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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: MNTNH who wrote (55495)	6/18/2015 8:50:33 AM
From: Graham Osborn	Respond to of 78702

MNTNH - I couldn't agree more. Right after I posted the GG formula I started kicking myself in the head because the RoR you expect is in fact WACC. I wrote this giant follow up trying to explain why WEB is able to justify using bond rates instead of WACC in his calculations and finally gave up because frankly I don't understand it either. I think part of it is he picks companies with dependable cash flows, and another is because his holding period is "forever" he doesn't demand compensation for price risk at the point of sale. Just another good reason why Buffett's calculations should be used with extreme caution by retail investors. Mary B seems to be a huge wanna B. I love how she interprets Buffett's RoR requirement as evidence that "price should not be the only determinant of purchase." It's as if she doesn't know how to convert between IRR and NPV. If price relative to intrinsic value is not the sole determinant of purchase one is not a value investor IMO, be it Graham, Fischer, Buffett, Gabelli, or otherwise. - Graham

To: MNTNH who wrote (55495)	6/18/2015 4:41:26 PM
From: bruwin	1 Recommendation Recommended By MCsweet Respond to of 78702

Interesting set of observations, MNTNH. I must say, I don't have a problem with Buffett's observation regarding companies that can be 'classified' as having Durable Competitive Advantage (DCA) and which, in turn, show such great strength and predictability in earnings growth. That growth turns their shares into what he regards as an Equity Bond with an ever increasing coupon or interest payment. Whereas the normal bond's coupon or interest rate remains fixed, that of the company with DCA generally keeps increasing year after year as seen from the company's pre-tax earnings, which are regarded as the equivalent of a normal bond's coupon or interest payment. The per share earnings rise over time, and with the rise in earnings comes a corresponding increase in the Return that one gets on one's original investment in the 'Equity Bond'. However, it seems that it is a requirement that a company falls within the "classification" of having Durable Competitive Advantage. Should a company that did, at one time, have those DCA criteria, but is now falling outside that definition, then it may no longer contain those attributes that best suits a favourable Equity Bond end result. That may possibly be why Buffett has been selling off his stake in PG. In the "template" that I included in my post ... Message 30110619 ... I did suggest that one of the reasons "When To Sell", i.e. (2), is when a company is losing its DCA. Others on this board have also commented on the aspect of Equity Bonds and have referred to estimating future performances of a company generally by inserting a percentage rate into their calculations. Personally, for what it's worth, I'm not a fan of trying to predict what a rate will be 3, 5, 10 years, or more, down the track. Because if you get it wrong, and you are putting reliance on the result of your calculation, then it could very well be 'garbage in, garbage out'. IMO DCF falls into that category. I would be more in favour of Buffett's approach in terms of his using relevant components from a company's financial statements and setting targets. If one then monitored a company's financials, on an ongoing basis, and they maintained meeting or beating those targets, then it seems to me that its business performance must be on track. With regard to your opinion regarding Mary Buffett, ... is that based on the fact that you personally know her reasonably well and can thereby confidently draw the conclusions you expressed ? Below is another extract from "the book" which I believe quite clearly indicates who provided the bulk of the research material that went into the book in terms of Warren Buffett's "wisdom on investing", and therefore how the book saw the light of day. Without David Clark's input the book could not have been written and I suggest that Mary Buffett alluded to that ... I'd say it's quite interesting to note that these two co-authors also produced "Buffettology" and "The Buffettology Workbook". I believe several regular contributors to this board, who I'd say are also very competent investors, have quite often in the past referred favourably to one or the other of those books. In addition there's also a whole Board devoted to "Buffettology" to which several members of this board contribute to quite regularly.