Old School Value Nugget Fest (Jan 30th Edition)

Written by

Jae Jun

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The word gets floated around easily. Ask what bubble someone is referring to and they won’t know.

“It just feels like one *shrug* ????”

I don’t think we are in a bubble. Yes market valuations are high. However, yields are still low and I doubt people in the market are going to sell to buy treasuries anytime soon. Companies are still producing excellent results, continuing to innovate and tax reform will add additional punch to the bottom line.

What’s not to like.

Frankly, I find it easier to look at the glass half empty, but with the strong fundamentals driving this economy, I see the glass half full.

On the flip side of this, many people are thinking the same thing with equity inflows gushing in. In the first week of 2018, $24.4B came in which is said to be the 6th biggest inflow ever.

  • More people wanting in
  • More funds buying

Also means that valuation is still going to be considered “old school”. If I had to guess, 2018 will largely see a lot of the larger liquid names driving large market returns like it did in 2017.

Nevertheless, I’m readily on the lookout to book profits where I can and regularly revisting my valuations and future outlook.

Old School Value Articles You May Have Missed

What We’re Reading in the Media

Warren Buffett Stock Ideas from the 1950’s (Geico, Western Insurance, Home Protective Co., and Oil & Gas Property Management)

I didn’t realize that Buffett wrote a series of “The Security I Like Best”. At first, I thought it was the same thing 4 times in the same PDF, but they each highlight the investments that we have heard about, but Buffett give his own investment theses.

Damodaran – A Cost of Capital Primer

Like all things Damodaran, this is another deep discussion and look at cost of capital. How it’s used, how it shouldn’t be used, how to think about and come up with your cost of capital.

Although Damodaran is referencing the corp finance world, when it comes down to valuation, he goes on to conclude that Cost of Capital isn’t going to be the biggest driver of valuations. It’s your cash flows and growth estimates. If you’re spending too much time to calculate Cost of Capital, you’ve got it wrong. Buffett and Munger have also mentioned that their watermark does change depending on the investment environment and where yields are, but they don’t spend too much time tinkering with discount rates.

You can read more of what I think in my detailed post on Discount Rates for Value Investors.

Network Effects that Amazon Continues to Develop

I’ve changed my position on Amazon. Before, I defaulted to avoiding it because of the valuation.

I couldn’t justify buying a company for 200x EBIT.

But the more I ignore analysts and focus on the business side of things and read intelligent and deep articles such as this one, the question isn’t what Amazon is worth right now, but how deep and wide their moat is becoming and what their long term valuation will be. If Amazon continues to attack every horizontal and vertical market, even the current valuation can be considered cheap. Every new venture and its domination of competitors just piles onto the market cap.

More links to get you thinking and learning: 

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