Warren Buffett on value investing

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Warren Buffett on value investing

Post by garlandwhizzer » Wed Dec 05, 2018 3:58 pm

An interesting article on the CNBC website that details Buffett's idea of what actually constitutes value investing and how difficult it is to find it. Article, well worth reading IMO.

https://www.cnbc.com/2018/12/05/warren- ... value.html

Excerpt from article:

"Most analysts feel they must choose between two approaches customarily thought to be in opposition: 'value' and 'growth.' ... We view that as fuzzy thinking … Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive. ... In addition, we think the very term 'value investing' is redundant. What is 'investing' if it is not the act of seeking value at least sufficient to justify the amount paid? Consciously paying more for a stock than its calculated value — in the hope that it can soon be sold for a still-higher price — should be labeled speculation (which is neither illegal, immoral nor, in our view, financially fattening)."

Buffett added that a low ratio of price to book value, a low price- earnings ratio, or a high dividend yield, "even if they appear in combination, are far from determinative as to whether an investor is indeed buying something for what it is worth and is therefore truly operating on the principle of obtaining value in his investments."

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Re: Warren Buffett on value investing

Post by nedsaid » Sun Jan 06, 2019 2:29 pm

The problem with valuing companies is that there are things that make a company valuable but that are difficult if not impossible to measure. In other words, intangible assets. Such things as the strength of management, the value of the company brand, the intellectual property, the potential of new products in the pipeline, etc. etc. etc. One thing that Peter Lynch always said was that when you purchased a stock, you develop a narrative for owning the company. Why did you buy it and what do you expect the company to do for you?

I think of the most famous bet that Lynch ever made as manager of the Fidelity Magellan Fund. He made a big bet on Chrysler. The company products were terrible and out of step with what consumers wanted, the state of the financials were terrible, and the company had to get financing from the US Government. Lynch was impressed with Lee Iacocca and his management team, particularly Bob Lutz, who was very passionate about the industry. They had a new design team with exciting new products on the drawing board. Don't think Warren Buffett would have touched this with a ten foot pole but Lynch did. There was a very plausible narrative behind the potential success of this stock.

Really what Lynch did was make a bet on Chrysler management, their crack design team, and the potential of exciting new products. Very difficult to put numbers on this. I think Lynch liked what he saw and went in there and bought. As Caesar might have said, "I came, I saw, and I purchased."

This also ventures into the definitions of value. The academic definition is buying the cheapest 30% of companies using metrics like Price to Earnings, Price to Cash Flow, Price to Sales, Price to Book. Problem is two-fold. One is that Value companies tend to have negative momentum, in other words, they tend to continue to go down in price after you bought them. Hard to catch the bottom on these things. Second, is that companies can be cheap for very good reasons. For example, their industry may be dying. Or the management is terrible. It isn't easy to know if a company is having permanent or temporary problems.

The Graham-Dodd approach is to analyze companies individually, a bottoms up rather than an academic top down approach. There is also the calculation of intrinsic value, which in part puts a value upon such things as intangible assets. This is not an objective process, if you ask three different people on the value of company intangible assets, you might get four different answers. Thus there is an art to this and what Munger and Buffett do is very difficult to replicate.

Buffett is closer to the Graham-Dodd approach and he and Munger have distain for the Academic Research and their approach to investing. Certain things you can't capture just by crunching numbers. Munger convinced Buffett about the quality of companies and not just the price. He famously said that it was better to buy a great company at a good price than a good company at a great price. So in factorspeak, Buffett and Munger combined Value with Profitability/Quality. So Buffett is not a Deep Value manager, he has morphed into something like Growth at a Reasonable Price.
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Re: Warren Buffett on value investing

Post by 2015 » Sun Jan 06, 2019 3:57 pm

Read this a while ago. Buffet and Munger have also said where there is complexity there is a propensity for fraud, opacity, and mistakes.

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Re: Warren Buffett on value investing

Post by goodenyou » Sun Jan 06, 2019 4:17 pm

Aswath Damodaran – Laws of Valuation: Revealing the Myths and Misconceptions (FULL PRESENTATION)

https://www.youtube.com/watch?v=c20_S-QgvsA

This is outstanding (in my opinion).
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Re: Warren Buffett on value investing

Post by nedsaid » Sun Jan 06, 2019 4:38 pm

goodenyou wrote:
Sun Jan 06, 2019 4:17 pm
Aswath Damodaran – Laws of Valuation: Revealing the Myths and Misconceptions (FULL PRESENTATION)

https://www.youtube.com/watch?v=c20_S-QgvsA

This is outstanding (in my opinion).
Thank you. I am watching it now.

"Valuation can never just be about the numbers. A good valuation always has a story embedded in it." Hmmm. Sounds a lot like Peter Lynch.

He also talks about the balance between story and numbers changes as a company goes from being a young company to an older company. He also discusses the topic of the great CEO and how what makes a great CEO changes as the company ages. Interesting stuff.
Last edited by nedsaid on Sun Jan 06, 2019 4:40 pm, edited 1 time in total.
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Re: Warren Buffett on value investing

Post by goodenyou » Sun Jan 06, 2019 4:39 pm

nedsaid wrote:
Sun Jan 06, 2019 4:38 pm
goodenyou wrote:
Sun Jan 06, 2019 4:17 pm
Aswath Damodaran – Laws of Valuation: Revealing the Myths and Misconceptions (FULL PRESENTATION)

https://www.youtube.com/watch?v=c20_S-QgvsA

This is outstanding (in my opinion).
Thank you. I am watching it now.

"Valuation can never just be about the numbers. A good valuation always has a story embedded in it."

He also talks about the balance between story and numbers changes as a company goes from being a young company to an older company. He also discusses the topic of the great CEO and how what makes a great CEO changes as the company ages. Interesting stuff.
Knowing you (from your posts), you will like it! That was one of the quotes I took away as well!
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Re: Warren Buffett on value investing

Post by nedsaid » Sun Jan 06, 2019 4:56 pm

The three things you need to know about Corporate Finance: 1) The investing decision (invest in assets that have a return greater than the minimum acceptable hurdle rate), 2) The financing decision (finding the right mix of debt and equity to fund your operations), and 3) the dividend decision (if you can't make investments that return more than the minimum acceptable hurdle rate, return cash to the owners of the business). Good stuff. I think Aswath Domodaran writes one of Larry Swedroe's favorite blogs.

He did address the future of General Electric. He said the Bataan Death March. Not too encouraging. But then again, if I sold my GE stock, I would have less to write about.

Here's more. Start-up companies should focus on the investing decision, mature companies should focus on the financing decision, declining companies should focus on the dividend decision. Start up companies have to use equity because they can't borrow. Growing and mature companies have to decide on the right mix of debt and equity. More good stuff.

Companies that don't act their age will destroy value. He is touching on what Peter Lynch called "diworseification", throwing money away on acquisitions that don't work out. Declining companies buying younger companies trying to be young again.

Younger companies will often have negative cash flow as they are reinvesting in their business to grow it. Cash burn is a feature and not a bug for young companies. More good stuff. At some point, a business has to start generating positive cash flows.

His comments about Amazon where interesting. Professor Damodaran said that he no longer thinks of Amazon.com as a retail company but as a disruption platform. It disrupts every business that it gets into. He said it was a difficult company to value partly because it is hard to tell what phase of its lifecycle it is in. I think of my dismissal of Amazon years ago as a company that sold dollar bills on the internet for 90 cents and made up for it with the volume. Damoradaran makes me wonder if the intent of Amazon was ever to be hugely profitable. It almost seems designed to just be a Death Star obliterating entire industries with the competitive advantage of not really having to make very much profit.

He is wrapping up discussing connecting the story with the numbers. Scary how the guy sounds like Peter Lynch. A good valuation is a bridge between a story and numbers. Interesting. Every number in my valuation has to have a story behind it. Hmm. Every story I tell about a company has to have a number attached to it. With young companies, it is all about the story. With mature companies, it is the numbers that drive the valuation.

He then talks about the kind of CEO you need for a company in each phase of its life. In the start up phase, Damodaran says you need a visionary. As you get into the growth phase, you want somebody who can build the business, as a mature company you need a CEO who can defend your place in the marketplace, and with a declining company you need (and I chuckled here) Larry the liquidator.

He also talks about compressed life cycles for companies today, particularly for Tech Companies. He highlighted GE which lasted over 100 years and Yahoo which has (had) a life cycle of about 25 years.
Last edited by nedsaid on Sun Jan 06, 2019 5:31 pm, edited 3 times in total.
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Re: Warren Buffett on value investing

Post by goodenyou » Sun Jan 06, 2019 5:23 pm

He did address the future of General Electric. He said the Bataan Death March. Not too encouraging. But then again, if I sold my GE stock, I would have less to write about.
Without divulging too much, let's just say there is a small degree of separation between Larry Culp and me. It was not a flattering comment, nor a promising one. Probably a painfully honest one. He has his work cut out for him to say the least.
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Re: Warren Buffett on value investing

Post by goodenyou » Sun Jan 06, 2019 5:30 pm

nedsaid wrote:
Sun Jan 06, 2019 4:56 pm
The three things you need to know about Corporate Finance: 1) The investing decision (invest in assets that have a return greater than the minimum acceptable hurdle rate), 2) The financing decision (finding the right mix of debt and equity to fund your operations), and 3) the dividend decision (if you can't make investments that return more than the minimum acceptable hurdle rate, return cash to the owners of the business). Good stuff. I think Aswath Domodaran writes one of Larry Swedroe's favorite blogs.

He did address the future of General Electric. He said the Bataan Death March. Not too encouraging. But then again, if I sold my GE stock, I would have less to write about.

Here's more. Start-up companies should focus on the investing decision, mature companies should focus on the financing decision, declining companies should focus on the dividend decision. Start up companies have to use equity because they can't borrow. Growing and mature companies have to decide on the right mix of debt and equity. More good stuff.

Companies that don't act their age will destroy value. He is touching on what Peter Lynch called "diworseification", throwing money away on acquisitions that don't work out. Declining companies buying younger companies trying to be young again.

Younger companies will often have negative cash flow as they are reinvesting in their business to grow it. Cash burn is a feature and not a bug for young companies. More good stuff. At some point, a business has to start generating positive cash flows.

His comments about Amazon where interesting. Professor Damodaran said that he no longer thinks of Amazon.com as a retail company but as a disruption platform. It disrupts every business that it gets into. He said it was a difficult company to value partly because it is hard to tell what phase of its lifecycle it is in. I think of my dismissal of Amazon years ago as a company that sold dollar bills on the internet for 90 cents and made up for it with the volume. Damoradaran makes me wonder if the intent of Amazon was ever to be hugely profitable. It almost seems designed to just be a Death Star obliterating entire industries with the competitive advantage of not really having to make very much profit.

He is wrapping up discussing connecting the story with the numbers. Scary how the guy sounds like Peter Lynch. A good valuation is a bridge between a story and numbers. Interesting. Every number in my valuation has to have a story behind it. Hmm. Every story I tell about a company has to have a number attached to it. With young companies, it is all about the story. With mature companies, it is the numbers that drive the valuation.
His comments about Amazon are dead on. I can't think of a company (or business model) more responsible as a deflationary force than Amazon. Maybe WalMart previously. Damodaran's comment about praying to God that they don't compete with your business was very true.
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Re: Warren Buffett on value investing

Post by nedsaid » Sun Jan 06, 2019 5:41 pm

goodenyou wrote:
Sun Jan 06, 2019 5:30 pm
nedsaid wrote:
Sun Jan 06, 2019 4:56 pm

His comments about Amazon where interesting. Professor Damodaran said that he no longer thinks of Amazon.com as a retail company but as a disruption platform. It disrupts every business that it gets into. He said it was a difficult company to value partly because it is hard to tell what phase of its lifecycle it is in. I think of my dismissal of Amazon years ago as a company that sold dollar bills on the internet for 90 cents and made up for it with the volume. Damoradaran makes me wonder if the intent of Amazon was ever to be hugely profitable. It almost seems designed to just be a Death Star obliterating entire industries with the competitive advantage of not really having to make very much profit.
His comments about Amazon are dead on. I can't think of a company (or business model) more responsible as a deflationary force than Amazon. Maybe WalMart previously. Damadoran's comment about praying to God that they don't compete with your business was very true.
Hence my comments about people literally shopping themselves out of their own jobs, first at Wal-Mart and then at Amazon. Wal-Mart at least made good profits. Amazon made the all-time innovation in corporate finance in that you can keep investing so much back into the business that you don't really have to make a profit but keep promising profits in the future. Market cap and future profit expectations are the thing and not actual profits. I just wonder where this will end, one reason I did not invest.

It just seems a bit like "The Producers", not saying its a scam, but there is a bit of unreality to it. Sort of like "Springtime with Hitler" on Broadway. It is a hit and somehow it shouldn't be a hit. I will say their distribution network rivals Wal-Mart and they execute their strategies and competitors very efficiently. Also the very high investment of having to build more and more warehouses. But then again, maybe it really is just a Cloud Data Storage company. Maybe retail is just a sideline. A complex and difficult company to understand and to value.
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Re: Warren Buffett on value investing

Post by goodenyou » Sun Jan 06, 2019 5:54 pm

nedsaid wrote:
Sun Jan 06, 2019 5:41 pm
goodenyou wrote:
Sun Jan 06, 2019 5:30 pm
nedsaid wrote:
Sun Jan 06, 2019 4:56 pm

His comments about Amazon where interesting. Professor Damodaran said that he no longer thinks of Amazon.com as a retail company but as a disruption platform. It disrupts every business that it gets into. He said it was a difficult company to value partly because it is hard to tell what phase of its lifecycle it is in. I think of my dismissal of Amazon years ago as a company that sold dollar bills on the internet for 90 cents and made up for it with the volume. Damoradaran makes me wonder if the intent of Amazon was ever to be hugely profitable. It almost seems designed to just be a Death Star obliterating entire industries with the competitive advantage of not really having to make very much profit.
His comments about Amazon are dead on. I can't think of a company (or business model) more responsible as a deflationary force than Amazon. Maybe WalMart previously. Damadoran's comment about praying to God that they don't compete with your business was very true.


Hence my comments about people literally shopping themselves out of their own jobs, first at Wal-Mart and then at Amazon. Wal-Mart at least made good profits. Amazon made the all-time innovation in corporate finance in that you can keep investing so much back into the business that you don't really have to make a profit but keep promising profits in the future. Market cap and future profit expectations are the thing and not actual profits. I just wonder where this will end, one reason I did not invest.

It just seems a bit like "The Producers", not saying its a scam, but there is a bit of unreality to it. Sort of like "Springtime with Hitler" on Broadway. It is a hit and somehow it shouldn't be a hit. I will say their distribution network rivals Wal-Mart and they execute their strategies and competitors very efficiently. Also the very high investment of having to build more and more warehouses. But then again, maybe it really is just a Cloud Data Storage company. Maybe retail is just a sideline. A complex and difficult company to understand and to value.
I remember the Barron's piece Amazon Dot Bomb in the late 1990's. I thought it was going to be roadkill just like the other Dot Com busts. It came roaring back well beyond my expectations. We shall see what becomes of it. I can't help believe that profits do matter, but with enough irrational exuberance, it can remain irrational for a long time. Maybe until the Zombie Apocalypse.
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Re: Warren Buffett on value investing

Post by nedsaid » Sun Jan 06, 2019 5:59 pm

goodenyou wrote:
Sun Jan 06, 2019 5:54 pm
nedsaid wrote:
Sun Jan 06, 2019 5:41 pm


Hence my comments about people literally shopping themselves out of their own jobs, first at Wal-Mart and then at Amazon. Wal-Mart at least made good profits. Amazon made the all-time innovation in corporate finance in that you can keep investing so much back into the business that you don't really have to make a profit but keep promising profits in the future. Market cap and future profit expectations are the thing and not actual profits. I just wonder where this will end, one reason I did not invest.

It just seems a bit like "The Producers", not saying its a scam, but there is a bit of unreality to it. Sort of like "Springtime with Hitler" on Broadway. It is a hit and somehow it shouldn't be a hit. I will say their distribution network rivals Wal-Mart and they execute their strategies and competitors very efficiently. Also the very high investment of having to build more and more warehouses. But then again, maybe it really is just a Cloud Data Storage company. Maybe retail is just a sideline. A complex and difficult company to understand and to value.
I remember the Barron's piece Amazon Dot Bomb in the late 1990's. I thought it was going to be roadkill just like the other Dot Com busts. It came roaring back well beyond my expectations. We shall see what becomes of it. I can't help believe that profits do matter, but with enough irrational exuberance, it can remain irrational for a long time. Maybe until the Zombie Apocalypse.
Well, probably Amazon will go bust after it has destroyed every company in the S&P 500. :wink: At some point, I would think Amazon would have to start focusing on profitability. But I am just an Anonymous avatar on the internet, what do I know?
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Re: Warren Buffett on value investing

Post by goodenyou » Sun Jan 06, 2019 6:08 pm

nedsaid wrote:
Sun Jan 06, 2019 5:59 pm
goodenyou wrote:
Sun Jan 06, 2019 5:54 pm
nedsaid wrote:
Sun Jan 06, 2019 5:41 pm


Hence my comments about people literally shopping themselves out of their own jobs, first at Wal-Mart and then at Amazon. Wal-Mart at least made good profits. Amazon made the all-time innovation in corporate finance in that you can keep investing so much back into the business that you don't really have to make a profit but keep promising profits in the future. Market cap and future profit expectations are the thing and not actual profits. I just wonder where this will end, one reason I did not invest.

It just seems a bit like "The Producers", not saying its a scam, but there is a bit of unreality to it. Sort of like "Springtime with Hitler" on Broadway. It is a hit and somehow it shouldn't be a hit. I will say their distribution network rivals Wal-Mart and they execute their strategies and competitors very efficiently. Also the very high investment of having to build more and more warehouses. But then again, maybe it really is just a Cloud Data Storage company. Maybe retail is just a sideline. A complex and difficult company to understand and to value.
I remember the Barron's piece Amazon Dot Bomb in the late 1990's. I thought it was going to be roadkill just like the other Dot Com busts. It came roaring back well beyond my expectations. We shall see what becomes of it. I can't help believe that profits do matter, but with enough irrational exuberance, it can remain irrational for a long time. Maybe until the Zombie Apocalypse.
Well, probably Amazon will go bust after it has destroyed every company in the S&P 500. :wink: At some point, I would think Amazon would have to start focusing on profitability. But I am just an Anonymous avatar on the internet, what do I know?
Just like the insects that will inherit the Earth after a nuclear war. It seems like they will continue to be a wrecking ball of everything until they stumble into an industry that is immensely profitable. Maybe they will corner the cryptocurrency market next :shock:
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Re: Warren Buffett on value investing

Post by nedsaid » Sun Jan 06, 2019 6:12 pm

goodenyou wrote:
Sun Jan 06, 2019 6:08 pm
nedsaid wrote:
Sun Jan 06, 2019 5:59 pm
goodenyou wrote:
Sun Jan 06, 2019 5:54 pm
nedsaid wrote:
Sun Jan 06, 2019 5:41 pm


Hence my comments about people literally shopping themselves out of their own jobs, first at Wal-Mart and then at Amazon. Wal-Mart at least made good profits. Amazon made the all-time innovation in corporate finance in that you can keep investing so much back into the business that you don't really have to make a profit but keep promising profits in the future. Market cap and future profit expectations are the thing and not actual profits. I just wonder where this will end, one reason I did not invest.

It just seems a bit like "The Producers", not saying its a scam, but there is a bit of unreality to it. Sort of like "Springtime with Hitler" on Broadway. It is a hit and somehow it shouldn't be a hit. I will say their distribution network rivals Wal-Mart and they execute their strategies and competitors very efficiently. Also the very high investment of having to build more and more warehouses. But then again, maybe it really is just a Cloud Data Storage company. Maybe retail is just a sideline. A complex and difficult company to understand and to value.
I remember the Barron's piece Amazon Dot Bomb in the late 1990's. I thought it was going to be roadkill just like the other Dot Com busts. It came roaring back well beyond my expectations. We shall see what becomes of it. I can't help believe that profits do matter, but with enough irrational exuberance, it can remain irrational for a long time. Maybe until the Zombie Apocalypse.
Well, probably Amazon will go bust after it has destroyed every company in the S&P 500. :wink: At some point, I would think Amazon would have to start focusing on profitability. But I am just an Anonymous avatar on the internet, what do I know?
Just like the insects that will inherit the Earth after a nuclear war. It seems like they will continue to be a wrecking ball of everything until they stumble into an industry that is immensely profitable. Maybe they will corner the cryptocurrency market next :shock:
What this represents is the creative destruction of capitalism. The internet threatened to put two types of jobs out of business: tax preparers and travel agents. Both are still around but have to provide added value. Just inputting numbers or taking orders just no longer works.

There are always the disruptive technologies that come along, eliminate a lot of jobs but ultimately make societies richer and create even more jobs than what were eliminated.
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Re: Warren Buffett on value investing

Post by latesaver » Sun Jan 06, 2019 8:45 pm

goodenyou wrote:
Sun Jan 06, 2019 4:17 pm
Aswath Damodaran – Laws of Valuation: Revealing the Myths and Misconceptions (FULL PRESENTATION)

https://www.youtube.com/watch?v=c20_S-QgvsA

This is outstanding (in my opinion).
Damodaran is fantastic. EVA is a very intriguing approach.

i love buffet and his folksy one-line zingers. truly. i also don't believe that the average investor can capitalize on the Intelligent Investor approach as he did during his career.

buffet was ahead of the game 30-40 years ago. he's still ahead of the game today but it's more due to having a substantial balance sheet that allows for political and capital leverage. the trade he did with goldman in 2009 was genius but had nothing to do with value investing.

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Re: Warren Buffett on value investing

Post by knpstr » Mon Jan 07, 2019 1:57 pm

latesaver wrote:
Sun Jan 06, 2019 8:45 pm
goodenyou wrote:
Sun Jan 06, 2019 4:17 pm
Aswath Damodaran – Laws of Valuation: Revealing the Myths and Misconceptions (FULL PRESENTATION)

https://www.youtube.com/watch?v=c20_S-QgvsA

This is outstanding (in my opinion).
Damodaran is fantastic. EVA is a very intriguing approach.

i love buffet and his folksy one-line zingers. truly. i also don't believe that the average investor can capitalize on the Intelligent Investor approach as he did during his career.

buffet was ahead of the game 30-40 years ago. he's still ahead of the game today but it's more due to having a substantial balance sheet that allows for political and capital leverage. the trade he did with goldman in 2009 was genius but had nothing to do with value investing.
His "intelligent investor" approach may work, but I don't know too many willing to do what he did. Arbitraging cocoa beans; Going to a small map company shareholder meeting and making a proposal that the company sell off it's investment portfolio and give a special dividend. Taking over a small textile company doomed for failure, etc. He put in WAY more work than most "active investors". Most people do not meet with management face to face of micro cap companies and discuss the business.
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Re: Warren Buffett on value investing

Post by nedsaid » Mon Jan 07, 2019 2:01 pm

knpstr wrote:
Mon Jan 07, 2019 1:57 pm
latesaver wrote:
Sun Jan 06, 2019 8:45 pm
goodenyou wrote:
Sun Jan 06, 2019 4:17 pm
Aswath Damodaran – Laws of Valuation: Revealing the Myths and Misconceptions (FULL PRESENTATION)

https://www.youtube.com/watch?v=c20_S-QgvsA

This is outstanding (in my opinion).
Damodaran is fantastic. EVA is a very intriguing approach.

i love buffet and his folksy one-line zingers. truly. i also don't believe that the average investor can capitalize on the Intelligent Investor approach as he did during his career.

buffet was ahead of the game 30-40 years ago. he's still ahead of the game today but it's more due to having a substantial balance sheet that allows for political and capital leverage. the trade he did with goldman in 2009 was genius but had nothing to do with value investing.
His "intelligent investor" approach may work, but I don't know too many willing to do what he did. Arbitraging cocoa beans; Going to a small map company shareholder meeting and making a proposal that the company sell off it's investment portfolio and give a special dividend. Taking over a small textile company doomed for failure, etc. He put in WAY more work than most "active investors". Most people do not meet with management face to face of micro cap companies and discuss the business.
Yes, this is what a lot of folks miss. Buffett and Munger didn't build Berkshire-Hathaway just by playing the stock market, they were also very astute businessmen. B-H is an actual operating company, a conglomerate really, that operates real businesses. B-H also has a large investment portfolio through which Buffett has taken large stakes in other large S&P 500 companies. Buffett and Munger don't just watch the stock ticker all day.
A fool and his money are good for business.

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Re: Warren Buffett on value investing

Post by betablocker » Mon Jan 07, 2019 2:35 pm

nedsaid wrote:
Sun Jan 06, 2019 4:56 pm
The three things you need to know about Corporate Finance: 1) The investing decision (invest in assets that have a return greater than the minimum acceptable hurdle rate), 2) The financing decision (finding the right mix of debt and equity to fund your operations), and 3) the dividend decision (if you can't make investments that return more than the minimum acceptable hurdle rate, return cash to the owners of the business). Good stuff. I think Aswath Domodaran writes one of Larry Swedroe's favorite blogs.

He did address the future of General Electric. He said the Bataan Death March. Not too encouraging. But then again, if I sold my GE stock, I would have less to write about.

Here's more. Start-up companies should focus on the investing decision, mature companies should focus on the financing decision, declining companies should focus on the dividend decision. Start up companies have to use equity because they can't borrow. Growing and mature companies have to decide on the right mix of debt and equity. More good stuff.

Companies that don't act their age will destroy value. He is touching on what Peter Lynch called "diworseification", throwing money away on acquisitions that don't work out. Declining companies buying younger companies trying to be young again.

Younger companies will often have negative cash flow as they are reinvesting in their business to grow it. Cash burn is a feature and not a bug for young companies. More good stuff. At some point, a business has to start generating positive cash flows.

His comments about Amazon where interesting. Professor Damodaran said that he no longer thinks of Amazon.com as a retail company but as a disruption platform. It disrupts every business that it gets into. He said it was a difficult company to value partly because it is hard to tell what phase of its lifecycle it is in. I think of my dismissal of Amazon years ago as a company that sold dollar bills on the internet for 90 cents and made up for it with the volume. Damoradaran makes me wonder if the intent of Amazon was ever to be hugely profitable. It almost seems designed to just be a Death Star obliterating entire industries with the competitive advantage of not really having to make very much profit.

He is wrapping up discussing connecting the story with the numbers. Scary how the guy sounds like Peter Lynch. A good valuation is a bridge between a story and numbers. Interesting. Every number in my valuation has to have a story behind it. Hmm. Every story I tell about a company has to have a number attached to it. With young companies, it is all about the story. With mature companies, it is the numbers that drive the valuation.

He then talks about the kind of CEO you need for a company in each phase of its life. In the start up phase, Damodaran says you need a visionary. As you get into the growth phase, you want somebody who can build the business, as a mature company you need a CEO who can defend your place in the marketplace, and with a declining company you need (and I chuckled here) Larry the liquidator.

He also talks about compressed life cycles for companies today, particularly for Tech Companies. He highlighted GE which lasted over 100 years and Yahoo which has (had) a life cycle of about 25 years.
Great summary thanks. I read his blog religiously. I sometimes wonder whether Amazon is a largely a profitless retail business that stumbled into a profit filled new business in cloud computing. The bet everyone is making is that they will either 1) find additional profit filled business (none to date beyond AWS) or 2) use the profits from Web Services to build a moat big enough to make retail actually profitable or 3) both. I think it's pretty delusional. The day Amazon starts making profits in retail, Walmart, Target, et al will simply move to match them and I'm skeptical that Amazon can find that many new areas like AWS. Best thing for an investor would be separating AWS into its own company and leaving the 2% margin retail business behind.

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Re: Warren Buffett on value investing

Post by goodenyou » Mon Jan 07, 2019 2:36 pm

nedsaid wrote:
Mon Jan 07, 2019 2:01 pm
knpstr wrote:
Mon Jan 07, 2019 1:57 pm
latesaver wrote:
Sun Jan 06, 2019 8:45 pm
goodenyou wrote:
Sun Jan 06, 2019 4:17 pm
Aswath Damodaran – Laws of Valuation: Revealing the Myths and Misconceptions (FULL PRESENTATION)

https://www.youtube.com/watch?v=c20_S-QgvsA

This is outstanding (in my opinion).
Damodaran is fantastic. EVA is a very intriguing approach.

i love buffet and his folksy one-line zingers. truly. i also don't believe that the average investor can capitalize on the Intelligent Investor approach as he did during his career.

buffet was ahead of the game 30-40 years ago. he's still ahead of the game today but it's more due to having a substantial balance sheet that allows for political and capital leverage. the trade he did with goldman in 2009 was genius but had nothing to do with value investing.
His "intelligent investor" approach may work, but I don't know too many willing to do what he did. Arbitraging cocoa beans; Going to a small map company shareholder meeting and making a proposal that the company sell off it's investment portfolio and give a special dividend. Taking over a small textile company doomed for failure, etc. He put in WAY more work than most "active investors". Most people do not meet with management face to face of micro cap companies and discuss the business.
Yes, this is what a lot of folks miss. Buffett and Munger didn't build Berkshire-Hathaway just by playing the stock market, they were also very astute businessmen. B-H is an actual operating company, a conglomerate really, that operates real businesses. B-H also has a large investment portfolio through which Buffett has taken large stakes in other large S&P 500 companies. Buffett and Munger don't just watch the stock ticker all day.
They have an intellectual gift. Plain and simple. Combine talent and an extraordinary work ethic and you will be a master of the universe. It is not a part time job nor a hobby.
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Re: Warren Buffett on value investing

Post by nedsaid » Mon Jan 07, 2019 3:07 pm

betablocker wrote:
Mon Jan 07, 2019 2:35 pm

Great summary thanks. I read his blog religiously. I sometimes wonder whether Amazon is a largely a profitless retail business that stumbled into a profit filled new business in cloud computing. The bet everyone is making is that they will either 1) find additional profit filled business (none to date beyond AWS) or 2) use the profits from Web Services to build a moat big enough to make retail actually profitable or 3) both. I think it's pretty delusional. The day Amazon starts making profits in retail, Walmart, Target, et al will simply move to match them and I'm skeptical that Amazon can find that many new areas like AWS. Best thing for an investor would be separating AWS into its own company and leaving the 2% margin retail business behind.
I have been wrong about a lot of things, and Amazon is one of them. Too bad I didn't invest, I just had serious doubts about their business model. It just seems that selling dollar bills on the internet for 90 cents and making it up on the volume didn't make sense to me. Of course, I am both joking and exaggerating but I wonder why its investors are satisfied with such slim profits from all that investment. It seems to be an "if you build it, the profits will come" business model and I have been rather dubious. Particularly when the big profits are always in the future and the company has to always do such massive reinvestment.
A fool and his money are good for business.

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Re: Warren Buffett on value investing

Post by knpstr » Mon Jan 07, 2019 3:09 pm

nedsaid wrote:
Mon Jan 07, 2019 2:01 pm
knpstr wrote:
Mon Jan 07, 2019 1:57 pm
latesaver wrote:
Sun Jan 06, 2019 8:45 pm
goodenyou wrote:
Sun Jan 06, 2019 4:17 pm
Aswath Damodaran – Laws of Valuation: Revealing the Myths and Misconceptions (FULL PRESENTATION)

https://www.youtube.com/watch?v=c20_S-QgvsA

This is outstanding (in my opinion).
Damodaran is fantastic. EVA is a very intriguing approach.

i love buffet and his folksy one-line zingers. truly. i also don't believe that the average investor can capitalize on the Intelligent Investor approach as he did during his career.

buffet was ahead of the game 30-40 years ago. he's still ahead of the game today but it's more due to having a substantial balance sheet that allows for political and capital leverage. the trade he did with goldman in 2009 was genius but had nothing to do with value investing.
His "intelligent investor" approach may work, but I don't know too many willing to do what he did. Arbitraging cocoa beans; Going to a small map company shareholder meeting and making a proposal that the company sell off it's investment portfolio and give a special dividend. Taking over a small textile company doomed for failure, etc. He put in WAY more work than most "active investors". Most people do not meet with management face to face of micro cap companies and discuss the business.
Yes, this is what a lot of folks miss. Buffett and Munger didn't build Berkshire-Hathaway just by playing the stock market, they were also very astute businessmen. B-H is an actual operating company, a conglomerate really, that operates real businesses. B-H also has a large investment portfolio through which Buffett has taken large stakes in other large S&P 500 companies. Buffett and Munger don't just watch the stock ticker all day.
I'd say yes and no. Berkshire is rather unique. Absolutely Berkshire owns many companies outright so it "operates real businesses", that is true - on paper. But at the same time. Berkshire lets those businesses manage/run independently. Berkshire does not micro-manage the subsidiaries - Buffett doesn't "run those businesses". I believe Buffett gets monthly reports from the subsidiaries. Berkshire does allocate the capital between any business that can justify needing it or into the greater market, etc. From my reading, Buffett is strictly a capital allocator.
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

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Re: Warren Buffett on value investing

Post by nedsaid » Mon Jan 07, 2019 3:13 pm

knpstr wrote:
Mon Jan 07, 2019 3:09 pm
nedsaid wrote:
Mon Jan 07, 2019 2:01 pm
knpstr wrote:
Mon Jan 07, 2019 1:57 pm
latesaver wrote:
Sun Jan 06, 2019 8:45 pm
goodenyou wrote:
Sun Jan 06, 2019 4:17 pm
Aswath Damodaran – Laws of Valuation: Revealing the Myths and Misconceptions (FULL PRESENTATION)

https://www.youtube.com/watch?v=c20_S-QgvsA

This is outstanding (in my opinion).
Damodaran is fantastic. EVA is a very intriguing approach.

i love buffet and his folksy one-line zingers. truly. i also don't believe that the average investor can capitalize on the Intelligent Investor approach as he did during his career.

buffet was ahead of the game 30-40 years ago. he's still ahead of the game today but it's more due to having a substantial balance sheet that allows for political and capital leverage. the trade he did with goldman in 2009 was genius but had nothing to do with value investing.
His "intelligent investor" approach may work, but I don't know too many willing to do what he did. Arbitraging cocoa beans; Going to a small map company shareholder meeting and making a proposal that the company sell off it's investment portfolio and give a special dividend. Taking over a small textile company doomed for failure, etc. He put in WAY more work than most "active investors". Most people do not meet with management face to face of micro cap companies and discuss the business.
Yes, this is what a lot of folks miss. Buffett and Munger didn't build Berkshire-Hathaway just by playing the stock market, they were also very astute businessmen. B-H is an actual operating company, a conglomerate really, that operates real businesses. B-H also has a large investment portfolio through which Buffett has taken large stakes in other large S&P 500 companies. Buffett and Munger don't just watch the stock ticker all day.
I'd say yes and no. Berkshire is rather unique. Absolutely Berkshire owns many companies outright so it "operates real businesses", that is true - on paper. But at the same time. Berkshire lets those businesses manage/run independently. Berkshire does not micro-manage the subsidiaries - Buffett doesn't "run those businesses". I believe Buffett gets monthly reports from the subsidiaries. Berkshire does allocate the capital between any business that can justify needing it or into the greater market, etc. From my reading, Buffett is strictly a capital allocator.
Yes, capital allocation is mostly what Buffett does today. I did hear that when they purchased Precision Castparts that some management changes were made. It is mostly hands-off but not totally. My guess is that Buffett's successors will not be able to resist the urge to micro-manage. After all, managers need SOMETHING to do. B-H pretty much runs itself.
A fool and his money are good for business.

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knpstr
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Re: Warren Buffett on value investing

Post by knpstr » Mon Jan 07, 2019 3:21 pm

nedsaid wrote:
Mon Jan 07, 2019 3:13 pm
Yes, capital allocation is mostly what Buffett does today. I did hear that when they purchased Precision Castparts that some management changes were made. It is mostly hands-off but not totally. My guess is that Buffett's successors will not be able to resist the urge to micro-manage. After all, managers need SOMETHING to do. B-H pretty much runs itself.
He is already training some people in that aspect.
Just to be clear, of course all of those subsidiaries have managers. They just aren't at the "berkshire level" of the hierarchy.
I guess I should mention, that I believe Munger and Buffett (and the board?) decide who will run any given subsidary. Usually they try to keep management in place when they acquire, but if a change is needed they okay it, I believe. From then on, the manager can manage. Berkshire allocates capital and does oversight. So yes, I guess there is some management there, it is just high level personnel management.

I'd imagine if they have a great idea they would mention (or enact) that as well, but I don't know how often that happens. I don't think I've read a story like that, but perhaps that is what happened with Precision Castparts.
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

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