Found under Notes from 2004 Annual Meeting
---
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.
Influential market and economic forecasters sometimes keep investors from making prudent long-term purchases (or worse...cause some to sell low) because they magnify fears during a crisis (take your pick - banking, sovereign debt, oil spills, war etc). There will always be another crisis and the time to build positions is often when it feels pretty awful.
The gloomiest forecasts became the loudest in early 2009...just when buying was the most prudent.
Yet it felt great to buy from 1998-2000 when prevailing prices were high (bad time to buy).
It's never obvious until after the fact.
Those in the business of making forecasts learned long ago it is profitable (if you want to sell books or newsletters) to make an extraordinary claim about the future. Ordinary claims don't sell.
Quality analysis and judgment matters. Charlie Munger calls professional forecasters "sheep gut readers"* (in reference to kings who once hired forecasters to interpret sheep guts to predict the future). Pretty useless.
Good businesses have thrived, producing high returns for investors, over the decades as the world went from one crisis to the next.
Having said that, the reason I am posting a recent article written by Doug Kass is not because he may be right in his forecast. It's because, among forecasters, Kass tends to have solid contrarian judgment and little tendency toward hyperbole. Kass also seems to avoid the perma-bear or perma-bull syndrome found among many forecasters.
Excerpt:
For a rough parallel, he said, go all the way back to England and the collapse of the South Sea Bubble in 1720, a crash that deterred people "from buying stocks for 100 years," he said. This time, he said, "If I'm right, it will be such a shock that people will be telling their grandkids many years from now, 'Don't touch stocks.'
--New York Times interview with Bob Prechter
On cue, the New York Times Jeff Sommer prominently interviewed Bob Prechter in Sunday's Business section. The Elliott Wave devotee is forecasting a DJIA "well below 1,000 in the next five or six years."
Prechter's comments are a classic example of Roubini-like hyperbole. As I have often written, both perma-bulls and perma-bears are attention-getters, not money-makers. Avoid their views like plagues. I do. Those views might make for juicy headlines, but they are not typically substantiated by rigorous analysis. Importantly, their views rarely prove accurate or value-added. - Doug Kass
I never have a strong opinion of the market direction. If the market gives me a good price on a stock I buy. It was easy to see we were in an extreme bubble based upon price vs intrinsic value of most equities in the late 1990s...but I still didn't try to figure out what the overall market was going to do. I just didn't buy the clearly overvalued stuff.
My interest is in buying good businesses with long-term competitive advantages at fair prices. That's it.
Charlie Munger and Warren Buffett have said they ignore market forecasts. They make money buying quality businesses at the right price and mostly owning them for a long time.
Adam
* Found under Notes from 2004 Annual Meeting
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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.
Monday, July 12, 2010
Soccer's Scoring Problem
With Spain winning the World Cup yesterday after a 1-0 extra time victory (minutes from it instead ending with penalty kicks) in mind, here's an additional Wall Street Journal article with the title:
The Scoring Problem
Soccer's low scores may be leading to random outcomes.
Richard Bookstaber argues that the game of soccer's current system and rules needs to change to produce more meaningful outcomes. Some excerpts:
There is an analytical basis for determining the amount of scoring a sport should have, and soccer is well below that point.
More Scoring = Less Lucky Wins
The greater the number of scores in a sport, the lower the chance for a lucky win by a team that is inferior.
Addressing Design Flaws
Most sports have conceded flaws in their design, and are better off for having addressed them. Tennis added the tiebreaker, football penalties for pass interference, basketball the three-point shot. So why not soccer? Oh, there was one attempt: the penalty shootout. It's like someone said, "For really important games, let's make the outcome even more random."
Makes some sense.
Check out the entire article.
Adam
The Scoring Problem
Soccer's low scores may be leading to random outcomes.
Richard Bookstaber argues that the game of soccer's current system and rules needs to change to produce more meaningful outcomes. Some excerpts:
There is an analytical basis for determining the amount of scoring a sport should have, and soccer is well below that point.
More Scoring = Less Lucky Wins
The greater the number of scores in a sport, the lower the chance for a lucky win by a team that is inferior.
Addressing Design Flaws
Most sports have conceded flaws in their design, and are better off for having addressed them. Tennis added the tiebreaker, football penalties for pass interference, basketball the three-point shot. So why not soccer? Oh, there was one attempt: the penalty shootout. It's like someone said, "For really important games, let's make the outcome even more random."
Makes some sense.
Check out the entire article.
Adam
Saturday, July 10, 2010
O'Rourke: Make Soccer Less Boring
Some thoughts on soccer from P.J. O'Rourke in a new Wall Street Journal article with the title: A Modest Proposal for Improving a Dull Game.
Excerpts:
Scoreless Sports Ties Are Boring
...let's talk about soccer scores. There are a few things that people all around the world need to admit to themselves. Trade restraints slow economic growth, the euro is not a reserve currency and scoreless sports ties are boring. What if there were a World Series where no team got a run? What if, during March Madness, Indiana were able to advance to the Final Four without making a basket?
Boredom Easily Obtained
The purpose of sports—even foreign sports—is not to bore people. Boredom can be so easily obtained. Hunger, exhaustion from making a living and authoritarian governments that ban the fun parts of the Internet provide it free in most of the world.
Check out the entire article.
Adam
Excerpts:
Scoreless Sports Ties Are Boring
...let's talk about soccer scores. There are a few things that people all around the world need to admit to themselves. Trade restraints slow economic growth, the euro is not a reserve currency and scoreless sports ties are boring. What if there were a World Series where no team got a run? What if, during March Madness, Indiana were able to advance to the Final Four without making a basket?
Boredom Easily Obtained
The purpose of sports—even foreign sports—is not to bore people. Boredom can be so easily obtained. Hunger, exhaustion from making a living and authoritarian governments that ban the fun parts of the Internet provide it free in most of the world.
Check out the entire article.
Adam
Friday, July 9, 2010
Altria vs Coca-Cola
A decade ago the S&P 500 index was at 1,475.
Today, after a nice rally this week it sits at 1,070 so any investor that matched the performance of the S&P 500 index (including dividends) is down substantially in the past ten years.
Of course, most investors do not even match the index...never mind outperform it.
Ten years ago, many sectors were overvalued...not just tech stocks. Coca-Cola (KO) was selling at a PE over 40. In fact, most of the great franchises like Coca-Cola were overvalued at that time. They (the likes of PG, PEP, JNJ and many others) spent the past decade increasing intrinsic values enough to "catch up" to their stock prices. All these businesses produce durable high returns on capital but they were not cheap enough to gain much benefit as an investor. The good news is they have, by and large, "caught up" as most sell for PE's less than 15 with some much lower than that.
One of the exceptions to the widespread overvaluation that existed ten year ago was Altria (MO). If you bought Altria back then the 10 year return, as of today, is over 540% including dividends. The reason is simple. Altria was both cheap and produces high returns on capital. Keep in mind, it accomplished this without the expansion of its PE to some nonsensical level. Today, Altria sells for around 11-12x earnings.
In contrast, while Coca-Cola's stock still outperformed the S&P 500, it didn't make you much money. Intrinsically, the business of Coca-Cola went up in value substantially over the past decade but it's just that the price ten years ago just about fully reflected today's value.
Altria didn't have a better decade in terms of business performance than Coca-Cola. The stock performance comes down to Altria was selling well below intrinsic value while Coca-Cola was definitely not.
Coca-Cola currently sells for 14-15x earnings so, unlike last decade, the odds are much better that the stock performance will come close to matching growth in intrinsic value going forward.
Adam
Long positions in all stocks mentioned
Related post:
GM vs Philip Morris (Altria)
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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.
Today, after a nice rally this week it sits at 1,070 so any investor that matched the performance of the S&P 500 index (including dividends) is down substantially in the past ten years.
Of course, most investors do not even match the index...never mind outperform it.
Ten years ago, many sectors were overvalued...not just tech stocks. Coca-Cola (KO) was selling at a PE over 40. In fact, most of the great franchises like Coca-Cola were overvalued at that time. They (the likes of PG, PEP, JNJ and many others) spent the past decade increasing intrinsic values enough to "catch up" to their stock prices. All these businesses produce durable high returns on capital but they were not cheap enough to gain much benefit as an investor. The good news is they have, by and large, "caught up" as most sell for PE's less than 15 with some much lower than that.
One of the exceptions to the widespread overvaluation that existed ten year ago was Altria (MO). If you bought Altria back then the 10 year return, as of today, is over 540% including dividends. The reason is simple. Altria was both cheap and produces high returns on capital. Keep in mind, it accomplished this without the expansion of its PE to some nonsensical level. Today, Altria sells for around 11-12x earnings.
In contrast, while Coca-Cola's stock still outperformed the S&P 500, it didn't make you much money. Intrinsically, the business of Coca-Cola went up in value substantially over the past decade but it's just that the price ten years ago just about fully reflected today's value.
Altria didn't have a better decade in terms of business performance than Coca-Cola. The stock performance comes down to Altria was selling well below intrinsic value while Coca-Cola was definitely not.
Coca-Cola currently sells for 14-15x earnings so, unlike last decade, the odds are much better that the stock performance will come close to matching growth in intrinsic value going forward.
Adam
Long positions in all stocks mentioned
Related post:
GM vs Philip Morris (Altria)
---
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, July 2, 2010
Grantham on Quality Stocks Revisited
The previous post on high quality stocks reminded me of what Jeremy Grantham had to say back in 3Q 2009.
Quality stocks (high, stable return and low debt) simply look cheap and have gotten painfully cheaper as the Fed beats investors into buying junk and other risky assets, a hair-of-the-dog strategy if ever there was one. In our seven-year forecast the quality segment has a full seven-percentage-point lead per year over the whole S&P 500, or 9% over the balance ex-quality. This is now at genuine outlier levels.
In addition, there are qualitative arguments. We like owning high-quality blue chips if we are indeed going into a more difficult seven years than any we have faced since the 1970s. The problems of reducing debt and the potential share dilution that can go with it as it did in Japan for a decade, particularly play to the strength of the largely debt-free high-quality companies.
Though Grantham said this a while back it remains true today.
I just don't expect too much in the short run.
For examples of what Grantham specifically means by "quality stocks" check out the top 25 holdings from one of GMO's mutual funds (GMO is Grantham's investment management firm).
The higher quality stocks historic performance promises nothing about the future but, at least relative to alternatives, this appears not the worst place to focus considering the potential risks and rewards.
Adam
Related posts:
Friends & Romans - May 2010
Grantham on Quality Stocks - November 2009
Best Performing Mutual Funds - 20 Years - May 2009
Staples vs Cyclicals - April 2009
Best and Worst Performing DJIA Stock - April 2009
Defensive Stocks? - April 2009
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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.
Quality stocks (high, stable return and low debt) simply look cheap and have gotten painfully cheaper as the Fed beats investors into buying junk and other risky assets, a hair-of-the-dog strategy if ever there was one. In our seven-year forecast the quality segment has a full seven-percentage-point lead per year over the whole S&P 500, or 9% over the balance ex-quality. This is now at genuine outlier levels.
In addition, there are qualitative arguments. We like owning high-quality blue chips if we are indeed going into a more difficult seven years than any we have faced since the 1970s. The problems of reducing debt and the potential share dilution that can go with it as it did in Japan for a decade, particularly play to the strength of the largely debt-free high-quality companies.
Though Grantham said this a while back it remains true today.
I just don't expect too much in the short run.
For examples of what Grantham specifically means by "quality stocks" check out the top 25 holdings from one of GMO's mutual funds (GMO is Grantham's investment management firm).
The higher quality stocks historic performance promises nothing about the future but, at least relative to alternatives, this appears not the worst place to focus considering the potential risks and rewards.
Adam
Related posts:
Friends & Romans - May 2010
Grantham on Quality Stocks - November 2009
Best Performing Mutual Funds - 20 Years - May 2009
Staples vs Cyclicals - April 2009
Best and Worst Performing DJIA Stock - April 2009
Defensive Stocks? - April 2009
---
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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