Tag Archives: valuation

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

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

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

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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.

 

 

 

BEING WRONG (VALE)

Brazil EM

Friday, September 25, 2015

No Mas, No Mas! The Vale Chronicles (Continued)!

Some of my Brazilian readers seem to be upset that I used “No Mas”, Spanish words, rather than Portuguese ones, in the title. To be honest I was not thinking about language, but instead about a boxing match from decades ago, where Roberto Duran used these words to give up in his bout with Sugar Ray Leonard.

I have used Vale as an illustrative example in my applied corporate finance book, and as a global mining company, with Brazilian roots, it allows me to talk about how financial decisions (on where to invest, how much to borrow and how dividend payout) are affected by the ups and downs of the commodity business and the government’s presence as the governance table. In November 2014, I used it as one of two companies (Lukoil was the other one) that were trapped in a risk trifecta, with commodity, currency and country risk all spiraling out of control. In that post, I made a judgment that Vale looked significantly under valued and followed through on that judgment by buying its shares at $8.53/share. I revisited the company in April 2015, with the stock down to $6.15, revalued it, and concluded that while the value had dropped, it looked under valued at its prevailing price. The months since that post have not been good ones for the investment, either, and with the stock down to about $5.05, I think it is time to reassess the company again.

vale

John Chew: At least the author has a process to reassess his investment.  I believe the critical flaw in his analysis (easy to say in hindsight) was not noting the massive mal-investment due to distorted credit markets caused by central bank policies. To normalize iron ore prices you would need pre-distortion prices going back twenty-five years.

Read more: No Mas!

Pop QUIZ

curve

An ode to the end of a con

How long can deception go on?

When prices are set by banks printing debt

All trust in the “markets” is gone!

QUIZ

Two businesses, each earns $10.

Company A: Has $50 in net assets and produces $10 in earnings.

Company B: Has $1,000 in net assets and produces $10 in earnings.

  1. Which is the better business?
  2. Which is the better value?
  3. What is the difference in value between the two companies?

Anyone who doesn’t pass this quiz meets my Ex (Hoping won’t help; prayin’ won’t do you no good!

Hallador Energy, Inc. (HNRG) Valuation Attempt

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A Reader Writes:
John, Here’s my quick and dirty for Hallador:
Currently not screaming cheap.
Hallador has traded to .6 book before. Current 1.2x. Highest is 4.4 or 30.36 ($4.14-$30 2015 TBV)
ev/ebitda 3mth op. inc + depr = 22341000/.25 to annualize = 6.9

industry multiple (still using the same from CLD) is 8.91

for approx 58.65 – 61.8  TBV is 6.8. Current price is 8.42.

It is making money (not a pure coal company; has oil/gas assets). From VL, it has cash flow after capex, 10% cap of 6.5 for no growth value.
It’s not a bad coal company after buying sunrise coal. The negative thing is its coal is high sulphur whereas CLD has all <1% SO2 coal (some <.5%). China recently announced a ban on high sulphur content coal. Existing shipments from Australia and South Africa in China cannot be used.
It does not break down its international shipments, but gauging CLD exports, its not much. around 4.7mt total shipments.
The thing I need to look into is how the coal companies booked their profits. Using newcastle 2014 price? Currently it is 59.6.
Hallador has good average per ton cost.
2 main areas of coal in the US. East and West.
East is higher while West is lower (CLD is lower because of transportation cost). Hallador has a 11.9 margin per ton with avg cost/ton at 31.43 and price/ton 43.3 as its mine are in the Eastern zone.
As a comparison, ANR’s 2014 Eastern cost/ton is 61.66. And Western 11.5. CLD still lowest but they have only mines in the West.
There was a report earlier in the week about POSCO in talks with Peabody about asset sales or product sales. They may be talking to others. One of the miners in Mongolia announced sales contract to Seoul today. Mongolia coal has a low sulphur too; however, after the Oyu Tolgoi deal recently, top 20 stocks there had a momentum run, and are not cheap. Another market I will look at is Indonesia. The government there has announced plans to remove mining export ban that they blamed on excessive nationalism. Indonesian coal has poor BTU but low sulphur. Also, these things will take a long time to sort out. Maybe next year. Just some things to keep an eye on. There is a special situation SGX catalist stock I’m waiting to see. It has become the parent company of a mongolian miner (2.6x book so not cheap anymore after the run up) and intend to hold other Mongolian coal assets. Will write when I know more.
Looking forward to seeing your write up.
Thank you,
HAVE A GREAT WEEKEND

So What is it worth? Carbo Ceramics (CRR)

paul-singer

 The consensus (bull case): The power of psychology is overwhelming, and investor sentiment indicates that asset prices are being driven higher by QE and Zirp, that the Fed can be trusted, and that we should not worry too much about the unintended consequences, because the Fed will be able to follow a path to normalization and a soft landing. In any event, America is now a safe haven and always will be a safe haven. Moreover, goes the case, we may be at the sweet spot of the economic cycle. It has taken a long time to get here, but finally we are getting sustainable growth, and we can expect more of the same, Interest rates are completely under control, in fact, long-term rates are in a secular decline, which is not nearly at its bottom. Inflation is virtually impossible, and we really ought to be worrying about deflation instead. If we focus on getting inflation higher, then growth will follow. The currency is also under control, goes this line of thinking, In fact, what could the dollar fall against? The competition is in much worse shape. Banks are in far better financial condition than in 2008 and will gradually bleed off any remaining toxic assets that they own. If anything starts to go wrong, the government will step in to fix it. Pushing investors out on the risk curve in search of yield is a good idea and a clever way to encourage them to do what they should be doing on their own (i.e., taking risks to help the ecobnomy grow).  We should not worry, because things will be okay. We can even trust the representative branches of government, because elected officials will not have to do much that is unplatable or challending–the central bankers have it all covered. Above all, trust the Fed.  –Paul Singer

Do the Lessons of History Apply?

So what’s it worth?

Carbo VL

Carbo 2013

Carbo Presentation Sept 2014

Please do a “down and dirty” valuation giving your assumptions within twenty minutes.  I will post mine tomorrow!

ATCE-2014-post2

 

PRIZE: A Date with my EX! for best valuation!

Seth Klarman

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…When men live by trade–with reason not force, as their final arbiter–it is the best product that wins, the best performance, the man of best judgment and high ability and the degree of a man’s productiveness is the degree of his reward.   (Atlas Shrugged)

Seth Klarman

Below are links to Seth Klarman’s investor letters and appearances.  I would try to study his philosophy, attitude, and approach to investing–see if you can integrate some of his approach to YOUR OWN methods.

New material from a reader (generous!) KLARMAN Response to Lowensteins Rational Investors found here:Graham Dodd Revisted by Lowenstein

Seth-Klarmanm-Interview-Financial-Analyst-Journal

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klarman-yield_pig

Klarman_on_running_a_fund_interview

Seth_Klarman-Why_Most_Investment_Managers_Have_It_Backwards

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Klarman 2013 Letter Excerpts

A BLOG DEVOTED TO Klarman  http://www.rbcpa.com/klarman.html

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Yamana Valuation

Upon returning from vacation, I have put off updating my valuation of Yamana. When there are fish, you must fish.   I promise to have it posted by this weekend.   I do recommend anyone who wants to hear a good management team explain their strategy for managing assets to listen to Yamana’s second quarter’s conference call:

http://www.gowebcasting.com/events/yamana-gold-inc/2014/07/31/second-quarter-financial-results/play

Yamana Gold Inc_ Q2 2014 MDA Final (SEDAR)_v001_t1ii3h

Yamana Gold Inc_Q2 2014

PresentationQ2 2014 – Conference Call Final

Asking a girl for her phone number

Buffett Tutorial on Accounting and Valuation: See’s Candies Case Study

I have always maintained that excepting fools, men did not differ much in intellect, only in zeal and hard work.  –Charles Darwin

Value investing works, because it does NOT work ALL the time. –Joel Greenblatt

Today’s post focuses on accounting (GAAP) and valuation through the words of Warren Buffett. The case study on See’s Candies and the other readings will help improve your skills. The burden is on you to understand and apply the lessons. If you do not understand FIFO or deferred taxes, then look up those terms in a basic accounting book, then do problem sets to grasp the concepts. Don’t take Buffett’s words on faith; try to apply the concepts of economic Goodwill to a commodity based company like, for example, US Steel (X) versus a franchise company like Coca-Cola (KO). Do you agree with Buffett’s analysis?

Prof. Joel Greenblatt’s book, The Little Book that Beats the Market, is (simply) an application of Buffett’s thoughts on economic Goodwill.

Helpful hint: Take a subject like share repurchases or divdend policy and try to find many different sources on the subject. Learn the subject to death. Master how, when or if a company should act in returning capital to shareholders.

See’s Candies Case Study:Sees Candies 2012

SUPPLEMENTARY READINGS

A Parable on Valuation: The Old Man and the Tree or a Parable of Valuation

Inflation:Inflation Swindles the Equity Investor and Buffett inflation file

EBITDA: Placing EBITDA into Perspective and TEV to EBITDA Research

Joel Greenblatt: Little Book That Still Beats the Market, The – Joel Greenblatt

Secrets of (view): http://youtu.be/3PShSES5nBc   25 minutes

Corporate Finance

Share Repurchases: Corporate Structure and Stock Repurchases and Assessing Buybacks from all Angles_Mauboussin

Dividends: Dividend Policy, Strategy and Analysis

You will beat Wall Street easily if you apply the above lessons. The hard work is in mastering the material.   Stay the course.

Valuing Growth

Try saying Profits without “Quotation Marks.”

Valuing Growth

A reader, Arden, asked an intelligent question about how I value growth. Since I am on the road and will not post again until Tuesday, I wanted to post Prof. Greenwald’s Lecture Notes on valuing growth.

Valuing Growth_ManagingRisk

Read through these and post your thoughts.

Have a happy Easter!