Old School Value Nugget Fest (Dec 12th Edition)
Hope you’re enjoying the start to winter so far.
On the blog, we published a piece we worked on with one of our readers, Ney Torres, asking whether negative equity is bad.
Depending on how much time you have, I highly recommend the piece by Aswath Damodaran and the interview with Vitaliy Katsenelson this week.
Interesting breakdown of BRK’s portfolio by industry, with each of the names listed. Hint: lots of financials.
“If a company is in a position to buy a rival, it’s probably in better shape than the target is, and that means its stock is worth more of a premium, Buffett wrote in 1997. Paying cash helps the acquirer avoid giving away the appreciation of its existing business to holders of the company getting bought out, which, if you’re doing it right, is larger than the gain likely to come from the acquisition, he wrote.”
Books mentioned in his shareholder letters. Some OSV favorites in here, a couple I haven’t read.
Markets & Investing
Regime Change and Value: A Follow up Post on Aramco [Damodaran]
Although this is conceptually a follow-up to his valuation of Saudi Aramco, it’s more like an overview of how to think about risk in valuation in general and in DCFs in particular. My favorite read this week.
“Survivorship bias is particularly common in the world of business. Companies which fail early on are ignored, while the rare successes are lauded for decades. Studies of market performance often exclude companies which collapse. “
This is why I rarely read books about successful people, because they cherry-pick the things that they think led to that person’s success and ignore all the people in the world that do those things and aren’t successful. This is an incredibly important thing to internalize.
Company & Strategy
This page links to notes from the recent Sohn London Investment Conference 2019 which featured investment managers sharing ideas to benefit charity. Mostly longs with some shorts.
Podcast of the Week
Vitaliy Katsenelson is interviewed by Tobias Carlisle. This link has notes from a selection of the interview, and it was my second favorite read this week. Vitaliy discusses his evolution as a value investor. Here’s an example:
“So if you look at Twilio and you say, okay, two things. First of all, their expenses are really too high because if you amortize the R&D investment over time, they actually would be making money, number one. Number two, this is a company that has fixed cost. If you’re certain the revenues will continue to grow, you cannot help but you see the margins expand. And this analysis, I realized, if I’m very conservative with the sales, and at the time of growing 50% a year, I took them down to 20%. 20, 25%.
“In three years they would be trading at maybe two and a half times revenues, which is for software company that’s actually probably the low end, as bad as it gets. So I realized if I’m very conservative in the worst case I won’t lose money. So long-term time horizon, I was looking at three to five years out, probably five years out, there was margin of safety.”