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Investment Strategy

Posted on January 29, 2014 | Leave a comment

Client Report Jan 29 2014

Gold is money, not an investment.

Value Investing Videos (Manual of Ideas)

https://www.youtube.com/user/manualofideas?feature=watch

Pabrai lectures in India: https://www.youtube.com/watch?feature=player_embedded&v=Py95fWZV2Vo

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Reader’s Questions

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.

Video Interviews of Klarman, Buffett, Munger, and More.

Investors have put their faith not in a fact but in a concept. As my friend John Mauldin puts it, “Faith in central banks today is equivalent to faith in the word dot-com in 1999 or faith in the eternal rise of housing prices in 2006.” No doubt, Warren Buffett was right that “a pack of lemmings looks like a group of individualists compared to Wall Street once it gets a concept in its teeth.” But QE is also a concept that is rather fully played out, especially with a likely tapering ahead. Notably, the shift toward tapering is not driven by substantial economic improvement or victory of the policy, but rather by an increasing recognition within the Fed itself that its actions are creating dangerous financial distortions.

www.hussmanfunds.com

Hundreds of Video Interviews with Klarman, Buffett, and new Fund Managers through the Manual of Ideas. For more videos click on the manual of ideas link at the top of the page in the link below:

http://www.youtube.com/watch?v=tfCyP8YDvxQ&feature=c4-overview-vl&list=PLA35FF2E9A6327BD7

Copying the greats: http://www.youtube.com/watch?v=Ap1dXMoVZP8&feature=share&list=UUafKjLe1fkRF1lhkhtkgGoA

There are hundreds of short videos on value investors. If you find any that are particularly enlightening, interesting, or helpful, let me know so others can see it.

QUIZ. Good Learning Resources: Net Nets, Liquidations and Special Situations

Net/Nets, Liquidations and Special Situations

I have a large library on special situation investing and eventually all will be posted or in the value vault. However………

The near-term focus of this blog will be strategic logic and valuation, but I want investors who are starting their journey to have access to resources for asset-based (non-franchise) investing.

You can learn how to invest just as if you were analyzing a company. Start with the balance sheet and work down from simple to complex. Cash is a more solid asset than a tax asset, for example.

But as you read the following resources always be thinking as a business person. Ask what is the economic reality of this asset or liability.

QUIZ

Can YOU name a fixed asset on a balance sheet that really is economically the same as a current asset, almost as liquid as cash? Conversely, can you name a situation where a current asset is less liquid than a typical fixed asset? Hint: Marty Whitman of Third Avenue Value Fund has preached this lesson often. (see links below).

Please take no more than 20 seconds to answer the first question. Prize: A tip from Jim Cramer on CNBC. C’mon, you can’t expect to win much on such a simple quiz!

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This document has several excerpts from Graham, Klarman and Whitman on liquidation values. A good primer on liquidation analysis.

http://www.scribd.com/doc/74692616/Special-Situation-Net-Nets-and-Asset-Based-Investing-by-Ben-Graham-and-Others

If you are going to pursue asset-based investing then you need to study Marty Whitman. Read his first book (not a breezy read, though)

http://www.amazon.com/Aggressive-Conservative-Investor-Investment-Classics/dp/0471768057/ref=sr_1_1?s=books&ie=UTF8&qid=1323016112&sr=1-1#reader_0471768057

And his shareholder letters: http://www.thirdavenuefunds.com/ta/shareholder-letters-mf.asp

If you are a shareholder or a student you can call his office and ask for his book of shareholder letters: 1990 to 2005. Highly recommended.

Marty Whitman on value and corporate governance

You can learn from blogs that focus on this type of investing.

My favorites: www.greenbackd.com (excellent. If you read all his posts and analyze past investment ideas you will have a solid grounding in net/nets.)

For podcasts on investing and net/nets from a self-taught investor: www.gannononinvesting.com

Also: http://www.manualofideas.com/blog/

http://www.rationalwalk.com/?p=2472

http://can-turtles-fly.blogspot.com/

Another good overall resource:

http://www.burgundyasset.com/index.asp?Main=FAMinst&Section=Library&SubSection=View&View=normal

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A reader kindly offered to share his resources here: http://motiwalacapital.com/blog/

And he suggested viewing these videos and materials: http://www.bengrahaminvesting.ca/resources/videos.htm–

You are on your way………….

Tag Archives: Manual of Ideas

Investment Strategy

Video Interviews of Klarman, Buffett, Munger, and More.

QUIZ. Good Learning Resources: Net Nets, Liquidations and Special Situations

Net/Nets, Liquidations and Special Situations

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Do you want the keys to the Value Vault?

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Tag Archives: Manual of Ideas

Investment Strategy

Video Interviews of Klarman, Buffett, Munger, and More.

QUIZ. Good Learning Resources: Net Nets, Liquidations and Special Situations

Net/Nets, Liquidations and Special Situations

subscription

Categories

Do you want the keys to the Value Vault?

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