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

To: Grommit who wrote (56544)	1/3/2016 5:42:18 PM
From: Spekulatius	Read Replies (1) \| Respond to of 78774

Grommit - you friend has compounded his error not just by investing in E&P's, but in E&P LP's which are a poor business model. While the depreciation in a pipeline of a typical midstream is just an accounting entry, because the pipeline had a long operation life (I assume it is so,but in some cases that is not true), the depreciation of an oil well is an very real expense, as any oil or gas well will run dry. This means that most of the cash flow really would need to be diverted to replacing the depleting reserves. This is a very different situation than with a midstream pipeline, where the asset swap would through of cash for decades with only a small fraction of the cash flow needed for maintenance Capex. The energy LP could maintain a mirage of sustainability as long as they could issue stock to yield hungry investors above NAV (purchasing them from E&P's in most cases) a one that avenue is gone, they are going into runoff and the remaining cash flows at lose nervy prices right now are only a fraction of what these partnerships were implying even a short time ago.

To: Grommit who wrote (56544)	1/4/2016 12:18:13 AM
From: Jurgis Bekepuris	1 Recommendation Recommended By Grommit Respond to of 78774

I contend that no one knows what crack spreads or oil prices will do. It's so great that you know what everyone else does or does not know. Talk about hubris.

To: Grommit who wrote (56544)	1/5/2016 6:42:01 PM
From: Graham Osborn	1 Recommendation Recommended By mopgcw Respond to of 78774

The quintessential "value trap" arises when value investors apply ratios to fundamentals in flux. One of Graham's core assumptions was that the historic operating performance of the business would predict the future better than modeling. When you consider the basic format of the ratios we use: Market valuation/ Balance sheet metric Market valuation/ Operating or Cash flow metric You see the problem: Market valuation (all future cash flows) / Balance sheet metric (right now) Market valuation (all future cash flows) / Operating or Cash flow metric (generally TTM cash flows) So your ratio-based investor will get screwed using these ratios if the fundamentals are changing. For this reason, I have decided to generally never invest in businesses that are shrinking their revenue or tangible book value. And in general, I like 10% growth on both. With those assumptions I can use the ratios and know that I am dealing with real value vs the "shriveling cash flows" illusion of value. You might call it the Buffett qualifier. 90% of the stocks discussed here fail on one or both criteria.