Value Investing

[Sirloin Steak]

I don't subscribe to the theory more volatile = more risk

This theory pay no attention to the quality of the company, its business
and how much cash or asset it has etc...

I measure risk on the probability if I could lose my capital investing
in a company based on its merits and quantitative measures....

I think it's a crazy idea, just because something move from 32.00 to 4.50
like FLT it's become riskier, it's a bargain that some people missed.

or Credit Corp 11 bucks to 40 cents bargain not to be missed..

Yes some company do move from dizzy high to low price and it deserve to
be so as it business model is weak and its debt laden culture isn't worth
putting the money at risk..that is risky not because the movement of price or company size

I wouldn't buy SIP for any price even from $2.00 to 50 or 20 cents
I used to think SIP was cheap once but not after I dig a lot deeper so
never got involve

I wouldn't buy PRY or ISF from any price to any price

to me those companies are hell a lot more risky than a small fry like ONT
same industries many time the size of ONT but I would put 30K into ONT than
3K in any of those mentioned.

FLT got slammed because of their highly leveraged business model. If they had have hit a bump in the road during the GFC they may have been ruined. I didnt buy in because I dont think it was a bargain I think it was a gamble. I would also like to emphasise that in my opinion its not that this stock was cheap at $4.50. It was overvalued before hand. Credit corp was an even riskier proposition. Luck can be an amazing source of high returns.

 

[Sirloin Steak]

I've always wondered how the rule of simple maths reconcile with Buffet's exposure to Gen Re (who reinsure all manor of long tail risks). Any thoughts?

My understanding is that the intelligent investor is more pitched at the average Joe investor like myself rather than a CBS graduate like Buffett. The man does a lot of things that I will never be smart enough to really understand, especially when it comes to derivatives and insurance.

What have your findings been on this one?

 

[Julia]

They are great stocks. The problem is that they are very expensive.Theres nothing to say that they wont keep going up for years to come but there is little margin of safety. People are paying a huge premium for the quality of these companies so if something goes wrong this premium may be eliminated and the share price will dive.

Could you explain your basis for the conclusion that these stocks are "very expensive". That's a very generic term and needs some justification imo.

What research have you done into the success or failure of the recommendations from "The Intelligent Investor"? What's the win rate for their recommendations, and the percentage capital gain over, say, one year? Five years?
In other words, what is your basis for placing your trust in this tip sheet?

 

[doctorj]

My understanding is that the intelligent investor is more pitched at the average Joe investor like myself rather than a CBS graduate like Buffett. The man does a lot of things that I will never be smart enough to really understand, especially when it comes to derivatives and insurance.

What have your findings been on this one?

I haven't come across Gen Re and I'm certainly no Buffet expert. That said, my gut feeling is that Gen Re writes a lot of very long tail risks and uses the cashflow to finance the rest of the Berkshire empire. I'm not sure if any of their large long tail bets have gone (very) bad yet, but it would be interesting. I know September 11 placed significant losses on Gen Re in particular, but unlike a lot of other insurers/reinsurers, had the attack been worse, it could very well have wiped them out.

 

[Sirloin Steak]

Could you explain your basis for the conclusion that these stocks are "very expensive". That's a very generic term and needs some justification imo.

What research have you done into the success or failure of the recommendations from "The Intelligent Investor"? What's the win rate for their recommendations, and the percentage capital gain over, say, one year? Five years?
In other words, what is your basis for placing your trust in this tip sheet?

Could you explain your basis for the conclusion that these stocks are "very expensive". That's a very generic term and needs some justification imo.

What research have you done into the success or failure of the recommendations from "The Intelligent Investor"? What's the win rate for their recommendations, and the percentage capital gain over, say, one year? Five years?
In other words, what is your basis for placing your trust in this tip sheet?

Thanks for your questions.

Im glad that you gave me an opportunity to clarify this.
My references to The Intelligent Investor refer to the 1949 book that Warren Buffett said was by far the best book on investing ever written. It was written by Benjamin Graham the founder of modern value investing.
I am in no way referring to any kind of newsletter that may or may not have reccomended Timbercorp as a strong buy soon before it collapsed.

The stocks mentioned are too expensive for my liking for a few reasons. The main reason is the premium to net tangible assets.
This means a smaller margin of safety.

 

[ROE]

FLT got slammed because of their highly leveraged business model. If they had have hit a bump in the road during the GFC they may have been ruined. I didnt buy in because I dont think it was a bargain I think it was a gamble. I would also like to emphasise that in my opinion its not that this stock was cheap at $4.50. It was overvalued before hand. Credit corp was an even riskier proposition. Luck can be an amazing source of high returns.

That where we differ

FLT is high leverage????

little debt, rarely raise equity, most of their expansion fund by retained earning and cash flow ..where is the risk??? I wouldnt call that leverage...I called that excellent in capital management and protect shareholders interest.

FLT was rock solid business, their business model is stunning
low capital out lay for a quick profit from all shop they open.

their margin is 2-3 times higher than any internet business

all business are profitable except they buy the US business at the top of the cycle and that turn out to be a disaster but nothing that threaten FLT business model
but Uncle Turner is quick to put a stop to that ...an exceptional manager who know when to hold and when to fold...

but then again people fear what dont understand and it generate bargains

and CCP people missed one little important detail ..fear Clouded people judgement
they have an army of direct debit from people who own them debt
that mean these guys are commited to pay their debt
and regular cash keep coming in on fortnightly basis while they sort out their mess
without resort to equity raising and cash flow problem...

again nothing can generate fear like media headlines

this stuff going around for many decades, it came during Benjamin Graham life time
it came to Warren Buffett and it will comes to those who know what to look for

 

[awg]

I've always wondered how the rule of simple maths reconcile with Buffet's exposure to Gen Re (who reinsure all manor of long tail risks). Any thoughts?

I read a book on this topic once.

He employs the very best actuaries, the guy that runs it is regarded as a genius of actuaries and is mooted to take over the shop when Warren gives it away.

Sorry I cant remember his name, as it is a long time ago. Indian guy I think.

There would be a ton of references on the Net, if u wanna surf.

btw, you can download a pdf of "Intelligent Investor" by Ben Graham for nix... cant beat that for value

sorry dont have the web addy, but I googled and downloaded it within the last year.

 

[ROE]

Insurance is about risk management and probability, if you can calculate the risk, you can write the policy and you need people with heavy maths to do this stuff

Ajit Jain is the man Warren use to come up with the risk-reward equation for him.

Warren and Charlie use probability a lot to make his investment decision.

wouldnt you invest in something knowing 95% of the times it make you money?

there is that 5% that you lose but over the long run the odds favour you
same deal with Casino they only wins by a few % points in probability
but over the long run money will go their way.

if the chance of me losing money sits at 51% on an investment I walk away
very useful stuff to know, probability, permutation and combination ...

 

[doctorj]

Insurance is about risk management and probability, if you can calculate the risk, you can write the policy and you need people with heavy maths to do this stuff

Ajit Jain is the man Warren use to come up with the risk-reward equation for him.

Warren and Charlie use probability a lot to make his investment decision.

wouldnt you invest in something knowing 95% of the times it make you money?

there is that 5% that you lose but over the long run the odds favour you
same deal with Casino they only wins by a few % points in probability
but over the long run money will go their way.

I've heard the story of Ajit Jain and know that he's considered by Buffet to have some sort of mastery of long tail risks.

Coming back to my point, I agree that 95% of the time they'd money (in fact, its probably higher than that) - but what if something like a 1 in 400 event (meaning you're profitable 99.9975% of the time) was enough to wipe out your capital? I'm not rehashing the old argument that in the long run all insurers go to 0, but I'm just speculating about the nature of the underwriting and reinsurance programme based on things I've read.

 

[UBIQUITOUS]

I've heard the story of Ajit Jain and know that he's considered by Buffet to have some sort of mastery of long tail risks.

Coming back to my point, I agree that 95% of the time they'd money (in fact, its probably higher than that) - but what if something like a 1 in 400 event (meaning you're profitable 99.9975% of the time) was enough to wipe out your capital? I'm not rehashing the old argument that in the long run all insurers go to 0, but I'm just speculating about the nature of the underwriting and reinsurance programme based on things I've read.

I can relate to this. I held only one stock (TZL). Everything seemed to be going great but then the black swan event happened. Let's just say that the former board are now fighting off multiple court cases by multiple unrelated parties - ASIC, TZ etc. So the worst can happen to any stock. I am quite happy to own one stock, but never happy to have my entire capital in the stock market just incase such an event happens and removes me from the game permanently.

 

[ROE]

Not really ....
Imagine you know how to calculate the risk to some degree of confident
nothing is 100% certain, most business decision are made on the probability of winning is higher than losing..

you then formulate your policy premium based on these events happening
so there is no way Warren would lose in the long run, the risk may look huge
but the statistic and probablity is stack to his side....

and if a black swan do happen he is well covered based on the premium he charged
it works like a casino no matter how hard people tried they always pocket
$1 and give back 95 cents, yes sometimes **** happen and they pay out $1.10
but the probability of that happening too often is so close to a zero that
you make the money back quickly in the following years...

have you seen QBE lose money, black swan did hit them sometimes ago and then what happen?
they keep racking more and more money years after that and increase premium
because a chance of another black swan hit them in a near future is fairly close to zero.

the pepsi $1 billion dollar prize, Warren works out the risk and take
on the insurance for it when no one else can...he pocket nice easy millions..

because the probablity of that happening is close to zero

he can do this a hundred time and make his money and invest the proceed to generate more
wealth one day he may pay out that billion but until that day he keep racking in

the cash and he generates more wealth from collecting the premium it will easily cover the billion dollar prize...and if it never happen because probablity is so low, rainny man.

Insurance is a very profitable business if you got smart people working for you
that can accurately calculate risk and probability...

and your black swan is not managing risk where a big even wipe you out...
there is no big event that would wipe Warren or QBE out, it has to be multiple of
those events happen in close proximity and that comes to close impossible

each one of these events are so rare that you take a few and multiple in a combination
the number you come out is pretty low

 

[So_Cynical]

.
and if a black swan do happen he is well covered based on the premium he charged
it works like a casino no matter how hard people tried they always pocket
$1 and give back 95 cents, yes sometimes **** happen and they pay out $1.10
but the probability of that happening too often is so close to a zero that
you make the money back quickly in the following years...

Casinos have massive surveillance systems and know how much they are up or down by the minute...casinos can and do ask gamblers (professionals) to leave if they are making too much money, they don't need a reason or any proof of anything illegal....casinos only cater to gamblers who they can profit from and that's not every one, just the vast majority....they spend millions on keeping the pros out....that's there black swan insurance.

So you'll have to come up with another comparison.

 

[Sirloin Steak]

That where we differ

FLT is high leverage????

little debt, rarely raise equity, most of their expansion fund by retained earning and cash flow ..where is the risk??? I wouldnt call that leverage...I called that excellent in capital management and protect shareholders interest.

FLT was rock solid business, their business model is stunning
low capital out lay for a quick profit from all shop they open.

their margin is 2-3 times higher than any internet business

all business are profitable except they buy the US business at the top of the cycle and that turn out to be a disaster but nothing that threaten FLT business model
but Uncle Turner is quick to put a stop to that ...an exceptional manager who know when to hold and when to fold...

but then again people fear what dont understand and it generate bargains

and CCP people missed one little important detail ..fear Clouded people judgement
they have an army of direct debit from people who own them debt
that mean these guys are commited to pay their debt
and regular cash keep coming in on fortnightly basis while they sort out their mess
without resort to equity raising and cash flow problem...

again nothing can generate fear like media headlines

this stuff going around for many decades, it came during Benjamin Graham life time
it came to Warren Buffett and it will comes to those who know what to look for

I made a detailed post about this but something went wrong. Really what I was saying though is that Graham takes into account all liabalities, not just bank debt. A liability still has to be paid back in a certain time frame whether it bears interest or not. I have seen a lot of the professionals in Australia who 'claim' to be value investors only including interest bearing debt in their analysis. I dont know where this came from.

 

[sageintraining]

I made a detailed post about this but something went wrong. Really what I was saying though is that Graham takes into account all liabalities, not just bank debt. A liability still has to be paid back in a certain time frame whether it bears interest or not. I have seen a lot of the professionals in Australia who 'claim' to be value investors only including interest bearing debt in their analysis. I dont know where this came from.

Many add there own twist to value investing but many of the underlying factors are the same. Wasn't it in securities analysis which mentioned that management should never be trusted? or something along those lines... Doesn't buffett often place some weighting in the management before he commits his money?

Personally I think the most dangerous (in a good way) guys are the ones that can apply fundamentals and technicals.. you know the guys who have the nice long term investments but have the ability to take on the wild swings of the market?

 

[Tysonboss1]

Insurance Companies are the power house behind Warrens company.

The simple reason he likes them is that people pay their insurance policy up front long before claims start to roll in. So he has a $50 Billion float to invest interest free in the mean time.

plus most years he will collect more in insurance premiums than he will pay out in claims, last year he collect $52B but paid out less than $50B. so he got a $2B profit + interest free use of $50B

 

[Sirloin Steak]

Many add there own twist to value investing but many of the underlying factors are the same. Wasn't it in securities analysis which mentioned that management should never be trusted? or something along those lines... Doesn't buffett often place some weighting in the management before he commits his money?

Personally I think the most dangerous (in a good way) guys are the ones that can apply fundamentals and technicals.. you know the guys who have the nice long term investments but have the ability to take on the wild swings of the market?

Wont get much consensus from me there. I understand that some technical analysts use fundamentals and get good returns. However, our whole approach as value investors is all about the wild swings of the market. Stocks go down. If they are cheap enough we buy. They go up to the point where they are overpriced, we sell. I dont see how trying to second guess a popularity contest can be assisted by three pages of formulas that you need to be a mathematician to understand. And if you want to know who the most dangerous guys are, look at the people who dominate the rich list year after year. What investment books are you reading? Have you checked out Graham? I cant get enough.

 

[New Stratos]

Could you explain your basis for the conclusion that these stocks are "very expensive". That's a very generic term and needs some justification imo.

What research have you done into the success or failure of the recommendations from "The Intelligent Investor"? What's the win rate for their recommendations, and the percentage capital gain over, say, one year? Five years?
In other words, what is your basis for placing your trust in this tip sheet?

Julia,
one of the fund managers which was founded by someone who studied under Graham publishes papers reasonably often - one is on which strategies work (with lots of evidence cited). It's on their website under 'resources', i think, Tweedy Browne (or something similar)

 

[McLovin]

Julia,
one of the fund managers which was founded by someone who studied under Graham publishes papers reasonably often - one is on which strategies work (with lots of evidence cited). It's on their website under 'resources', i think, Tweedy Browne (or something similar)

I think you're talking about the book, Julia was talking about the newsletter, which like almost every other newsletter is at best only good for providing a starting place. I certainly wouldn't buy anything purely on the strength of what is written in there.

 

[Julia]

I think you're talking about the book, Julia was talking about the newsletter, which like almost every other newsletter is at best only good for providing a starting place. I certainly wouldn't buy anything purely on the strength of what is written in there.

Quite so, McLovin. Many years ago I accepted a trial of the Intelligent Investor newsletter. It all sounds pretty to the inexperienced investor, but the actual recommendations were largely crap.
Perhaps they got better.