Buffett’s Annual Letter: What You Can Learn From My Real Estate Investments

Buffett’s Annual Letter: What You Can Learn From My Real Estate Investments

Buffett’s Annual Letter: What You Can Learn From My Real Estate Investments

Warren Buffett is the CEO of Berkshire Hathaway. This essay is an edited excerpt from his annual letter to shareholders.

 

This story is from the March 17, 2014 issue of Fortune and sent along to us by Garrett with our thanks. This is a wonderful letter.  It basically says investing isn’t all that hard but that most people shouldn’t try it – they should just go buy an index.  Buffett’s been saying the same thing for years.  What’s different here is that he lays out his rules for buying stuff more succinctly than I’ve seen before.

 

In an exclusive excerpt from his upcoming shareholder letter, Warren Buffett looks back at a pair of real estate purchases and the lessons they offer for equity investors.

 

By Warren Buffett

The author visiting (for just the second time) the 400-acre farm near Tekamah, Neb., that he bought in 1986 for $280,000

FORTUNE — “Investment is most intelligent when it is most businesslike.” –Benjamin Graham, The Intelligent Investor

 

It is fitting to have a Ben Graham quote open this essay because I owe so much of what I know about investing to him. I will talk more about Ben a bit later, and I will even sooner talk about common stocks. But let me first tell you about two small nonstock investments that I made long ago. Though neither changed my net worth by much, they are instructive.

 

This tale begins in Nebraska. From 1973 to 1981, the Midwest experienced an explosion in farm prices, caused by a widespread belief that runaway inflation was coming and fueled by the lending policies of small rural banks. Then the bubble burst, bringing price declines of 50% or more that devastated both leveraged farmers and their lenders. Five times as many Iowa and Nebraska banks failed in that bubble’s aftermath as in our recent Great Recession.

 

In 1986, I purchased a 400-acre farm, located 50 miles north of Omaha, from the FDIC. It cost me $280,000, considerably less than what a failed bank had lent against the farm a few years earlier. I knew nothing about operating a farm. But I have a son who loves farming, and I learned from him both how many bushels of corn and soybeans the farm would produce and what the operating expenses would be. From these estimates, I calculated the normalized return from the farm to then be about 10%. I also thought it was likely that productivity would improve over time and that crop prices would move higher as well. Both expectations proved out.

 

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I needed no unusual knowledge or intelligence to conclude that the investment had no downside and potentially had substantial upside. There would, of course, be the occasional bad crop, and prices would sometimes disappoint. But so what? There would be some unusually good years as well, and I would never be under any pressure to sell the property. Now, 28 years later, the farm has tripled its earnings and is worth five times or more what I paid. I still know nothing about farming and recently made just my second visit to the farm.

 

In 1993, I made another small investment. Larry Silverstein, Salomon’s landlord when I was the company’s CEO, told me about a New York retail property adjacent to New York University that the Resolution Trust Corp. was selling. Again, a bubble had popped — this one involving commercial real estate — and the RTC had been created to dispose of the assets of failed savings institutions whose optimistic lending practices had fueled the folly.

 

Here, too, the analysis was simple. As had been the case with the farm, the unleveraged current yield from the property was about 10%. But the property had been undermanaged by the RTC, and its income would increase when several vacant stores were leased. Even more important, the largest tenant — who occupied around 20% of the project’s space — was paying rent of about $5 per foot, whereas other tenants averaged $70. The expiration of this bargain lease in nine years was certain to provide a major boost to earnings. The property’s location was also superb: NYU wasn’t going anywhere.

 

I joined a small group — including Larry and my friend Fred Rose — in purchasing the building. Fred was an experienced, high-grade real estate investor who, with his family, would manage the property. And manage it they did. As old leases expired, earnings tripled. Annual distributions now exceed 35% of our initial equity investment. Moreover, our original mortgage was refinanced in 1996 and again in 1999, moves that allowed several special distributions totaling more than 150% of what we had invested. I’ve yet to view the property.

 

Income from both the farm and the NYU real estate will probably increase in decades to come. Though the gains won’t be dramatic, the two investments will be solid and satisfactory holdings for my lifetime and, subsequently, for my children and grandchildren.

 

I tell these tales to illustrate certain fundamentals of investing:

  • You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognize your limitations and follow a course certain to work reasonably well. Keep things simple and don’t swing for the fences. When promised quick profits, respond with a quick “no.”
  • Focus on the future productivity of the asset you are considering. If you don’t feel comfortable making a rough estimate of the asset’s future earnings, just forget it and move on. No one has the ability to evaluate every investment possibility. But omniscience isn’t necessary; you only need to understand the actions you undertake.
  • If you instead focus on the prospective price change of a contemplated purchase, you are speculating. There is nothing improper about that. I know, however, that I am unable to speculate successfully, and I am skeptical of those who claim sustained success at doing so. Half of all coin-flippers will win their first toss; none of those winners has an expectation of profit if he continues to play the game. And the fact that a given asset has appreciated in the recent past is never a reason to buy it.
  • With my two small investments, I thought only of what the properties would produce and cared not at all about their daily valuations. Games are won by players who focus on the playing field — not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.
  • Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important. (When I hear TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle’s scathing comment: “You don’t know how easy this game is until you get into that broadcasting booth.”)

 

My two purchases were made in 1986 and 1993. What the economy, interest rates, or the stock market might do in the years immediately following — 1987 and 1994 — was of no importance to me in determining the success of those investments. I can’t remember what the headlines or pundits were saying at the time. Whatever the chatter, corn would keep growing in Nebraska and students would flock to NYU.

 

There is one major difference between my two small investments and an investment in stocks. Stocks provide you minute-to-minute valuations for your holdings, whereas I have yet to see a quotation for either my farm or the New York real estate.

 

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It should be an enormous advantage for investors in stocks to have those wildly fluctuating valuations placed on their holdings — and for some investors, it is. After all, if a moody fellow with a farm bordering my property yelled out a price every day to me at which he would either buy my farm or sell me his — and those prices varied widely over short periods of time depending on his mental state — how in the world could I be other than benefited by his erratic behavior? If his daily shout-out was ridiculously low, and I had some spare cash, I would buy his farm. If the number he yelled was absurdly high, I could either sell to him or just go on farming.

 

Owners of stocks, however, too often let the capricious and irrational behavior of their fellow owners cause them to behave irrationally as well. Because there is so much chatter about markets, the economy, interest rates, price behavior of stocks, etc., some investors believe it is important to listen to pundits — and, worse yet, important to consider acting upon their comments.

 

Those people who can sit quietly for decades when they own a farm or apartment house too often become frenetic when they are exposed to a stream of stock quotations and accompanying commentators delivering an implied message of “Don’t just sit there — do something.” For these investors, liquidity is transformed from the unqualified benefit it should be to a curse.

 

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A “flash crash” or some other extreme market fluctuation can’t hurt an investor any more than an erratic and mouthy neighbor can hurt my farm investment. Indeed, tumbling markets can be helpful to the true investor if he has cash available when prices get far out of line with values. A climate of fear is your friend when investing; a euphoric world is your enemy.

 

During the extraordinary financial panic that occurred late in 2008, I never gave a thought to selling my farm or New York real estate, even though a severe recession was clearly brewing. And if I had owned 100% of a solid business with good long-term prospects, it would have been foolish for me to even consider dumping it. So why would I have sold my stocks that were small participations in wonderful businesses? True, any one of them might eventually disappoint, but as a group they were certain to do well. Could anyone really believe the earth was going to swallow up the incredible productive assets and unlimited human ingenuity existing in America?

 

When Charlie Munger and I buy stocks — which we think of as small portions of businesses — our analysis is very similar to that which we use in buying entire businesses. We first have to decide whether we can sensibly estimate an earnings range for five years out or more. If the answer is yes, we will buy the stock (or business) if it sells at a reasonable price in relation to the bottom boundary of our estimate. If, however, we lack the ability to estimate future earnings — which is usually the case — we simply move on to other prospects. In the 54 years we have worked together, we have never forgone an attractive purchase because of the macro or political environment, or the views of other people. In fact, these subjects never come up when we make decisions.

 

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It’s vital, however, that we recognize the perimeter of our “circle of competence” and stay well inside of it. Even then, we will make some mistakes, both with stocks and businesses. But they will not be the disasters that occur, for example, when a long-rising market induces purchases that are based on anticipated price behavior and a desire to be where the action is.

 

Most investors, of course, have not made the study of business prospects a priority in their lives. If wise, they will conclude that they do not know enough about specific businesses to predict their future earning power.

 

I have good news for these nonprofessionals: The typical investor doesn’t need this skill. In aggregate, American business has done wonderfully over time and will continue to do so (though, most assuredly, in unpredictable fits and starts). In the 20th century, the Dow Jones industrial index advanced from 66 to 11,497, paying a rising stream of dividends to boot. The 21st century will witness further gains, almost certain to be substantial. The goal of the nonprofessional should not be to pick winners — neither he nor his “helpers” can do that — but should rather be to own a cross section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal.

 

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That’s the “what” of investing for the nonprofessional. The “when” is also important. The main danger is that the timid or beginning investor will enter the market at a time of extreme exuberance and then become disillusioned when paper losses occur. (Remember the late Barton Biggs’s observation: “A bull market is like sex. It feels best just before it ends.”) The antidote to that kind of mistiming is for an investor to accumulate shares over a long period and never sell when the news is bad and stocks are well off their highs. Following those rules, the “know-nothing” investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results. Indeed, the unsophisticated investor who is realistic about his shortcomings is likely to obtain better long-term results than the knowledgeable professional who is blind to even a single weakness.

 

If “investors” frenetically bought and sold farmland to one another, neither the yields nor the prices of their crops would be increased. The only consequence of such behavior would be decreases in the overall earnings realized by the farm-owning population because of the substantial costs it would incur as it sought advice and switched properties.

 

Nevertheless, both individuals and institutions will constantly be urged to be active by those who profit from giving advice or effecting transactions. The resulting frictional costs can be huge and, for investors in aggregate, devoid of benefit. So ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm.

 

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My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit. (I have to use cash for individual bequests, because all of my Berkshire Hathaway (BRKA) shares will be fully distributed to certain philanthropic organizations over the 10 years following the closing of my estate.) My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s. (VFINX)) I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions, or individuals — who employ high-fee managers.

 

And now back to Ben Graham. I learned most of the thoughts in this investment discussion from Ben’s book The Intelligent Investor, which I bought in 1949. My financial life changed with that purchase.

 

Before reading Ben’s book, I had wandered around the investing landscape, devouring everything written on the subject. Much of what I read fascinated me: I tried my hand at charting and at using market indicia to predict stock movements. I sat in brokerage offices watching the tape roll by, and I listened to commentators. All of this was fun, but I couldn’t shake the feeling that I wasn’t getting anywhere.

 

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In contrast, Ben’s ideas were explained logically in elegant, easy-to-understand prose (without Greek letters or complicated formulas). For me, the key points were laid out in what later editions labeled Chapters 8 and 20. These points guide my investing decisions today.

 

A couple of interesting sidelights about the book: Later editions included a postscript describing an unnamed investment that was a bonanza for Ben. Ben made the purchase in 1948 when he was writing the first edition and — brace yourself — the mystery company was Geico. If Ben had not recognized the special qualities of Geico when it was still in its infancy, my future and Berkshire’s would have been far different.

 

The 1949 edition of the book also recommended a railroad stock that was then selling for $17 and earning about $10 per share. (One of the reasons I admired Ben was that he had the guts to use current examples, leaving himself open to sneers if he stumbled.) In part, that low valuation resulted from an accounting rule of the time that required the railroad to exclude from its reported earnings the substantial retained earnings of affiliates.

 

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The recommended stock was Northern Pacific, and its most important affiliate was Chicago, Burlington & Quincy. These railroads are now important parts of BNSF (Burlington Northern Santa Fe), which is today fully owned by Berkshire. When I read the book, Northern Pacific had a market value of about $40 million. Now its successor (having added a great many properties, to be sure) earns that amount every four days.

 

I can’t remember what I paid for that first copy of The Intelligent Investor. Whatever the cost, it would underscore the truth of Ben’s adage: Price is what you pay; value is what you get. Of all the investments I ever made, buying Ben’s book was the best (except for my purchase of two marriage licenses).

 

Warren Buffett is the CEO of Berkshire Hathaway. This essay is an edited excerpt from his annual letter to shareholders.

This story is from the March 17, 2014 issue of Fortune.

http://finance.fortune.cnn.com/2014/02/24/warren-buffett-berkshire-letter/?iid=Lead

 

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About Phil Town – Phil Town is currently recognized by the American Association of Individual Investors as their #1 investor in the world. Phil is an investor, a hedge fund manger, a best-selling author, and a teacher. He spends much of his time teaching “Rule 1 Investing” – The #1 strategy for successful investing. Phil’s goal is to help you learn how to invest and achieve financial independence. You can follow him on google+, facebook, and twitter.

  • Paul Myers

    Has anyone any ideas in investment ideas as a result of what’s happening in Crimea?
    . just trying to learn from what Phil did with BP a few years back

  • http://profile.typepad.com/6p01a3fcba4746970b Phil S

    “A climate of fear is your friend when investing; a euphoric world is your enemy.”
    Are we in a euphoric world right now? Sure seems like it to me and I’m really hesitant (even scared) to jump into any stocks right now. All the ones I’m following appear either over priced or at best at their expected value. Anyone else experiencing this?

  • Will Regan

    Hi Rulers,
    Here is the link to Buffet’s annual shareholder letter. I have not read it yet but there are always a few pearls of wisdom.
    http://www.berkshirehathaway.com/letters/2013ltr.pdf
    Michael, thanks for posting Phil’s video. It brought back fond memories from Atlanta.
    Happy Capitalism,
    Will

  • Mike G.

    Every weekend I take a look at the CFA Institute Weekend Readings Blog for an interesting read from the previous week. Sometimes there are older readings worth mentioning. This weekend it was filled with good ones. Here is the link for this weekend’s readings:
    http://blogs.cfainstitute.org/investor/2014/02/28/weekend-reads-for-investors-a-building-froth-in-stocks/
    _____________________________________________________________
    One worth mentioning on the entertainment front is an article where a journalist snuck into a private Wall St. fraternity party comprised of top financial Wall St. Executives and Bankers. Although not all were in attendance, some members of this group include(d) Larry Fink (CEO of Blackstone), Jon Corzine (Most likely not a member anymore due to MF Global’s collapse), Michael Bloomberg, and current leader of the fraternity, Wilburt Ross. The journalist tells how he snuck in, recites some jokes told at the event, posts recordings and pictures, and tells what happened when he got caught.
    http://nymag.com/daily/intelligencer/2014/02/i-crashed-a-wall-street-secret-society.html
    Some other good ones on the education front are:
    http://www.institutionalinvestor.com/Article/3313677/Asset-Management-Macro/Robert-Shiller-Says-Markets-Have-Become-More-Prone-to-Bubbles.html?ArticleId=3313677&p=2#.UxJRf_ldVls
    http://blogs.cfainstitute.org/investor/2014/02/20/take-15-success-in-value-investing-video/ (I recommend this one; it’s an 11 minute video with good advice from Scott Black of Delphi Management on value investing so it isn’t too long)
    http://www4.gsb.columbia.edu/filemgr?&file_id=7223872
    https://www.gmo.com/America/CMSAttachmentDownload.aspx?target=JUBRxi51IIA1YdxRKKPedC4G2eurBn2%2bd3ARrjvveda8sumcugE6dXREamdLtHkcd5ittAq7C64SkhLdHt7vV1%2fE4TjVDW94bi52A80m93Q%3d
    http://www.nytimes.com/2014/02/25/us/efforts-to-rein-in-public-sector-pension-costs-are-falling-short-experts-say.html?ref=business&_r=2
    ______________________________________________________________
    And if you’re feeling really ambitious this weekend, Warren Buffett released his chairman’s letter:
    http://www.berkshirehathaway.com/letters/2013ltr.pdf

  • http://profile.typepad.com/6p01901e2c5a61970b Christian

    Hi Keith,
    Gurufocus has a great 10-year finincial data section. They give us a 10-year FCF-growth of 15.10%, and 5-years of 25.10%.
    And if you do a valuation with excel, always do it with the median, instead of the simple average.
    You need to sort the numbers in ascending order to do that.
    Why? Because the median is “outlier-adjusted”!
    Greetings,
    Christian

  • Erick L

    where was that bbby post. I must’ve missed it :( thanks m and g luv your posts

  • Keith

    OH, I bet you got the inputs from Morningstar and the last one is TTM. Do you use the TTM value to calculate growth?

  • Keith

    Cool. That jives. But how did you get your last two FCF numbers? Are there more up-to-date reports for 2013? And is that last number a 2014 estimate?

  • Alon

    Michael,
    Although I participated in the Free Cash Flow course in Atlanta last year and had a chance to hear Phil in-person, I was still enjoying the video a lot. It was fun and educational on the same time. As a matter of fact, it was that good that I forward the link to friends of mine who don’t follow the blog. There is no doubt that Phil knows how to tell a story and how to convey a message.
    Thank you for posting the link to the video and I recommend everyone to watch it, even if you already seen Phil talking before.
    By the way, your other post with the analysis of BBBY was great! Only few days ago Gurufocus added BBBY to their ‘Buffett-Munger Bargain’ portfolio based on a very compelling analysis.
    Alon

  • http://profile.typepad.com/garrettwoolley Garrett

    Keith,
    Regarding BBBY, I very quickly went with the following FCF Numbers:
    435,426,440,296,256,368,752,804,982,838,882 (millions)
    I went with a 10% average FCF GR.
    Market Cap $14,170,000,000
    Therefore:
    FCF PBT at $67.82 bucks per share is 9 years. If I go with 10% and $60 bucks per share, I’m at 8 year FCF PBT.
    To Your Weatlh!
    Garrett

  • http://profile.typepad.com/garrettwoolley Garrett

    Rulers,
    Here’s an interesting article:
    HOW BUFFETT CRUSHED THE DOW IN 1951:
    “If I was running $1 million today, or $10 million for that matter, I’d be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I’ve ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.”
    I am sure every investor wants to find out how would he make 50% a year guaranteed. A logical starting point is his rates of return as well as portfolio details in the 1950s. Unfortunately there is extremely limited information out there with regards to his return and portfolio composition. Therefore, I was delighted to find the following information from Andrew Kilpatrick’s book “Of Permanent Value.” The following information was contained in a letter Warrren Buffett wrote to Andrew Kilpatrick in 2001. This table shows the details of his investment from 12/31/1950 to 12/31/1951. Let’s take a look:
    12/31/50
    Buffett & Co. $591.20
    Selected Industries (1200@3 1/8) 3,750.00
    U.S & International Securities (700 @ 4 1/8) 2,887.50
    Parkersburg Rig & Reel ( 200 @13) 2,600.00
    Total $9,828.70
    Less Loss on Interest in Marshall Wells (12 ½ @198) 25.00
    Net Assets $9,803.70
    12/31/51
    Buffett-Falk & Co. $292.63
    Dividends receivable 140.00
    Government Employees Insurance (350 @ 37 ½) 13,125.00
    Timely Clothes (200@13) 2,600
    Baldwin Co. (100@22) 2,200.00
    Greif Brothers Cooperage “A” (200@18 ¼) 3,650.00
    Des Moines Railway 5’s -1955 (2000@33) 330.00
    Thor Corp. (200 @12 ¾) 2,550.00
    Total: $24,876.63
    Less Bank Loans : $5,000.00
    Loss on interest in Cleveland Worsted Mills (25@95) 150.00
    Total Deductions : $5,150.00
    Net Assets: 19,737.63
    Net Increase in Investment Account $9,933.93
    Less: Capital Additions 2,500.00
    Net Gain from Investments: 7,433.93
    Percentage Gain on 12/31/50 Net Assets : 75.8%
    Dow-Jones Industrials 12/31/51: 269.23
    Dow-Jones Dividends – 1951: 16.34
    Total:285.57
    Less: Dow-Jones Industrials 12/31/50: 235.41
    Gain in Dow-Jones Industrials:50.16
    Percentage Gain on 12/31/50 Dow-Jones Industrials 21.3%
    Wow! Buffett did kill the Dow in 1951 with a return of a mind-blowing 75.8% versus the Dow’s 21.3%.
    Here are a few observations:
    Buffett put more than half of his net assets in GEICO after he found out that Ben Graham was heavily invested in it and after he spent a few hours with Lorimer Davidson.
    His next four largest positions such as Thor Corp and Timely Clothes made up 9% to 15% of his portfolio.
    Together, his five largest holdings accounted for a whopping 97% of his portoflio.
    Buffett’s 75.8% return is leveraged as he borrowed $5,000 in 1951, probably to finance the Geico purchase.
    None of the year-end 1950 holdings were included in the year-end 1951 holdings, implying that Buffett flipped them within a year.
    This doesn’t include his short position in Kaiser-Frazer, which you can find more detailes in Alice Shroeder’s “Snowball.”
    I think the following lessons offer some foods for thought:
    Bet big when the odds are extremely in your favor, such as Buffett’s investment in GEICO. But only if you have done enough scuttlebutt work on your own and the investment is within your circle of competence. A related topic, which will require another full article, is the concept of expected return.
    This may sound controversial, but It is okay to use some leverage when the odds are good. Both Buffett and Munger used leverage in their early investment life. Especially when you are still young and have nothing to lose. But his lesson only applies to intelligent investing, not to speculation and gambling alike.
    You don’t have to hold a stock for five to 10 years just to prove you are long-term oriented. Mohnish Pabrai (Trades, Portfolio) once said something like for most of us, the stocks that can make us 50% a year will likely not take that long to get us the results. Of course if you prefer quality and are satisfied with a 10% to 15% annual compounded return, a longer time horizon may work better.

  • Keith

    Oh, so compared to valuations Michael D did a few days ago,
    DCF-based MOS of $37.40, and
    8 Yr PBT based on Earnings of $62.82,
    I think this valuation falls right in line, which is what I think we’ve seen from analyses of several other wonderful companies on this blog. Pretty cool.
    BTW, there’s a Jan 2015 $60 PUT you could sell right now for just under $3. That would put your basis around $57…..

  • Keith

    Hey guys,
    Michael D. offered up taking a crack at FCF-based PBT for BBBY. I’m game. I’ve actually got a nice spreadsheet I set up to do this. So this will be a good test of both my understanding of the process and my Excel skills. Here goes:
    So, I pulled up the Cash Flow statement numbers in Phil’s tools and copied over some numbers into Excel, namely: Cash from Operating Activities, Sale of Property & Equipment, and Purchase of Property & Equipment. (Sale and Purchase of Prop/Quip together equate to Capital Expenditures)
    For each year I ran the formula: Free Cash Flow (FCF) = Cash from Operations + Sale of Prop/Equip – Purchase of Prop/Equip.
    Results: FCF in $Millions:
    2004: 435.45
    2005: 425.67
    2006: 440.05
    2007: 296.13
    2008: 256.33
    2009: 368.11
    2010: 751.73
    2011: 803.94
    2012: 981.91
    2013: 798.31
    Initial reaction: All in the black, which is great. There’s a general growing trend over time, nice. Fairly large drop the last year (-18.7%), which looks to be due entirely to the large CapEx last year, perhaps mostly from acquiring World Market(?). There’s my next homework assignment.
    Anyway, let’s look at the FCF growths:
    1-yr: -18.7%
    2-yr: -0.4%
    3-yr: 2.0%
    4-yr: 21.4%
    5-yr: 25.5%
    6-yr: 18.0%
    7-yr: 8.9%
    8-yr: 8.2%
    9-yr: 7.0%
    The average of those numbers is still 8.0% even with the short term negatives. Not too shabby.
    But, what if we wrote off 2013 as an anomaly and just looked at growth up to 2012? Check this out:
    1-yr: 22.1%
    2-yr: 14.3%
    3-yr: 38.7%
    4-yr: 39.9%
    5-yr: 27.1%
    6-yr: 14.3%
    7-yr: 12.7%
    8-yr: 10.7%
    WOW!!! And the average of those numbers is 22.5%!!! This might be what Michael D wanted us to see.
    Okay. So, now for the Payback Time calculations. 214 Million shares outstanding at today’s $67 price gives us a market cap of $14.39 Billion. If I bought the whole company today, how long would it take the FCF growth to pay me back? Let’s start really conservative and use that 8% from above as the FCF growth. Working in Billions, 2013 FCF was $.798. So if that grows by 8%, then 2014 FCF will be %.862. Subtract that from $14.39 and my basis after the first year will be $13.53. Keep doing that until my basis gets to zero and it will take just over 11 years. So we have an 11-year PBT based on FCF.
    What about the 8-year PBT? Now, here’s where my spreadsheet really helps me out. If I just change the cell value for price per share from today’s $67 to a lower number, then my market cap drops and my PBT gets shorter. Turns out, a price of $42.70 results in a PBT of exactly 8 years.
    Fine, but I think the 8% is probably a little too conservative. On the other hand the 22% I got from the 2012 numbers is also a little bit of wishful thinking to sustain for very long. In my Cash Flow Course, Jeff Town told us that he typically won’t go any higher than 15% growth when doing valuations. So, why not? Lets see where 15% lands us.
    Since I have my nifty spreadsheet, I can just replace the growth number with 15%. At $67 that gives me a PBT of about 8.5 years. Not too bad. The price that gives me exactly 8 years is $58.68.
    So, if we assume a 15% FCF growth, our 8-year PBT price is $58.68.
    Michael D., how did I do?
    ~Keith

  • http://profile.typepad.com/garrettwoolley Garrett

    Joe – perhaps you missed my post regarding the DVA valuation. It was based on the last slide they had in an investor presentation where they shared how they calculate and use their Free Cash Flow. Essentially, my primary means of putting a value on DVA was based on FCF Payback Time. I did not value the using a Discounted Cash Flow Method.
    Michael D – Cheryl works for Thermo Fisher Scientific (TMO) which is a Fortune 500 Company. Her title is basically an Allergy Diagnostic Sales Consultant and she’s consistently in the top 10% in her sales performance in her company.
    …Which is good because the gas and electric bill showed up and it’s over $700 flipping dollars again!
    To Your Wealth!
    Garrett

  • http://profile.typepad.com/highflight1985 Michael D.

    I think Garrett’s wife is in the medical business, but I might be mis-remembering. Sorry G if I got this wrong.
    MD

  • http://profile.typepad.com/highflight1985 Michael D.

    Rulers,
    I’d like to invite you to come watch Phil speak about Rule One. It’s not quite the same as what he does over 3 days at a workshop; in fact, it’ll only be an hour and half, but it’s still good information and very entertaining. Here’s the catch: You’ll need a time machine.
    Actually, this speech has already happened, but it was recorded by the group at Passion Test (www.passiontest.com). (My linking to it is in no way a personal recommendation, nor is it Phil’s unless he says differently.) This was done just a few months ago and was the source of students for our most recent workshop. There was such a great demand by this group that we’re doing it again in March; we couldn’t fit enough in the auditorium last time.
    My best guess–total guess, not a promise and I have no inside information about it–is that the next workshop available to the blog community could be in the summer. Keep your fingers crossed.
    Anyway, here’s the video: http://vimeo.com/85209079
    By the way, if you’ve never heard Phil’s live telling of his trip down the Grand Canyon and near-death experience at Crystal, or, even if you have, I personally think this is the absolute best version he’s ever told. I’ve heard the story many times and I still laugh; it’s like that classic movie that can always make you laugh.
    So, grab a snack and a drink, and watch an hour and a half of TV that might actually be worth something. :)
    Break Free,
    Michael D.
    P.S. If you haven’t yet had the chance to come to a workshop but want to, they won’t put one on the schedule unless they know there’s demand. So…let’s create some demand! Reply to my post and say so. Or email Michelle at mblackburn@ruleoneinvesting.com. Better yet, do both!
    P.P.S. My hidden agenda behind saying the above is that I need a vacation every month or else I go nuts. So…give me an excuse to have a vacation!! Yes, I do consider these things fun and they really are a vacation for me.

  • Will Regan

    Hello Rulers,
    I tried to get in on Phil’s webinar tonight but I had technical difficulties. I read a real beauty of a blog today by Josh Brown of CNBC’s Fast Money. He is quite the character. Anyways, here is the link. Enjoy!
    http://www.thereformedbroker.com/2014/02/27/everything-is-awesome/
    Happy Capitalism
    Will

  • Joe

    Garret, using my own analysis and ruleoneinvest tools for DVA I am coming up with a sticker of around $44 using growth of 10.5% and future PE of 20. Where do you see the value ?
    Judging by your previous posts (just read entire blog) I’m guessing healthcare has meaning to you BRLI..

  • http://Www.dataroma.com Sue

    Hi Michael –
    I’m glad you enjoy using the tools and nothing but respect for you as a person, and a learning machine. I just think the payout is better to focus on value rather than charts and Greek symbols and candlesticks. This is a subjective opinion but to me 5 minutes w/charts would be better spent reading a 10k
    But your right I do think I’m right and your wrong – but i resign trying to convince you because at least we are both having a blast

  • Tom

    Don’t know how much commission you pay in the US, but here in Switzerland it’s way too high.
    Anyways, here’s a zero commission app that looks promising. Any thoughts?
    http://techcrunch.com/2013/12/18/zero-commission-stock-trading-robinhood/

  • http://profile.typepad.com/garrettwoolley Garrett
  • http://profile.typepad.com/garrettwoolley Garrett

    I’ve mentioned DVA on the blog before. I’m a long-term fan.
    Here’s a recent SeekingAlpha headline:
    Berkshire ups stake in DaVita • 8:31 AM
    Berkshire Hathaway (BRK.A) has bought another 1.13M shares in DaVita Healthcare (DVA) to take its total holding in the kidney dialysis company to 37.62M shares, or 17.7%.
    The investment is being led by Berkshire fund manager Ted Weschler rather than Warren Buffett.
    Last May, Berkshire agreed not to raise its stake above 25%, and not to push for board seats or launch a proxy fight.
    DaVita shares are +2.2% to $67.50.
    To Your Wealth!
    Garrett

  • http://profile.typepad.com/highflight1985 Michael D.

    Sue,
    This is the last thing I’ll say about this.
    You’re making the generalization that the tools don’t work at all (for everyone) when they don’t work for you (and maybe others you know). (For clarity, I’m not just talking about Phil’s preferred tools; I’m talking about all technical analysis and charting.) The problem is not in the tools, it’s in how you read the tools. The formula and code that go into making those tools are the same no matter where you look. So, it’s in reading the tools and reading the tools is not a science, it’s an art. Some people are naturally better at painting than others, and the same applies to reading charts and technical analysis.
    We try our best to turn an art form into a science by using a confluence of indicators, but in the end, it is still an art. If you want to use tools successfully, you must combine them with your fundamental knowledge of the stock and have an ability to interpret floors and ceilings, resistance and support, trading volume, and what I call the stocks’ “price-action personality.” If you’re doing all of this and still not able to pick the short-term direction of the stock price more than half the time, then you’re absolutely right: the tools are worthless to you! However, I’ve come to know personally many people who are able to do this, including myself. So it is incorrect to generalize that they don’t work for everyone when you have not been successful at using them.
    It’s like saying guns are poor choices for self-defense because when you went to the range, you missed the target. Moral or ethical considerations aside, guns are obviously great choices for self-defense because 99 times out of 100, it stops attacker immediately.
    When I got started in Rule One, I literally spent months, day after day, learning about technical analysis, charting, and options. I virtually dedicated my life to it at the time because I had unique circumstances that allowed me to do so. (I sorta left fundamental value investing behind for a time.) I was able to practice and practice and practice, learn, learn, learn. It takes practice, dedication, and determination to get good at most things, especially technical analysis and charting. I’m no wiz at it, either; I know of many people who are much better at it, and those people have spent whole careers doing it professionally.
    In summary, don’t generalize that something isn’t good or useable at all on the basis that it wasn’t good or useable to you. That’s irrational. And lastly, the most rational conclusion you could have come to was that I like the tools because I think they work for me, rather than assuming I wouldn’t be willing to have an opinion that differs from Phil.
    Break Free,
    Michael D.

  • http://profile.typepad.com/highflight1985 Michael D.

    I use the tools to in conjunction with floors and ceilings to make decisions on when to sell to open and buy to close covered calls and cash-secured puts to lower my basis. You’re right, stockpiling does mean accumulating stock on the way down, but what if you’re fully invested with all that you want? I don’t want any more Coach stock. So, I shift gears from consumption to cautious-agressive basis reduction. I’m predicting a sideways movement in Coach, channeling between a floor and a ceiling, at least until September. I could be wrong, but given what I know fundamentally about the company, adding in the the tools and floors and ceilings, I’m doing alright on basis reduction.
    Break Free,
    Michael D.

  • Sue

    wasn’t accusing you of not being your own person. just don’t know how else to rationalize how people think the tools work when they don’t. the tools aren’t icing on the cake, they are mixing turds with raisins, causing people to speculate on price rather than focus on value. mainly, markets are irrational, and all it takes is a head fake dip of the market to get you out of a position where-as the value of company remains and because of that a lower price means it’s even dumber to sell then.
    people are always going to use charts and tools because people like magic tricks and shortcuts not to think – but these are dangerous because when people abandon tools, those still using the old tools get smoked. all i’m saying is it’s my total opinion that tools and charts are not helpful, they are worthless,and they can get the users in a speculative mindset.. but if peoiple want to use tools and create more volatility in the markets I like that – more opportunity

  • Joe

    Michael, sure you can buy that way but you will not be trading in and out per se. Maybe selling calls or puts with tools but stockpiling means you buy and buy more if lower

  • http://profile.typepad.com/highflight1985 Michael D.

    Joe,
    Just read a little bit about it. I haven’t dug into this one much, though it’s been brought up many times since I started with Rule One.
    I’m having trouble figuring out the moat. It has to be brand if one exists, I think. What do you think? My concern with it being a brand moat is that its brand just took a hit with some bad product, no? …and for such a new company, where the moat hasn’t completely filled with water yet (less than 10 years of data), it’s hard to know if they will bounce back from it as easily as, say, Coke might from another experiment in changing their formula.
    But, based on numbers alone, it looks very close to buyable. If you could make a case for 20% growth and a 40 PE, then it is buyable.
    What do you think?
    Break Free,
    Michael D.

  • http://profile.typepad.com/highflight1985 Michael D.

    Joe,
    I’d agree with everything you said, except one small detail.
    Even when stockpiling, you can use them to make shorter-term trading decisions to help effect a lower cost basis. In other words, using the tools = trading, and trading has its place even inside of a stockpiling strategy. This is not me just regurgitating theory; I am speaking from (successful) experience.
    Break Free,
    Michael D.

  • http://profile.typepad.com/highflight1985 Michael D.

    And I’d agree with that, too. If it’s not making money, how can you value it? Or a better question, what’s the probability that your assigned value is accurate? Hard to say, isn’t it?
    MD

  • http://profile.typepad.com/highflight1985 Michael D.

    Sue,
    Wow. You have to be kidding. You have to be Phil testing me or one of my friends playing a joke, right? You sure do know just what to say to convince me to break my vow of silence.
    Let me just say that I am most definitely my own person. I have free will. Like the title of a recent book I read, “Choose Yourself,” I choose myself. (It’s a good book, by the way; ya’ll should pick up a copy and it’s dirt cheap. My opinion only, not an endorsement by Rule One, Phil, etc.) If I ever decide that Phil is wrong about something, I am very capable of making that decision, and if for some reason it’s necessary, I’ll voice that opinion. There are, in fact, a couple of things I do disagree with Phil about, but they aren’t really worthy of being posted to the blog. But since you brought it up, in an email today, he actually asked me if he was wrong about something. He’s realistic like that. He realizes he may not always be right and his students can sometimes see something he doesn’t. I’m not some small-minded guy, spellbound by Phil’s aura, enslaved by his generosity, and brainwashed into thinking he can do no wrong.
    You are right about one thing, though. Simplifying it as much as possible, yes, all you need is a price and a value. I never said you need technical analysis or anything else. They aren’t required equipment; they are optional equipment. I opt to use them, just like Phil, just like Paul, just like Dale, just like all of our other instructors, many of our students, and a large group of people out there doing very well in their trading and investing who are not selling a pitch. They exist for a reason, and I believe they are valid tools. They aren’t perfect and no one claims that they are. You and at least a few commentators believe they are just noise and worthless, or at least, not worth your time. That’s fine; we can agree to disagree on the subject.
    Since I am an instructor/coach, and Rule One continues to teach these tools–stochastic, MACD, moving average, fibs, etc–then I will continue to discuss them from time to time on the blog as necessary. You may of course chime in when you want, but let’s not continue to accuse me of not being my own person, okay? Please?
    Break Free,
    Michael D.

  • Joe

    A handicap and one way to “limit downside”
    If you don’t buy wonderful companies preferably cheap, technicals won’t do much.
    The best way with discipline is to stock pile when other events cause dramatic reduction in price.
    Garrett,
    I understand what you mean invest in what you know and is simple, but that varies by person. To me, as a 24 year old who is very un mechanical but loves tech , I feel I can understand the value of FB GOOG and AAPL a lot more than I can understand the value of cars tractors or oil. Tech is something I love and what I prefer to invest in when I can see the value. Problem is hard to value 5 years yet alone 10….
    Anyone checked out LULU since they fired there previous CEO

  • Joe

    Phil never meant for anyone to buy and sell solely based on technicals. To understand why he used them at all in rule number 1, you have to understand
    1)how much true discipline it requires to stock pile and keep buying when your life savings is down 50% or more due to a market melt down. Human nature sees that portfolio dropping and makes us sell (or buy) at worst times. The “tools”‘are lagging indicators. They won’t make you rich. But they will prevent you from riding a failing stock to 0 or catching a falling knife.
    2) how confident and positive you have to be in your rule 1 research. Even the slightest error can be the difference in valuation. Trading in and out with tools reduces the perfection needed.
    3) the time period phil wrote the book and investing world we live in. It seems like we have absurd run ups and bear best downs on the regular. Think 2000, 2003, 2008 etc. With lagging indicators you could Have saved some money and missed riding to bottom.
    With this in mind,the tools will not “create wealth”. Wealth is created by buying 50 cents for a 1.00 of company. You can have the best quickness and eyes for tools, but if company is not worth less than a dollar, in the long run it won’t go up and you will not create wealth, probably just get the “death of a 1000 cuts” n
    So in short, IMO, the tools are a handicap for those not disciplined enough for stockpiling

  • http://profile.typepad.com/garrettwoolley Garrett

    Michael D,
    I'm just saying I don't know how to put a Value on it.
    Garrett 

  • http://profile.typepad.com/highflight1985 Michael D.

    Garrett,
    I know a great number of people who use Facebook, and a few of them make a decent living from it. If you asked them, they wouldn’t say “no one uses it anymore.” One of those making a living from it IS a teenager. Don’t consider it dead, because it’s far from it.
    I would, however, agree with everything else you said.
    Break Free,
    Michael D.

  • http://profile.typepad.com/highflight1985 Michael D.

    …I’d do everything Garrett just said well before I attempted valuing a bank. Only if I had money coming out of my ears and I was starting to have the same problems as Buffett–capital allocation–only then would I consider stepping outside of my circle of competence.
    Sadly, I don’t have that problem. Bittersweet, no?
    Break Free,
    Michael D.
    P.S. G: Good post.

  • http://profile.typepad.com/highflight1985 Michael D.

    David,
    I’ll reply before I read Garrett’s post, that way my own response won’t biased by his.
    Phil has talked at great length in his advanced class on how to value banks, especially small banks. So, what we learned there I can’t share. Even if I could share, I wouldn’t because after about the second day of discussing the topic, my head was spinning. I had a headache. Valuing banks is a whole other creature where you have to worry about ROE, nonperforming loans, and a bunch of other things. Lots more minutia.
    Add in the fact that you’re asking about banks in a completely different country where I haven’t a clue as to what their regulations and reporting standards are, and we’ve stepped a great many hundreds of miles outside of my small house of understanding.
    Also, are you a really advanced investor? Are you truly ready to try to invest in a bank in another country? (I’m assuming you don’t live in Brazil.) That seems way, way complicated.
    Having said all that, if you’re absolutely insisting on pushing forward, I can give you this hint: Google “How to Value a Bank.” You’ll find all kinds of stuff about it. Maybe you can use it to value an American bank instead? Just a thought.
    Break Free,
    Michael D.
    P.S. If ever you find yourself asking a question, just remember to put it into Google. Taken with a grain or two of salt, you’d be amazed at what you can find and answer yourself. Just grab a snack and a drink, sit back, and read on. Thank you, Google! :)

  • Garrett

    Hi David!
    Yes, I know how to value banks. Go to Brazil and ask the Bank Manager if you can see every single loan they have on their books. Next, sift through them and determine which ones you think will be in default! How do you and me know with certainty that those loans aren’t toxic?
    So there’s the problem…how does the little guy like you and me VALUE a bank?
    I don’t know. The ONLY bank I would EVER invest in is Wells Fargo because it’s Buffett’s largest position and I can have a Margin of Safety because I know when he’s buying or selling based on some subscription based services I have.
    Banks fall into my category of “Too Hard to Value” so I won’t invest in them.
    With thousands of other companies out there that serve food (Panera, Buffalo Wild Wings, Texas Road House), find oil (BP, Exxon), sell fertilizer (CF Industries), sell tractors (John Deere), make soda (Coke), mine uranium (Cameco), fix your home (Home Depot), sell t-shirt (Gildan), fly jets (Southwest Airlines), sell stuff (Wal-Mart), sell burgers (McDonald’s) etc…I don’t ever feel the need to invest in something as obtuse to me as a foreign bank in a country where possible inflation, political instability and currency issues exist.
    I think we’ve got enough of those issues here in the United States!
    My enormous financial losses have taught me that if you had $100,000 to invest, you’d probably make more money in 5 years buying $25,000 of Wal-Mart TODAY, buying more next quarter if the price went DOWN and buying more the following quarter if the price went even further down!
    And if it went up with that first $25,000 purchase…then you have $75,000 to invest in another great company.
    If you do this 4 times because every time you bought a Rule #1 Company the price went UP with each purchase, you’d have 4 really great investments.
    This is what I wish I had done 10 years ago. It would have saved me a lot of financial pain!
    Keep it simple…just invest in the stuff that you can explain to a 5 year old.
    Example: Hey kid…see those big green and yellow tractors on that there farm? Cool, huh? Oh, you say you’ve got a John Deere tractor in your sandbox? Neat. Well, I own some of those big tractors too because I’m what you call an “Investor.” When John Deere sells that tractor to the farmer, the farmer can grow his crops and sell his food to make money. When that happens, everybody is happy because we’re all making money, we’re feeding people and people that eat continue to make babies and babies need more food…and then we need to sell more tractors so the farmer can feed more people.”
    John Deere has been a company for 147 YEARS! Do you think they have a MOAT? Do you think they will be around for another 20 years? Do you think, like Buffett said there will be an occasional year(s) when times are tough? Sure. We buy on those occasions because we know we own a great company.
    I’ve been reading Phil’s blog for over 7 years now and I’ve read every post.
    It’s amazing how hard I’ve worked at losing money and how hard others have done the same. You don’t need to make the same mistakes I’ve made. Just keep it simple. Invest in a good Rule #1 4M Company that you can value.
    Begin with the end in mind. If you want to own $100,000 worth of it, then buy in 3 or 4 tranches when at or below the “Green Zone.” If it drops to new floors, make sure you’ve got “The Story” right and ALWAYS seek help on the blog. No investment is so great that you can’t wait a day or two to get a little help from some Rulers that have been there and done that!
    To Your Wealth!
    Garrett

  • http://philtown.typepad.com/phil_towns_blog/2014/02/buffetts-annual-letter-what-you-can-learn-from-my-real-estate-investments.html David

    Hello Everyone!
    I have been following the blog for quite some time. Does anyone know how to value banks? The Brazilian banking sector looks cheap to me. BSBR and ITUB come to mind. I think there is quite a bit of fear in this sector due to possible inflation, political instability, and currency issues. I would like to hear anyone’s thoughts.
    Thanks,
    David

  • http://profile.typepad.com/garrettwoolley Garrett

    Tom,
    I’d agree with you that you were indeed “lucky” because whatever the Value of FB is, I KNOW I won’t pay $70 per share if I can’t figure out the value.
    Forget MEANING, MOAT, MANAGEMENT…if I can’t figure out the VALUE to determine a Margin of Safety, I won’t buy it.
    I’ve been down this road enough and I won’t ever do it again.
    Eventually, LUCK runs out and we’re left with the truth when we’re losing money…Did I really know the VALUE of what I bought and do I believe and trust myself that my 4M analysis is correct and rational OR is it time to “Get Out” because “The Story” has changed?
    I don’t know how you VALUE a company like YELP and determine that it’s a “Just One” investment? There are so many stories of everyone chasing the next hot stock …and making money…but eventually, they lose because it’s not a long-tern winning strategy.
    If people want to invest in such companies, that’s certainly fine and I hope they are profitable. However, it’s not what we’d call sound Rule #1 Investing.
    We can all save ourselves a lot of pain and financial loss if we ONLY invest in companies that we can VALUE!
    Once you get a clear value, then you can start figuring out if indeed it’s worth your time to dig deeper into a full Rule #1 4M Analysis.
    To Your Wealth!
    Garrett

  • James Bley

    Disclaimer: I have no position in FB, nor do I plan to initiate one in the near or long term future. Additionally, I have no FB account, nor do I plan to create one in the near or long term future.
    Nobody uses FB anymore, but everybody uses Instagram and WhatsApp, both of which are owned by FB. The currency of “Likes” is going nowhere, and FB is leading the way.

  • Tom

    Garrett, I sold FB beginning of the year after realizing they’ve reached their peak and still lack a smart business idea. Same goes for Yelp and all the other overvalue tech stocks currently.
    Luckily I sold with profit, and luckily right now my portfolio is with companies I understand, trust and I don’t feel they’re overvalued so I couldn’t care less about prices at the moment.
    I truly believe though we’re in a tech bubble again that could crash the whole market.
    Problem this time (versus the dot-com crash) is that most tech companies that are overvalued have millions of users without a business model to sustain. So market prices them with hope. It will be just a matter of time until reality kicks in. Could be this summer, could be next year.
    But I hope it’s sooner so I can load up more of great business again.

  • sue

    Hi Michael-
    i thin this issue may bother you because it makes sense to you but you don’t want to go against Phil
    although i could be wrong
    best,
    Sue

  • sue

    Yeh Michael –
    Buffett’s quote, “In contrast, Ben’s ideas were explained logically in elegant, easy-to-understand prose (without Greek letters or complicated formulas). ” speaks to me.
    Basically Buffett is saying just because charting and the like is not wrong per say, he is saying those tools are absolutely worthless to him.. a distraction and he doesn’t advise using them, and he knows how to invest.
    all of the tools you use are based on past performance of the stock price and luckily all you need is value and the current stock price to make your decision.
    sure the tools may be fun, they may feel like an edge, but they are just noise
    “is there anyone I haven’t offended yet?”

  • http://profile.typepad.com/highflight1985 Michael D.

    Thanks, G!

  • Brian

    Michael, this is silly, whether Buffett specifically “dissed” technical analysis in this particular letter is irrelevant, he and many other value investors certainly have dissed it elsewhere. Fundamental analysis tells us that a stock’s price is ultimately a function of the underlying business, technical analysis tells us that a stock’s price is a function of where it has been in the past. I don’t see the need to reconcile these two ideas, one is right the other has been promulgated by brokerages and TA “gurus” to lure in clients with their fancy charting platforms and educational seminars.
    “I realized that technical analysis didn’t work when I turned the chart upside down and didn’t get a different answer.” – Warren Buffett

  • http://profile.typepad.com/garrettwoolley Garrett

    Michael,
    That was a good post on your BBBY price Moat comparison. I hope Newbie Rulers copied it for future reference when they’re evaluating companies.
    To Your Wealth!
    Garrett

  • http://profile.typepad.com/garrettwoolley Garrett

    Rulers,
    Things are getting stupid in the Market again…
    Facebook is at $70 bucks a share. My teenager says nobody uses Facebook anymore. This is the greater fool theory…people keep buying it hoping it goes up.
    Tesla hasn’t really done anything and they’re are valued at 75% below General Motors and 60% of Ford. Stupid.
    Here’s a nice quote:
    Jeff Mortimer of BNY Mellon Wealth Management: Greed, and fear of missing out…
    Unprofitable companies such as Zynga Inc. and FireEye Inc. are leading gains in the Russell 1000 Index. The Nasdaq Biotechnology Index is up 25 percent in the past 10 weeks, the most since February 2012, data compiled by Bloomberg show. Less than a third of its 122 companies earned any money in the last 12 months. Marijuana shares, which trade on venues with less stringent reporting requirements, are among the most active.
    “In this backdrop of human emotions, which begins to take over, it’s one of greed, it’s one of willing to pay for something that will happen in the future and being afraid that one might be left behind.”
    Be Careful out there! As soon as the world decides the US can’t and won’t pay it’s 17 Trillion dollar debt this is all going to crash.
    To Your Wealth!
    Garrett

  • http://profile.typepad.com/highflight1985 Michael D.

    Sue,
    How did I know you’d comment? :)
    I was on my phone earlier today when I posted the above, and I was also at work. Those two circumstances didn’t permit me to respond more thoroughly. Now that I’m home, allow me to comment further, and specifically, in response to you, Sue.
    Let’s clarify “diss,” so that you and I are on the same page and for our non-English-slang speaking readers. Per the dictionary:
    diss: informal verb
    1. speak disrespectfully to or criticize. Ex: “I don’t like her dissing my friends”
    Simply put, by “diss” you mean that he was being critical of technical studies and the like. If this is not what you mean, please feel free to clarify. For now, we’ll go with that.
    Help me out: I just re-read the entire excerpt and found no where in it a critical statement of any tools or methodology. The closest he came to it, from my interpretation, is this:
    Before reading Ben’s book, I had wandered around the investing landscape, devouring everything written on the subject. Much of what I read fascinated me: I tried my hand at charting and at using market indicia to predict stock movements. I sat in brokerage offices watching the tape roll by, and I listened to commentators. All of this was fun, but I couldn’t shake the feeling that I wasn’t getting anywhere.
    To be clear, he did not say not to use them or that they are poor choices, etc. He simply said that HE couldn’t shake the feeling that he wasn’t getting anywhere. This simply means he felt that he wasn’t good at making directional calls based on these other methods. He goes on to say in the next few paragraphs that Ben Graham’s method of applying a value to a company was much more suitable for him.
    I know plenty of charticians and technicians who are fascinatingly successful at what they do. Buffett doing something in a certain way probably makes it a very good thing to mimic given his track record, but that doesn’t make things he doesn’t do wrong. We’ve said it before, but I’ll repeat it again: There a ton of things Buffett doesn’t do because he can’t, but would if he could. His size and regulations make them either impractical or impossible.
    There is more I could say, but I’m so exhausted that I’m falling asleep at the keyboard between thoughts, I don’t desire to get into a debate on the subject any more than I already have, and I don’t want to chance rambling on and not making any sense. I may already have. With that, I rest my case. You may have the last word if you care to.
    Break Free,
    Michael D.

  • Sue

    I loved the part where he dissed using any such tools though

  • http://profile.typepad.com/highflight1985 Michael D.

    Anthony,
    My opinion only…
    I’d go with the Buffett plan. He’s a more reputable and experienced investor (least rational reason) and buying only American means less you have to keep track of. Keep it simple stupid.
    I’d still try to buy in and sell out on the tools. Before someone argues against me on the basis that Buffett just said not to, he didn’t. He said for the “know nothing” investor to buy and hold. We know more than nothing, and I believe the tools give us an edge, or at the very least, a thin layer of protection.
    But it’s your money. I’m not giving advice. I just think it’s easier to keep track of one country’s stock market versus a global economy. Might be the wrong approach though. I don’t know.
    Break Free,
    Michael D.

  • Anthony Ball

    So if investing in the Federal employees 401k (Thrift Savings Plan) do you invest like Dave Ramsey suggests which is 60% in the S&P 500 fund, 20% in the Small Cap fund and 20% in the International fund or like Warren suggests which is 10% in the Short Term Government Bond fund and 90% in the S&P 500 fund?

  • Sue

    Excellent idea to get this on the blog!

  • Brian

    The whole letter is great but this paragraph in particular should be required reading for everyone who owns stocks. Or maybe not, after-all it’s that erratic behavior that often provides the best opportunities for far-sighted investors.
    “It should be an enormous advantage for investors in stocks to have those wildly fluctuating valuations placed on their holdings — and for some investors, it is. After all, if a moody fellow with a farm bordering my property yelled out a price every day to me at which he would either buy my farm or sell me his — and those prices varied widely over short periods of time depending on his mental state — how in the world could I be other than benefited by his erratic behavior? If his daily shout-out was ridiculously low, and I had some spare cash, I would buy his farm. If the number he yelled was absurdly high, I could either sell to him or just go on farming.”