Tag Archives: lxk

What Can We Learn from IBM?

PS: I may not post the See’s Candies case study until tomorrow….backed up with work. Until then, tackle this:

Why did Buffett buy IBM?

IBM_VL    Don’t cheat! Look at the Value-Line and write what Buffett sees in IBM. (Disclosure: I own IBM along with BDX, BCR, CSCO, LXK, NVS, TESCO, ORI, etc. and I will not announce if and when I sell. I may be incorrect in the assessment of those businesses either in price paid or assessment of value.)

What do you think of IBM’s growth? Is this a good business? What might be driving returns for shareholders? How would you classify this company?  A rapid compounder? Value trap?

How can a company as well-known as IBM become mis-priced?

Hint: For those who wish to start your own fund….research the studies on horse track betting where favorites are SYSTEMATICALLY under-bet (under priced) while long shots are SYSTEMATICALLY over bet or over priced.

Notes:

Betting on Favorites

See research:Favorite_Longshot_Bias

http://www.gogerty.com/blogpersonal/2012/09/

One of the common criticisms I (Investor lecture at Columbia GBS) hear about this type of investing is that it is akin to betting on favorites at the race track. Once you have identified a company that is so obviously superior, how likely is it to be undervalued since the whole world will have perceived that it is an extraordinary company? The stock won’t have a margin of safety and may be persistently over-valued. The stock may be over-loved and overvalued.

Let me back up a second. As part of my misspent youth, I spent a lot of time in horse racing and handicapping. In fact, bettors in aggregate in pari-mutual betting are, in fact, very good at picking winners at the racetrack. Favorites do win races. But betting on favorites does not make you money; it loses you the least amount of money. Because there is a tremendous track take. So the horse racing/handicapping is a minus 20 percent on typical betting. If you just put money down on favorites as a mechanical system, the record shows that you will lose over time only 2%, 3% or 4%. If you bet on long shots, you will lose 20+% of your money.

Now in the case of the stock market over a long period of time, it has been a plus 9, plus 10, plus 11% game so it is very much more favorable business than horse betting. But betting on favorites, betting on quality as opposed to junk is a winning bet, as long as the valuation discipline is appropriate.

Prize awarded: Boom, Gloom, and Doom Report for the BEST reply.

Ok, now take a look at these articles: http://tech.fortune.cnn.com/2011/11/14/warren-buffett-ibm/

and  http://seekingalpha.com/article/510371-what-does-warren-buffett-see-in-ibm

Lessons learned?

If I can stress anything–and it took me TEN years to learn and I fall off the wagon occasionally–keep things simple!

Update on Lexmark (LXK) Case Study

An Update about a Month Later

I first mentioned LXK here on Friday the 13th (I should have known!) http://wp.me/p1PgpH-11x

This Post is to establish a basis for a case study in the future. This post is NOT a recommendation to do what I do (buy LXK today at $20.71) because you may be doing this:http://www.youtube.com/watch?v=go9uekKOcKM.

—-

Knife Catching

Was I catching a falling knife? Here is research on that subject: Falling Knives Around the World Paper

When LXK announced earnings, the price plummeted further. What I did not want to do is this: http://www.youtube.com/watch?v=VfiY2nbV9RI&feature=related I don’t want to ignore the market’s reaction. I concluded that LXK’s intrinsic value had declined due to a lowing of future cash flows, but that price had more than compensated for the news. I decided to hold.

I could have done this:http://www.youtube.com/watch?v=tZnkql_Xkhc or http://www.youtube.com/watch?v=4ywfiKl5fsc&feature=related or http://www.youtube.com/watch?v=CvbTjM5HPCI

But I needed to step back and reflect on the situation and my portfolio’s condition. First, LXK is not a franchise. It’s business allows some customer captivity for reselling toner, but the business is changing/shrinking while the company transitions into more software services where the company may not have a competitive advantage.

Secondly, management announced and is–so far– returning capital to shareholders, so I view this as an asset/special situation type of investment. Though the overall printing market will shrink, it won’t disappear within five years and if the company can buy in shares at lower prices, value will out unless the business is permanently impaired. A more in-depth view/valuation will be forthcoming in another update.

I noted that about 1/4th of the company shares traded hands on the last big sell-off. I don’t know if that indicated capitulation, but I am estimating that the sellers where not the most informed participants. Why wait to sell after the price of the company has dropped by 50% and AFTER the news has been announced twice?

Since I weight special situation/asset investments smaller than franchise (compounding machine) investments, this was about 1% which I could build to 2% or 3%. I may have 20% of my account in my favorite holding. But I won’t buy more because management doesn’t own a significant share of the business, there are impediments for a take-over and I don’t see management buying shares for themselves.

I would sell if I find a more compelling investment for the capital, especially if I could acquire a tax asset (loss) while having the same margin of safety in another investment.

I hold LXK, and I will have another update in due course.

Update Jan 23, 2013. Unfortunately my target has been reached so I have sold around $28 per share my remaining stake.  Oh no, cash is building up.

LXK