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Budlab
28 Comments
Hiring a New Money Manager (in Omaha)
Bottom Fishers May Find Value in Housing Stocks Like Mohawk
Bottom Fishing is even more profitable when you swim with a fish expert holding a spear gun. So, this is the feeling I get when I read books about Buffett and Munger. Mohawk Industries is a producer of floor covering products for residential and commercial applications in the United States and Europe. The Company operates in three business segments: Mohawk, Dal-Tile and Unilin. The Mohawk segment designs, manufactures, sources, distributes and markets its floor covering product lines, which include carpet, ceramic tile, laminate, rugs, carpet pad, hardwood and resilient, in a range of colors, textures and patterns for residential and commercial applications in both new construction and remodeling. The Dal-Tile segment designs, manufactures, sources, distributes and markets a line of ceramic tile, porcelain tile, stone and other products used in the residential and commercial markets for both new construction and remodeling. Mohawk Industries , MHK has a (5-year annual average) net income growth rate of 19.96 . What competitive advantages does it have? Brand, Technology, Cost of Production, Distribution Network? Are possible advantages sustainable? Does MHK have a solid mix of Product, Pricing Power, Placement, and Promotions? When buying companies or common stocks, look for understandable first-class businesses, with enduring competitive advantages, accompanied by first-class managements.
MHK has a current market price is 39.59 Using an assumed growth rate of 5 percent, the estimated Intrinsic Value is 131 per share from ValuePro.net, and this may or may not indicate a bargain of 91 dollars. Is it a possible Value Trap? If the growth assumptions used in estimating the Intrinsic Value are accurate and sustainable, this may or may not indicate a price-to-value ratio of .31 , and a possible margin of safety of 69 percent. The current price/earnings ratio = 9.8 and It's current return on capital = negative 13.1 Using a debt to equity ratio of .6, Mohawk Industries shows a current return on equity of negative 22. But, that is the current environment and not necessarily the future one. Some industries have higher ROE because they require no assets, such as consulting firms. Other industries require large infrastructure builds before they generate a penny of profit, such as oil refiners. Generally, capital-intensive businesses have higher barriers to entry, which limit competition. But, high-ROE firms with small asset bases have lower barriers to entry. Thus, such firms face more business risk because competitors can replicate their success without having to obtain much outside funding. Growth benefits investors only when the business in point can invest at incremental returns that are enticing; only when each dollar used to finance the growth creates over a dollar of long-term market value. In the case of a low-return business requiring incremental funds, growth hurts the investor. The wonderful companies sustain a competitive advantage, produce free cash flow, and use debt wisely.
Automatic Warning, ( above 0.5 ) on this current debt to equity level of .6
Does Mohawk Industries make for an intelligent investment or speculation today? Time is said to be the friend of the wonderful company and the enemy of the mediocre one. Before making an investment decision, seek understanding about the company, its products, and its sustainable competitive advantages over competitors. Next, look for able and trustworthy managers who are focused more on value than just growth. Finally ask: Is there a bargain relative to its intrinsic value per share today? Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misapraised. In terms of Opportunity Cost, is MHK the best place to invest our money today?
I need to do more study into its competitive position. However, like I told my nephew, the bargains at charts like finviz.com/map.ashx?t=... will show up with the color red and not green.
And, thanks to "Mr. Market," there seems to be more opportunities with the "red" color these days.
After Wall Street's Broken, Who Pays the Piper?
aka "The Labitan Solution"
Peter Cohan of Babson College recently wrote that "The problem we face now is fear of insolvency which leads to capital hoarding. Financial
Institutions do not know whether it is safe to do business with other FIs
because the others might be insolvent." He believes that "if they could be
confident that they were solvent, then they would lend to each other because they would be missing out on profit opportunities. However, there is more going on now that remind me of a young patient with cancer.
Warren Buffett has described the recent American economy like an athlete who has collapsed of cardiac arrest and needs resuscitating with a defibrillator. But, what if the cause of this collapse is a tumor close to
the economic heart? Tumors that originate in the heart are rare, but can be either benign or malignant. Because the heart is such an essential organ, even benign tumors can be life-threatening.
Myxoma, the most common benign tumor inside the cavities of the heart,
accounts for about half of the tumors that originate in the heart. Fibromas, which also develop in the myocardium or the endocardium. Malignant tumors that originated elsewhere in the body and spread to the heart are more common than ones that originate in the heart. Malignant tumors, including carcinomas, sarcomas, leukemias and eticuloendotheliar tumors, can spread to any heart tissue. Lung and breast cancers often invade the heart.
Treatment of myxoma is usually done by surgical removal of the tumor.
Treatment of malignant cardiac tumors usually involves radiation,
chemotherapy and management of complications. So, the bottom line is this:
If these "toxic derivatives of unknown value" are the tumor around the heart of advanced economies, then they need to be effectively identified, shrunk, and safely surgically excised from the healthy portion of these economies. Until a comprehensive treatment plan is devised to include radiation, surgery, and rehabilitation, the current infusion of extra blood is just keeping this patient alive.
Feel free to pass this on for critical discussion and debate.
Bud Labitan. Author of "The Four Filters Invention of Warren Buffett and Charlie Munger. Two Friends Transformed Behavioral Finance." which is available from Amazon.com
Dislaimer: medical portions of my talk here are taken from: [csmc.edu]
Buffett and Cramer Agree: It's Time to Buy Stocks
www.amazon.com/dp/0615...
I am not familiar with the other two companies. How is their record on free cash flow growth? What is the competitive situation there?
From the book I mentioned above, folks can get a better idea of how Buffett and Munger "frame" their investing decisions.
Irrational Stupidity
You may also enjoy the advancement in valuation ideas here: "The Four Filters Invention of Warren Buffett and Charlie Munger." It explains and honors the intellectual partnership of two brilliant men. The genius of Warren Buffett and Charlie Munger's four filters innovation was to "capture all the important stakeholders" in one "multi-variable&q... four step process. www.amazon.com/dp/0615...
Unwinding and unwinding of complex derivative contracts will occur. In time, market values will meet intrinsic values.
Buffett Buys GE, Goldman: Should You Follow?
1. Understandable => "things I can understand"
2. Sust.Comp.Advantage => "fundamentally good economics"
3. Able n Trustworthy Managers => "a management that I like and trust and admire"
4. Bargain Price => "it's got to be a price that makes sense"
Charlie Rose: Is there an operative narrative to the kinds of investments you are making other than you look at and you buy on value, look at advantage, management, you look at a place that can absorbed the amount of money you want to invest, and you look at its prospects, and you look at price.
Warren Buffett: Yeah. They have to be pretty good size for us now to have... to move the needle. But we look for fairly large situations.
We look for things I can understand. A lot of businesses I don't understand. So some guy may know how to make money in cocoa beans, but I don't so I just let him have that. But it's got to be something I understand. It's got to be a business with fundamentally good economics. It's got to be a management that I like and trust and admire. And it's got to be a price that makes sense. And lately the price --
Charlie Rose: Prices make sense.
Warren Buffett: Prices make a lot more sense now, yeah.
Voices Of Calm In the Maelstrom
It would be interesting to hear what Charlie Munger thinks of this tumultuous period in the markets. Here is a new example of the "four filter clusters" I found in Warren Buffett's latest talk with Charlie Rose on 10/01/08.
Charlie Rose: Is there an operative narrative to the kinds of investments you are making other than you look at and you buy on value, look at advantage, management, you look at a place that can absorbed the amount of money you want to invest, and you look at its prospects, and you look at price.
Warren Buffett: Yeah. They have to be pretty good size for us now to have... to move the needle. But we look for fairly large situations.
We look for things I can understand. A lot of businesses I don't understand. So some guy may know how to make money in cocoa beans, but I don't so I just let him have that. But it's got to be something I understand. It's got to be a business with fundamentally good economics. It's got to be a management that I like and trust and admire. And it's got to be a price that makes sense. And lately the price --
Charlie Rose: Prices make sense.
Warren Buffett: Prices make a lot more sense now, yeah.
How do the concepts line up? With slightly different words, like this:
1. Understandable => "things I can understand"
2. Sust.Comp.Advantage => "fundamentally good economics"
3. Able n Trustworthy Managers => "a management that I like and trust and admire"
4. Bargain Price => "it's got to be a price that makes sense"
So, you and Buffett are in agreement: You want to be greedy when others are fearful. You want to be fearful when others are greedy.
Where are the other voices of calm, hope, and sensible valuation?
Hopefully, one of the candidates will step up to the plate tonight in the second Presidential debate.
The Growth and Value Managers and Investors Conundrum
The One Buffett Biography Worth Reading
"The Four Filters Invention of Warren Buffett and Charlie Munger"
www.amazon.com/dp/0615...
[Ed note: Bud Labitan is the author of the linked book]
The "Four Filters" of Warren Buffett and Charlie Munger
"The Four Filters Invention of Warren Buffett and Charlie Munger"
www.amazon.com/gp/prod...
.
The "Four Filters" of Warren Buffett and Charlie Munger
www.lulu.com/content/3...
ISBN 978-0-6152-4129-6
Paperback book $32.95 Printed: 148 pages, 6" x 9", perfect binding,
cream interior paper (60# weight), black and white interior ink,
white exterior paper (100# weight), full-color exterior ink.
Description:
"The Four Filters Invention of Warren Buffett and Charlie Munger"
examines each of the basic steps they perform in "framing and making" an investment decision. This book is a focused look into this amazing invention within "Behavioral Finance." The genius of Buffett and Munger's parsimonious four filters process was to "capture all the important stakeholders" in a "multi-variable&q... equation or formula.
Imagine...Products, Enduring Customers, Managers, and Margin-of-
Safety... all in one mixed "qual + quant" formula. Other important
ideas are embedded in each chapter. The book can be used as a
supplemental textbook in a Valuation or Decision Sciences course.
Gleanings From Housing-Related Industries Conference Calls [Housing Tracker]
Here is the Paperback Book Announcement
"The Four Filters Invention of Warren Buffett and Charlie Munger. Two Friends Transformed Behavioral Finance." by Bud Labitan
www.lulu.com/content/3...
ISBN 978-0-6152-4129-6
Paperback book $32.95 Printed: 148 pages, 6" x 9", perfect binding,
cream interior paper (60# weight), black and white interior ink,
white exterior paper (100# weight), full-color exterior ink.
<img src="www.frips.com/cover4.j...;></img> width="564"h...
Berkshire Hathaway Is Not a Value Now
It all depends upon our "frame of reference" and our views of "intrinsic value" versus "market value." Buyers of "market prices" will buy and sell at several times in these troughs and peaks. A buyer of intrinsic value wants cheaper prices.
Since my own view is that BRK is worth north of $175,000 per A share, I am saying that BRK is a nice quality bargain for both A and B share buyers.
What we view as tough times may soon be viewed as "buying opportunities" for Warren Buffett and other value investors. After all, some of their best purchases were made during the stagflationary period of the 1970's. During that time period, I think Buffett and Munger invented an amazing Behavioral Finance Formula or Process that is underappreciated by the business and academic communities.
On paper as early as the 1977 BRK annual letter, their work in designing a mixed qualitative + quantitative formula may be worthy of a Nobel Prize in Economics and Behavioral Finance. So, in my new self-published book "The Four Filters Invention of Warren Buffett and Charlie Munger" ( frips.com ) I examine each of the basic steps they perform in "framing and making" an investment decision. I made this book a small and focused look into this amazing invention within "Behavioral Finance."
Buffett mentions the Four Filters this way: "Charlie and I look for companies that have a) a business we understand; b) favorable long-term economics; c) able and trustworthy management; and d) a sensible price tag."
In my view, the genius of Buffett and Munger's four filters process was to "capture all the important stakeholders" in one "multi-variable&q... checklist-like equation.
Since this is the model (intrinsic value on a per share basis) of thought that motivates me, this is my frame of reference. I only wish I had more free cash to buy more BRK shares at this time. I would "back up the truck!"
Building Your Own Berkshire Hathaway
I wrote a new book that you can review at frips.com
I think Buffett and Munger invented an amazing Behavioral Finance Formula or Process that is underappreciated by the business and academic communities. On paper as early as the 1977 BRK annual letter, their work in designing a mixed qualitative + quantitative formula may be worthy of a Nobel Prize in Economics and Behavioral Finance. So, in my new self-published book "The Four Filters Invention of Warren Buffett and Charlie Munger" ( frips.com ) I examine each of the basic steps they perform in "framing and making" an investment decision. I made this book a small and focused look into this amazing invention within "Behavioral Finance."
Buffett mentions the Four Filters this way: "Charlie and I look for companies that have a) a business we understand; b) favorable long-term economics; c) able and trustworthy management; and d) a sensible price tag."
In my view, the genius of Buffett and Munger's four filters process was to "capture all the important stakeholders" in one "multi-variable&q... equation. Imagine...Products, Enduring Customers, Managers, and Margin-of-Safety... all the important stakeholders for business success in one mixed "qual + quant" formula. Quality bargains at 50 cents on the dollar may soon appear; Use the Four Filters!
A Letter to Warren Buffett
Lehman Brothers Holdings Inc. (Lehman Brothers) serves the financial needs of corporations, governments and municipalities, institutional clients and high-net-worth individuals worldwide.
The Company operates three business segments: Capital Markets, Investment Banking and Investment Management. Lehman Brothers generates client-flow revenues from institutional, corporate, government and high-net-worth clients by advising on and structuring transactions; serving as a market maker and/or intermediary in the global marketplace, including having securities and other financial instrument products; originating loans for distribution to clients in the securitization or principals market; providing investment management and advisory services, and acting as an underwriter to clients.
Lehman Bros. Holdings, LEH has a (5-year annual average) net income growth rate of 35.41 . What competitive advantages does it have? Brand, Technology, Cost of Production, Distribution Network? Are possible advantages sustainable? Does LEH have a solid mix of Product, Pricing Power, Placement, and Promotions? When buying companies or common stocks, look for understandable first-class businesses, with enduring competitive advantages, accompanied by first-class managements.
LEH has a current market price of 18.9 Using an assumed growth rate of 5 percent, the estimated Intrinsic Value is 10.87 per share from ValuePro.net, and there does not appear to be a bargain or 'margin of safety' present here. The current price/earnings ratio = Unavailable. It's current return on capital = negative .13
Using a debt to equity ratio of 6.54, Lehman Bros. Holdings shows a current return on equity = negative 3.4
Some industries have higher ROE because they require no assets, such as consulting firms. Other industries require large infrastructure builds before they generate a penny of profit, such as oil refiners. Generally, capital-intensive businesses have higher barriers to entry, which limit competition. But, high-ROE firms with small asset bases have lower barriers to entry. Thus, such firms face more business risk because competitors can replicate their success without having to obtain much outside funding.
Growth benefits investors only when the business in point can invest at incremental returns that are enticing; only when each dollar used to finance the growth creates over a dollar of long-term market value. In the case of a low-return business requiring incremental funds, growth hurts the investor. The wonderful companies sustain a competitive advantage, produce free cash flow, and use debt wisely. Automatic Warning, ( above 0.5 ) on this current debt to equity level of 6.54
Does Lehman Bros. Holdings make for an intelligent investment or speculation today? Time is said to be the friend of the wonderful company and the enemy of the mediocre one. Before making an investment decision, seek understanding about the company, its products, and its sustainable competitive advantages over competitors. Next, look for able and trustworthy managers who are focused more on value than just growth. Finally ask: Is there a bargain relative to its intrinsic value per share today? Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misapraised. In terms of Opportunity Cost, is LEH the best place to invest our money today? What about growth in Free Cash Flow? This author's book is at frips.com
These days, Warren Buffett mentions the Four Filters this way: "Charlie and I look for companies that have a) a business we understand; b) favorable long-term economics; c) able and trustworthy management; and d) a sensible price tag." These Four Filters can enhance the probability of our investment success. I think they will help you in your search for intrinsic value and sensible investment.