Graham/Buffett et al - Strategies etc

[Dazza]

sorry if theres already a thread, if there is could someone url it for me thanks.

INTRINSIC VALUE

anwyays just reading the warren buffett way 2nd edition, and i came across Graham's 2 step simple rule thingie:

1. calculate the net asset of a co. and times by 2/3, if market price is below then buy.

2. low P/E retios.


its point 1 that i am finding hards to grip with..

when he says net asset, does he mean just buy total net assets?
theres a sentence along the lines, where he minus's total liablilities, and uses the residual values.

give u guys an example, we will take SKC:

total assets : 1424 mill
total liabilites: 1236 mill
# of shares: 417 mill


so :

1. do we take the total assets, times by 2/3 then divide by # of shares to get an intrinsic value?

or

2. take total assets - total liablilites and THEN times by 2/3 devide by # of shares to get intrinsic value?

[stephen]

"Net" = "net of liabilities". In your example, SKC would have a net asset value per share of only 45 cents! SKC at 30c per share would indeed be a bargain, but it'll never happen.

Graham was more targetting industrial firms with plant, property and inventories that had realisable value. Some other companies are still fine cash generators with almost no net assets, like, I dunno, Telecom. And SKC. In the case of such companies, you want to be looking at cashflow, not assets, as a yardstick of value. Not coincidentally, companies like Telecom and SKC have almost monopoly-like properties, not on the books, that let them use their paltry book assets to great advantage - the local line loop and casino licenses respectively.

Even looking at the industrials etc that Graham had in mind, you have to adjust for the times, I'm afraid. Few if any shares will be selling below net asset value at the moment, and if they are, there is likely a very good reason (is it TTP that has a majority overseas shareholder who's trying to drive the others out?)

[thereslifeafter87]

UOS.ax is another good example.

Trading at less than 2/3 NTA.

[Westie]

If you are interested in valuing a company like SKC from a value investing standpoint, then another book you may wish to consider is Value Investing & Beyond by by Bruce Greenwald (Greenwald is the Robert Heilbrun Professor of Economics at Columbia University Business School, Ben Graham's old stomping ground). He expands on the Graham, Buffett value styles by kind of synthesising them together. He gives a method for getting the asset value of the company, and then goes on to value a company's earnings power (or franchise value a la warren buffett) and then the value of growth. With SKC, as Stephen has pointed out, their earnings are due to intangible assets such as its monopoly position in NZ. The franchise value method will give a more accurate picture of the company in this case. Look up the book on Amazon.

There are some co's still selling below nta in australasia (although not as low as 2/3rds) that have better than average prospects, in NZ you have ten, air, chp, evf, twr(?) to name a few. I think all these will perform well over the next 12-24 months (ttp is interesting, there will be some movement in the next 6 months on pure speculation as the major shareholder will again make a takeover offer but at what price who knows).

In australia you have
avj (close to NTA and has earned 20% returns over the last 10-15yrs, pe of 5, & yeild of 5% which isn't being cut, def contrarian buy!) ane, nam, ghg, aeo, ogd, lcp, hic to name a few more interesting ones. The last two are value investing funds that are now sitting on 30% or so cash because of the high valuations on the ASX.

I must admit the above are all on my list to scrutinize more closely but i haven't gotten around to it yet. Do be careful though, as Stephen has said, there is often a good reason, Henry Walker Elton (bankrupt)is a case in point. However, do keep an eye on the new company that the administrators are looking at raising from HWE, if it happens new co will have good points.......no debt, lots of sellers (former debt holders with new equity they don't want), just the best bits of the old business.

[duncan macgregor]

DAZZA,I think you need to differenciate where you stand and warren regarding investment decisions. It is pointless working out what a company is worth more to the point is what your partners think it is worth. Warren works it out, and buys the company,and controls it. You and i buy shares in a company there lies the difference. The people that are shareholders let you know by the day what it is worth, your opinion is only a small part of that process. Working out what your fellow shareholders think is more productive than working out the companies worth. If you place your own personal opinion above your fellow shareholders opinion you tread on dangerous ground. WARREN BUYS COMPANIES YOU AND I INVEST IN COMPANIES . macdunk

[Dazza]

agreed, i continued reading a bit more
and warren says that grahem's theory is old... hense he combined it with i tink fishers ideology

thanks for the tips guys, will continue to ask more questions in future

*duncan, if u dun mind could u answer my question in SKC's thread about EQUITY thanks *

[duncan macgregor]

DAZZA, Sorry i havent done the homework so wont comment. macdunk

[Winston001]

quote:Originally posted by duncan macgregor

DAZZA,I think you need to differenciate where you stand and warren regarding investment decisions. It is pointless working out what a company is worth more to the point is what your partners think it is worth. Warren works it out, and buys the company,and controls it. You and i buy shares in a company there lies the difference.

With respect Mac, this isn't always true. In his early days, Buffet didn't have the cash to get control. Also, he simply buys stocks in companies he perceives as undervalued. His judgement is just a bit better than everyone else.

Buffett often uses arbitraging, which doesn't require owning control. He also uses FA and TA eg. seeing a return of capital, he calculates the market strength of the stock, and if his figures suggest the new price (after payout) will move above its theoretical value, then he buys. A punt but I think it would have worked with CAV and a few others in recent years.

Dividend stripping can work the same way. The ex-div price quite often recovers close to the come-div price in a short time.

quote: The people that are shareholders let you know by the day what it is worth, your opinion is only a small part of that process. Working out what your fellow shareholders think is more productive than working out the companies worth. If you place your own personal opinion above your fellow shareholders opinion you tread on dangerous ground. WARREN BUYS COMPANIES YOU AND I INVEST IN COMPANIES . macdunk

Fine except this means the market is correct at every moment. And you'd never buy or sell because the next moment a change would occur which would be the new correct position.

The market is chaotic - for every seller with reasons, there is a buyer with other reasons. It is driven hourly by emotion, rumour, and news. No matter what anyone says, there is no predicting the market. So we are each left to make best guesses, which can be backed up by FA or TA or whatever style you like.

[duncan macgregor]

WINSTON001, Everything you say is correct, with a very big but.
Warren now plays out of our league, what happened then and what happens now against what you and i get up to is more to the point.
Pointless looking at warren with the excepttion of following the snail trail and his successfull policy. He has the handicap of being oversize, which means to buy and sell equates to a major share price movement. You and i can sneak in and sneak out unnoticed. Why follow what warren does when we dont have his handicap. We also dont have his priviledges, we or should i say you and i are in a different market to warren. It is more important to warren the worth of a share where you and i it is more important the investor perspective of worth. macdunk

[Westie]

quote:Warren works it out, and buys the company,and controls it. You and i buy shares in a company there lies the difference.

That is incorrect. While Buffett does buy whole companies for Berkshire, he also purchases shareholdings in companies. He does not own all of Gillette, Coke, Washington Post etc.

If you hunt around you'll also find an old post of mine on here with an article about what Buffett buys for his own personal portfolio. Interestingly enough, many of them are Ben Graham style "cigar butts". So while his style of investing has changed for Berkshire, (dictated by the ever growing mountain of money the company owns) his personal choices with small(er) amounts of $ haven't changed all that much from his days when he was running his investment partnership.

quote:The people that are shareholders let you know by the day what it is worth, your opinion is only a small part of that process. Working out what your fellow shareholders think is more productive than working out the companies worth.

You'll also find this opinion at odds with Buffett & Graham's philosophies. MacDunk confuses price with value. As per Buffett "price is what you pay, value is what you get". Logically, if you think about what MacDunk is saying, Buffett nor anyone else should ever purchase a non-listed company as it is worthless (after all, there are no "fellow shareholders" to let you know what it is "worth" just you, and how can you know what it is worth without them?). However, if non-listed co's have a value without a stock ticker, then surely so too must listed companies, independent of their stock ticker.

So the correct way to value a business then? Private or public, value is the free cashflow that is generated by the biz over its lifetime, discounted to the present. Buffett has said this much. That is what the book buffettology is about.
On this basis, at times, the market will irrationally price a business. There is no need for your "opinion" and "treading on dangerous ground" in determining the market is right or wrong, just analyze the hard data. To steal another quote:
"You are neither right nor wrong because others agree with you, you are right because your facts are right and your reasoning is right, nothing else makes you right" Ben Graham

At the heart of buffett's investing style is ben graham's saying "investing is most rational when it is most businesslike". No one sells a private business simply because someone walked past and yelled out that they'd buy it for a low price. The value of a business is worth either its assets at liquidation value or the cash that it makes over its lifetime. Period. The stock market is simply there to let you know if someone will offer you a bargain today.