Monday, January 12, 2009

Billytickets intervie part 2 with a billionaires student

Billytickets: How do you invest now?

Student: What do I do now? First of all, I deal with seasoned companies. By that I mean companies that have been around for long enough to have a record that shows how the business behaves in various economic environments—a business that has been through good times and bad, through recessions, inflations--and see how the business performs. I look for companies that have a long enough track record so what you are looking at present can’t possibly be an aberration. Pretty much unavoidably these are pretty big companies. These are big companies and they have been around long enough to be seasoned by my definition, they are successful and they are not tiny, little companies. The insight that I bring to these companies is that their stock prices—this is historically demonstrable--are much more volatile than their underlying values.

Billytickets: many say that there is not big profits in large caps like there is in small caps?


Student: Laughs. Well that is if you are skilled enough to pick the small caps. Even Warren was mistaken on Berkshire Hathaway the textile company . And while I can’t prove it, it would appear that stock prices are much more variable than the changes in their underlying intrinsic values. I refine or restrict my list to companies with superior financial characteristics. We will talk about what that means. But in general these are companies that are cash generating, with free cash flow, businesses that are more than self-financing. They generate cash in excess of their cap/ex and reinvestment needs. Because they are cash generating, they tend to have lower debt

Billytickets: So how important is trying to find the next Apple or Crocs or RIMM?

Student: All those stocks have been profitable but the investor can not say with certaintity that these investments would be 99.9% profitable. I am also no longer interested in companies where there is a story or a narrative. I am not interested in a company that is going to do something new and different. I am interested in its long record. I presume that a company of a certain size has a long record. We will talk about specific examples in a few minutes when we look at some Value Lines. I am not talking about long-term growth, I am talking about long-term high profitability, consistent profitability and consistent cash generation.

Billytickets:But isn't it true that everyone knows the best large caps and they never become cheap?

Student:Now, if I said to you, almost no company doesn’t have some degree of cyclicality in its operations. Wall Street because of its short-run obsession is very twitchy. You see these stories every so often like IBM, an enormous company, reports earnings that are a penny or two higher or lower than expectations, will move the stock price of these enormous companies 3% to 5% in a day. For sure, the value didn’t move 5% but the price did. Not in a single day, but over a series of days, you can have the divergence between price and value. The opportunities for value investors can and do present themselves

Wednesday, January 7, 2009

Billytickets interview with a billionaire's student Part 1

I have talked extensively and read the class notes of a student of one of investing legends.I have NOT named anyone because the words stand 'alone" .Please enjoy part 1 of this MANY part interview: and feel free to ask questions and comment

Billytickets: Hi I am a bit of a contrarian and I would like to about how beinga contrarian and being a value investor goes hand in hand?

Student: I am…nearly all value investors have a little element of contrarianism in them. We lean against the tide. We like to buy when things are out of favor and sell when they are in favor. Benjamin Graham used to write in a Latin phrase for it, “Nothing is ever as bad as it seems, nor as good as it seems.” (From the 2nd Edition of Security Analysis—“Many shall be restored that now are fallen and many shall fall that now are in honor.” Horace--Ars Poetica). It means in modern terms that there is a tendency toward mean reversion.

When businesses are doing well, they have a tendency to go back to their long term performance measures and vice versa. (Competition enters, there is over-expansion, etc. Prices revert). Businesses go back to their long-term norm. All businesses are cyclical to some extent. That is a deception that people perpetuate on themselves—that is to say I am going to buy businesses that are not cyclical. One way or the other all businesses are cyclical. Companies that report very smooth earnings are fudging the numbers through accounting that would make the earnings smoother than the underlying business’s true earnings really should be.


Billytickets:Many believe that Buffett would be buying many smaller caps if he had only a million dollars to invest ,very similar to what he did in the 50s and 60s?Agree or disagree?

Student:Warren Buffett: “The chains of habit are too light to be felt until they are too heavy to be broken.”

This is Warren quoting the English philosopher Bertrand Russell, because his words so aptly describe the insidious nature of bad business habits that don’t become apparent until it is too late. This is what happened to Warren with the Benjamin Graham-inspired investment strategy of buying bargain (“cigar-butts”) stocks that were selling below book value regardless of the nature of the company’s long term economics. This was something Warren was able to do with great success during the 1950s and early 1960s. But he stayed with this approach long after it wasn’t viable anymore—the chains of habit were too light to be felt. When he finally woke up in the late 1970s to the fact that the Graham bargain ride was over, he shifted to a strategy of buying exceptional businesses at reasonable prices and then holding them for long periods—thereby letting the business grow in value


Bilytickets: So you don't believe warren would be buying smaller caps today if he was smaller in size?


Student: What's stopping him ? He could buy a basket of 250 stocks and put 4 million dollars in each and that would be equal to his position in Wal Mart . However many would turn out like Berkshire Hathaway the textile company did :without Warren deploying the cash into insurance and the good businesses. And the questions of when to sell out or buy more are NOT CLEAR. When he purchases Wal Mart he has the security of knowing that company's underlying business is fine and his ROE and moat is intact.


Billytickets: So even if Warren only had a million or 2 you dont think he would invest any different?

Student:Buffettt: “Turnarounds seldom turn.” The world is full of businesses with poor economics selling at what seem to be bargain prices. Warren looks for a good business that is selling at a fair price, or even better, a great business at a bargain price. Poor businesses tend to stay poor businesses.

In Warren’s early days he was only concerned with the historical financials of a company, he didn’t really care about the products it produced. His mentor Graham believed the numbers reflected everything there was to know; he didn’t separate a commodity-type business such as textiles, which has poor long-term economics, from a consumer-monopoly business such as Coke, which has great long-term economics. But as Warren became active in running a struggling commodity type business, he soon realized that it was the consumer-monopoly-type companies that had the competitive advantage and were producing the superior results. Graham would buy anything as long as it was cheap. Warren will only buy a consumer-monopoly-type company that has a competitive advantage, and he doesn’t have to wait for it to be selling cheap. A fair price is all he needs, if he holds on to it long enough.

An excellent example of this was his investment in Coca-Cola, for which he paid approximately 20 times earnings. The old Warren would never have made this investment because the Grahamian valuation techniques would have deemed it way too pricey. But for the new Warren it was a more-than-fair price that paid off for him in the billions. (The Tao of Warren Buffett pages 46-47)