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Wills · 1024 · 129098

Wills

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.......
« Last Edit: Jul 06, 2018, 12:39 PM by Wills »


TSO

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1. It means it's pointless to differentiate a "value" stock from a "growth" stock because "value" is the reason why people invest their money, regardless of time horizon or intentions.
2. Means a bull market makes everyone look like a winner and bears reveal who is lucky and who is operating on skill.
3. No, he's not talking about circle of competence. He's talking about the follies of pursuing precison or reducing everything to mathematics.
4. I know what he's discussing here and you've made the right interpretation. However, I disagree with it. Empirical research has shown that 50% of long-term returns come from the price you pay for a business, and 30% from the company's underlying performance over time. Ergo, a company that makes 6% a year or 20% a year for ten, twenty, thirty, or forty years will have value or not depending on the price you pay for it.


pocoyo

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1. It means it's pointless to differentiate a "value" stock from a "growth" stock because "value" is the reason why people invest their money, regardless of time horizon or intentions.
2. Means a bull market makes everyone look like a winner and bears reveal who is lucky and who is operating on skill.
3. No, he's not talking about circle of competence. He's talking about the follies of pursuing precison or reducing everything to mathematics.
4. I know what he's discussing here and you've made the right interpretation. However, I disagree with it. Empirical research has shown that 50% of long-term returns come from the price you pay for a business, and 30% from the company's underlying performance over time. Ergo, a company that makes 6% a year or 20% a year for ten, twenty, thirty, or forty years will have value or not depending on the price you pay for it.

 :applause: :applause: very well said boss TSO  :cool2: :cool2: :cool2:


TSO

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My interpretation of

- Buffett's two rules: establish a process to minimize long-term capital losses, and never stray from it.

- The pole-jumping analogy: similar to the Aesop fable Tortoise and the Hare. Going with the herd and focusing on short-term gains (instant gratificatin) will more than likely result in catastrophe than plodding along at a constant speed in the long run.


Wills

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"Someone's sitting in the shade today because someone planted a tree a long time ago." Warren Buffett


This is one of Catt's favourite Buffett quotes and illustrates perfectly why taking a long-term view is important.

"We should never forget why we enjoy some of today's luxuries - most of them are because someone else had a long-term vision and was prepared to invest for the future," Catt says.

Orlando uses a bank savings account as an example.
"Saving $50 a week over 10 years will allow you to save $26,000, not including interest, and like the tree it has taken years to grow," he says.


From www.news.com.au


Wills

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"Price is what you pay. Value is what you get." - Warren Buffett


The price of an investment can mask its true value because of factors such as emotion, market booms or busts, and even tax considerations. "Sadly, all most people see is the price," Whitford says. "They are often unable to perceive value."
Orlando suggests following Buffett's strategy of seeking undervalued assets.
"Sometimes buying the worst house in the best street may provide good value for money," he says.


From www.news.com.au

Parang mali ang interpretation nito?


TSO

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The first: Businessmen and policymakers (ideally) are long-term thinkers.
The second: Value is determined by the price you pay for a business.

To add to the second, I should mention that Societe Generale has done empirical research on the sources of returns over one and five year periods in the stock market and has determined:

- over the short-term (one year), 60% of your returns come from market sentiment and the remainder from growth in the underlying business and the price you pay for it, equally.
- over the long-term (five years in the study), 50% and 30% of your returns come from the price you pay and growth in the underlying business respectively, with market sentiments taking up the final 20%.-


Wills

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My question Sir is can we lean/depend on that 5 year research? Because from what I understand, Buffett buys stock in a very long term view like say 20 to a hundred years.

So it's like maybe if we will look at it that way the results of the research would be different and will prove Munger's case "Buying great businesses in an average price"

As an example Heinz.
Heinz with high P/E but also high ROE.

Am I making sense here? I'm sorry if my question is obvious
« Last Edit: May 16, 2013, 09:48 PM by Wills »


Wills

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3. No, he's not talking about circle of competence. He's talking about the follies of pursuing precison or reducing everything to mathematics.

I really like your answer here.

It just makes sense! It's very hard to pursue precision in this arena plus it's very stressful.

That is why Buffett often jokes "IF CALCULUS OR ALGEBRA WERE REQUIRED TO BE A GREAT INVESTOR, I’D HAVE TO GO BACK TO DELIVERING NEWSPAPERS."

Mathematical methods used in stock market today doesn’t stand up to the test of time.


TSO

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My question Sir is can we lean/depend on that 5 year research? Because from what I understand, Buffett buys stock in a very long term view like say 20 to a hundred years.

So it's like maybe if we will look at it that way the results of the research would be different and will prove Munger's case "Buying great businesses in an average price"

As an example Heinz.
Heinz with high P/E but also high ROE.

Am I making sense here? I'm sorry if my question is obvious

Yes, I'm aware Buffett is speaking from the viewpoint of "permanent capital", where he'd have no qualms owning a company for decades on end. The fact of the matter is, the purchase price ALWAYS determines the value you're going to get from the stock. They understand that and is a reason why they harp on "fair" or "average" price, not excessive price.

The problem with high P/E's is that the market -- the investing community -- also expects high growth from the company. Whether high P/E is excessive or not depends on the growth prospects surrounding that company, or at least speculations surrounding its near future. Benjamin Graham recommends 16x P/E as the ceiling, but from my experience, fixation on an immobile number results in missed opportunities. What you want is growth at a reasonable price (GARP, which is another form of value investing), or growth for free or at a discount (which is 16 PE and lower at a 6.25% discount rate, 10 PE and below at 10%, or 8.33 and below at 12%).

Let's say you have two companies. One trading at 30 PE, and the other at 17.

Growth prospects, again, MATTER. ROE is directly tied to the growth rate of the business? How so? Because a company must sustain a growth rate equal to its current ROE to maintain it over the long-term. For example, if ROE is 50% (as is the case in a small business in the Philippines), then an equity investment of P100,000 will be P150,000 after year 1. In year 2, to maintain 50% ROE, it must grow at the same percentage, with retained earnings going up from P50,000 to P75,000.

So let's say the 30 PE company has a 25% ROE (to reflect the stronger economic moat and the higher valuation by the market) and the 17 PE one has a more pathetic 12%. Assume EPS at 15. Obviously, 30 PE co. is priced at 450. The other one, at 255.

Over a five year period, if EPS grows at 25% a year, you'd have EPS of roughly 45.78. If PE remains the same, then the price is at 1373 -- 305% return or 25% a year. For the other company, EPS would be 26.44. Price would be 449 -- 76% return or 12% a year.

Now, what if this growth does not materialize at all? A very mature company with few growth prospects other than making acquisitions would have a very hard time growing at 25% a year to maintain this 25% ROE over the long run. And most exec officers are horrible investors, overpaying for other businesses to the extent they increase total assets and end up deflating ROE. If earnings growth was 15% instead of 25%, then you'd have an EPS of 30.17  by year 5. IF PE miraculously remains the same (which is a VERY BIG "IF" given that earnings growth is declining and failing to meet past expectations), then the current price is 905. A 200% return or 15% a year. Not the expected 25%. If PE happens to drop from 30 to 20, which is likely to be the case, the price would be a little bit over 600 -- 34% return or 6% a year. Eew.

On the other hand, if the smaller company surprises the market and ends up with 15% returns (remember that the assumption was 12% based on ROE), at the 17 PE the market might price this one at 513 -- 201% or 15% a year. If the PE rises to 20 (because it was beating growth expectations), the price would be 603 -- 237% return or 19% a year.

All because you paid a lower price!

What if you were buying stock in the meantime? You'd no doubt be accumulating shares, and at the same time, increasing your average cost per share. This dilutes your overall ROI from THAT one company. If your average cost per share in the second company rises from 255 to 350 over that five year period, your returns fall from cumulative 237% to 172%. A massive drop of 30%, because of the price you paid. As you can CLEARLY see, it doesn't matter if PE went up or down!

Let's put it in a 20 year period then. Inflation in the Phil's roughly 5%. EPS of 10, 5% growth rate, 20 years = 26.53 EPS after 20 years. PE of 10 = P100 at the beginning and P265 at the end. If the company happens to grow twice as fast over this time frame, you'd have 67.27 EPS after 20 years, and an ending price of 673 if the market doesn't adjust the PE multiple upwards. The rates of return are extremely high, of course, and are even higher if the market reappraises the company. If you happen to buy enough to have an average cost of P270 by two decades' end, you would've earned nothing at the first scenario. At the other, you would've made a cumulative 150%. One hell of a drop from the massive 570% you would've made had you stuck to one giant buy near the very beginning. Even if PE dropped to 8 just because of the market (let's say it's a 1.0 beta stock), then the price would be P538. At P100, that's a 438% return. At 270, that's 200%. In both cases (where PE falls by 2 points or it is unaffected at all), the difference between cost averaging and making all your purchases early and then holding it for the long run except possibly on major dips, is enormous. (150 percent is 74% less than 570; 200 percent is 54% less than 438; 438 percent is 23% less than 570.)

My point is, the absolute price you pay for a company determines everything. The results of this 5-year study can be extended to extremely long-term records of 20 or 30 years. Changes in market sentiment (the PE ratio) is obviously a small matter, because what matters is the future growth of the company. The PE is factored in as a proxy for expected growth, which you can compare against what you think the company can achieve over the long run.


Wills

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Sir TSO you should write a book!

My Gawd! ito ang hinahanap ko! Para mo na rin ako binigyan ng cash dahil sa post mo na to, you saved me Mannn!hehehe

Btw Heinz has a 5yr average of 40+ ROE!haha Lupit ni Buffett! Kaya pala sabi niya sa interview e very very cheap daw ang pagkabili niya sa Heinz.

Ang linaw na ng mata ko, grateful for your generosity Mannn!
« Last Edit: May 17, 2013, 12:22 PM by Wills »


TSO

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^ Be aware that Heinz already had a very high P/E ratio to begin with. I had thought of purchasing shares in the company, but being a mature business I wasn't sure how else it could grow.

Remember that Berk is a multibillion company in size. I have no idea what Heinz's sales are but the acquisition itself may not move the needle. Plus, iirc Warby got prefereed shares, not outright common. The short seller he invited to the ASM early this month was wondering if Berk got the better deal than the common shares, to which both Warby and Charlie were quick to refute.

I don't know anything about Heinz's future prospects, so whether or not Berk's investment in the company sustaining double-digit growth in the long run remains to be seen. They HAVE mentioned after all that they are being forced to fork over the higher premiums for companies of better quality.

Warby's reputation and discipline should protect Berk from the overpayment risks every serial acquirer is subjected to, so long as he still lives.


vicces

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Makikisabat..

What can you say about berk's credit rating downgrade by fitch last night... Everyone was like, #WTF?!


Wills

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^ Be aware that Heinz already had a very high P/E ratio to begin with. I had thought of purchasing shares in the company, but being a mature business I wasn't sure how else it could grow.

Remember that Berk is a multibillion company in size. I have no idea what Heinz's sales are but the acquisition itself may not move the needle. Plus, iirc Warby got prefereed shares, not outright common. The short seller he invited to the ASM early this month was wondering if Berk got the better deal than the common shares, to which both Warby and Charlie were quick to refute.

I don't know anything about Heinz's future prospects, so whether or not Berk's investment in the company sustaining double-digit growth in the long run remains to be seen. They HAVE mentioned after all that they are being forced to fork over the higher premiums for companies of better quality.

Warby's reputation and discipline should protect Berk from the overpayment risks every serial acquirer is subjected to, so long as he still lives.

Since Heinz maintained 40+ ROE for the last 5 years, do you think the price Warren paid for Heinz can be justified if The company maintain an average of 25-30 ROE for the next 15 years?

Or Warren is not expecting performance like Coke? It's like he bought Heinz just for stable long term earnings only?

Because I remember Warren expressed that they are a victim of their own size.


TSO

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Oh, I'm not worried about the price he paid for it. Again, he's gotten the preferred shares, and Heinz's business has a very strong moat so whatever yield he gets will definitely realize over time.

The problem is clearly for small people like us. If average ROE has remained at 40 or so, sooner or later the company will either slow down in growth or intensify acquisitional expansion to maintain it, both of which results in lower ROE. (Slower revenue growth = lower turnover = lower ROE; acquisitional expansion = risk of overpayment = higher assets = lower turnover = lower ROE.)

Of course, if the market sentiment from missed growth expectations shifts down enough to underestimate potential growth in the medium-term... that's good for us, and for Berk to accumulate ownership if needed. (He has permanent capital after all.)

@ vicces

Wow, srsly? Ano ung mga rason?


 


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