It was a surprise (a pleasant one!) and extremely interesting and informative for me to read those posts, that followed on from my post #2333, regarding the price spread that has recently occurred between the SI Top 10 Portfolio and Buffett’s choice of stocks.
One can never tell what viewpoints and conclusions others will arrive at on a particular topic or observation.
Even if it’s only for my own interest sake, I thought I’d take extracts from the 5 posts, following my own, and put forward my own opinions and comments (for what they are worth !!) .....
1) E_K_S :-
”Buffet does not really care as long as he believes he is acquiring the stock at a deep discount to his "value" criteria. ..... will generally buy when everybody else is selling.”
Yup, I’d go along with that. We all know that “fearful” and “greedy” quote!!
The “value” criteria may be different things to different folks. For Buffett I understand it’s based on the current stock price being Less than the Pretax Income/share divided by the current Long Term (AAA) CORPORATE Bond Rate (Not Treasury Rate) (See page 165 of "Warren Buffett and the Interpretation of Financial Statements").
”This excludes these companies from the Graham screens as his defensive posture is to require 10 years of positive EPS.”
Yes, I’d also say that one of the few common denominators between “Buffett’s way” and “Graham’s way” is the emphasis they put on the longer term performance of a company. However, there’s no doubt that Buffett took his own route when he decided on what he would invest in and how he would go about doing it, which, IMO, is different to that of Graham.
”The other unique thing during this period is the Fed's QE3 announcement (9/13/2012 ). This may have influenced our results and Buffets portfolio too. It is/was an unprecedented announcement that interest rates would remain at "0" through 2015 and they would buy $40B worth of mortgage paper in the open market every month and it is "open ended"!
I am not sure if that influenced how/what/where you invest new monies but it sure has for me. I believe both Buffet and our SI portfolio have been, and will be, affected by the Fed's statement and I expect to see new Buffet buys and sells that play into what the Fed announced (i.e. QE to infinity).”
Yes, indeed. And that was one of those aspects that prompted me to ask the question, a while ago, regarding the opinions and/or observations of others about the reaction/performance of stocks in the Top 10 when they were faced with events such as the FED’s QE3. It seems that there’s the possibility that our choice of stocks has varied to a greater degree than Buffett’s. As usual it’s always the “Why” that becomes useful information.
”Graham's and Buffet's "value" styles are different but then again similar in a lot of ways. I would say that Buffet's value approach is more mechanical than you might think but he still leaves the door open for "other" non formulaic factors.”
Personally, I’d say that Buffet approaches investing differently to Graham in as much that Graham focused a lot of his attention on the Balance Sheet and determining Book Value and how that compared to current share price. Graham would buy if there was a deep discount between the two.
Buffett, IMO, takes into account, and puts a lot of emphasis, on those “markers” that one would normally find within the three Financial Statements of a company with Durable Competitive Advantage. He applies ‘above average’ target percentages to ratios obtained from those “markers” and uses those as his starting off point when looking for investments.
Of course, the “other non formulaic factors” such as good, honest and reliable management, stock ownership by management, etc... also play their important roles.
As a matter of interest, there isn’t one reference, that I could find, in the book, ‘Warren Buffet and the Interpretation of Financial Statements’, to Buffett's use of the Price/Book ratio.
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2) The Ox :-
”We didn't "time" any of the purchases. We bought on a specific date.
Because we bought 10 stocks at one point in time, it shouldn't come as a surprise that we timed some of our purchases beautifully and others poorly. We focused on Fundamentals. On Value.”
Absolutely correct.
’I'm much more interested in a year or 2 down the road. Let's see how these are doing in 9 months, 19 months, 29 months.....”
And so am I.
Needless to say, my latest observation was more aligned towards how the companies have performed within the context of latest events in the Market place. Over the longer term price performance is, IMO, more likely to be the end result of the “Fundamentals” and “Value” that you referred to.
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3) Valueguy :-
”Also, one has to take into account the fact that it is quite often that stocks at new highs go on to make even newer highs, and conversely for the new lows.”
Yes, indeed.
I remember, not that long ago, when I had an exchange with an SI member regarding Netflix(NFLX). Way back when I first put NFLX forward it was trading for just under $50 and its Fundamentals, at that time and IMO, looked good to me.
The SI member’s opinion was that the stock was ‘too expensive’ at $50. Well, the thing is, the stock price continued upwards to $100 and then to $150 and then to $250 and then to top out at $300. Well, I reckon that the relevant fundamentals that one saw at about $50/share were very much the same at about $150/share to about $200/share.
So as you quite rightly say, “stocks at new highs (can) go on to make even newer highs.”
Of course, one needs to keep an eye on the ongoing fundamentals, as well as any other aspects/announcements, that may change the company’s future price performance. That certainly happened in the case of NFLX when their share price was in the region of $300.
”Why did CMI go down by 10% anyway? I have not analysed it but more often than not there is a specific reason as to why a stock's price would go down or up. If there is none and the fundamentals that we based our 'buy' decision are still intact, then buy up some more!”
Agreed.
The question is, ‘What are the relevant fundamentals’ that one is using, and have those fundamentals provided positive results over time and in a variety of market conditions?
In that regard I’d say it would probably be a good idea to go along with what the really successful investors, such as Buffett, use as their relevant fundamental criteria, which seem to have stood the test of time very well indeed.
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4) Sergio H :-
”Buffett's value equation means finding stocks that will continue to outperform the market so it does not matter at what point you start a position. Let them run and the short term blips do not matter if we're playing long term. Buffett's major holdings have withstood the test of time. If we're challenging Buffett, so should our picks.”
Yes, I’d agree that Buffett’s stock selection would generally outperform the market and one could do a lot worse than hanging onto his coat tails and going along for the ride.
With regard to the starting point, it seems that Buffett’s starting point would always be based on his “Equity Bond” approach. And once he was into that stock he would normally buy more only when the price satisfied that same criteria in the future.
Personally that’s an approach that I’d go along with as well.
”Graham was focused on finding stocks that had assets that were not recognized by the market, so price at entry point was key. This is a big difference in estimating value. Graham's value and Buffett's value are not the same. Follow Graham and you need to get in at the right price. Follow Buffett and entry point is not relevant.”
I’d also agree that the Graham 'value' and the Buffett 'value' are not the same because, IMO, they approached their stock selections based, in several areas, on differing criteria. That approach often meant that Graham would have sold, whereas Buffett would have held on for the longer term because the criteria that he used gave him no reason to sell.
Conversely Buffett would not have bought what Graham bought just because Graham thought he was getting a “bargain” due to the difference between price and book value per share. There were certainly times when Graham’s ‘bargain price’ continued to go through the floor because there was good reason why that stock’s price had fallen to where it was.
On the other hand, when a stock met Buffett’s fundamental criteria, it was most unlikely that you were buying a “lemon” because “lemon’s" would not have been able to have Simultaneously met All of Buffet’s target percentage ratios.
”You can't run a scan to measure moats and market dominance.”
Well, ..... Personally, I’m not so sure about that.
If we think in terms of those percentage target ratios that Buffett requires, then we can take all of a company’s Financial Statement report(s) for the last “x” number of Years or Quarters, download it into, say, EXCEL, and get EXCEL to do all the financial target ratio calculations for us. From that result we can do the necessary sorting and eliminate those companies that don’t meet all of those required ratios.
That would give one a much shorter list from the general market, and one could then further interrogate those stocks for other “non formulaic factors” as referred to by E_K_S.
”Anyway, we are challenging Buffett and not Graham.”
Agreed !! {:-)
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