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July 11 - July 22, 2018
profits better than the rate required by the market should grow.
Businesses with profits below that rate turn dollars in earnings into cents on the dollar in business value.
The Acquirer’s Multiple is the enterprise value divided by operating earnings.
The enterprise value is an x-ray into the company. It is the total price an acquirer of a company must pay.
If we don’t know how many slices are in the pizza, the price of a piece tells us nothing about the price of the whole pie.
Companies with enterprise values of $0 (and less) do exist. A low or negative enterprise value is a good thing to find. It means the company has little debt and lots of cash relative to the market cap.
The greater the company’s discount to its value, the bigger the margin of safety. The bigger the margin of safety, the better the return and the lower the risk. A wide discount allows for the ordinary errors in calculations of value, and it allows for any drop in value.
Why do fair companies at wonderful prices beat wonderful companies at fair prices? Because great businesses don’t stay great. They only look great at the top of their business cycle. Mean reversion pushes great business back to average.
The reason great businesses become average businesses is mean reversion.
Over time, competitors eat away the unusually high profits until the
business earns average profits.
This also happens to bad businesses, which are less profitable than average. Over time, competitors leave the industry until the businesses that stay earn average pro...
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Here is the simple truth: profits move toward the average over time. Only some stocks avoid it, and we don’t know why. Without Buffett’s genius for business analysis, we can’t rely on a high-profit business staying that way. This is why fair companies at wonderful prices beat wonderful companies at fair prices.
Price-to-book value measures how much you pay for that value.
The high growth and profits had disappeared. In fact, most of the stocks were no longer excellent by Peters’s own rules. The reason? Mean reversion.
mean. Economic theory suggests that markets that offer high returns will attract new entrants, who will gradually drive returns down to general market levels.
stocks. But the excellent stocks’ valuation went down, so the stock price of the excellent stocks lagged. This is mean reversion.
For this reason, wonderful businesses tend to be fair investments, and fair businesses tend to be good investments.
Wonderful stocks lag because investors overestimate future growth and profits.
This is why fair companies at wonderful prices beat wonderful companies at fair prices and why the Acquirer’s Multiple tends to beat the Magic Formula.
b) waging a proxy contest; c) making a tender offer and/or; d) selling back our position to the company.
He likened it to a gardener who stopped a homeowner from selling a house because the gardener might lose his job.
The takeover bid put Icahn in a win-win position. On one hand, it created a price floor in the stock.
By trying to control the company, Icahn could control his own destiny.
Buffett’s old control situation trick. And he’d do the heavy lifting himself.
him. Takeovers were rare in 1977.
with the Securities and Exchange Commission (SEC). A shareholder with more than 5 percent of a company’s shares must file a 13D if they plan to take over or liquidate the company.
He also attacked U.S. Steel, the
world’s first billion-dollar corporation, then with a market cap of $6 billion.
Including the spin-offs, Stiritz created more than one hundred times the value he inherited.
Stiritz won’t take a call from such a small shareholder and certainly not from a guy with a fund named after a surf break in California. Stiritz is the hundred-bagger legend. Loeb is some punk kid.
Influence is all that matters.
mouth. He used to pay a bigger kid a quarter a day to protect him when it got him into trouble in the schoolyard.
A shareholder needed a degree in English literature to know what he meant.
Following the trend is instinctive. Mean reversion is not.
For those of us without Buffett’s talent, the more undervalued the stock, the better. This is
contrarian investing. This is value investing.
“Marine Salvage—A science of vague assumptions based on debatable figures taken from inconclusive experiments and performed with instruments of problematic accuracy by persons of doubtful reliability and questionable mentality” —C. A. Bartholomew, Mud, Muscle, and Miracles: Marine Salvage in the United States Navy, Department of Navy, 2010.
investors. Consider this: most professional investors can’t beat the market. (And when we say most, we mean 80 percent of professional investors.) The reasons most people lag the market: cognitive biases and behavioral errors.
The quant investor is by far and away the more boring of the two. Economist John Maynard Keynes wrote, “investment is intolerably boring and overexacting to anyone who is entirely exempt from the gambling instinct; whilst he who has it must pay to this propensity the appropriate toll.” In other words, investing is boring if you don’t like gambling. But if you like gambling, you pay a price.
It’s best to buy all your stocks at once. But it’s fine to scale in—make regular portfolio purchases over twelve months. One way to do it is to buy two or three stocks each month.
“Survival is an infinite capacity for suspicion.”
the only way to get a good price is to buy what the crowd wants to sell and sell what the crowd wants to buy.
bet: a small downside and a big upside. The
Given time, many businesses turn out to be less scary, bad, or boring than they seem at first.
The bigger the discount to value the better the return.
The enterprise value is the true price we must pay for a company.
It rewards companies for cash, and it penalizes
companies for debt, preferred stock, minority interests, and off-balance-sheet debts.
