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The Science of Hitting
The Science of Hitting
Articles (454) 

Jack of All Trades, Master of None

Tesla Motors (TSLA) is a bubble and is worth pennies in comparison to its current market valuation.

Tesla Motors will change the world; those that have already been burned shorting the stock have only begun to feel the pain that they will incur if they don’t cover now.

Those two statements are about as opposite from one another as you can get – and if you went and read any articles about Tesla on SeekingAlpha (not too many are published here on GuruFocus, which says a lot about the different crowds on the two sites), you could find a seemingly endless number of people in the comment section that are 100% certain that one of those two statements is undeniably true.

For those ready to tune out, don’t worry – this article isn’t about Tesla. I have nothing to add to the conversation: I can’t begin to understand the company’s technology, let alone estimate its sustainability (the company’s disclosure on patents in its 10-K doesn’t do me any good). What I’m more interested in discussing are the people who “know” how this will all play out. Now, I must admit, I’ve made one key assumption: I believe that most of the people discussing Tesla don’t have the first clue what they’re talking about, either from a financial (even rough, “back of the envelope” calculations) or technological perspective (quite important in determining the success – and sustainability – of Tesla’s business model); if you stop for a quick read of the aforementioned comments, I’m sure that you’ll agree.

The unfounded conviction of a seemingly large number of market participants despite any background knowledge or research (with TSLA being a prime example) is a truly astounding phenomenon. Unsurprisingly, the great investors of our time take a different approach, following the wise words of Thomas Watson Sr. – “I'm smart in spots, and I stay around those spots.”

In a Forbes interview in 1987, Phil Fisher said the following when asked about what kind of companies he liked: “My own interests essentially are in manufacturing companies that in one way or another can expand their markets by taking advantage of the discoveries of natural science. In other fields, such as retailing and finance, there are excellent opportunities, but I feel this is one where I am more qualified. I think a weakness of many people's approach to investment is that they try to be jacks of all trades and masters of none.

This is astounding when we consider that Mr. Fisher made these statements at the age of 80, with more than half a century of investment experience. Even then, Phil Fisher still saw no reason to stray beyond his core competency (his success with investments in Motorola and Texas Instruments (TXN) over many years prove that was a wise decision).

Speaking of Mr. Fisher, another of his quotes is appropriate here. This is from the list that I wrote about the other day (here): “There are a relatively small number of truly outstanding companies. Their shares frequently can’t be bought at attractive prices. Therefore, when favorable prices exist, full advantage should be taken of the situation. Funds should be concentrated in the most desirable opportunities… For individuals, any holding of over twenty different stocks is a sign of financial incompetence.”

These concepts are related, if not one in the same: Many people attempt to become a jack of all trades, and as a result become a master of none. It’s much the same for the investor that owns a little bit of everything, and when all is said and done “owns” nothing; they’ve done a lot of buying and selling to end up in a spot that is essentially identical to what they could’ve achieved with no work and at a lower cost (trading, taxes, etc) via an index fund. In fact, studies have shown that, if anything, they’re bound to end up on the wrong side of the divide in comparison to the major indices due to poorly timed decision-making (buy high, sell low).

The solution is clear: concentration and conviction, with that conviction supported by analysis and facts; Berkshire Hathaway (BRK.B) was built upon those two pillars, and Warren Buffett’s most notable investments all fit the bill - from American Express (40% of portfolio after the salad oil scandal) to Coca-Cola (the investment was equal in size to approximately three years of operating earnings for Berkshire in the late 1980’s) to Burlington Northern (the purchase price is equal to ~10% of Berkshire’s current market cap). Charlie & Warren went big when they acted, and it’s paid off; even today, Berkshire isn’t the index fund that many paint it out to be: at the company’s current market capitalization of $265 billion, five names – American Express, Coca-Cola, Wells Fargo, IBM, and Burlington Northern (assuming a similar multiple to UNP, CSX, etc) – account for nearly 50% of Berkshire’s underlying value.

The point is that it’s okay to say “I don’t know” – but on the few occasions where you do know, act accordingly.

Very few people can make an informed decision about Tesla – on the buy side or the sell side (there’s a reason why smart people like Jim Chanos don’t short stocks based upon valuation alone). Figuring out the important questions that you should be asking – let alone answering them – is easier said than done; failure to address critical questions can leave you with a false sense of confidence, and lead to a permanent impairment of capital.

A great example is competitive threats: whether or not General Motors (GM), Ford (F), and others will stymie TSLA is simply unclear at this point in time - yet it’s a critically important piece of the puzzle; considering that GM spent more than $7 billion on R&D in FY2012, or more than 26X what TSLA spent in the same year, this cannot be glossed over as immaterial (Ford spent roughly twenty times more than TSLA).

There are people out there that could gather and distill the core arguments and facts involved and put together a logical estimate of what the coming years will bring; I’d bet that the vast majority of people with a current interest in Tesla (long or short) couldn’t – or have not – done so.

I’m of the mindset that intelligent investing requires intense self-reflection; action that is rooted in behavioral biases must be sought out and eliminated swiftly. Many people jump from one stock to another, racking up confidence from the winners and finding scapegoats for the losers; they’re flipping coins, and it has no place when we’re talking about something like saving for retirement. Even worse, many can’t recognize that what they call investing is really gambling.

The best course of action is to move on when you’re at a competitive disadvantage; recognizing that reality is an arduous task. Missing a few winners that are near the edge of your circle of competence is a small price to pay to avoid the true disasters - like buying a tech stock at the turn of the century only to see it crater 80% or 90% in a few months’ time (as an example, Pets.com went from IPO to liquidation in less than nine months).

Don’t get caught up in the game, even if it’s just a small piece of your portfolio; this stuff is like poison – with some luck, you’ll start to believe that you actually know what you’re doing. It’s a dangerous road that can result in disaster. Let the media and the bloggers worry about the “hot stocks” of the day; there are plenty of other companies out there - almost all of which are under less focus than Tesla, Facebook (FB), and Apple (AAPL). Find the spots where you can truly excel, and stick to those spots; if you’re the guy who can honestly say that you’ve done the research and will long/short Tesla, more power to you (I think you should require a minimum commitment of time and money if you make that call, but I’ll save that discussion for another day).

When you find yourself with a screaming opportunity that’s based upon thorough analysis, don’t move gingerly - act boldly. Otherwise, stay away; leave the gambling for Vegas.

About the author:

The Science of Hitting
I'm a value investor with a long-term focus. As it relates to portfolio construction, my goal is to make a small number of meaningful decisions a year. In the words of Charlie Munger, my preferred approach to investing is "patience followed by pretty aggressive conduct". I run a concentrated portfolio, with a handful of equities accounting for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification.

Rating: 4.8/5 (38 votes)



AlbertaSunwapta - 4 years ago    Report SPAM
Great discussion. Fisher's books were among the first investment books I ever read. I guess I should re-read them as now I note that he said: "For individuals" which implies other investment entity don't apply. How did he explain that implicit differentiation? Multiple managers, investment committees, sectoral bets, indexing...?

For instance, on several occasions hasn't Buffett via Berkshire Hathaway held significantly more than the 20 stock litmus test for competence Fisher speaks of? In fact, how many holdings does Buffett, via his own hand, have right now?

"Funds should be concentrated in the most desirable opportunities…For individuals, any holding of over twenty different stocks is a sign of financial incompetence.” - Fisher
Gurufocus premium member - 4 years ago
Excellent read! Thanks!
The Science of Hitting
The Science of Hitting - 4 years ago    Report SPAM

Here's the quote in full from Mr. Fisher:

"There are a relatively small number of truly outstanding companies. Their shares frequently can't be bought at attractive prices. Therefore, when favorable prices exist, full advantage should be taken of the situation. Funds should be concentrated in the most desirable opportunities. For those involved in venture capital and quite small companies, say with annual sales of under $25 million, more diversification may be necessary. For larger companies, proper diversification requires investing in a variety of industries with different economic characteristics. For individuals (in possible contrast to institutions and certain types of funds), any holding of over twenty different stocks is a sign of financial incompetence. Ten or twelve is usually a better number. Sometimes the costs of the capital gains tax may justify taking several years to complete a move towards concentration. As an individual's holdings climb toward as many as twenty stocks, it nearly always is desirable to switch from the least attractive of these stocks to more of the attractive. It should be remembered that ERISA stands for Emasculated Results: Insufficient Sophisticated Action."

That probably goes a long way to answering your questions. In terms of Berkshire, about 70% of their equity holdings were across just five names as of 2012.

Thanks for the comment!


Thanks for the kind words!

Cornelius Chan
Cornelius Chan - 4 years ago    Report SPAM
Very insightful investor you are Science. You are absolutely right in your observation of how the crowd behaves in the stock market, with the example of Tesla to highlight it.

There are many types of people participating in the stock market. I have the view that just as life in general produces a lot of people who never distinguish themselves or bother trying, so in the stock market there are millions who participate but few who succeed consistently.

As an old saying goes, "If you don’t want to learn, why waste your hard-earned money in the stock market?"

Another good one, "You don’t get rich quick gambling in the stock market. You only attain new levels of relative poverty."

I have checked out Seeking Alpha before and found that there is a lot of hot air going on there. I prefer the company of value investors. At least there is a focus, which is so very important to the fine art of investing. As they say, "birds of a feather flock together."

Sapporosteve premium member - 4 years ago
Ben Graham held well over 20 or 30 stocks. Walter Schloss does as well. It would be a brave person to call them financially incompetent. In the end (1974) Graham said basically to buy a lot of cheap stocks based on 2 or 3 simple criteria and then hold them for 2 years or 50% profit. The magic formula's success is predicated on simple formulas not a deep knowledge of individual companies.

While concentration and conviction works for Buffett and Munger, the question is for how many others does it work? It can - a study shows that if you followed Buffett into each of his purchases when it was made public, you would have made 15% annually. But how many followed through?

Quant strategies have been shown to outperform humans - but many think that quant strategies are a floor that they personally can improve on - however, as James Montier states, they are actually the ceiling and most human intervention reduces their success. These strategies rarely focus on deep knowledge and conviction, but simply use other strategies to outperform the market.

I suppose you could self reflect adequately and come to the conclusion that concentration and conviction are the domain of only a few like Buffett and Munger. But then what are the odds that you think you are can be among that type of company. That is the conclusion I came to.

I am not saying that Buffett type concentration and conviction does not, or can not work - of course it can but there are many ways to make long term money in the market. For most people it would be easier to simply adopt the Magic Formula, or perhaps the Dogs of the Dow rather than try to become a member of a very elite group that is able to select the few great companies.

Science - I know you wrote much about JCP and believed it to be a long term turn-around, but I have been wondering whether you still hold the stock.



The Science of Hitting
The Science of Hitting - 4 years ago    Report SPAM

Well thank you - that's very kind of you. Agree with all that you've said, and I hope to be part of the flock for a long time. Thanks for the comment!


There are certainly examples to the contrary, and from great investors; I wouldn't get caught up in the exact number put forward by Mr. Fisher, and instead think about what he said as it pertains to even a very good individual investor (who is still no Graham, Schloss, etc). I think your point is valid, and I'd note that what Buffett/Munger do seems a lot like what Fisher did in his time (or at least how he described it; I don't have intimate details on his exact transactions); his book essentially never addresses the point of selling a stock that has reached fair value, because he felt so deeply that one should not depart from a truly great business with long term growth prospects. That certainly sounds more like Buffett than Graham (of course Graham's single best investment by a wide margin was in a situation quite like that - GEICO).

I don't think it's about right or wrong, and as you note, many people can have success approaching the problem different ways. One thing that certainly doesn't work is spreading your bets as a hedge against analysis; that is what I really looked to address in this article.

And on JCP I have not sold a single share; at the same time, I haven't bought any either, and will not be doing so (with all but 100% certainty). I made a commitment to be a business owner when I bought the shares and am seeing it through; I'm hoping painful lessons are more likely to be remembered....

Thanks for the thoughtful comment! Anybody who quotes Montier is a friend of mine :)

Batbeer2 premium member - 4 years ago
>> I made a commitment to be a business owner when I bought the shares and am seeing it through

I don't know about JCP but I think you will have satisfactory results with that approach. In any case you'd deserve them which is probably the best way to get them.

Off topic.... it just struck me that SPLS may be what's killing Dell. They are both trying to push tablets and other computer devices/peripherals to businesses/offices through their websites. SPLS seems to be growing that part of the business while Dell is transforming itself into a services/solutions provider precisely because the retail side is not as hot as it used to be.

Maybe Dell lacks the distribution footprint SPLS does have. Also, Dell used to assemble stuff themselves and they did a very good job. With the tablets and other modern/non PC devices, distribution of the finished product may be more important than the ability to assemble custom machines cheaply.

Like you, I've been giving the OMX/ODP/SPLS competitive dynamic some thought. I hadn't given much thought to the SPLS/DELL dynamic though. It struck me yesterday while I was reading up on the latest Dell news.

Just some thoughts. Thanks for another article worth reading.

The Science of Hitting
The Science of Hitting - 4 years ago    Report SPAM

That's my thinking - it will force me to partner with great businesses; if I don't get too crazy on the prices I pay, I expect the result to be quite satisfactory (I've been happy with my results in the few years I've been doing this, of course the markets have been friendly as well). I'll build cash when I can't find anything - as I have done this year, without a single trade to date - and then hopefully have the gumption to move in a big way when I get the chance to.

In regards to Staples/Dell, that's an interesting idea. I'm not sure if you heard it, but Mr. Sargent noted at the GS Retail Conference this week that roughly 3% of the company's sales come from PC's ("and declining virtually every quarter"), from 9% at it's peak (I believe he was referring to the peak when he said "at one point").

On $24 billion in sales, that's about $720 million in PC sales per year; across a total store base of ~2100 locations, that's $343,000 in computer sales per year, or somewhere around two PC's per day per location (assuming a price point of $400-500 on average). Obviously that assumes that none of these PC's are sold through contract or on the website, which isn't the case; not much that is useful from that, I just think those numbers are interesting...

Thanks for the comment!

Batbeer2 premium member - 4 years ago
>> I'll build cash when I can't find anything

Have you had a thorough look at Tesco plc?

Take what you know about Costco and Staples and through that lens, look at what Tesco has been doing since 2002.... FWIW, I think they are in the same league.

The Science of Hitting
The Science of Hitting - 4 years ago    Report SPAM
"Have you had a thorough look at Tesco plc?"

I did when Berkshire started adding and was intrigued; I haven't since and should follow up - thanks for the reminder!

Swnyc2 - 4 years ago    Report SPAM

I agree with your comments on Tesco, plc. FYI, it's been my largest holding since Q2 2012. I've been shy about mentioning it because I don't think it's been selling at as steep a discount as many of the stocks you discuss.

I, too, first looked at it when Berkshire was buying it. At the time, I thought it was a good value, had some easy catalysts (e.g. divesting of unprofitable stores in certain countries, eventual improvement in Europe's economy, etc), and was very shareholder friendly. As someone who mainly holds U.S. stocks, I also liked the fact that I was getting some geographic diversity away from the U.S..

A few months ago, I added to my position when the ADR was trading below $16 per share. Then, several weeks later, I read a comment from you on GuruFocus, that essentially said you were looking for the price to drop below ~$14.50 before you would be interested. One possible difference between our behaviors is that I value TSCO more than you. However, another possibility is that we value the company similarly, but you demand a greater margin of safety.

I'd be curious as to your opinion on TSCO's fair value today and the margin of safety you seek. I consider TSCO a more predictable company than most and am willing to accept less of a margin of safety than some other stocks I own (e.g. COCO).

With regard to the SPLS / DELL dynamic, I think it's a very original thought. However, the PC sales at SPLS are far too small to be affecting DELL....
Batbeer2 premium member - 4 years ago
@ Swnnyc2

I could come up with an asset based liquidation value of 300p if a tried. They own lots of real estate and if you "isolate" that and also the online operation, you get a lot of value.... like the case for SHLD. I'm not a DCF guy but I think this is one business where a standard DCF (like the gurufocus DCF) gets you decent results. As you say, fairly predictable. I try to keep a 50% hurdle rate but I've been having a tough time in recent months finding quality stuff that meets that hurdle.

@ SoH

If memory serves, Tesco plc was covered in the Buffett-Munger Newsletter some months ago.

Tannor - 4 years ago    Report SPAM
I thoroughly enjoy your writing Science, some personal thoughts on Dell. Some over looked value may be found in the reoccurring revenue provided from enterprise contracts, as I know a large financial service provider in Canada (Investors Group & Power Financial) have leasing contracts with Dell until at least 2017. From my observations, Staples has under-performed their peer group based on both traffic & conversion, although the service side is growing and has higher margins, the threat from Amazon, Wal-mart and Costco can't be ignored.

Tesla is providing a great example of irrational exuberance, especially if you look into the forecasted lithium-ion battery production in the coming years (if they hit 40,000-50,000 deliveries), demand has almost outstripped supply even as Panasonic ramps production and builds new factories.

I would be short but cult stocks can be tricky as Keynes said famously, "The market can remain irrational longer then you can remain solvent."
The Science of Hitting
The Science of Hitting - 4 years ago    Report SPAM

Thanks for the kind words - always happy to hear from someone who enjoys my articles. Good point on shorting cult stocks; I'm looking at GMCR right now, but nothing to report yet...

Aagold - 4 years ago    Report SPAM


You wrote, "And on JCP I have not sold a single share; at the same time, I haven't bought any either, and will not be doing so (with all but 100% certainty). I made a commitment to be a business owner when I bought the shares and am seeing it through"

I really think you're doing yourself a disservice with the idea that you should always continue to hold a stock you bought because of a commitment "to be a business owner", even if the original investment thesis no longer holds. I'm quite sure that Buffett himself would tell you that's faulty logic.

For any investment one makes, new information is constantly becoming available. In most cases, the new information is not that significant. But sometimes, the new information causes an investor's estimate of a security's intrinsic value to change so much that it can't be ignored. For example, if the new information causes the investor's estimate of intrinsic value to fall below the current market price of the stock, then continuing to hold the stock due to a "commitment to be a business owner" is irrational and none of the great investors (including Buffett) would advise you to do that.

- aagold
Batbeer2 premium member - 4 years ago
>> and none of the great investors (including Buffett) would advise you to do that.

Munger has often stated that he plans to hang on to his picks even if they go sour. Not coincidentally, they rarely do.

Recently he stated that he would hang on to BYD "to the bitter end" if that is what it came to.

Buffett too seems to be changing his attitude. I was reading some comments he made where he stated that the manager of one of Berkshire's holdings had recently done a dumb acquisition. Heconsidered selling. After discussing it with Munger, they decided not to sell. The rationale was that they themselves had done some dumb acquisitions in the past and they shouldn't be too critical of their managers if they did the same. Not every decision has to be perfect to create tremendous value over time.

For myself I can say that my performance has improved after deciding to take the buy and hold stuff literally.

I used to do more Cigar-butt stuff. WCG, SODI, LVB... It took five years for WCG to reach my initial estimate of fair value. If memory serves it was submitted it for the annual (january) stock picking contest in '08 or maybe '09.

My geiger counter still starts ticking when stuff like that crosses my path and I enjoy writing about stocks like PostNL, AHC, NTE... when I come across anything that seems particulalrly cheap

So why take a different tack?

Most investors, after a few years, should be able to correctly identify an NCAV. That's great but it implies that you can't reasonably expect to improve that skill over time. Walter Schloss was as effective in his thirties as he was in his nineties. There's just not much value in memorising the list of NCAVs from 2003 or 1993.

With the other approach, any knowledge you acquire does become cumulative. Once you identify a company with truly sustainable competitive advantages, that knowledge will serve you well for the rest of your investing career. If you stick with that you will inevitably become a better investor. Given enough time, you will acquire what seems to be phenomenal skill. Many companies you analysed years earlier will still be out there. Some of them may become cheap at one point or another. If and when they do, that is when it's important that you really do understand the competitive advantages. At that point, the consensus view will be that the earnings power has been permanently impaired.

You can safely assume Buffett doesn't screen the S&P500 to see if there are any that are trading at a discount to book or some low p/e multiple. After more than 50 years, he's literally seen em all. He invested in the Mid-Continent Tab Card Company in the fifties. He has probably had a pretty clear idea about IBM's competitive position ever since. IBM is not something he discovered last year. After tracking it for half a century, he has decided now is a probably a good time to buy.

That's nice in theory but does it work in practice?

DJCO was on my radar for a couple of years before I had the wherewithal to acquire it at less than its liquidation value. Since then, not much else I''ve done has been worth the effort. I expect DJCO to do a (partial) liquidation some day. They've done it before. It may not be within my lifetime but that's not very relevant is it?

What matters is that I bought at a discount to liquidation value and that liquidation value has been compounding at a satisfactory rate. It will inevitably end in liquidation. It always does.

For sake of this discussion I define:

- Companies that pay dividends as being in gradual liquidation.

- Companies that are acquired as being liquidated with the entire business being treated as a single asset.

WPO comes to mind. The assets Buffett initially bought have been liquidated. What he ended up with (including the diviends he's collected) came out of the (gradual) liquidation of the newspaper.

Berkshire Hathaway itself is an example. The assets Buffett initially bought have been liquidated. What investors now own came out of that liquidation.

Leucadia is another example. The ticker may be the same but the original business has been liquidated. I think LUK's history serves as a template for thinking about DJCO.

In short, buy and hold investing to me means I try to identify companies that will be able to compound their liquidation value at a satisfactory rate. I buy them at a discount to liquidation value and assume they will be liquidated at some point.

If that point happens to be beyond my lifetime, that makes me a buy and hold investor :o)
Aagold - 4 years ago    Report SPAM


You wrote about a bunch of different topics in your response. I agree that it takes much more investing skill, and it can be much more lucrative, if an investor knows how to identify businesses with true competitive advantages that allow an above average return on capital. But what does that have to do with sticking with companies "to the bitter end" and taking "buy and hold" to an extreme that isn't necessary or rational?

For example, let's say Wang Chanfu of BYD died, new management went in the wrong direction, and Munger no longer had confidence that the company was worth more than its current stock price. Why would he continue to hold it? It makes no sense, and I don't believe he *would* continue to hold it under those circumstances.

It doesn't matter whether an investor buys low quality companies at even lower prices (i.e., fair company at a wonderful price) or extremely special companies at the price of an average company (i.e., wonderful company at a fair price). Either way, the investor is receiving more value than what he's paying for. But if very important new information rolls in, which fundamentally changes what an investor believes the business is worth, then it's irrational to remain attached to the original analysis and to hold the investment regardless of how the new valuation compares to the current stock price.

- aagold

Batbeer2 premium member - 4 years ago
>> For example, let's say Wang Chanfu of BYD died, new management went in the wrong direction,

If Munger speaks highly of management, he probably has reason to believe they have a decent succession plan. It's a topic they discuss extensively on Berkshire's board so it's at least possible he gives the matter some thought in his holdings.

>> and Munger no longer had confidence that the company was worth more than its current stock price. Why would he continue to hold it?

I honestly think he would. I would rephrase that as "the stock gets overvalued". That for some (including me) may not be a reason to sell.

In the long run, you will be worse off if you exchange a stock at a p/e of 50 with a sustainable 20% ROE for cash yielding 5% (sometimes less). That is what you do when you sell. You may expect to buy that stock later on at a lower price. That's a gamble.

Many investors will consider it a success if they are able to buy that stock at a lower p/e later on. They rightly claim to have outsmarted the herd but fail to see how they've destroyed value.

I'll grant you, it makes sense to sell if a company evolves into something you no longer want to own. In my case, that would mean I'm no longer confident the company will compound value at a satisfactory rate for a very long time. Since I used to believe it would, I either have to admit I was wrong or that the company has evolved into something else.

I no longer own LUK precisely for that reason.

Though I sold the stock, I held the company for as long as it existed in recognisable form. Cumming and Steinberg left their company in what they considered to be very capable hands but the LUK ticker now represents an investment bank. That is not bad per se but it isn't what I bought and it certainly isn't something I understand or want to own.


Come to think of it, at Mungers age, any investment is a buy and hold forever investment. Hanging on to the bitter end may not be that long and Munger does have a wicked sense of humour.
Aagold - 4 years ago    Report SPAM


In reading your comments, I think it's interesting to see that you don't seem to be too concerned with valuation - that is, how the current stock price compares to your estimate of intrinsic value. It seems like your thought process is that there are certain types of companies you want to own (i.e., good honest management, business that earns a high return on invested capital, large and defensible moat, etc.), and the price you have to pay isn't a priority. I suppose that's also why you said that if a stock becomes overvalued that's no reason to sell.

As I said in a comment on Science's latest article about Intrinsic Value, I think that investment philosophy is dangerous. It's very difficult to identify companies that will earn a 20% return on invested capital for an infinite number of years into the future, and therefore price and its relation to estimated intrinsic value is important.

- aagold

Batbeer2 premium member - 4 years ago
Yeah... I see how you would get that impression. Indeed, I can spend less than 30 minutes on valuation of a company that I've spent months analysing (the qualitative aspects).

That doesn't mean I'm insensitive to price. I can't remember ever having bought a stock at less than 30% discount to my pessimistic estimate of IV.

The hard part is waiting for say.... SIAL, COST, NSC or WPO to trade at a meaningful discount. Some might be surprised that I personally append QUAD to that list.

A couple of years ago, most investors would agree QUAD was a beaten down value stock. More likely a value trap. I perceive it to be a long-term holding that at the time was available at less than 3x earrings. So from where I sit, I say it is possible to buy quality at 3x earnings. That is what I look for.

The Science of Hitting
The Science of Hitting - 4 years ago    Report SPAM
I hear what you're saying, and largely agree. My point is more so that I want to buy shares of companies where my returns over a long period of time replicate the returns of the underlying business; naturally that focus should push me towards buying the highest quality businesses, while still staying cognizant of the price being paid. I see this as an effective way to reach that goal while recognizing that behavioral biases and emotions can / will try and get me to do otherwise down the road (with reinforcement from short term thinkers just about everywhere you look); I think the best way to avoid playing the short term game is to make a commitment to avoid it entirely.

This may be an extreme approach with some drawbacks, but I think it's a small price to pay to keep my mind focused on what really matters. The best way to avoid gambling is to never set foot in the casino.

Thanks to the both of you for keeping a lively discussion going!

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