Buffettique Discussion Threads

[tanners] 14/4/2009 21:09

Hmm, a tad patronising Liarspoker, tho perhaps unintentionally ;-)

I'm well aware of the reasons for investing in net cap stocks, but there has to be an exit!

Of course it can provide a safety margin, but if there are no plans to break up and realise the value of assets then you might be in for a very long wait!

A good example from The Snowball is Sanborn Map that had liquid investments far in excess of it's market cap, but the Board had absolutely no inclination to split the Company and sell the investments......eventually Buffet bought enough shares to gain a seat on the Board and force the issue himself; but not an option that is open to many private investors!

Returning to the issue of earnings - without trying to be contrary, I still maintain that this is a factor even in these situations as quite simply negative earnings can turn a NWC play into a non net cap.

As for stock and the first in or last in methodology, well even Graham concedes in Security Analysis, that the analsyst will not have the info necessary for taking account of distortion caused by inventory price changes, and may simply assume a basic method when acounting for it....or at least that's my undertstanding of it!

Graham was so cautious that even Buffet found his exact methodology too restrictive, tho in current markets I bet even the former would have been rubbing his hands with some of the opportunities afforded.

[liarspoker] 13/4/2009 17:42

I think that perhaps you have misunderstood the reason for investing in net nets tanners. In effect you are investing in a company at less than break up value. Therefore, in short, profitability and competitive advantage have little to do with it as long as cash is decent and debt is low.

There is a formula touted by Graham followers that is as follows:

( Cash + ( Stock X .5 ) + ( Receivables X .75 )) less all liabilites

This formula agrees with your point above regarding stock not being recoverable. Another point regarding stock, which you probably know about, is the accounting effect of FIFO and LIFO especially when prices are rising.

In Security Analysis Graham notes that almost all companies eventually trade at fair value or working capital value ( which is when he says to sell ). Even Buffett in his partnership letters says that although he also mentions that sometimes they correct quickly and others don't correct for years. Anyhow you pay your money and take your chances. ;o)

Re MUBL - it was only a momentum punt. :O)

[tanners] 13/4/2009 00:27

Hmmm.......looking solely at net working capital is an interesting game, but dangerous if not taking into account other factors such as profitability, and competitive advantage.

NWC stocks could trade that way for years and for good reason, for example stock is a part of current assets, and the inventory may be carrying values that are not realistically realisable at cost which is often the case in liquidation sale anyway.

Furthermore if a stock such as the one you've mentioned Holders Technology, do slip into a loss making situation then obviously their net working cap advantage starts to diminish, and also the Company would become less of a tempting takeover target.

Say for example a new competitor has started succesfully eroding their customer base......quite clearly that would be a factor that would justify a rating below liquidation value.

What is more interesting tho is that you're applying Buffetology to something he would never touch, i.e. a technology Company.....however if you've got an expert knowledge of exactly what their product is and any risks to their market then fair enough.

Back to MUBL, which as you stated trades at about a multiple of 2 to working capital; tho that isn't a true picture as you're comparing todays M/Cap to the working cap of 7.3M at the interims to September.......there's been 6 months more trading since then which have been exceptional and I fully expect the multiple to be nearer 1 when the full year accounts are released in July.

The key with MUBL to me is the speed of the rate of change (a NWC muliple reducing from 3 to approx 1 in just 2 years) and the sheer amount of cash they are throwing off......but I note you've invested in the past so you're more than aware of that!

Nothings guaranteed however and I accept that there have always been scepticism about the longevity of their business, but they're showing no sign of slowing up yet and the margin of safety more than allays such concerns imo.

I'd be interested to hear why you're no longer invested tho.....!

[liarspoker] 10/4/2009 09:26

Ah yes MUBL - I've traded that one successfully in the past.

Trading at 2 X net working cap though so perhaps not comparing like for like and more liquid too.

Anyhow if you want to have a friendly wager that's fine with me. I don't mind being the underdog. :O)

First prize: The honour and glory bestowed upon a stock picker champion.

The loser: Get's to roll around in dirt followed by an oil bath after which he has to roll in chicken feathers.

Ok a bit extreme maybe but I made a chit load of cash yesterday so I'm in a good mood. :O)

Edit: I must add that the CEO said that there is a possibility of making a loss in H1 - it is not a definite yet. A new product line which will make it's impact in H2 has been received well. Therefore at a push I'd say that HDT will be profitable for the year.

Anyhow whether a company makes a small profit or small loss is largely irelevant to net working cap stocks. The point of net working cap stocks is that they trade 1) below the cost a private buyer would pay for the company and 2) that they trade below liquidation value. It's an asset based approach not an earnings based approach ( mostly ).

PS: We'll take the divi into account no doubt.

[tanners] 10/4/2009 01:09

Ah Liarspoker......a rite hefty tome that one; I'm currently enjoying it too!

Another interesting point is WB's disinclination to diversify or spread the risk - early on in his investment career when he thought he had found a share that was massively discounted (GEICO) he simply bought as much as he could!

You've used an interesting analogy in a technology Company that may be going fro profitability to loss making........I'd prefer a Company that over the last 3 years has gone from profit making to even more profit making, is throwing off piles of cash but can stil be bought at the price it was 3 years ago; Music Box Leisure!

Perhaps we should have a friendly wager on what fares best.....say by the end of the year; I'll let you pick the prize ;-)

[liarspoker] 09/4/2009 18:48

I'm reading Buffett's biography atm - The Snowball.

Few interesting facts alright on how he used to invest when he was starting out. Basically he was into illiquid small caps trading below net working capital.

Such a share is Holders Technology ( HDT ) - it sports a 4.8% final dividend ( goes ex 22nd April ) and was profitable but H1 2009 might not be ( read latest results ). CEO owns +- 49% so it's in his interest to see shareholder value. Trading at a discount to current assets less ALL liabilities. It might take a while to light up but the divi makes up for that. :O)

[gsands] 01/3/2009 12:09

US 'medicine will have unwelcome after-effects' says Buffett

[liarspoker] 27/2/2009 10:47

Buffett has been buying shares of Burlington Northern Santa Fe ( NYSE:BNI ) quite heavily over the recent past. It's interesting to note that the lowest price he paid was around $62.50 but you can now buy the shares for under $60.

Remember though that Buffett invests for the long term so aim to hold for 5 - 10 years minimum. I bought a few for the pension portfolio. FIngers crossed. :O)

[anarkox] 05/2/2009 12:04

A bit off topic, but well worth a look.

Ackerman's Attack
Rep. Gary Ackerman (D-NY) lets SEC officials know what he thinks about their lack of oversight in the alleged Madoff Ponzi scheme.

[4237_rides_again] 05/2/2009 08:55

Read todays Swiss Re announcement and the presentational slides.

Swiss Re says it has paid CH2bn to "someone" for CH5bn of cover on its entire book of business.

BH has offered to invest CH3bn at 12% convertible at CH25per share plus anti-dilution.

Net cash inflow CH1bn

Nice work Warren!

[gsands] 21/1/2009 17:09

Even quality investors are taking the hit:

[mtness] 15/12/2008 17:01

Did you finish the Snowball ?

WB has been buying more railroad shares and electric cars

[bigbigdave] 18/10/2008 15:18

Yer man's buying....

[smoke and mirrors] 07/10/2008 16:11

Busy reading "The Snowball" - great writing.

But I'm getting a bit concerned.

$5bn to Goldman, $3bn to GE all for preference shares issued to the parent company - not paid for from the insurance float.

$4.5bn for Marmon

Where's the money coming from?

Cash at end '07 was $3bn and dividends from Insurance companies without prior approval of insurance regulators are capped at $6.6bn

Regulatory Capital of the Insurance Businesses seems to be only $62bn.

Can't be a lot of underwriting capacity left now that BH has a 20% Quota share of Swiss Re's business w.e.f. 1 Jan '08

$10bn hit on mark to market in the first half, and $40bn exposure to equity index put options.

Book Value now is surely well below 50% of Market Cap.

Time to sell?

[bigbigdave] 04/10/2008 15:02

'British Buffet' says its time to buy

[traderabc] 03/10/2008 13:02

Great interview, thanks GSands. He almost seems to endorse Obama,that surprised me.

[gsands] 02/10/2008 23:54

Buffett speaks on PBS. Excellent interview:

[gsands] 25/9/2008 14:40

Wow - that was some spike:

[gsands] 25/9/2008 13:06

Buffett says: act or face 'economic Pearl Harbor'

[liarspoker] 24/9/2008 08:20

Buffett & Goldman Sachs deal:

[traderabc] 21/9/2008 15:08

Did Warren Buffett hang up on Lehman phone call?


Rediff News
Friday, September 19, 2008

Failed American investment bank Lehman Brothers, voted the best in the business many times, is rumoured to have made a distress call to Warren Buffett to rescue it, but the legendary investor politely hung up as he did not see good returns.

Days before filing for bankruptcy protection from its creditors to whom it owes over $600 billion, Lehman Brothers wrote to Buffett for help, according to a mail currently doing the rounds on the Internet through blogs and forwarded e-mails.

Buffett, the world’s richest person with over $60 billion of net worth, is said to have replied: “Thank you for your recent letter for my company to invest some funds into Lehman Brothers. . . Unfortunately, I do not see good return on my money if I invest into your company.”