OT.
Interesting and informative post, IndependentValue, and certainly worthy of a reply.
But , firstly, a quick look back ... in the late 90's I was more into TA and ignored FA. I was then exposed to the writings of someone who had studied the ins and outs of financial statements and how they reflected the business performances of companies. He concluded, and thereby advised, in his books, written in the early 80's, that very good investment results were obtained if one extracted several components from the three financial statements, turned them into percentage target ratios and searched for companies that simultaneously met or exceeded those ratios. Several of them are in my board's header.
Having said that, many years later, after missing my flight, I browsed through an airport bookshop and came across "Warren Buffett and the Interpretation of Financial Statements" published in 2008. The more I read it, the more amazed and astounded I became because in it I found that the set of "investment principles" that Buffett used was virtually the same as those postulated by someone else 20 years earlier.
Two individuals, in two different countries, independently arriving at their own, similar conclusions as to how best to choose companies to invest in. Once again, I've summarised Buffett's modus operandi in my board's header.
My friend did very well investing capital on behalf of retirees and Buffett's performance is, of course, legendary.
Now to my reply, with the above in mind ...
a) There's no doubt that the behaviour of a senior executive, i.e. CEO, or business owner can adversely impact on a business IF that behaviour carries through to his/her decisions directly related to the running of that business. I'd say that he/she could be an a---hole in terms of their basic character or behaviour. But if their business acumen and ability to run and manage a business was divorced from the undesirable aspects of their persona, and their business performed well, then I suspect the shareholders would retain the stock. But Buffett, for one, certainly places a lot of emphasis on the enthusiasm and dedication that the management team, and especially the owners, have for a business. Nebraska Furniture Mart and Clayton Homes are possibly good examples in that regard.
b) You disagree, as is your prerogative, with regard to the "Asset Value (per share)" criteria. A quick initial point ... in the " ... Interpretation of Financial Statements", where the factual input came, primarily, from Buffett's researcher David Clark, there is not one mention of Buffett's use of an Asset Value/share (or Book Value/share) in his search and determination of companies to invest in. In fact Buffett has altered the "Graham-based" value investment strategy that he encountered when he first worked for Graham as seen in ...
Apparently, while working for Graham, there were a few things about his mentor's teachings that he found troubling. Firstly, not all of Graham's UNDER-valued businesses were re-valued upwards. Some, in fact, went bankrupt. Secondly, some companies that Graham purchased, then sold under Graham's 50% Rule, continued to prosper year after year. Their stock prices soared far above where they were when Graham unloaded them.
It seems to me that the Asset Value/share metric, on its own, and where it is derived from, needs careful consideration.
In this regard, if we take the Balance Sheet equation of : Share Capital + Retained Income = Total Assets - Total Liabilities, and assume that Share Capital has remained reasonably constant, then, for the Balance Sheet to improve, 'Retained Income' must increase. And as we know, that input comes from the company's Bottom Line after dividends. And that, I'd say, is more in line with your contention regarding "good prospects", "going concern" and "improving operations" rather than with Market Cap (shares x price) being greater than Asset Value.
It seems that Buffett has placed his emphasis on the ongoing business performance of a company which he determines by scrutinizing numerous areas of all three financial statements and thereby creates a form of "template" that he prefers a company to meet, rather than placing emphasis on Market Cap being greater than Asset (or liquidated) Value. I'd say that if a company can comply with his target requirements then it's very unlikely it would be a poor investment and would not show an ongoing positive performance in its share price. |
