Category Archives: Valuation Techniques

Case Studies on Buffett’s Investing: NYU Course This April

 The Fundamentals of Buffett-Style Investing

Learn the investment techniques of Warren Buffett, the world’s most legendary investor. Examine case studies of Buffett’s acquisitions in order to review the real-world principles that the “Oracle of Omaha” uses to pick companies. Topics include both quantitative methods, such as valuation metrics and cash flow analysis, as well as qualitative principles, such as competitive advantage and economic moats. As a final project, partner with a classmate to present a publicly traded company you believe Buffett would buy. At the conclusion, understand what Buffett means by a “great business at a good price.” This course is appropriate for beginners in the industry and for individuals with a broad array of backgrounds. The final session is taught synchronously from the Berkshire Hathaway annual meeting in Omaha.

More details

You’ll Walk Away with

  • An understanding of the investment techniques of Warren Buffett, the world’s most legendary investor
  • The opportunity to present a publicly traded company you believe Warren Buffett would buy

Ideal for

  • Students with little to no knowledge of investing
  • Professionals across the experience spectrum in regard to investing

READ:

CSInvesting Editor: Let me know if you attend.  Several readers took the class last year and enjoyed it.

I received this email:

Dear Mr. Chew,

You were very kind last year to post a notice about our Buffett investing class on your website.  We had several students from your site, all of whom were excellent and dedicated. According to end-of-semester student surveys, the students enjoyed the class quite a bit. You clearly attract a high caliber of investor to your online community. We would be very grateful if you would consider posting a notice of this year’s class, which starts April 1st.
See below:
New York University’s School of Professional Studies is offering an online class focused on the time-honored techniques of value investing, as practiced by the world’s most legendary investor, Warren Buffett.
By examining case studies of Buffett’s acquisitions, students will explore the real-world principles that Buffett uses to pick companies. The class starts online April 1st and is open to the public for registration.
CONTACT INFO:

The instructor, James Berman, is available to answer questions. He can be reached at 212.388.9873 or jgb4@nyu.edu.

The INSTRUCTOR

If it’s about value investing, I’m interested. I run a global equities fund that invests in the United States, Europe and Asia. As the president and founder of JBGlobal.com LLC, a registered investment advisory firm, I manage separate accounts for high-net-worth individuals and trusts. As a faculty member in the Finance Department of the NYU School of Professional Studies, I teach Corporate Finance and the Fundamentals of Buffett-Style Investing. My book, Lessons from the Lemonade Stand: a Common Sense Primer on Investing, winner of the 2013 Next Generation Indie Award for Best Non-Fiction eBook, is a guide for the first-time investor of any age. I received a B.A. from Harvard University and a J.D. from Harvard Law School. My wife, daughter and I live in Greenwich Village where I find the lessons of value investing as useful with life as with money.

An article from the Instructor on Buffett

The One Word Missing from Buffett’s Annual Letter

 These days, can anyone tweet, converse or goose-step–let alone write 28 pages–without using the five letter word: Trump?

Warren Buffett just did.

As a value investing aficionado and Berkshire shareholder, I anticipate the annual missive from the Oracle of Omaha with bated breath. When it popped online today, I knew enough not to expect much commentary on the economic or the political. A secret to Buffett’s success has been an agnostic view on the too-many moving pieces of the macro scene. By avoiding the human obsession with the short-term and fortune telling, Buffett has always concentrated on the only thing that matters: buying wonderful businesses at fair prices. As Peter Lynch says: “If you spend more than 13 minutes analyzing economic and market forecasts, you’ve wasted 10 minutes.” I myself have found no other investing mantra more important.

But really? No mention of the greatest threat to the democratic process and the rule of law since Nixon–or beyond?

Geico is mentioned 22 times, Charlie Munger 17 times, hedge funds 12 times, table tennis once. Trump zero.

In April of 2016, Buffett went on record saying that Berkshire would do fine even with a Trump presidency. But that was at last year’s meeting–well before the election, and well before anyone thought it was a serious concern. And Buffett made some further post-election comments in December about still buying stocks, but this letter was his first major written opportunity to hold forth.

He even mentions the worthwhile contributions of immigrants but somehow never calls out Trump by name. Perhaps the silence is deafening. Buffett was an ardent supporter of Hillary Clinton in the election and his failure to mention Trump may be the most damning maneuver of all.

Or not.

Because if there’s one thing I wanted as a Buffett follower, it was a reasoned and sober commentary–refracted through the prism of his extraordinary, eminently sensible brain–on what this erratic, errant president means for our country, our markets and our lives.

James Berman teaches The Fundamentals of Buffett-Style Investing, an online class starting April 1 offered by NYU’s School of Professional Studies.

Buffett Warning

Where is he now? http://ericcinnamond.com/buffett-1999-vs-buffett-2017/

Buffett 1999 vs. Buffett 2017

This may sound awful coming from a value investor, but I don’t read Berkshire Hathaway’s annual reports cover to cover. I did earlier in my career. In fact, I’d eagerly await its release, just as many investors do today. However, over the years I’ve gravitated more to what makes sense to me and have relied less on the guidance from investment oracles such as Warren Buffett (see post What’s Important to You?).

While I know significantly less about Warren Buffett than most dedicated value investors, it seems to me that he has changed over the years. I suppose this shouldn’t be surprising as we all have our seasons. And maybe I’m the one who has changed, I really don’t know. But I remember a different tone from Buffett almost twenty years ago when stocks were also breaking record highs. It was during the tech bubble when he went out of his way to warn investors of market risk and overvaluation.

I found an old article from BBC News with several Buffett quotes during that period (link). The article discusses Warren Buffett’s response to a Paine Webber-Gallup survey conducted in December 1999. The survey showed that investors expected stocks to rise 19% annually over the next decade. Clearly investors were extrapolating recent returns far into the future. Fortunately, Warren Buffett was there to save the day and help euphoric investors return to their senses.

The article states, “Mr Buffett warned that the outsized returns experienced by technology investors during 1998 and 1999 had dulled them into complacency.”

“After a heady experience of that kind,” he said, “normally sensible people drift into behaviour akin to that of Cinderella at the ball.

“They know that overstaying the festivities…will eventually bring on pumpkins and mice.”

I really like and can relate to the Warren Buffett of nearly twenty years ago. If I could go back in time and show the 1999 Buffett today’s market, I wonder what he would say. I’d ask him if investor psychology and the current market cycle appears much different than the late 90s.

Similar to 1999, have investors experienced outsized returns this cycle? From its lows in 2009, the S&P 500 has increased 270%, or 17.9% annually. This is very close to the annual returns investors were expecting in the 1999 survey, when Buffett was warning investors.

Have investors been dulled into complacency? Volatility remains near record lows, with every small decline being saved by central banks and dip buyers. Investors show little fear of losing money.

Are today’s investors not Cinderella at the ball overstaying the festivities? It’s the second longest and one of the most expensive bull markets in history!

There are of course differences between 1999 and today’s cycle. While valuation measures are elevated, today’s asset inflation is much broader than in 1999. The tech bubble was extremely overvalued, but narrow. A disciplined investor could not only avoid losses in the 1999 bubble, but due to value in other areas of the market, could make money when it burst. Given the broadness of overvaluation in 2017, I don’t believe that will be possible this cycle. In my opinion, it will be much more challenging to navigate through the current cycle’s ultimate conclusion than the 1999 cycle.

The broadness in overvaluation this cycle makes Buffett’s recommendation to buy a broadly diversified index fund even more difficult for me to understand. Furthermore, given the nosebleed valuations of many high quality businesses, I’m not as confident as Buffett in buying and holding quality stocks at current prices. It again reminds me of the late 90s. At that time, there were many high quality companies that were so overvalued it took years and years for their Es catch up to their Ps. But these are important (and long) topics for another day.

Let’s get back to Buffett 1999. I find it interesting to compare him to Buffett 2017. Surprisingly, Buffett 2017 doesn’t seem nearly as concerned about valuations this cycle. Buffett writes, “American business — and consequently a basket of stocks — is virtually certain to be worth far more in the years ahead [emphasis mine]. Innovation, productivity gains, entrepreneurial spirit and an abundance of capital will see to that. Ever-present naysayers may prosper by marketing their gloomy forecasts. But heaven help them if they act on the nonsense they peddle.”

You can include me as a naysayer of current prices and valuations of most risk assets I analyze. Based on the valuations of my opportunity set, I’ll take the advice from another naysayer – the Warren Buffett of 1999. As he recommended, I plan to avoid extrapolating outsized returns and will not ignore signs of investor complacency. I plan to remain committed to my process and discipline. By doing so, when the current market cycle concludes, I hope to achieve two of my favorite Warren Buffett rules of successful investing – avoid losing money and profit from folly.

The World of Inefficient Stock Markets

“Let us not, in the pride of our superior knowledge, turn with contempt from the follies of our predecessors. The study of errors into which great minds have fallen in the pursuit of truth can never be uninstructive… Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, one by one… Truth, when discovered, comes upon most of us like an intruder, and meets the intruder’s welcome… Nations, like individuals, cannot become desperate gamblers with impunity. Punishment is sure to overtake them sooner or later.”

Charles MacKay, Extraordinary Popular Delusions and The Madness of Crowds, 1841

My prior post on Charts and Technical Analysis is here: http://csinvesting.org/2017/01/04/chartists-and-technical-analysis/

The point is to realize that charts are a tool but using them to predict is a fools’ game.   You can try to find disconfirming evidence,but make sure the sample size is a large one.   More on market inefficiency from Bob Haugen.

Readers’ Questions

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When you have questions–first try to solve the problem for yourself–build a good investing/accounting/finance library. Then join and reach out to the Deep-Value Group at http://csinvesting.org/2015/01/14/deep-value-group-at-google/
There you will find many serious investors who are nice enough to answer an intelligent question.  Many are far more knowledgeable than this wretched scribe.
Ok, your questions………..
Estimated Reproduction Cost is Above your EPV
My question pertains to circumstances in which your estimated reproduction cost of assets is above your EPV. If this circumstance arises not because of managerial incompetence or malfeasance, but rather because the industry as a whole has significantly overinvested and faces excess capacity, does this change what you use as your estimate of intrinsic value?
No.  You have to normalize your earnings power value, EPV, (See Graham’s discussion in Securities Analysis, 2nd Ed.) using a long-enough period like ten years to average mid-cycle (if highly cyclical company) earnings and eliminate the highest and lowest values.  Reproduction value will have to decline to EPV or, mostly likely, EPV has to rise to reproduction value as capital leaves the industry. 
Do a search on CSinvesting (use search box at top right corner of this blog) and look up Maritime Economics.   Then Capital Returns.  Right now Shipping companies are not able to cover their voyage costs, but new builds trade above scrap.  The market estimates that eventually rates have to normalize and ship owners cover their costs.  
QUESTION
 
Am I wrong to think that although this industry is viable, you should use your calculated EPV as the more conservative estimate of intrinsic value rather than current reproduction cost of assets because presumably some of the capacity that will subsequently come offline will be that of the firm you are valuing? Accordingly, the firms in this industry will return to earning the cost of their invested capital but this will be achieved through some combination of increased prices as capacity comes offline and a reduction in individual capital bases.
The only circumstance I can think of in which this situation warrants using the current reproduction cost of assets would be if all the capacity that exited the market was the capacity that belonged to firms other than the one you are valuing.
Greenwald from Value Investing, pages 93-94:
In Chapter 3, we defined  the EPV of a firm as earnings after certain adjustments time 1/R where R is your current cost of capital. The adjustments mentioned:
  1. Undoing accounting misrepresentations, such as frequent one-time charges that are supposedly unconnected to normal operations. The adjustment consists of finding the average ratio that these charges bear to reported earnings before adjustments, annually, and reducing the current year’s reported earnings before adjustment proportionally.
  2. Resolving discrepancies between depreciation and amortiztion, as reported by the accountants, and the actual amount of reinvesatment the company needs to make in order to restore a firm’s assets at the end of the year to their level at the start of the year. The adjustment adds or subtracts this difference.
  3. Taking into account the business cycle and other transient effects. The adjustment reduces earnings reported at the peak of the cycle and raises them if the firm is currently in a cyclical trough (know your company and industry to do this effectively!)
  4. Applying other modicifations as are resonable, depending on the specific situation.

The goal is find distributable cash flow (owner’s earnings) Buffett used EBITDA minus maintenance capex for pre-tax owner’s earnings where maintenance capex kept the business competitive at the current level of operations.  If a competitor in your motel business puts in HD TV, then you might lose customers to your competitor unless you join the “arms race.”

Reproduction value is a signpost.  If the reproduction of a mine today is above the required capital returns, then you know that capital will have to be leaving the industry.   Who will build and/or operate a new mine.   Know your industry.   Mines can take over a year to shut-down or restart.   Finding an economical deposit and building a mine may take over 25 years.  You have to have industry knowledge to make a reasonable assessment.   Make sure you give youerself a big margin of safety.   

Take bulk shipping companies, you can see that new orders are slim and scrapping is taking place, so supply will be lessening. The question is how long before supply/demand equals. The pendulum swings. 
Follow up Questions
I have an additional question. This one is regarding Greenwald’s discussion of expected growth rate. He says that your expected return on a growth stock is the (current earnings yield*payout ratio)+(current earnings yield * retention ratio *ROE/r) + organic growth. I really appreciate how intuitive it is and how it forces you to focus on the core issues that generate returns on growth stocks. Moreover, I understand that the formula is not intended to spit out an exact figure of prospective returns, but rather to guide the investor towards a yes no decision about whether or not the stock can be reasonably classified as a bargain.
But one issue I have remains–it seems to me that to a certain extent the organic growth and reinvestment growth are comingled, at least to the extent that Greenwald suggests estimating organic growth by looking at the growth of the market that the business is in. I suppose I’m just worried about any embedded circularity/double counting in disaggregating the growth figure into two figures that may have some overlap with one another. Thank you.
Answer: I don’t know if I fully understand your question. You need to separate maintenance capex from growth capex. So the change in sales over the change in fixed assets shows you total capex, so then you need to subtract maintenance capex to see the remainder, growth capex.  You either find maint. capex in the 10-K or call the CFO/Inv. Relations.
Another Reader
Can you help help me to make the estimates on current earnings, I know Bruce said to do five years average, but he also said add back one time charge, and any cyclicality. Conversely, Joel Greenblatt mention he add back pension liabilities, is he talking about adding back maintenance cap ex  ? This is the only issue I have been having for the last year.. I would appreciate your help.
If you are figuring Enterprise value, then you need to add back liabilities to the market cap, including operating leases, unfunded pension funds, long-term debt, etc. Then deduct non-operating cash –depending upon the business, usually 2% to 3% of sales.
You want to figure out what distributable earnings the company can give you, the owner.    Depreciation and Amortization is an accounting principle while maintanance capex is a TRUE cost to stay in business. 
You drive a cab so your fares minus expenses, including maintenance of running your cab and REPLACING it.
IF you can’t figure out a company, then pass on it.
Good luck,

Back to Basics: Valuing a Cow; Investing Principles

how-to-buy-a-mining-stock-flow-chart

VALUATION

Buffett say there are ONLY two things you need to know as an investor

  1. How to think about prices (Read Chapter 8 in The Intelligent Investor by Ben Graham).
  2. How to do valuation: See below

valuing-a-cow_vk

Then place those two skills in an investing philosophy/framework. See below.

manifesto_on-value-investing

Improve the YOU: http://reasonio.teachable.com/courses/enrolled  a free course on Epictetus and Stoic Philosophy–needed for what is coming!

world-stock-markets

http://millionaire-investor.com/program.html   A value investing training program in Singapore.

Damodaran Valuation Lecture at Google

http://people.stern.nyu.edu/adamodar/New_Home_Page/webcasteqfall16.htm

Valuation Readings:  http://people.stern.nyu.edu/adamodar/New_Home_Page/eqread.htm

Class: http://aswathdamodaran.blogspot.com/2016/09/the-school-bell-rings-its-time-for-class.html

Or take Buffett’s Course  http://www.buffettsbooks.com/howtoinvestinstocks/course3/when-to-sell-shares.html

I don’t understand why business schools don’t teach the Warren Buffett model of investing. Or the Ben Graham model. Or the Peter Lynch model. Or the Martin Whitman model. (I could go on.)

In English, you study great writers; in physics and biology, you study great scientists; in philosophy and math, you study great thinkers; but in most business school investment classes, you study modern finance theory, which is grounded in one basic premise–that markets are efficient because investors are always rational. It’s just one point of view. A good English professor couldn’t get away with teaching Melville as the backbone of English literature. How is it that business schools get away with teaching modern finance theory as the backbone of investing? Especially given that it’s only a theory that, as far as I know, hasn’t made many investors particularly rich.

Meanwhile, Berkshire Hathaway, under the stewardship of Buffett and vice chairman Charlie Munger, has made thousands of people rich over the past 30-odd years. And it has done so with integrity and a system of principles that is every bit as rigorous, if not more so, as anything modern finance theory can dish up.

On Monday, 11,000 Berkshire shareholders showed up at Aksarben Stadium in Omaha to hear Buffett and Munger talk about this set of principles. Together these principles form a model for investing to which any well-informed business-school student should be exposed–if not for the sake of the principles themselves, then at least to generate the kind of healthy debate that’s common in other academic fields.

Whereas modern finance theory is built around the price behavior of stocks, the Buffett model is centered around buying businesses as if one were going to operate them. It’s like the process of buying a house. You wouldn’t buy a house on a tip from a friend or sight unseen from a description in a newspaper. And you surely wouldn’t consider the volatility of the house’s price in your consideration of risk. Indeed, regularly updated price quotes aren’t available in the real estate market, because property doesn’t trade the way common stocks do. Instead, you’d study the fundamentals–the neighborhood, comparable home sales, the condition of the house, and how much you think you could rent it for–to get an idea of its intrinsic value.

The same basic idea applies to buying a business that you’d operate yourself or to being a passive investor in the common stock of a company. Who cares about the price history of the stock? What bearing does it have on how the company conducts business? What’s important is whether you can purchase at a reasonable price a business that generates good returns on capital (Buffett likes returns on equity in the neighborhood of 15% or better) without a lot of debt (which makes returns on capital less dependable). In the best of all worlds, the company will have a competitive advantage that allows it to sustain its above-average ROE for years, so you can hang on to it for a long time–just as you would live in your house–and reap the power of compounding.

Buffett further advocates investing in businesses that are easy to understand–Munger calls it “clearing one-foot hurdles”–so you can come up with more reliable estimates of their long-term economics. Coca-Cola‘s basic business is pretty staid, for example. Unit case sales and ROE determine the company’s future earnings. Companies like Microsoftand Intel–good as they are–require clearing much higher hurdles of understanding because their business models are so dependent on the rapidly evolving world of high tech. Today it’s a matter of selling the most word-processing programs; tomorrow it’s the Internet presence; after that, who knows. For Coke, the challenge is always to sell more cases of beverage.

Buying a business or a stock just because it’s cheap is a surefire way to lose money, according to the Buffett model. You get what you pay for. But if you’re evaluating investments as businesses to begin with, you probably wouldn’t make this mistake, because you’d recognize that a good business is worth buying at a fair price.

Finally, if you follow the Buffett model, you don’t trade your investments just because our liquid stock markets invite you to do so. Activity for the sake of activity begets high transaction costs, high tax bills, and poor investment decisions (“if I make a mistake I can sell it in a minute”). Less is more.

I’m not trying to pick a fight with modern finance theory enthusiasts. I just find it unsettling that basic business-school curricula don’t even consider models other than modern finance theory, even though those models are in the marketplace proving themselves every day.

 

 

 

The Base Rate Book

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the-base-rate-view-by-mauboussin  I wonder if readers will find this useful.  We last discussed base rates here: http://csinvesting.org/2016/09/29/hedge-fundfamily-office-consulting-job/

 

Portrait of a contrarian; Steel Partners

Notice the flawed thinking and view of history by the “brilliant” bankers. Being laughed at is often a good sign if you are trying to avoid the herd.


Portrait of a contrarian

Steel Partners: Value Investors and Operators.

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sp-investor-letter-5-21-15

steel-partners-holdings-lp-2014-annual-letter

steel-partners-holdings-l_p_-investor-letter_2013

sph-investor-lettter-may-4-2012

sph-investor-letter-3-12-10

Is the unit cheap now? What do YOU think and why?

https://www.thestockmarketblueprint.com/asset-based-analysis-does-it-work/  A great blog for NCAV stocks and more!

 

Extra

Hi John:

A while back you took my Investment IQ Test questionnaire. As you may recall, it was based on the character traits of the world’s most successful investors I outlined in my book, The Winning Investment Habits of Warren Buffett & George Soros.

Here, very briefly, are a few of the “highpoints” of the investment behaviors that made them so successful.

I trust you enjoy it and I appreciate your comments.

Best regards,

PS: If you prefer to read it in your browser just go here.


7 Investment “Tips” From the World’s Richest Investors


Warren Buffett, Carl Icahn, and George Soros are the world’s richest investors. Their investment styles are as opposite as night and day. Buffett buys companies that he considers to be good bargains; Soros is famous for his speculative forays into the currency markets, which is how he came to be known as “The Man Who Broke the Bank of England.”

But—as I have shown in The Winning Investment Habits of Warren Buffett & George Soros—they both practice the same 23 mental habits and strategies religiously. As do Sir John Templeton, Bernard Baruch, Peter Lynch, and all the other successful investors I’ve ever studied or worked. It doesn’t matter whether you buy stocks, short currencies, trade commodities, invest in real estate, or collect ancient manuscripts: adding these mental strategies to your investment armory will do wonders for your bank account.

To make it easy to get going, I’ve distilled these 23 mental habits into these seven simple (though not always easy to follow) rules:

1. If you’re not certain about what you’re intending to do, don’t do it

Great investors are always certain about what they are doing whenever they put money on the table. If they think something is interesting but they’re not sure about it, they do more research.

So next time, before you call your broker (or go online), ask yourself: “on a scale of 1 to 10, how certain am I that I will make money?” Choose your own cut off point, but if it’s less than a 7 or an 8, you definitely need to spend more mental energy before making a commitment.

Remember: the great investor’s sense of certainty comes from his own experience and research. If your sense of “certainty”doesn’t come from your own research, it’s probably a chimera.

2. Never take big risks

Warren Buffett, George Soros, Peter Lynch . . . they only invest when they are confident the risk of loss is very slight.

Okay, what about that person you heard about who made a bundle of money in copper or coffee futures or whatever by taking on enormous leverage and risk? A few simple questions:

  • Did he make any other big profits like that?
  • Did he do this last year as well, and the year before that, and the year before that?

If not, chances are that’s the only big profit he ever made.

(And what did he do with the money? If he spent his profits before he got his tax bill . . . )

The great investors make money year in year out. And they do it by avoiding risk like the plague.

3. Only ever buy bargains

This is another trait the great investors have in common: they’re like a supermarket shopper loading up on sale items at 50% off.

Of course, the stock exchange doesn’t advertise when a company’s on sale. What’s more, if everybody thinks something is a bargain, the chances are it’s not.

That’s how Benjamin Graham, author of the classic The Intelligent Investor, averaged 17% a year over several decades of investing. He scoured the stock market for what he considered to be bargains—companies selling under their break-up value—and bought nothing else.

Likewise, Warren Buffett. But his definition of a bargain is very different from Graham’s: he will only buy companies he can get at a discount to what he calls “intrinsic value”: the discounted present value of the company’s future earnings. They’re harder to identify than Graham-style bargains. But Buffett did better than Graham: 23.4% a year.

Even George Soros, when he shorted sterling in 1992, was convinced that the pound was so overvalued that there was only one way it could go: down. That’s a bargain of a different kind, but a bargain nonetheless.

4. Do your own leg work

How do they find investment bargains? Not in the daily paper: you might find some good investment ideas there, but you won’t find any true bargains.

The simple answer is: on their own. After all, almost by definition, an investment is only a bargain if hardly anybody knows about it. As soon as the big players discover it, the price goes up.

So it takes time and energy to find an investment bargain. As a result, all the great investors specialize. They have different styles, they have different methods, and they look for different things. That’s what they spend most of their time doing: searching, not buying.

So the only way you’re going to find bargains in the market is the same way: by doing your own legwork.

5. “When there’s nothing to do, do nothing”

A mistake many investors make is to think that if they’re doing nothing, they’re not investing.

Nothing could be further from the truth. Every great investor specializes in a very few kinds of investments. As a result, there will always be stretches of time when he can’t find anything he wants to buy.

For example, a friend of mine specializes in real estate. His rule is to only buy something when he can net 1% per month. He’s a Londoner so—aside from collecting the rent!—he’s been sitting on his thumbs for quite a while.

Is he tempted to do something different? Absolutely not. He’s made money for decades, sticking to his knitting, and every time he tried something different, he lost money. So he stopped.

In any case, his real estate holdings are doing very well right now, thank you very much.

6. If you don’t know when you’re going to sell, don’t buy

This is another rule all great investors follow. It’s a major cause of their success.

Think about it. You buy something because you think you are going to make a profit. You spend a lot of time so you feel sure you will. Now you own it. It drops in price.

What are you going to do?

If you haven’t thought about this in advance, there is a good chance you will panic or procrastinate while the price collapses.

Or . . . what if it goes up—doubles or triples—what then? I’ll bet you’ve taken a profit many times only to see the stock continue to soar. How can you know, in advance, when it’s likely to be the right time to take a profit? Only by considering all the possibilities.

The great investors all have; and will never make an investment without first having a detailed exit strategy. Follow their lead, and your investment returns should soar.

7. Benchmark yourself

It’s tough to beat the market. Most fund managers don’t, on average, over time.

If you’re not doing better than an index fund, then you’re not getting paid for the time and energy you’ve spent studying the markets. Much better to put your money in such a fund and spend your time looking for that handful of investments you are so positive are such great bargains that you’re all but guaranteed to beat the market.

Alternatively, consider the advice from a great trader. When asked what the average trader should do, he replied: “The average trader should find a great trader to do his trading for him, and then go do something he really loves to do.”

Exactly the same advice applies to the average investor.

Find a great investor to do your investing for you, and focus your energy on something you really love to do.


One other thing:

I’ve just published a “mini”-eBook titled How to Make More Money By Sitting on Your Butt.

You can download it here, with my compliments.

By the way, as it is not DRM-protected, you may share it as you wish.

Profitable reading!


If you no longer wish to receive emails like this, simply reply with “unsubscribe” in the subject line.


GPO Box 9444
Hong Kong

What I learned from Ben Graham

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https://www.brandes.com/institute/knowledge-center

As always, I try to also post the criticisms of investing legends:

Victor Niederhoffer, tireless critic of Benjamin Graham, Graham’s investment idea, and Warren Buffett, is blown up once again —to the tune of some 75% losses for his funds —as reported for a story in this week’s The New Yorker. Whereas Niederhoffer’s latest catastrophic losses might serve as schadenfreude for some students of value investing, this self-described Ayn Rand Objectivist is a living testament to the lethal nature of some spectacularly subjective biases, including a disdain for anything resembling a margin of safety.

The New Yorker article is a bit heavy on Niederhoffer’s personal life, but is still worth a read. Here’s the link:

http://www.newyorker.com/reporting/2007/10/15/071015fa_fact_cassidy

Several years ago, Victor Niederhoffer was questioned during a radio interview about his rejection of the value investment paradigm as espoused by Benjamin Graham. The interviewer asked Niederhoffer how he might then explain the half-century success of Graham students such as Walter Schloss and others, given his rejection of Graham’s ideas. Niederhoffer replied that such success was “random.”

In Niederhoffer’s book, Practical Speculation, an entire chapter is devoted to refuting Graham’s pursuit of bargain issues. Only Niederhoffer hardly gets around to doing so. Instead, this sophisticated statistician attempts to stigmatize Graham and dwells on a small, essentially anecdotal sampling to prove his points about the lameness of value investing. One fellow Niederhoffer knew bought a stock below book value and watched as the stock proceeded to trade lower.

See? Graham’s ideas are useless.

When he is done expounding on the value investment discipline’s futility and ineffectualness, Niederhoffer allows as how he is troubled by the discipline’s ostensibly cynical premise: a dollar bought for fifty cents means that the seller is exploited. It seems odd that this cultivated observer of free-enterprise fails to recognize a couple of cold, hard facts: the business that fails to sell at half-price is likely to be sold for even less, and buyers of these ailing businesses are, in effect, upholding a competitive counterpoint to stronger businesses that might otherwise have a stranglehold in a capitalist system.

“Random”, the quality that Niederhoffer attributes to successful value investors and any successful value investments as defined by Benjamin Graham, might more aptly be attributed to Niederhoffer’s own quest for an intellectually sound speculative framework. This tendency is displayed in living color by Niederhoffer and other participants on dailyspeculations.com, the website Niederhoffer hosts, as these traders engage in frothy examinations of the parallels between non-related phenomena, such as the evolved habits of exotic animals seen while on safari, and “trading”. Niederhoffer himself is especially fond of drawing wisdom from Captain Jack Aubrey, the main hero in Patrick O’Brian’s 18th century British Navy epics, as that wisdom might pertain to the markets. But after reading Practical Speculation, it is painfully obvious that if Captain Aubrey ever sashays into Niederhoffer’s trading-room and hands him a copy of The Intelligent Investor, Niederhoffer will politely accept the book, and promptly throw it overboard when the good Captain is out of site.

It’s easy to take potshots at this outspoken speculator gone off his trolley. But in the spirit of inquiry that Niederhoffer offers in his book, MSN articles and website, it seems reasonable to ask whether two catastrophic losses and one near-catastrophic loss offered to investors over a 10 year investment period —nearly 4 years of which were spent on hiatus— are more or less “random” than the market-beating investment success that Schloss, et al, offered to investors for over 50 years using a value framework. In any case, the simple fact is that the alternatives to a value framework in the securities markets frequently lead to misery, and by all accounts, Victor Niederhoffer is currently altogether miserable. In the manner that Walter Schloss’ 50-plus years of risk-averse investment returns are “random”, it may be safely said that Victor Niederhoffer’s self-inflicted misery is also randomly rendered.

http://boards.fool.com/niederhoffer-and-the-quotrandomquot-success-25976330.aspx?sort=whole

and http://www.bearcave.com/bookrev/practical_speculation.html

Amazon is Disappearing Says Prof. Greenwald of Columbia GBS

big-amzn

Amazon’s Business Is ‘Disappearing,’ Columbia’s Greenwald Says

December 1, 2011 — 11:25 AM EST
http://www.bloomberg.com/news/articles/2011-12-01/amazon-s-business-is-disappearing-columbia-s-greenwald-says

Amazon.com Inc. shares are overvalued because its core business of selling books and music online is “disappearing” and it’s competing with larger rival Apple Inc. in tablet devices, according to Columbia University’s Bruce C. Greenwald.

“Amazon trading at 100 times earnings is almost a joke,” Greenwald, a professor of management and asset management at the New York-based university, said today at the Bloomberg Hedge Fund Conference hosted by Bloomberg Link. “If Amazon doesn’t deliver profitability in the long run, it’s not going to stay at 100 times earnings.”

Amazon, based in Seattle, trades at 103 times reported earnings for the past year, down from this year’s peak of 129.8 in October, according to data compiled by Bloomberg. The company’s shares gained 2.5 percent to $197.16 in New York trading, and have climbed 9.4 percent this year.

==

Bruce Greenwald: Amazon Is Trading on Vapors

Bruce Greenwald: Now, Amazon I think is completely different. I think, if Apple is a current profit machine, Amazon is trading on vapors. [laughs]

They make no reported profit; the whole story is a growth story. They’re buying customers on the theory, presumably, that those customers are going to be profitable in the future. Now, for customers to be profitable you have to dominate segments.

The segment that Amazon has traditionally dominated is, of course, books, music, and video. Well, we know what happened to the music business when it went digital, which is the profit vanished and even Apple doesn’t make any money on iTunes.

The same thing is happening to books, with the connivance, by the way, of Amazon. The same thing is happening to video, so their core business is dying. The business that they dominated, where they made all their money, is dying.

What have they decided to do? Go into a lot of businesses where they have no competitive advantage. First they’ve gone into every variety of retail: TV sets against Wal-Mart and Best Buy, who have better distribution economics…

They can buy the business, but in the long run, unless they can get bigger share than those companies, their pricing is going to be at a disadvantage to those companies, because those companies can distribute the TVs and other devices more cheaply.

Then what did they decide? They said, “Oh, that wasn’t a big enough challenge. Let’s go after the Oracles and the IBMs and all the companies that do cloud computing, and the SAPs and so on, and the Googles,” and they went into that business.

Now, if you think they’ve got a competitive advantage in that business while they’re going after everybody in retail, lots of luck. But then they decided that was not enough, so they decided to go after Apple and the others in the device business.

This looks, to me, like a company that makes no reported profit, which I think is fair, that’s trying to buy growth in all sorts of areas where, because it has no competitive advantage, the growth is going to be value-destroying, not value-creating.

http://www.fool.com/investing/general/2013/01/04/bruce-greenwald-amazon-is-trading-on-vapors.aspx

Amazon is on a p/e of 500 – but I’m happy to keep my shares

Amazon launched its first smartphone last week – the Amazon Fire phone.

It doesn’t represent any sort of leap forward in smartphone technology, according to reviews. So it probably won’t take a huge amount of market share from Apple or Samsung/Google.

Meanwhile, both Apple and Google are eating into one of Amazon’s traditional core businesses, selling music and video content.

So is Amazon’s new smartphone just a desperate bid to preserve market share? Or is it another ballsy, far-sighted move by Amazon’s boss, Jeff Bezos – one that will pay off in the end?

I think it’s the latter. And that’s why I’m willing to hang on to my Amazon shares – even although they trade on an eye-watering price/earnings ratio (P/E) of 500.

You might think I’m mad – but let me try to persuade you otherwise…

What’s Amazon’s new phone like?

I’ve not seen one of Amazon’s phones, but it sounds like they’re pretty similar to your average iPhone, but with two fresh add-ons.

One is a semi-3D capability that has been greeted with a ‘meh’ reaction by most reviewers. In truth, I don’t really understand how this 3D function works – I’ll have to wait and see a phone before I can do that.

The other improvement is a ‘recognition engine’ which has been received much more warmly.  It’s called Firefly and is a sort of audiovisual search tool. It recognises books, various consumer goods, music, video and more. And once the phone has recognised the item, you can immediately put it in your Amazon shopping basket.

“Not only was it effective”, says Gizmodo, “it was kind of beautiful”.

So it’s pretty obvious that Amazon is launching the phone in an effort to sell more stuff. Purchasers of the phone will also get a year’s free membership of Amazon Prime, which normally costs £79.

Prime offers free delivery on many purchases, the opportunity to ‘borrow’ books to read on your Kindle, and access to a wide selection of video titles. Amazon says that Prime customers spend four times as much on Amazon as other users, and that half of Amazon’s sales are to Prime customers.

So if the Fire phone can significantly boost the number of Prime customers, it will probably prove to be a savvy move by Bezos.

Now, not everyone is convinced that the phone launch is a smart move.



For example, Bruce Greenwald, a finance professor at Columbia Business School, made some negative comments to the Guardian. “This sequence of crazy initiatives in areas where they have no competitive advantage is about sustaining an unsustainable stock price… Amazon owns the books market, but what is happening to the value of that monopoly? They have a core business in which they are dominant, it’s going away and they are thrashing around trying to justify their $150bn market capitalisation.”

Is Greenwald right? I don’t think so.

Yes, Amazon faces growing competition. In digital content, it is competing with Apple, Google, music streaming service Spotify, and many others.

And on the physical consumer goods side – in other words, items that are delivered from its warehouses rather than online – the likes of Tesco, Argos and Walmart are all growing smarter about online retail. These chains also benefit from owning large store networks which are useful for customers who like to “click and collect.” Amazon isn’t so well placed for ‘click and collect.’

Greenwald is also right to highlight Amazon’s high valuation. However, I believe that valuation can be justified and that’s why I’m happy to hang onto my shares.

Why Amazon’s ‘crazy’ share rating is justified

No other online retailer offers such a large variety of products for sale. And Amazon is still growing its sales faster than the growth rate for overall e-commerce around the world. Last year, Amazon was the ninth-largest retailer in the world. Consultancy Kantar expects it to be the second-largest by 2018.

Amazon’s network of warehouses is also a very useful asset. It has 106 ‘fulfilment centres’ around the world, of which ten are in the UK. It is also trying to improve its ‘click and collect’ capacity by offering collection points at some London Underground stations.

Amazon also has a great record of investing for the long term. When Amazon launched Amazon Web Services in 2005, many observers doubted that the company could become a major player in this field – providing services to businesses. But, according to The Motley Fool, it now controls more than 30% of infrastructure for the ‘cloud’.

The point is, there will come a time when Amazon can afford to slow down the pace of growth and allow its profits to rise dramatically. When that happens, today’s valuation won’t look so crazy.

I’ll freely admit that Amazon is probably the highest-risk stock in my portfolio, but I’m happy to hold for further growth to come. And the Fire phone will play its part in achieving that growth.

So what do YOU think?  How would you value Amazon?  What major adjustment would you need to make? What is the business trying to do?

If you need a hint: http://ben-evans.com/benedictevans/2014/9/4/why-amazon-has-no-profits-and-why-it-works

Does anyone want to bet $200 that Prof Greenwald will NEVER admit he might have miscalculated or misunderstood Amazon’s business?

What if he read their annual report: amazon-shareholderletter97

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What caused the above?

The Mining Clock

Mining clock

When to start buying mining shares

Ignore the analysis but note the concept.  The advice to NOT buy the miners was the perfect situation to do the opposite:
mining assets

See the lows put in Jan. 11th in both the HUI Goldbugs index and Freeport McM (FCX). Only six days after the publishing of this article.

When to start buying mining shares

Five years ago, the FTSE 350 Mining index reached a post-financial crisis peak at just over 28,000. It currently sits at 7,134, down 75% at an 11-year low, and share prices remain vulnerable.Global commodities markets remain massively oversupplied and Chinese demand is waning, but there will come a point at which mining shares are a ‘buy’ again.  (You always want to buy commodities and/or commodity stocks at the point of MAXIMUM PESSIMISM or when supply is greatest and demand lowest!).

Investec Securities has built a “Mining Clock”, which brilliantly illustrates the mining cycle, including when to buy and when to sell. It’s a real “cut-out-and-keep” for every investor.

Investec writes:

“Please see the updated Mining Clock below where we indicate that it appears still too early to be buying the mining sector. This is despite five straight years of underperformance from mining equities globally, in every sector, save Australian listed gold equities which outperformed the ASX in 2014 and 2015.” (Where is the article that told you WHEN, exactly, to buy?).  Rearview investing doesn’t work.

The above article proves once again that no one can time a sector–except when (like in this article) there is no hope for a rebound.

GDX LT Chart

Aug52016JrGoldbullanalogs

Aug52016HUIBullanalog

Aug52016Goldbullanalogd

xau

ev

http://prostedywagacje.blogspot.co.uk/2016/08/how-to-play-this-bull-market-in-gold-in.html

Last time I sold a few of my miners back in July

july

http://csinvesting.org/2016/07/08/time-to-sell-some-miners-but-not-much/

And now over the next few days and weeks, a time to rebuy at the margin.  But if you are in a bull market Sentry__Com_BullishGold_MacLean___E then sitting tight is what you must do.  At most, I think we are in six to seven on the mining clock.  So far, the public is not yet participating except perhaps in the last month.

WHAT do YOU think?

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HAVE A GOOD WEEKEND!

P.S.: http://donmillereducation.com/journal/   Work on yourself!