Investing Advice

“When I say long term, I mean long term.  The stock market and investors, for the most part, are short-term focused.  They want to know what’s happening to current same-store sales.  They want to know what’s happening to a particular contract.  They want to know what’s happening to next quarter’s earnings.  And while everyone is focused on those short-term things, we’re looking ahead years and years and years.”  — Ron Baron of Baron Funds NY.

“The person that turns over the most rocks wins the game. And that’s always been my philosophy.” — Peter Lynch

“Based on my own personal experience — both as an investor in recent years and an expert witness in years past — rarely do more than three or four variables really count. Everything else is noise.” — Marty Whitman

“I’ve never bought a stock unless, in my view, it was on sale.” — John Neff

“We estimate Berkshire’s valuation the same way Buffett does, by valuing the company’s investments (cash, bonds, stocks) at market and then placing a multiple of 12x on the pre-tax operating profits of the company.” – Whitney Tilson Kiplinger’s

There are risks, unquestionably [in running a concentrated portfolio], but if you do your research and take valuations very seriously and look at the financial statements and buy stocks that are selling for low multiples, have debt ratios that are not excessive, good growth potential and good profit margins, you’ll be on pretty solid ground.” — Seth Clickenhaus of Glickenhaus & Co. is 92 years old (2006) – $1.3 billion AUM.

“Investors are like hyperactive first graders playing musical chairs.” — Sam Stovall, S&P Equity Strategist

“In life as in poker, the occasional coup does not necessarily demonstrate skill and superlative performance is not the ability to eliminate chance, but the capacity to deliver good outcomes over and over again.  That is how we know Warren Buffett is a skilled investor and Johnny Chan a skilled poker player.” — Financial Times www.johnkay.com

“Return on capital is calculated by dividing earnings before interest and taxes (EBIT) by the tangible capital employed, which is net working capital plus net fixed assets. Net working capital includes accounts receivable (less accounts payable), inventory and cash, while net fixed assets includes property, plants and equipment minus depreciation.” — John Reese of Forbes.

“If you want to have a better performance than the crowd, you must do things differently from the crowd.” — John Templeton

“I find it fascinating when people think it’s a conflict of interests to own what you like. I always thought it was a conflict of interest not to own what you like. If I don’t like it, I don’t own it. If I own it, I like it. It is easy to check any time on our website what we own. I suspect if I gave you your choice of two sheets of paper, both of which have the same criteria, the only difference is I own one and don’t own the other, which would you choose?”  — Interview with RON MUHLENKAMP

http://www.wealthtrack.com/transcript_02-24-2006.php

“Second opinions are also critical, so test your thinking out on as many informed and dispassionate listeners as possible.  In addition to the obvious benefits of hearing alternative viewpoints or questions you didn’t think of, the simple act of articulating an idea is a powerful check on the thoroughness of your analysts…Make sure to have a disciplined investing approach and stick with it.  Many great investors have a written checklist they go through in analyzing ideas:  is this within my circle of competence?  Is this a good business?  Do I give mgmt high marks?  Is this stock really cheap?”  — Value Investor Insight

“Discounted Cash Flow (DCF) to us is sort of like the Hubble telescope – you turn it a fraction of an inch and you’re in a different galaxy.  There are just so many variables in this kind of an analysis – that’s not for us” — Curtis Jensen of Third Avenue Management

 “The market is like high school.  Everyone wants to be in the popular crowd, but often it’s the humble outcasts who go on to make the most money.”  — Barron’s

Mr. Sinegal, whose father was a coal miner and steelworker, gave a simple explanation. “On Wall Street, they’re in the business of making money between now and next Thursday,” he said. “I don’t say that with any bitterness, but we can’t take that view. We want to build a company that will still be here 50 and 60 years from now…. Costco has used Mr. Price’s formula: sell a limited number of items, keep costs down, rely on high volume, pay workers well, have customers buy memberships and aim for upscale shoppers, especially small-business owners. In addition, don’t advertise – that saves 2 percent a year in costs.” — New York Times interview with Costco CEO on paying employees well, markup on goods minimal.

Beane has a maxim that should adorn every fund manager’s wall:  “You are constantly searching for the ability to pay for future performance and to stay away from paying for past performance.” — Barron’s on Billy of the Oakland A’s- Moneyball book reference.

“Any great company is a bad investment if the price is high enough. Xerox was a great company in 1972, but it was overpriced. Amazon was a great company and a lousy investment five years ago. So was Cisco. So was Microsoft.  The point is that investors frequently fail to distinguish between a company and its stock. A company may be great because it has excellent management or offers a unique service. Still, if the stock fully reflects this information, it isn’t necessarily a good buy. Alternatively, the stock of a troubled company could be a great buy if the price more than discounts all the problems. Whether a company is good or bad, the stock is good only if it’s selling for less than it’s worth.  The trick, of course, is determining what the stock is worth. Analysts rely on a number of methods to determine this intrinsic value. Discounted cash flow is one of my favorites; this method recognizes, in theory at least, that a business must be worth the present value of all the cash flows it will generate in the future.”  — Forbes.

We asked Stephen Sanborn, director of research at Value Line for advice on narrowing the list. His preferred metric: earnings growth. “Even if you pick a stock at the wrong time,” he says, “earnings growth may bail you out.” Sanborn likes companies that are expected to post at least 10% profit growth annually over the next couple of years. Ideally, he says, the company should also have delivered a similar level of earnings growth in the past.  — Forbes

Definition of FCF:  “ours is net income plus depreciation plus depletion and amortization of goodwill and deferred taxes, minus required capex and working capital needs.  It’s what’s left over that you can put in your pocket.” (same as Buffett’s definition).  — Longleaf Partners Mason Hawkins et. Al.

Investment Strategy of S&P:

Key financial variables to consider in assessing the investment merits of an industrial company are the following:

Sales: What is the trend? Is future sales growth expected to be greater than the past 5-year and 9-year growth average? Accelerating sales growth ultimately provides the fuel behind earnings growth.

Net Margin: As a key measure of company profitability, a rising net margin assesses management capability to wring out more net income from incremental sales.

% LT Debt of Capitalization: A rising percentage implies greater financial risk, all else being equal. Rising debt leverage without a concomitant rise in Return on Equity should raise warning signals of potential cash flow problems. Percentages above 40%-50% should also be considered a warning.

% Return on Equity: A key performance measurement of capital efficiency assesses what investment returns management can earn on a company’s existing capital

“So how do you know this is the right time to buy?  An old rule of thumb can help” You should invest in cyclical companies when the P/E ratios are high, and sell when they’re low.  This sounds upside-down, but more often than not, it works.”  — Paul Sturm, Smart Money

“As energy stocks are traditionally the last sector to move during a bull market cycle, the financial stocks are usually one of the first.”  — Barron’s

“Clothing retailers have a basic problem,” Barnard said. “They are totally dependent on the public’s acceptance of the fashions they are offering. And the public’s fickle.” — Barnard’s Retail Consulting Group

“Property and Casualty stocks- look at growth in book value.  What drives stocks is premiums they can charge.”  — Analyst Bank of America.

“Says Mr. Lee: ‘Whenever there’s a decision to be made, I ask myself two questions: Will I make more money in the next 12 months.  And.  Will I make more in five years?’  In the spirit of someone without public shareholders to consider, Mr. Lee adds:  ‘The five-year one is the only one that matters.’ ” – WSJ 6.6.06 – Jerry Lee of private radio station B101, which has managed to be more successful than deeper pocketed Philly radio stations owned by deeper pocketed Clear Channel, for example.

 “Every business requires capital which can take two forms – equity (from owners) or debt (from lenders).  The cost of the capital (what the company pays the providers to use their money) differs, of course.  With debt, it comes in the form of regular interest payments.  The cost of equity capital isn’t paid with a monthly check but is every bit as real: it’s the return that investors demand for putting their money at risk.”  Estimated WACC for Intel:  13.9%, P&G (more debt):  7.4%) – Fortune’s Geoffrey Colvin

“The long-term return on a stock depends not on the actual growth of its earnings, but on the difference between its actual earnings growth and the growth that investors expected.”  — Jeremy Siegel The Future for Investors

“Generally speaking, by the time a large percentage of market participants agree on something, the game is over…..When everybody agrees that a company is terrible, odds are good that its stock has become undervalued. Similarly, when everybody agrees that a company’s destined for greatness, its stock is most likely overpriced.” ––Stephen Simpson Motley Fool Writer

“He uses a ratio he calls return on tangible capital employed.  Like his earnings yield, it uses pre-tax operation earnings, or EBIT, as the top side of the ratio.  On the bottom is net working capital plus net fixed assets.  NWC is the amount of money a company uses to build its inventory and pay for goods it has sold but not yet collected on.  Fixed assets are just what you’d think:  PP&E, R/E, etc.  The measure is designed to avoid distortions such as goodwill.”  — Jack Hough on The Little Book that Beats the Market, Smart Money. 

“Companies with impressive ROE’s show that they’re squeezing strong profits out of the things they own, making it likely they’ll put future capital to good use” — Jack Hough WSJ

“Anyhow, the higher the ROIC, the better, because a company’s raison d’être is to take financing from given sources and generate returns that exceed the overall cost of that financing. It’s a bit like getting a loan from the bank to make some investments. Whatever you do, you’d better earn at least the interest rate the bank wants in order to make the whole thing worthwhile. In the corporate world, a company’s investments are basically its operations.”  – Motley Fool

“To sum up, earnings are up but free cash flow is down. To experienced analysts and smart investors, that is a classic warning sign that something could be amiss and calls for a close look at a company’s income statement — not an easy task in this case.” – WSJ longandshort@wsj.com.

 

Buffett Quotes

Why do you think that despite making your methods publicly available, that relatively few people have been able to emulate your success?

Buffett:  I asked Graham the same question. Everyone took his class at Columbia Business School. He used current examples, and by the end of the semester you would have a portfolio that would’ve made you money. Graham lived a life of sharing. He may have had more money hoarding, but lived happier because of it. The money’s just a figure in the paper, perhaps he would’ve died with 86 million instead of 42 million, but it doesn’t really matter. 90% of the people that took his class ended up doing something else.

At age 11 I started investing, purchasing three shares of Cities Service Preferred. I had read every book on investing in the Omaha library. I was really into charting and technical analysis. I loved it, but didn’t make any money from it. At 19 I read Graham’s “The Intelligent Investor” and it changed my world. Did Ben lose because I read his book? Maybe we competed and he made less money, but it didn’t matter to Graham.

The philosophy either takes immediately or it doesn’t at all. The reason gets down to temperament. People want to make money fast, but it doesn’t happen that way. Graham’s philosophy doesn’t promise enough for many people. You don’t know when it will happen, but you just wait for the fat pitches within your circle of competence. It’s not as exciting as guessing whether the stock price will go up the next day. Most investors in internet companies didn’t know the market cap. They were buying because they thought the stock would move, but if you asked them to write “I would buy XYZ company for $6 billion because”, they wouldn’t get halfway through the sentence. It’s the classic tortoise versus hare, bound to work over time. Charlie and I have educated competitors. Most don’t compete with us, though. It’s fine, we have more than enough money.

http://undergroundvalue.blogspot.com/2008/02/notes-from-buffett-meeting-2152008_23.html

“Over the past 50-60 years, Charlie and I have never permanently lost more than 2% of our personal worth on a position. We’ve suffered quotational loss, 50% movements. That’s why you should never borrow money. We don’t want to get into situations where anyone can pull the rug out from under our feet.” -

2010 Berkshire press conference:

Q. What are your most valued characteristics in a CEO? How do you assess them?

WB. A passion for their business & to have run it successfully for 5 or 10 years. A fiduciary feeling for shareholders. We don’t have IQ tests, contracts, investigations etc. I can usually tell within 2 or 3 minutes on the phone if they are someone I’d want to work with.

CM. We can assess high IQ asininity because it is diagnosable. LTCM was a classic example of smart people doing dumb things – their IQ got in the way. People that know the edge of their competency are safe, those that don’t are dangerous.

Q. What are the elements of Berkshire’s culture? Why do you think it will last?

WB. Number one principle is that Berkshire is a partnership. Managers view shareholders as partners. Number two we have enormous trust in our managers (decentralized). This sometimes leads to mistakes that wouldn’t happen in most large companies but overall it is hugely beneficial. Number three our board members do not do well unless our shareholders do well. Each reinforces the other and people have pride in the culture. The system would reject a CEO that did not follow the culture. It won’t erode after my time and it may intensify. It is not a function of one person.

CM. Decentralization is the key to the culture. Big bureaucracies do not have great cultures.

 

“Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results.” — Warren Buffett. TMF:  The Greatest Investment Quotes of All Time: Part 1 By Morgan Housel November 26, 2007

“But the real insight you get about a banker is how they bank.  You’ve got to see what they do and what they don’t do.  Their speeches don’t make any difference.  It’s what they do and what they don’t do.  And what Wells didn’t do is what defines their greatness.”  — Buffett

 

“In the Oracle’s exact words, ‘In business, I look for economic castles protected by unbreachable ‘moats.’ Many investors easily surmise the first point about moats–that a competitive advantage is required–but they miss the importance of the second, which is above-average returns. If the business doesn’t throw off attractive returns (making the castle a worthwhile target for competitors), then who cares if the it has a competitive advantage? Autos and airlines are two businesses with very high barriers to entry, but few new competitors are trying to crash the party in a race for single-digit ROEs or bankruptcy.” — Morningstar 04.01.05

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

“Wide diversification is only required when investors do not understand what they are doing.”

 “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

 “Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised.”

 “I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.”

“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”

“If a business does well, the stock eventually follows.”

“If past history was all there was to the game, the richest people would be librarians.”

“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”

“Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.”

 “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”

 “Risk comes from not knowing what you’re doing.”

 “The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective.”

“The first rule is not to lose. The second rule is not to forget the first rule.”

“The investor of today does not profit from yesterday’s growth.”

 “The smarter the journalists are, the better off society is. For to a degree, people read the press to inform themselves-and the better the teacher, the better the student body.”

 “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”

“Why not invest your assets in the companies you really like? As Mae West said, ‘Too much of a good thing can be wonderful’”.

“You do things when the opportunities come along. I’ve had periods in my life when I’ve had a bundle of ideas come along, and I’ve had long dry spells. If I get an idea next week, I’ll do something. If not, I won’t do a damn thing.”

“You only have to do a very few things right in your life so long as you don’t do too many things wrong.”

 “A public-opinion poll is no substitute for thought.” — http://nofieiman.com/2005/11/wisdom-of-warren-buffett/

General Business Advice

“I come from Wall Street, and you’ll never see me do a PowerPoint because I’m all about the Excel spreadsheets.  If it’s not in the numbers, I don’t care how strategic it is, it doesn’t play out.”  –Safra Catz, co-President Oracle and Ellison’s right-hand lady

“I normally find that when you deal with good and intelligent people, a consensus of views is possible.”  Financial Times interview with Bulent Bulgurus, CEO of KOC Holding in Turkey

Mahindra Satyam is encouraging more debate among managers.  During a leadership conference in June, C.P. Gurnani, the new CEO, encouraged managers to debate and disagree.  Previously corporate policy was more likely to be dictated from the top and accepted.  WSJ Asian edition

Business is simple, he [Mackey of Whole Foods] says.  “Management’s job is to take care of the employees.  The employees’ job is to take care of the customers.  Happy customers take care of the shareholders.  It’s a virtuous cycle.” 

“Right is still right even if nobody’s doing it.  And wrong is still wrong even if everybody’s doing it.”  — Texas Ranger credo.

Experts usually turn out to be those who are asked, not those who know.  — John Kenneth Galbraith

Never ask the barber if you need a haircut.

“Active waiting” — Financial Times

“Your time is limited, so don’t waste it living someone else’s life. Don’t be trapped by dogma – which is living with the results of other people’s thinking. Don’t let the noise of others’ opinions drown out your own inner voice.  And most importantly, have the courage to follow your heart and intuition.  They somehow already know what you truly want to become.  Everything else is secondary.”  — Steve Jobs commencement speech to Stanford University June 2005

“Knight is not a people person in anyone’s book.  And yet he manages to do 3 things better than just about anyone in the business:  hire good people, shuffle them around, and inspire them.”  — Fortune on Nike CEO Phil Knight

“Genius might be the ability to say a profound thing in a simple way” — Charles Bukowski

“Genius, that power which dazzles mortal eyes, is often perseverance in disguise” — Henry Willard Austin

good things may come to those who wait, but not those who wait too late. — Grover Washington, Jr. – Just the Two of Us (album: winelight: 1980)

Life can only be understood backwards-but it must be lived forwards. — Soren Kierkagaard.

A tendency to employ critical thinking, according to studies going back a decade, goes along with certain personality traits, not necessarily with intelligence.  Being curious, open-minded, open to new experiences and conscientious indicates a disposition to employ critical thinking, says Prof. Bensely.  So does being less dogmatic and less authoritarian, and having a preference for empirical and rational data over intuition and emotion when weighing information and reaching conclusions. — WSJ Critical Thinking: Part Skill, Part Mindset And Totally Up to You.

When the river runs dry, the jagged rocks are revealed.

“Judge a man by his questions rather than his answers.”  — Voltaire

Master Investor Tenets

1 Believes the first priority is preservation of capital.

2 As a result, is risk-averse.

3 Has developed his own investment philosophy, which is an expression of his personality. As a result, no two highly successful investors have the same approach.

4 Has developed his own personal system for selecting, buying and selling investments.

5 Believes diversification is for the birds.

6 Hates to pay taxes, and arranges his affairs to legally minimize his tax bill.

7 Only invests in what he understands.

8 Refuses to make investments that do not meet his criteria. Can effortlessly say ‘no’.

9 Is continually searching for new investment opportunities that meet his criteria and actively engages in his own research.

10 Has the patience to wait until he finds the right investment.

11 Acts instantly when he has made a decision.

12 Holds a winning investment until a pre-determined reason to exit arrives.

13 Follows his own system religiously.

14 Is aware of his own fallibility. Corrects mistakes the moment they arise.

15 Always treats mistakes as learning experiences.

16 As his experience increases, so do his returns.

17 Almost never talks to anyone about what he’s doing. Not interested in what others think of his investment decisions.

18 Has successfully delegated most, if not all, of his responsibilities to others.

19 Lives far below his means.

20 Does what he does for stimulation and self-fulfillment – not for money.

21 Is emotionally involved with the process of investing; but can walk away from any individual investment.

22 Lives and breathes investing, 24 hours a day.

23 Puts his money where his mouth is. For example, Warren Buffet has 99 per cent of his net worth in shares of Berkshire Hathaway; George Soros, similarly, keeps most of his money in his Quantum Fund. For both, the destiny of their personal wealth is identical to that of the people who have entrusted money to their management.

- From The Winning Investment Habits of Warren Buffett & George Soros What You can Learn from the World’s Richest Investors

The publication that Charlie Munger likes best is The Economist. He believes it is the adult intellectual publication of the world. Notes from the final Conversations wiht Charlie on July 1, 2011.
 

Why Gambling is Silly

WYNN 10-Q2 – filed 8/3/05 Wynn Las Vegas casino revenues were comprised of table games revenues, slot machine revenues and other gaming revenues of approximately $62.0 million, $34.2 million and $2.5 million, respectively. The average table games win per table per day was $7,117, and the average slot win per unit per day was $273. Table games win percentage (before discounts) was 21.1%, which is within the expected range of 18% to 22%. Slot win percentage was within the expected range of 5% to 6% of handle.