Category Archives: Investing Gurus

A Masters Degree in Mungerisms, Druckenmiller Buys 20% of Portfolio in GLD

Bakshi

A Masters in Munger  Take the university level course.

Charlie Munger

Mungerspeech_june_95

110302239-Munger-Talk-at-Harvard-Westlake

Berkshire Hathaway Annual Meeting Notes 2004

gold and Drucken

Druckenmiller Buys GLD 20%

spy credit spreads

credit spreads widen

What is Mr. Druckenmiller worried about?

Buy-Backs Create Stealth Leverage

wmc150817a

wmc150817b

wmc150817c

Gold “UNDERVALUED?”

letter-aug-16-gold-discount

 

Buffett’s Search and Analysis Techniques; Economic Fitness

investor-trait

Wise Thoughts from Buffett on Finding Stocks

  1. I started at page one [of these manuals-Moody’s and Value-Line] and went through every company that traded, from A to Z. When I was done I knew something about every company in the book.
  2. I like businesses that I can understand. Let’s start with that. That narrows it down by 90%. There are all types of things I don’t understand, but fortunately, there is enough I do understand. You have this big wide world out there and almost every company is publicly owned. So you have all American business practically available to you. So it makes sense to go with things you can understand.
  3. First, you need two piles. You have to segregate businesses you can understand and reasonably predict from those you don’t understand and can’t reasonably predict. An example is chewing gum versus software. You also have to recognize what you can and cannot know. Put everything you can’t understand or that is difficult to predict in one pile. That is the too-hard pile. Once you know the other pile, then it’s important to read a lot, learn about the industries, get background information, etc. on the companies in those piles. Read a lot of 10Ks and Qs, etc. Read about the competitors. I don’t want to know the price of the stock prior to my analysis. I want to do the work and estimate a value for the stock and then compare that to the current offering price. If I know the price in advance it may influence my analysis. We’re getting ready to make a $5 billion investment and this was the process I used.
  4. You have to turn over a lot of rocks to find those little anomalies. You have to find the companies that are off the map – way off the map. You may find local companies that have nothing wrong with them at all
  5. Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.
  6. I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.
  7. If we were to do it over again, we’d do it pretty much the same way. The world hasn’t changed that much. We’d read everything in sight about businesses and industries we think we’d understand. And, working with far less capital, our investment universe would be far broader than it is currently.

7 Gems from Buffet on Analyzing Stocks

  1. You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognize your limitations and follow a course certain to work reasonably well. Keep things simple and don’t swing for the fences. When promised quick profits, respond with a quick “no.”
  2. There’s nothing different, in my view, about analyzing securities today vs. 50 years ago.
  3. We favor businesses where we really think we know the answer. If we think the business’s competitive position is shaky, we won’t try to compensate with price. We want to buy a great business, defined as having a high return on capital for a long period of time, where we think management will treat us right. We like to buy at 40 cents on the dollar, but will pay a lot closer to $1 on the dollar for a great business.
  4. Munger: Margin of safety means getting more value than you’re paying. There are many ways to get value. It’s high school algebra; if you can’t do this, then don’t invest.
  5. If you’re going to buy a farm, you’d say, “I bought it to earn $X growing soybeans.” It wouldn’t be based on what you saw on TV or what a friend said. It’s the same with stocks. Take out a yellow pad and say, “If I’m going to buy GM at $30, it has 600 million shares, so I’m paying $18 billion,” and answer the question, why? If you can’t answer that, you’re not subjecting it to business tests.
  6. Capital-intensive industries outside the utility sector scare me more. We get decent returns on equity. You won’t get rich, but you won’t go broke either. You are better off in businesses that are not capital intensive.
  7. No formula in finance tells you that the moat is 28 feet wide and 16 feet deep. That’s what drives the academics crazy. They can compute standard deviations and betas, but they can’t understand moats. Maybe I’m being too hard on the academics.

7 Nuggets from Buffett on Valuing Stocks

  1. When Charlie and I buy stocks which we think of as small portions of businesses our analysis is very similar to that which we use in buying entire businesses. We first have to decide whether we can sensibly estimate an earnings range for five years out, or more. If the answer is yes, we will buy the stock (or business) if it sells at a reasonable price in relation to the bottom boundary of our estimate. If, however, we lack the ability to estimate future earnings – which is usually the case we simply move on to other prospects. In the 54 years we have worked together, we have never foregone an attractive purchase because of the macro or political environment, or the views of other people. In fact, these subjects never come up when we make decisions.
  2. In 1986, I purchased a 400-acre farm, located 50 miles north of Omaha, from the FDIC. It cost me $280,000, considerably less than what a failed bank had lent against the farm a few years earlier. I knew nothing about operating a farm. But I have a son who loves farming, and I learned from him both how many bushels of corn and soybeans the farm would produce and what the operating expenses would be. From these estimates, I calculated the normalized return from the farm to then be about 10%. I also thought it was likely that productivity would improve over time and that crop prices would move higher as well. Both expectations proved out.
  3. Intrinsic value is terribly important but very fuzzy. We try to work with businesses where we have fairly high probability of knowing what the future will hold. If you own a gas pipeline, not much is going to go wrong. Maybe a competitor enters forcing you to cut prices, but intrinsic value hasn’t gone down if you already factored this in. We looked at a pipeline recently that we think will come under pressure from other ways of delivering gas [to the area the pipeline serves]. We look at this differently from another pipeline that has the lowest costs [and does not face threats from alternative pipelines]. If you calculate intrinsic value properly, you factor in things like declining prices.
  4. Investors making purchases in an overheated market need to recognize that it may often take an extended period for the value of even an outstanding company to catch up with the price they paid.
  5. We use the same discount rate across all securities. We may be more conservative in estimating cash in some situations.
  6. Just because interest rates are at 1.5% doesn’t mean we like an investment that yields 2-3%. We have minimum thresholds in our mind that are a whole lot higher than government rates. When we’re looking at a business, we’re looking at holding it forever, so we don’t assume rates will always be this low.
  7. The appropriate multiple for a business compared to the S&P 500 depends on its return on equity and return on incremental invested capital. I wouldn’t look at a single valuation metric like relative P/E ratio. I don’t think price-to-earnings, price-to-book or price-to-sales ratios tell you very much. People want a formula, but it’s not that easy. To value something, you simply have to take its free cash flows from now until kingdom come and then discount them back to the present using an appropriate discount rate. All cash is equal. You just need to evaluate a business’s economic characteristics.

More Reading

Most of these quotes came from Buffett FAQ which contains the Q&A from shareholder meetings and goes beyond what you’ll find in the annual letters.

Just from these small selection of quotes, you can see how Buffett manages to dance in zone 4.

Take his words to heart and let’s join him on the dance floor because the sweet spot is where we belong. Read more: http://www.oldschoolvalue.com/blog/investing-perspective/warren-buffett-analyze-value-stocks/#ixzz3iofOBNF9

Economic Review & Fitness

Boot Camp  A good resource for students

Consequence of ZIRP

What is money?

Economic Conversations

How the economy works by Ray Dalio

Sentiment

Crude-Oil-Returns

oil Sentiment

oil carnage

Oil headed to $10 a barrel

HAVE A GOOD WEEKEND!

What Happened to Einhorn’s Mojo?

Einhorn

Einhorn, Has he lost his mojo?

Can anyone understand the change in performance. Is it Einhorn’s process or the market?  Hint: I don’t think Einhorn went from brilliance to idiocy or was it random luck?  Comments welcome.

Advice for New Investors

Applause for Jim Grant

Jim Grants

https://vimeo.com/chrisderrico/review/131241569/0f1bbc32bc

 

Investing in Nightmares (Tim McElvaine)

Bears

McElvaine Stock-Market-Superstars-2008   Book Excerpt.

McELvaine Presentation


HAVE A GREAT WEEKEND!

Great Annual Reports/Shareholder Letters; Catch-22

the outsiders

How-the-outsiders-became-one-of-the-most-important-business-books-in-america/

I recommend the above book!

When we read annual reports and shareholder letters we are searching for good businesses, cheap assets and excellent operators and capital allocators.

From the Preface of  The Outsiders: In assessing performance, what matters isn’t the absolute rate of return but the return relative to peers and the market. You really only need to know three things to evaluate a CEO’s greatness: The compound annual return to shareholders during his or her tenure and the return over the same period for peer companies and for the broader market (S&P 500)

Context matters greatly–beginning and ending points can have an enormous impact, and Welch’s tenure coincided almost exacly with the epic bull market that began in late 1982 and contiued largely uninterrupped until early 2000. During this remarkable period, the S&P 500 averaged a 14 annual return, roughly double its long-term average. It is one thing to deliver a 20 percent return over a period like that and quite another to deliver it during a period that includes several severe bear markets.

A baseball analogy helps to make this point. In the steroid saturated era of the mid-to-late 1990s, twenty-nine nome runs was a pretty medicore level  of offensive output (the leaders consistently hit over sixty). When Babe Ruth hidid it in 1919, however, he shattered the prior record set in 1884 and changed baseball forever, ushering in the mdoern power-oriented game. Again, context matters.

The other important element in evaluating a CEO’s track record is performance relative to peers, and the best way to assess this is by comparing a CEO with a broad universe of peers. As in the game of duplicate bridege, companies competing within a  industry are usually dealt similar hands, and the long term difference between them, therefore, are more a factor of managerial ability than expernal forces.

When a CEO generages signifiantly better returns than both his peers and the market, he deserves to be called “great,” abnd by this definition, Welch, who outperformed the S&P 500 by 3.3 times over his tenure at GE, was an undeniably great CEO.

He wasn’t even in the same zip code as Henry Singleton:

From a Deep-Value Member: Hi guys and girls:

Seeing as though we have such a passionate investors in John’s group, and we’re in annual report season, I wondered if everyone could nominate their top 5-10 “must read” shareholder letters. I will collate the results and re-post the top 10 back to you all when done (hopefully by the coming weekend). I think the idea here is for us all to hear about a few undiscovered names, rather than the obvious ones… so there is nothing too small or obscure as long as you think it conveys something meaningful and insightful.

Please reply with “shareholder letter” in the title as it will make this a little easier for me. Also… we can all assume Berkshire is an annual must read, so lets leave this on one off the list. I’m curious to hear what people have to say. Let me start off seeing as though I have put forward the idea.

  1. Fairfax Financial Letter 20015
    Markel Corporation Annual Report 2014
  2. Burgundy AM (Canada) Stoicism-and-the-Art-of-Portfolio-Intervention       2014-Confessions_of_a_Buffetteer (from Canada)
  3.  http://www.leithner.com.au/links.php (Australian Grahamite-FABULOUS) http://www.chrisleithner.ca/newsletter/index.php#.VUzyCvlVhBc    Great links to investing material/lessons.

Cut and past the above–excellent web-site with a trove of Graham an Dodd links, materials and letters!

JP Morgan
Amphenol
Overstock.Com
Serco Plc
Amerco

……………………………………………

After two weeks of sifting and sorting, I can reveal our top 10 favorite shareholder letters.  It’s an eclectic mix.

Thank you to all you who contributed.

  1. Complete_Buffett_partnership_letters-1957-70
  2. Aristotle Capital Annual Letters Managers-and-Baseball-Aristotle-Borowski-7.22.13     Aristotle-The-Essence-2015Q1-ACML-15-197-Kosher-Meat   Aristotle-Commentary-2015Q1-Value-Equity-ACML-15-220
  3. Ned Goodman Annual Letters Dundee 2013-Annual-Report and Dundee Annual-Report-2012
  4. Ennismore Asset Management Letters OEIC – Most Recent NL  and  Globo – Jan 2014 (Good to see the international managers mentioned)
  5. Oaktree Capital ManagementHoward Marks Liquidity
  6. Packaging Corp of America Shareholder Letters PCA_2014AnnualReport  (??)
  7. Skagen Fund 2015 04 01_Market-report  (looks interesting!)
  8. Expeditors EXPD_2014_Full
  9. Seacor Holdings  SEACOR 2014_Annual_Report (A brilliant man in a mundane group of businesses)
  10. Grantham Mayo van Otterloo – Quarterly Letters  breaking-out-of-bondage-and-are-we-the-stranded-asset- and gmo-7-year-asset-class-forecast-(1q-2015)

Here are my (from another reader/contributor) favorite letters:

Skagen from Norway – Just finished reading it today – good stuff!
http://ipaper.skagenfondene.no/Skagenfondene/English/SKAGENFundsAnnualReport2014/
Go straignt for the PDF (icon in the middle)

About Skagen: We search for companies that are priced significantly lower than our estimation of the value of the underlying operations. Our ideal investment is a company which is Undervalued, Under-researched and Unpopular, and that has potential triggers which could make hidden values visible and therefore create excess returns for our clients.

Troy Asset Management in the UK
http://www.taml.co.uk/archive-reports/investment-reports

Orbis Fund management in Bermuda
https://www.orbisfunds.com/Home   (Free registration required)

Ennismore Small European Value
http://www.ennismorefunds.com/

GMO
www.gmo.com (free registration required but worth it)
Their Quarterly letter is a real gem.
http://www.gmo.com/websitecontent/GMO_Quarterly_Letter_4Q14.pdf

RECM in South Africa
https://www.recm.co.za/

California based Aristotle Capital
http://www.aristotlecap.com/news-events-2/publications/

John Chew: Fantastic to have the international contributions!

Great Value Investing Blogs as chosen by another blogger:

Just wanted to drop a quick note to let you know that we featured csinvesting in a recent roundup of the best dividend / value investing columns:  http://dividendreference.com/articles/2015/170/10-brilliant-value-investing-experts-worth-reading/    (Nice words, but all I need to do to stay humble is ask the opinion of my Ex.

 

Catch-22 

HAVE A GREAT WEEKEND!

 

 

Tim McElvaine: Kissing a lot of frogs to find a prince or Portrait of a Deep Value Investor

“Value investing is about praying on the emotions of the seller,” McElvaine said, noting that he loves to be a buyer of un-loved securities when their owners need out at any cost.

McElvaine pointed to a Globe and Mail headline about beat-up mining stocks being great tax-loss sale candidates this past December. He bought up shares in Sprott Resource Corp and Anglo American recently for trading at considerable discounts to NAV (more info at chat.ceo.ca/mcelvaine).

Six years into the global bull-market and McElvaine’s funds are about 25% in cash to provide an opportunity to buy assets if prices return to Tim’s liking.

Is the US bull-market over? McElvaine talked about what could go right in the United States, and suggested that a great way to stimulate the US Economy would be to wipe out student loan debt, which is $1 trillion of $1.3 trillion owned by the US Government, according to McElvaine. That move could put $1 trillion back in the hands of the most aggressive consumers.

There was a brief moment before Tim’s speech that my dad and I got to share a word with him, and I asked how do they know if a cheaply priced security represents a value gap, meaning it’s undervalued and going higher, or is it a value-trap, as so often cheap stocks get cheaper.

“You don’t know,” Dad and McElvaine agreed, which reminded me of something Tim taught me 6-7 years ago:

“You’ve got to kiss a lot of toads in this business to find your prince.”

Take the time to read his annual reports and transcripts, then go the extra mile and look at the annual reports of the companies he mentions–do you see what he sees?  For example, in the chat of his presentation for 2014 (see bold index and then the link) he mentions that Sprott Resource Corp is trading for about $1.00 Cdn while its NAV is above $3.00 or “It’s not pretty, but it’s cheap.”  Can you learn from his approach and analysis? What would you do differently? You have to be a contrarian with a calculator to buy what is hated.

Some reports below:

Buying dollar bills for fifty cents Recent talk on his investments.
2014-Transcript-of-May14-Annual-meeting

2013-Annual-Report and 2013-Partners-Confererence-Transcript

2012-Annual-Report and 2012-Transcript-Partners-Conference-website-version

Go deeper: http://mcelvaine.com/reports/

Tomorrow: I will post a reader’s list of great annual reports.

I love reading Warren Buffett’s letters and I love contrasting his words with his actions…I love how he criticizes hedge funds, yet he had the first hedge fund,” Mr. Loeb said. “He criticizes activists, he was the first activist. He criticizes financial services companies, yet he loves to invest in them. He thinks that we should all pay taxes, yet he avoids them himself.  – Business Insider LINK

http://investmentresearchdynamics.com/warren-buffet-is-the-definition-of-scumbag/     (A bit over the top but I like to present the contrasting view whether I agree or not).

Prof. Greenwald on Value Investing

OVERVIEW Value_Investing_Slides

Greenwald_2005_Inv_Process_Pres_Gabelli in London

Greenwald Overview of VI

A Value Investing Class in Three Minutes

sentiment_cycles
Buying High

Next Week

I have been too busy to do another lesson but be ready next week! For those attending the Berkshire Hathaway Meeting in Omaha enjoy the experience. Flash your Deep-Value Group card for up to 95% discounts.

HAVE A GREAT WEEKEND!

Joel Greenblatt