More on Buffett’s Investments

Buffett_Lecture_Fla_Univ_Sch_of_Business_1998 (transcript of above lecture–see page 7 for See’s Candies)

329_Buffett_Seminar_1978 to a value investment class at Stanford University.

Buffett_Case Study on Investment Filters Tabulating Company

The Essays Of Warren Buffett – Lessons For Corporate America  (Please read pages 82 to 97, especially the section on cigar-butt investing).

Valuation of Western Insurance_2  (A reader, WAPO mentioned in the comments section of the Dempster Mill Post that Chapter 3 of Deep Value didn’t include Buffett’s other early investments like Western Insurance, Genesee Valley, Union Street Railway, American Fire Insurance, and Rockwood.   Does anyone wish to dig these investments up from somewhere?  Just post in the comments section and/or I can post your work for the readers. 

In the Dempster Mill Post we learned that Buffett succeeded in this investment because he:

  1. Most importantly and in deference to Graham, he bought well--he started paying $18 in 1956 for Dempster with its $70 per share of book value and $50 of net working capital per share.  He bought right.  Note in the video lecture above, Buffett mentions that he paid 1/3 of working capital for a windmill company (probably Dempster).
  2. Then he was patient. This investment was held for at least seven years.
  3. Finally, he had Harry Bottle to turn the business around.

Thanks for the intelligent and thoughtful comments on Dempster. We learn from the questions and thoughts of others.

Perhaps his success in Dempster Mills lured him to buy Berkshire Hathaway?(considered by Buffett to be his worst investment)

Next we will review See’s Candies, Sanborn Map.  We will focus on Buffett’s writings in his shareholder letters on valuation.  See the Essays of Warren Buffett above.

For new investors you may feel frustrated by the lack of clear rules.  Net/nets depend upon reversion to the mean before total value destruction, but franchises manage to repel the forces of competitive entry for longer than investors expect. Early, fast growing franchise companies like Wal-Mart (in the 1970s) or Costco trade at what appear to be sky-high multiples of earnings (30+) yet the market is UNDER-pricing the profitable growth of those companies.   There seem to be grey areas. Congratulations, we are making progress.    And for experienced investors, we can never reread the writings of investment greats like Graham and Buffett as many times as we should, but it may seem like


Have a Great Weekend!

The Superinvestors of Graham and Doddesville


Effective money managers do not go with the flow. They are loners, by and large. They are not joiners; they’re skeptics, cynics even. Whatever label you want to put on them, they trait they all share is that they don ‘t automatically trust that what the majority of people–especially the experts–are doing is necessarily correct or wise. If anything, they move in the opposite direction of the majority, or they at least seek out their own course.

Warren Buffett is the best example of this contrarian impulse. In the 1960s, when Buffett started out (An excellent recounting of that era is The Go-Go Years, The Drama and Crashing Finale of Wall Street’s Bullish 1960s  by John Brookes, Good review of the book, the Go-Go Years)go go most money managers were investing in highly cyclical, heavily indebted and capital-intensive industrial giants like U.S. Steel (X). As a consequence, stock in those kinds of companies were overpriced in Buffett’s view, especially when compared to their earnings. Instead of following the majority and buying into that mini-bubble, he consciously sought out companies on the other end of the spectrum–businesses with lower capital expenditures and higher profit margins–and he wound up buying relatively cheap stocks in ad agencies and regional media companies like Capital Cities, Gannett, and the Washington Post. This was a complete departure from the consensus of the time, and it made Buffett a ridiculous amount of money. (Scott Rearon, Dead Companies Walking, 2015)

As we study Chapter 3 in Deep Value and Buffett’s early career, we should learn more about this tribe called value investors. Have they had success and why?

Below are four (4) articles you should read in sequence. Watch for what these investors do differently than the majority of institutional investors. Lessons we can use?

  1. The Superinvestors of Graham and Doddsville by Warren Buffett
  2. Graham Dodd Revisted by Lowenstein
  3. Searching for rational investors in a perfect storm
  4. KLARMAN in response to Lwenstein Article on Rational Investors

This Friday/Weekend I will review our readings.  By the way, I don’t know if the graph above is accurate, but it might stimulate our reading of the articles.

How to join Deep-Value group at Google I ask enrollees to join to make communication and emailings easier.

Reader’s Q: Would Graham Consider SHOS (Sear’s Hometown) a Net/Net?

Homestores(SHO-11.01.14-10Q _Final

If we take all the liabilities of $236.576 mil. and deduct from Current Assets of $524.238 = $287.662 mil of net working capital then divide by 22.666 million outstanding shares to have $12.68 per share of working capital minus all other liabilities and leaving out other assets.  Klarman used net-net working capital as  approximating the liquidation value of a company–See Chapter 8 in Margin of Safety.  So current assets minus (current liabilities + all long-term liabilities) = net-net working capital.

big (2)

Today the price of SHOS is under $12.68 or $11.90, so yes, the price is trading below net working capital per share, but Graham would not pay more than $8.46 for SHOS given his penchant for a margin of safety of paying no more than two-thirds of net working capital.  Obviously, investors might be concerned with falling same-store sales. On the flip side, deep value investors may see comfort with asset value and the type of inventory.  Note, that there have been a few well-known deep value investors stepping in 3/Q 2014 like Chou Associates (the Canadian Deep Value Investor) Chou Associates Management-inc-top-holdings/ and video lecture: Guest_Speakers/2009/Chou_2009.htm (worth watching).

The above isn’t a plug for investing in SHOS, but pointing out how I think Graham would view investing in the company.

Advice from Wall Street

The third phone call I made that day was to the brokerage handling the stock offering, Montgomery Securities in San Francisco. The institutional salesman there who had recommended the stock was named Rick. Like just about everybody else at Montgomery, Rick was an aggressive pitchman. The word bulldog gets thrown around a lot, but I don’t think that quite captures the level of mindless tenacity the brokers at Montgomery brought to their work. Picture an angry hyena that hasn’t eaten in a couple of days. Now picture someone throwing a bloody porterhouse in front of it. That is how hard these guys sold their deals.

After I introduced myself, I told Rick about the research I had done and informed him as courteously as I could that I would not be recommending the stock.

“The bank is on the verge of insolvency,” I explained. “If they are this new company’s main customer, that is not going to be good for their earnings or their share price.”

Rick barked into the phone, “How old are you, kid?”

I swallowed hard and replied, “Twenty-five.”

“You’ve got a lot to learn,” Rick growled. “Nobody stops me from collecting a commission. I’m not going to waste my time talking to you. I ‘ll call your boss first thing in the morning.”

The line went dead. I stared at the receiver in disbelief. I didn’t understand d what had just happened. I had informed a representative of a prestigious, well-respected brokerage that a stock they were offering had significant downside risk. I had assumed that he would be grateful for my insights, or at least interested in what I had to say. Instead, he had acted like I had belched in his ear.

In reality, Rick was right: I did have a lot to learn. The idea that someone on Wall Street would give a damn about the truth or doing the right thing by his clients was almost laughably naïve.

…….After thirty years of doing this (analyzing investments and managing money), I can tell you in no uncertain terms that buying stocks on the word of so-called experts in the single biggest mistake an investor can make. … This misplaced faith in Wall Street whizzes is a symptom of a much larger and more destructive problem in the investment world: The cult of the guru. Investors of all types–from fund managers to day-traders to mom-and-pop savers hoping to boost their 401(k) accounts –are constantly looking for a market messiah, someone who’s figured out–once and for all-the magical formula for how to beat the Street. It is an understandable but self-defeating desire, because the people who actually possess these kinds of insights almost NEVER SHARE THEM. (from Dead Companies Walking (2015) by Scott Fearon)

BOILER ROOM: I Became a Stock Broker

See’s Candies, Sanborn Map, and Inflation Article

SeesA Nor’easter is coming my way (up to two to three feet of snow with high winds) so I may be out of contact for two or three days.  But push on we must. We continue to study Chapter 3, in Deep Value and Buffett’s investing career.Sees 2

The best investment article I have ever read of Buffett’s is:

Buffett & Inflation Highlighted plus if you wish to read all that Buffett has said about inflation then Buffett inflation file.

A key case for you to focus on is See’s_Candies_Case_Study. Combined with Buffett’s Inflation Swindles the Equity Investor (Fortune Article: Buffett – How Inflation Swindles the Equity Investor), you will see a leap in Buffett’s thinking. Both are important to understand and complementary to each other.

Finally, Sanborn_Map_Case_Study_BPLs is another case mentioned in Chapter 3 of Deep Value.

Hopefully, students will discuss in the comments section.

Time to bring out the snowshoes!

It’s not entirely clear what will happen in the near term, but the financial markets are already pushed to extremes by central-bank induced speculation. With speculators massively short the now steeply-depressed euro and yen, with equity margin debt still near record levels in a market valued at more than double its pre-bubble norms on historically reliable measures, and with several major European banks running at gross leverage ratios comparable to those of Bear Stearns and Lehman before the 2008 crisis, we’re seeing an abundance of what we call “leveraged mismatches” - a preponderance one-way bets, using borrowed money, that permeates the entire financial system. With market internals and credit spreads behaving badly, while Treasury yields, oil and industrial commodity prices slide in a manner consistent with abrupt weakening in global economic activity, we can hardly bear to watch..   John Hussman, Jan. 26, 2015

Deep Value Course Materials (Updated)

cattle drive


Course Materials Have Been Updated Here:

Read chapter 3 in DEEP VALUE and Dempster Mills Case Study (Buffett)

Have a good weekend.   

Warren Buffett: Liquidator to Operator

Dempster Mills

Dempster Mills Case Study:

Dempster_Mills_Manufacturing_Case_Study_BPLs  Note the difference in strategy between Buffett and Graham in this type of investment.

As previously discussed, we have read the Preface and Chapter 2, Contrarians at the Gate in Deep Value where we learned about Graham and liquidations and the great mean-reverting mystery of value investment. Klarman’s writings were also read (Margin of Safety) to learn about his approach to liquidation and valuation. Valuation is an imprecise art where value is no one precise number.  Finally, Mr. Market is there to serve us not guide us. Therefore, think of all the pundits, experts, and CNBC commentators we can ignore for the rest of our investing careers.

If readers have questions or comments, do not hesitate to write. I try not to look at my emails but once a week. I neither have a cell phone nor a TV, but time is scarce so I can respond faster (or another student can to your questions) here in the comments section.

Now we transition into reading Chapter 3 of Deep Value, “Warren Buffett: Liquidator to Operator.”  Buffett was Graham’s prized student who forged his own way.   There are about ten books written on Buffett every year. We will now focus on his early career by going through his Complete_Buffett_partnership_letters-1957-70_in Sections

After Dempster, we will study Sanborn Map and then See’s Candies. Put on your thinking caps.   Go the extra mile and find out more about these companies if you have the interest.   Focus on how Buffett estimated the intrinsic value of Dempster Mills AND how he managed the investment over time.   What made up his margin of safety BESIDES the price discount?

Reader Question:   Do I know Toby Carlisle, and do I think his approach works?

Yes, I have had the pleasure of meeting Toby. A nice guy who seems like a Renaissance man similar to Graham but with a darker sense of humor. Toby taught me how to speak Australian English.   You don’t thank your host for a delicious meal by saying, “That was excellent.!”   You say, “What a belly-bust!”   You don’t go out to drink beers, you go out to “rip down a frosty.”  I am indebted for those tips.  I learned during my working days in Cairns, Australia that fly-crawling was the national sport.  If you could choose which fly could crawl the furthest along a wall or ceiling, you were the champ.  The game had a huge element of randomness. I digress…

Since we haven’t finished our course of study on Deep Value Investing, I am no expert to comment upon his approach. But Deep Value investing can work since it does the opposite of a naive strategy. Hard-core contrarian-investing is difficult because buying what has been losing or is obscure, despised, and loathed goes against human nature.  Are you more attracted to go into a full restaurant than one with cobwebs across the window?   So far in our readings, net/nets seem more likely to be small, illiquid securities, so the investing approach may be more suited for individuals with a limited amount of capital who can go anywhere to find bargains.

Even the great Walter Schloss managed small amounts of money using his deep value approach. As his accounts grew, he would return capital to his partners, thus keeping the amounts of money he managed appropriate for the illiquidity of the names he bought and sold.  He would also buy and sell scale down and up, I heard.

Why don’t you call him at his firm, Eyquem Investment Management LLC or visit and find his email address. Ask for his record so far in managing accounts.  What happens when there are only six or seven net/nets–does he concentrate into those?

-Are my instructions clear?

Addendum: Does Intuition Have a Role in Quantitative Investing?

Course Review/Index to Date


Course Review

Our goals in this course are to learn about investing, especially deep value investing through the book, DEEP VALUE  by Toby Carlisle and supplemented by Quantitative Value by Toby Carlisle.  Also, many original source readings will be provided to clarify and deepen our understanding of the primary readings. Also, we wish to be skeptical, independent thinkers who prove to ourselves what works and makes sense.   We will be open to disconfirming evidence.  We will question and help each other learn.

Below are the links in chronological order. The REQUIRED readings are in BOLD. Everything else is supplementary, but I hope you dig even deeper into the concepts and ideas.

  1. Toby Carlisle talk on DEEP VALUE Investing at Google (This was a preview/introduction to the course)
  2. Introduction to the course and book DEEP VALUE
  3. Lesson 1 Read PREFACE in Deep Value, Margin of Safety chapter in Intelligent Investor, Mr. Market and Behavioral Investing The first REQUIRED readings (Preface in Deep Value book (required), then supplemented by the other three readings.
  4. Lesson 1 Emergency Crash Landing The purpose of this post was to show the element of character, temperament, and training to maintain a process in the face of extreme stress. Investing is more about discipline and character to stay with the right process than IQ.
  5. Announcement that Margin of Safety by Klarman was emailed to participants
  6. Announcement that Value Investing by Montier was sent out as a supplement reading
  7. Rodney Dangerfield Video about Questioning Traditional Concepts, Deep Value Author Lectures
  8. Review of readings, a video of a deep value and activist investor valuing a company and an activist in action from Other People’s Money Munsingwear Case Study provided to test students’ ability to approach a business problem.
  9. An example of paying a huge premium for net asset value or What NOT to do as an investor
  10. Major Reading Assignments, Chapter 2 in DEEP VALUE book, Graham and Net/nets, liquidation value The institutional imperative was introduced. As deep value investors we feast on the errors of others due to cognitive biases or the institutional imperative (We can’t hold this poor performing stock because what would the client think?) I emailed out the books Security Analysis and Intelligent Investor to all in the course.
  11. Hannibal Lecter lecture on how to do the readings-Simplicity Try to focus on the main points and how you can apply them. Humor 
  12. How to join Deep-Value group at Google I ask enrollees to join to make communication easier.
  13. Videos on search and Net/Net Investing. This post supplements your reading in Chapter 2, DEEP VALUE
  14. Munsingwear Case Study Analysis See #8 above.
  15. Supplementary Original Source Documents for Chapter 2 DEEP VALUE See #10 above. Net/Net research and Graham’s testimony to Congress, Liquidation of American Businesses in 1932—Are Companies Worth More Dead Than Alive by Graham.
  16. httpAnalysis of Liquidation Valuation from Klarman’s Margin of Safety book in Chapter 8 (Valuation) Supplement to Chapter 2 in DEEP VALUE
  17. Supplementary Readings: Buffett Partnership Letters and King Icahn emailed. Next reading assignment will be Chapter 3 in Deep Value book.

OK, so after the chaos of postings and all the videos, you SHOULD have read:

The Preface and Chapter 2 in Deep Value by Tobias Carlisle (primarily supplemented by Chapters 1 & 2 in Quantitative Value).  That’s it! All the other material is simply if you wish to go further or want greater understanding and reinforcement.  For example, a student asked me what cost of capital would I use to discount the royalty earnings in the Munsingwear case study.  If you dug into Margin of Safety by Seth Klarman, he would say to use your required rate of return.  Try to find the answers from the investing greats and then determine if it makes sense to you.  You should answer for yourself whether the returns to net/nets are due to higher risk or behavioral biases of other investors. Pose questions in the comment section of the blog if you have thoughts or other ideas.

You should after those readings have an understanding of why net/net investing generates superior performance. The returns are generated by the behavioral flaws of other investors. We should understand the concepts of Mr. Market and Margin of Safety.  Investing is simple but not easy. Often temperament trumps IQ.

Next to read will be Chapter 3 in Deep Value. 

There will be a review of the readings in another post. Our goal is to move DEEPLY and slowly through the readings. If you will notice all the other supplementary readings like Seth Klarman’s Margin of Safety, the Intelligent Investor, the SSRN research are from the footnotes of DEEP VALUE or Quantitative Value.

At the end of the week I will send out a zipped folder containing the books and materials collected for this course.  Relax and don’t panic if you don’t have a book. I will email the folder to everyone in the Deep-Value group at Google.

I am sorry for the confusion, and I will strive to clarify.


TIME OUT: Franchise Investing (Pat Dorsey)

Thanks to

Slides here:pat-dorsey-talks-at-google

A franchise-type company does not often become a distressed, deep value investment. But since we will next be discussing Buffett and his development from cigar-butt investing to buying See’s Candies, I thought a review of franchises by this money manager would interest you.

One mistake investors make is confusing an average company with a franchise. Not to pick on anyone but when Monish Pabrai said Pinnacle Airlines had a moat due to the type of aircraft the airline was flying or Excide Batteries had a brand, he thought he was investing in a franchise. Yes, Excide batteries may be well-known but it doesn’t change a consumer’s behavior.


The Buffett Partnership Letters were mailed out as a supplement for the reading we will do in Chapter 3 in Deep Value. Also, several keys were mailed out that should give you access to King Icahn, the book.  One special project to find a better way to determine the cost of capital was sent as well.

UPDATE: I put those books in the DEEP VALUE folder and then mailed keys to EVERYONE in the DEEP-VALUE GROUP (at Google).

Later this week, we will review the readings so far and catch up.  We should progress slowly, but I wanted to send out as many readings as I could since there are many people with different schedules so they can have time to go at their own pace.

First Quarter Earnings are on tap. Expect this

How to negotiate

Liquidation Valuation (Ch. 2 Deep Value)

Time-out: How to Think and How to read a book        Worth reviewing.

As a supplement to Chapter 2, Contrarians at the Gate in DEEP VALUE, please read the highlighted paragraphs on liquidation value in Seth Klarman’s chapter on Valuation (Chapter 8 in Margin of Safety and emailed to the Deep Value Group at Google).

You will understand

  1. how wide the range of valuations can become
  2. how uncertain valuation is.

Therefore, a value investor passes on what he or she can’t understand or uses CONSERVATIVE assumptions to build-in a margin of safety.

Take your time and read the above chapter carefully, especially his case study on Esco Electronics.  He makes a compelling case. The difference between price and intrinsic value (determined several ways) is ASTOUNDING.  A great investment should slap you in the face–it should be obvious, but then you might say what am I missing? You can’t believe the opportunity.

To reveal one of the secrets of this course (shh..) by the time we have journeyed through the readings, examples, videos, and cases, you will realize that if you are buying assets like net/nets, then you must buy them VERY cheaply to allow REVERSION to the MEAN to work.

Or if you go the Munger/Buffett (in his later years) route and buy franchises with moats around them (the companies have high returns on invested capital and they either grow profitability or return excess cash to shareholders) those companies are RARELY on sale.  The franchise moat (barrier to entry) slows the reversion to the mean process while high profitability allows for compounding of capital–an investor’s nirvana.

Great investments are FEW and FAR BETWEEN unless markets are in a huge dislocation.  Keep waiting and waiting until the money is just lying there for you to safely pick it up.  In other words wait for:


Can any pretty women taking this course teach the others:say no

Certainly we need to do better than this:

I will be posting a lesson index shortly.   We will tackle Chapter 1, The Paradox of Dumb Money, of Quantitative Value next before we move back to Chapter 3 in Deep Value and read Buffett’s Partnership letters (to be posted).