Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

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

To: Shane M who wrote (1057)	2/18/1999 2:09:00 AM
From: Michael Burry	Read Replies (1) \| Respond to of 4690

Both of these stocks - I would think you either a) would have to know the industry extrememly well or b) know the inside story on each co very well. No one said this was easy. Mike

To: Shane M who wrote (1057)	2/19/1999 9:50:00 AM
From: porcupine --''''>	Read Replies (1) \| Respond to of 4690

shane: I'm not going to second guess these picks, given their provenance. What interests me is the possibility of a "3rd Era of Value Investing" paradigm shift on Buffett's part (regardless of who actually made the purchase). In the 1970's, Buffett learned the hard way that in an inflationary environment, even though accrual earnings may be consistently positive, cash earnings may still be negative. This is because the depreciation charges that are deducted from revenue on the way to arriving at net income are much smaller than the inflated capital expenditures required to replace this capital in the current period -- as well as the front loading of interest expense -- that contemplates future inflation -- on the bonds or bank loans used to finance current capital expenditures. It is GADR's thesis that the global shift away from statism in general, and, in particular, the shift away from the inflationary bias of the war economy that prevailed from 1940 to 1990, has returned Capitalism to its normal state: Deflation. There is nothing unusual about Capitalists constantly finding ways to produce more and better for less. I admit that there remains a troubling source of possible future inflation. There is the possibility that providing medical care to an aging population throughout the developed world will re-introduce an inflationary bias. Both military and medical spending have a similar "your money or your life", ergo, "money-is-no-object" economic dynamic. But, that caveat aside, it is a corollary to GADR's thesis that capital intensive industries are being systematically undervalued by Mr. Market. Because, as the replacement cost of capital falls or at least fails to rise as much as valuations would imply, depreciation charges loom larger on the income statement, relatively speaking, than current capital expenditures on the balance sheet. Thus, net income may appear static or falling while cash earnings are actually pouring into the corporate coffers. It has been 20 years since Buffett's Great Awakening that the Graham-like asset plays that worked so well in Value Investing's boom-and-bust First Era were not as successful in its inflationary Second Era. I assume that GLK and TCAT are superior companies within their respective industries. Nevertheless, the industries themselves are notorious for requiring enormous capital outlays to produce thin profit margins of the sort Buffett railed against in BRK annual reports of the late 70's and early 80's. Regardless of whether Buff or Lou actually pulled the trigger, could these new components of the WEB Empire signal that Buff accepts that Value Investing is in its 3rd Era --???>