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September 23 - September 29, 2020
requires some serious capital.
The ability to get started with a tiny pool of capital—and add to that pool over the years—is a huge advantage.
5. There are thousands of publicly traded businesses in the United States,
You can buy or sell a stake in a publicly traded company for under $10. With a $100,000 portfolio and even at a hyperactive 50 trades a year, frictional costs are 0.5 percent—and
Having an ownership stake in a few businesses is the best path to building wealth. And with no heavy lifting required, bargain buying opportunities, ultra-low capital requirements, ultra-large selection, and ultra-low frictional costs, buying stakes in a few publicly traded existing businesses is the no-brainer Dhandho way to go.
Per Williams, the intrinsic value of any business is determined by the cash inflows and outflows—discounted at an appropriate interest rate—that can be expected to occur during the remaining life of the business. The definition is painfully simple.
If we were to look at a business like Google, it starts getting very complicated. Google has undergone spectacular growth in revenues and cash flow over the past few years. If we extrapolate that into the future, the business appears to be trading at a big discount to its underlying intrinsic value.
The Dhandho way to deal with this dilemma is painfully simple: Only invest in businesses that are simple—ones where conservative assumptions about future cash flows are easy to figure out.
the psychological warfare with our brains really gets heated after we buy a stock. The most potent weapon in your arsenal to fight these powerful forces is to buy painfully simple businesses with painfully simple theses for why you’re likely to make a great deal of money and unlikely to lose much.
it requires me to fire up Excel, it is a big red flag that strongly suggests that I ought to take a pass.
I’d be a bum on the street with a tin cup if the markets were always efficient.1 Investing in a market where people believe in efficiency is like playing bridge with someone who has been told it doesn’t do any good to look at the cards.2 It has been helpful to me to have tens of thousands [of students] turned out of business schools taught that it didn’t do any good to think.3 Current finance classes can help you do average.4 —Warren Buffett
However, there is a huge difference between mostly and fully efficient. It is this critical gap that is responsible for Mr. Buffett not being a street corner bum.
In the case of the stock market, an individual investor in the same doom-andgloom mind-set would likely have unloaded his entire position in a few minutes. Hence, stock prices move around quite a bit more than the movement in underlying intrinsic value.
1. If you read the business headlines on a daily basis, you’ll find plenty of stories about publicly traded businesses. Many of these news clips reflect negative news about a certain business or industry.
2. Value Line publishes a weekly summary of the stocks that have lost the most value in the preceding 13 weeks. It is another terrific indicator of distress.
3. There is a publication called Portfolio Reports (www.portfolioreports.com) that is published monthly. It lists the 10 most recent stock purchases by 80 of the top value managers.
Distressed situations are a subset of value investing, so some of their investments fall into the distressed category.
4. If you’d like to avoid the subscription price tag for Portfolio Reports, then much of that data can be gleaned by looking directly at the public filings (e.g., SEC Form 13-F)
5. Take a look at Value Investors Club (VIC; www.valueinvestorsclub.com). It is a wonderful web site started and managed by Joel Greenblatt of Gotham Capital.
6. Last, but certainly not least, please read The Little Book That Beats the Market by Joel Greenblatt.
How can we ever get our arms around all of them? Well, we don’t. We begin by eliminating all businesses that are either not simple businesses or fall squarely outside our circle of competence.
How do we know when a business has a hidden moat and what that moat is? The answer is usually visible from looking at its financial statements. Good businesses with good moats, like our barber, generate high returns on invested capital.
Of the fifty most important stocks on the NYSE in 1911, today only one, General Electric, remains in business. . . . That’s how powerful the forces of competitive destruction are. Over the very long term, history shows that the chances of any business surviving in a manner agreeable to a company’s owners are slim at best.1 —Charlie Munger
There is no such thing as a permanent moat.
We are best off never calculating a discounted cash flow stream for longer than 10 years or expecting a sale in year 10 to be at anything greater than 15 times cash flows at that time (plus any excess capital in the business).
the optimal fraction of your bankroll to bet on a favorable bet is:
The wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don’t. It’s just that simple.3 —Charlie Munger
What causes a cheap stock to find its value?
Graham: That is one of the mysteries of our business and it is a mystery to me as well as to everybody else. But we know from experience that eventually the market catches up with value.7
if you invest in any under- or overpriced business, it will eventually trade around its intrinsic value—leading to an appropriate profit or loss. We can pretty much treat this as a law of investing and hang our hat on it.
In the light of these logical facts, it is indeed amazing that the average mutual fund has 77 positions. More important, their top 10 holdings represent just 25 percent of assets.
It is also no wonder that fewer than 1 in 200 mutual funds delivers long-term annualized performance that beats the S&P 500 by three percent or more.
Dhandho is all about placing few bets, big bets, infrequent bets; and the Kelly Formula supports this hypothesis.
Using the Kelly Formula may lead to relatively high volatility. The formula optimizes just one variable—the maximization of wealth in the least amount of time.
Since all odds are based on our circle of competence and our view of how the world works, it is error prone.
It’s all about the odds. Looking out for mispriced betting opportunities and betting heavily when the odds are overwhelmingly in your favor is the ticket to wealth.
The elimination of downside risk, even if upside is limited, is awesome—and that’s exactly what arbitrage gives us.
1. TRADITIONAL COMMODITY ARBITRAGE
2. CORRELATED STOCK ARBITRAGE
3. MERGER ARBITRAGE
4. DHANDHO ARBITRAGE
Sniffing out an available arbitrage opportunity is what prompts entrepreneurs to embark on journeys that have lead to the creation of compelling businesses.
We like to own castles with large moats filled with sharks and crocodiles that can fend off marauders—the millions of people with capital that want to take our capital. We think in terms of moats that are impossible to cross, and tell our managers to widen their moat every year, even if profits do not increase every year. We think almost all of our businesses have big and widening moats.3 —Warren Buffett
The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.4 —Warren Buffett
The Intelligent Investor is still the best book on investing. It has the only three ideas you really need: 1. Chapter 8—The Mr. Market analogy. Make the stock market serve you. The C section of the Wall Street Journal is my business broker—it quotes me prices every day that I can take or leave, and there are no called strikes. 2. A stock is a piece of a business. Never forget that you are buying a business which has an underlying value based on how much cash goes in and out. 3. Chapter 20—Margin of Safety. Make sure that you are buying a business for way less than you think it is
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Most security analysts, media brokers, and media executives would have estimated WPC’s intrinsic business value at $400 to $500 million just as we did. And its $100 million stock market valuation was published daily for all to see.
the key to successful investing was the purchase of shares in good businesses when market prices were at a large discount from underlying business values.
Whenever I make investments, I assume that the gap is highly likely to close in three years or less. My own experience as a professional investor over the past seven years has been that the vast majority of gaps close in under 18 months.
It is during times of extreme distress and pessimism that rationality goes out the window and prices of certain assets go well below their underlying intrinsic value. Extreme distress can be caused by macro-events like 9/11 or the Cuban missile crisis. Or they can be company specific—for example, Tyco’s stock price collapse during the Dennis Kozlowski corruption scandal.
Or covid-19 you know
The future performance of these businesses was very uncertain. However, these savvy Dhandho entrepreneurs had thought through the range of possibilities and drew comfort from the fact that very little capital was invested and/or the odds of a permanent loss of capital were extremely low.
