Client Report Jan 29 2014
Gold is money, not an investment.
Value Investing Videos (Manual of Ideas)
Pabrai lectures in India: https://www.youtube.com/watch?feature=player_embedded&v=Py95fWZV2Vo
How much of your decision to not own stocks of businesses outside of the mining sector is based on a top-down or macro decision. The reason that I as is because you mention that you owned COH in the past and that seems like a cheap stock at the moment. I could understand that you might not want to own it because of it struggles in the US and possible brand erosion, but that seems more like a quality issue than a valuation issue. Or is it a fear of a hurting consumer?
My reply: Actually, it is a bottom-up decision. I have pawed through my 250 stocks that I target in Value-line but see little margin of safety. Yes, I owned COH many months ago but sold near $58 as I had about a $60 to $65 valuation on it. I am very skeptical that the high end of their profit margins can be sustained because of their clientele and QE. But the undervaluations in miners gave me a better uses for my capital. So bottom up on both sides push/pull.
But I am certainly not suggesting anyone follow exactly what I am doing. I still own some non-miners like ESGR but I wouldn’t add to them.
Question: Also, I’m still trying to understand the margin decline argument. I haven’t done enough homework on it myself to ask intelligent questions, but intuitively I don’t understand why a specific geography (in this case the US) couldn’t have more than average of the types of companies that generate higher margins. The geographic lines on a map seem arbitrary to me.
My reply: Well, set aside geography, because the same principles apply to any country. The most mean reverting metric of companies in general would be profit margins. Think about the inevitable law of competition and lack of barriers to entry. But understanding this subject will make you a better investor and save you heaps of pain! If an analyst projects an increase in multiples on top of today’s profit margins, then I suggest a mercy kill for that analyst and his boss/clients. We are in the death zone–a climber’s term for high altitude conditions.
Cutting back on growth capex and returning excess capital to shareholders if there are no adequate opportunities to generate excess returns is the right thing to do, but how sustainable is it for large companies like IBM or CSCO? Also, buying stock today may not be below intrinsic value for every company that is doing it.