Barmann's Interpretation: Reproducible Value Investing

Mr. Tang’s Art of Value Investing. Through the writings or words of historical investment masters, we deeply analyze the various schools of investment. Finally find the right way of value investment for ordinary people!

The Art of Investing, including the cigarette butt school, the index school, the growth school of quality companies, etc. The cigarette butt school is mainly based on Graham as the core, by finding the valuation is lower than the net asset value or liquidation value, by buying its shares, pushing the management of the company to recover cash, and then gaining income.

What I Liked 🔗︎

What I Disliked 🔗︎

Key Takeaways 🔗︎

• Cigarette butt stocks only buy stocks whose share price is less than two-thirds of net tangible assets, or even only stocks whose share price is less than two-thirds of net operating assets. Market capitalization is less than current assets or cash assets.
• Money has time value.
• Inversion: Leveraged money does not care if your stock is undervalued or severely undervalued, a market decline means margin calls or chopping off positions. Constant chopping of positions in turn leads to the creation of lower market prices
• The funds must be long-term in nature and not require passive buying and selling decisions based on market fluctuations.
• How Fisher selects growth stocks: Focus on the company’s industrial prospects, operations, management, and ability to grow profitably; make it a prerequisite for stock selection that the company’s management must be honest and sufficiently talented; understanding the strengths and weaknesses of a target company through its competitors; distinguishing between companies that grow because of luck or because of ability; always investing only with spare money so that quality companies can be held for the long term; buying stocks because of the quality of the company and not because the stock is cheap; focusing too much on dividends for good companies is not necessary; that a firm’s profit margin is two or three percentage points higher than that of its sub-optimal rivals is a good investment, and that excessive profit margins often hide risk; concern about exactly where a firm’s excess profits come from those practices that competitors cannot imitate; the fact that human energy is limited and that over-diversification may turn out to be more dangerous than concentration; that the number of truly outstanding businesses is so small that it is foolish to hold them for the long term after discovery and to sell them simply because they are profitable by a certain margin; There are only three situations in which holding a stock should be considered for selling:
  1. the mistakes made in the original purchase become increasingly apparent
  2. The company’s operations are deteriorating 3, found a better company
• Money view: Munger has money to prioritize the improvement of family status, while Warren Buffett prioritizes investment
• Newspaper: The residential newsletter accompanying the newspaper attracted advertisements from real estate developers. In the general industry, a product of bad quality must not do well in business. But the newspaper industry is different, as long as the newspaper industry has a monopoly.
• Warren Buffett invested in the Washington Evening Post: the investment was trapped for three years, the market occasionally goes crazy, but definitely not stupid. Less than 30% off a reasonable valuation, and still plummeted more than 30%. Because the Post-affiliated television station operating license lawsuit for two and a half years, the litigation costs alone exceeded $1 million, and the uncertainty of the business prospects and profits increased greatly. The emergence of low prices must be accompanied by some major shortfall. Investors should think rationally, judge the various possible probabilities, the impact of the situation, and then make their own choices and suffer the consequences of such choices.
• Measures to bring Gayco Insurance back from the dead: 1 Scale follows profit. Cut all high-cost policies or raise the price of such policies to bring the combined cost-to-cost ratio back below 100% 2 Find reinsurance peers to share the risk 3 Raise capital quickly to increase the company’s capital 4 Convince the insurance committee not to declare bankruptcy and liquidation. Warren Buffett bought Gayco Insurance stock in three separate tranches.
• Insurance industry faced a large number of competitors, very low entry barriers to the industry and difficulty in making differentiated products
• General reinsurance investment: return on net assets, ROE less than 12%; revenue and profit, revenue from investment income, investment return of 3.94%, growth of 10.2%, profit annualized growth of 6.6%, Buffett to 23.5 times P/E acquisition relative to the National Indemnity Insurance Company bid is very high, the latter is 5.4 times P/E acquisition. The reason why Buffett bought, one is to see the floating deposit, but by issuing 22% more shares of Berkshire to all shareholders of General Reinsurance, and then exchanging all the shares of General Reinsurance for bonds. It was possible to curve down the stock in hand. At that time, Berkshire’s stock was significantly overvalued, including Coca-Cola’s shares, which were priced at nearly 30 times the P/N ratio and over 50 times the P/E ratio.
• The value of the float is higher than the shareholders’ equity because shareholders need to have a return. Suppose Zhang San enters $1 million in stock and Li Si is willing to lend me $1 million at 5% interest. There is no doubt that Li Si’s money is more valuable because it will generate 15% more profit for me each year.
• Warren Buffett’s view of risk: The return on an investment comes from the dividends you expect to receive over the time period you hold it, and the eventual proceeds from selling it at a conservative estimate of a reasonable P/E ratio. Whether it is risky or not depends on whether this level of return significantly exceeds the sum of the risk-free interest rate and inflation. The magnitude of the investment risk is directly related to two factors: the expected length of the holding period and the closeness of the company’s earnings and dividend estimates to the ultimate reality. Given the profit-seeking nature of capital, the probability of a stock price reaching a conservative and reasonable valuation increases with time, up to a certain point where the probability is 100%. But as Keynes famously said: the practice of keeping the market irrational may last until after you go bankrupt.
• The probability that stocks will return more than bonds is 66.9% on a 1-year rolling basis, 73.3% on a 3-year basis, 74.6,% on a 5-year basis, and 99.5% on a 20-year rolling basis
• Warren Buffett bought Coca-Cola at 2.43 earnings per share and bought it at 41.85, about 17 times the P/E ratio. The second time he bought at 46.95, about 19x P/E. This investment is in line with Warren Buffett’s investment philosophy: 1 Upwards of 30% return on net assets 2 Net income is all real money 3 Maintaining current profitability does not require significant capital investment 4 It is expected to be difficult to get worse in the future 5 Dynamic P/E ratio of less than 20 times
• Buffett didn’t sell at Coca-Cola’s 50x P/E because of Barmann’s optimism about it. But Barmand overestimated sales and also overestimated earnings per bottle. Even for a company with such a simple product, it is still quite difficult for investors to make accurate predictions about its profit growth; when the company is doing well and its market value is growing after investment, investors are more likely to make optimistic predictions.
• To get all the money you need in order to make money you don’t need is absolutely silly! Willingly risking what is important to you in order to get what is not important to you can’t do that.
• What Warren Buffett says about index funds: Index funds are good, but if you have the basic investment skills, there is no need to get into index funds. Investors with common business sense should concentrate on investing in 5 to 10 companies with reasonable stock prices and long-term competitive advantages.
• Active investment funds have a high probability of losing the index, because 2/3 of them will be lower than the index, while taxes and fees have to be deducted, so the probability of being lower than the index is even lower. The increasing funds tend to have mediocre performance down the road.
• Stock returns come from two parts: industry and speculation. The vast majority of people lack the necessary business knowledge, and participation in the stock market is like a newspaper beauty contest. Participants are asked to choose the six most beautiful photos out of 100. Each participant does not choose the one they think is the most beautiful, but the one most likely to be recognized by everyone. Volatility can’t be corrected unless the share of professional investors and institutions is expanded.
• Keynes’ General Theory quote: The difficulty is not in coming up with new ideas, but in getting rid of old ones.
• Which assets are most worth investing in: Invest in productive assets, whether they are businesses, farms or real estate. It takes very little capital investment to ensure that the purchasing power of its output is maintained during inflation.
• Apple has a huge market cap and trading volume, with highly sticky products and the ability to raise prices, as well as a good asset structure and excellent management.
• Investing in just 4 proper ways: 1 Low fee index funds 2 Arbitrage with certainty of opportunity, represented by Graham, Buffett, and Thorpe 3 Package of butts model, represented by Schlosser 4 Grow with quality companies