Old Investing Advice Gems from Wallstraits days

[FFNow]

If the security isn't DCF-able (means cash flow yoy isn't increasing consistently), should we invest in such a company? Are we breaking a rule in the value investing tenant if we invest in companies that are not predictable? I know for each his own and the rule is not cast on stone but Warren Buffett has preached investing in companies with consistent owners' earnings so that we can project the earnings better into the future.

I know DCF-able companies with consistent cash flow yoy are very hard to find. I vividly remember that Thomson Medical Centre had consistent cash flow yoy and fitted well to be a value investing stock with good growth story. We only need three or four of such companies to have commendable returns for the long-term.

Looking forward to the views of the rest...

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Also, I don't rely too much on P/E ratios as they rely on earnings as this can be manipulated. I look more into Price/Free Cash Flow ratio as cash flow is much harder to be manipulated.

[donmihaihai]

The masterpiece(BRK) from Master(WB) is one of the company that is furthest away from being consistent and what happened to it since 1960s till now?

The problem with investing assuming that we are investing is trying to act or look at certain things or word. like consistent, value investing, growth, etc etc.

The best thing we have is we are able to think.

[d.o.g.]

The masterpiece(BRK) from Master(WB) is one of the company that is furthest away from being consistent and what happened to it since 1960s till now?

Consistency is relative. Relative to most other companies, Berkshire Hathaway WAS consistent. From 1965 through 2010 (35 years) book value declined in only 2 years (2001 and 2008). So it made money in 33 out of 35 years. Few companies have such a track record.

And the reason that Berkshire Hathaway has such a track record is because it was itself heavily invested in companies that had such track records e.g. See's Candies, Coca Cola, American Express, Washington Post etc.

And of course the other reason that Berkshire Hathaway did so well was because the money for such investments was obtained cheaply i.e. from the float in trading stamps and insurance premiums. Without the leverage afforded by Blue Chip Stamps and later the insurance float, Berkshire Hathaway would be a lot smaller than it is today. Warren Buffett might merely be just another successful fund manager instead of being THE most successful one.

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If the security isn't DCF-able (means cash flow yoy isn't increasing consistently), should we invest in such a company? Are we breaking a rule in the value investing tenant if we invest in companies that are not predictable?

There is more than one way to value a company. If DCF doesn't work, try something else... don't be a man with a hammer. You can't value a steel mill using DCF, for example. That should not stop you from using a different method.

Of course, if none of the tools work, try another company! There are plenty of choices out there.

[FFNow]

Yes d.o.g, there are other ways like using P/B, NAV, etc. Thanks.

[donmihaihai]

Yes consistency is relative and relative to what. Looking at BRK in the way you put up is consistency. BUT that is not what many are looking for when it come to consistency. Many are looking for stable consistent profit growth. I.e. No lumpy profit yoy. And that is the kind of consistency BRK cant produce.

[d.o.g.]

Many are looking for stable consistent profit growth. I.e. No lumpy profit yoy. And that is the kind of consistency BRK cant produce.

No business grows consistently forever. Newspapers came pretty close for maybe 30 years, then the Internet appeared and started killing them off. Berkshire Hathaway's results are actually lumpier than its underlying investments because of the insurance business - every once in a while there is a big loss from the supercat policies - quakes, hurricanes etc.

I personally think a company that has maintained its margins within a narrow range and has never lost money in the last 1 or 2 decades would qualify on a shortlist of consistent companies. But that is a view shaped by reading thousands of financial statements. Very few companies are immune to the business cycle, it is usually a question of the degree to which they are affected. A company whose profits fall 90% or swings into loss during the downturn is not consistent. A company whose profits fall 30% during the same cycle would probably be on the shortlist. Because of operating leverage, profits fluctuate much more than sales. A 10% decline in sales may well cut profits by 20%, and a 20% decline could cut profits 40%.

Investors who project a flat 15% CAGR for the business they are looking at are either tremendously naïve, or looking at a very special business, literally one in a thousand (or more). Of all the companies I have looked at, very very few qualified as consistent. One of them was Hsu Fu Chi. And even then Hsu Fu Chi is a seasonal business - March is the peak quarter while Jun reports a loss or more recently breakeven. It resembles See's Candies in these aspects. One big difference is that capex is quite heavy - only in FY10 did Hsu Fu Chi begin to produce meaningful free cash flow. But now that cash flow is improving, Nestlé is going to take it off the market. Sigh.

[KopiKat]

For fans of Wallstraits, their old blog is still available here.

Pls note that any links in the blog posts to wallstraits.com is no longer available as that site no longer exists. Newbies may however find some of the articles useful.

[Temperament]

If the security isn't DCF-able (means cash flow yoy isn't increasing consistently), should we invest in such a company? Are we breaking a rule in the value investing tenant if we invest in companies that are not predictable? I know for each his own and the rule is not cast on stone but Warren Buffett has preached investing in companies with consistent owners' earnings so that we can project the earnings better into the future.

I know DCF-able companies with consistent cash flow yoy are very hard to find. I vividly remember that Thomson Medical Centre had consistent cash flow yoy and fitted well to be a value investing stock with good growth story. We only need three or four of such companies to have commendable returns for the long-term.

Looking forward to the views of the rest...

---

Also, I don't rely too much on P/E ratios as they rely on earnings as this can be manipulated. I look more into Price/Free Cash Flow ratio as cash flow is much harder to be manipulated.

Hi FF,
To me only, (not sure about anyone), any data/numbers on a Balance Sheet can be manipulated so expertly that many analysts find hard to spot them. So the most important thing to learn about Balance Sheet is how to spot them. i am still very blurr about spoting them though i have read real examples or famous cases. i am depending on market's report which may not be correct or as good as if i can spot it, myself.
Ha! Ha! Too bad i am not clever at all but manage to survive in the stock markets; hopefully till i hand over my estate to my only son.
My 2 cents worth.

[Drizzt]

Many are looking for stable consistent profit growth. I.e. No lumpy profit yoy. And that is the kind of consistency BRK cant produce.

No business grows consistently forever. Newspapers came pretty close for maybe 30 years, then the Internet appeared and started killing them off. Berkshire Hathaway's results are actually lumpier than its underlying investments because of the insurance business - every once in a while there is a big loss from the supercat policies - quakes, hurricanes etc.

I personally think a company that has maintained its margins within a narrow range and has never lost money in the last 1 or 2 decades would qualify on a shortlist of consistent companies. But that is a view shaped by reading thousands of financial statements. Very few companies are immune to the business cycle, it is usually a question of the degree to which they are affected. A company whose profits fall 90% or swings into loss during the downturn is not consistent. A company whose profits fall 30% during the same cycle would probably be on the shortlist. Because of operating leverage, profits fluctuate much more than sales. A 10% decline in sales may well cut profits by 20%, and a 20% decline could cut profits 40%.

Investors who project a flat 15% CAGR for the business they are looking at are either tremendously naïve, or looking at a very special business, literally one in a thousand (or more). Of all the companies I have looked at, very very few qualified as consistent. One of them was Hsu Fu Chi. And even then Hsu Fu Chi is a seasonal business - March is the peak quarter while Jun reports a loss or more recently breakeven. It resembles See's Candies in these aspects. One big difference is that capex is quite heavy - only in FY10 did Hsu Fu Chi begin to produce meaningful free cash flow. But now that cash flow is improving, Nestlé is going to take it off the market. Sigh.

d.o.g how many years of discounted cf or cf evaluation we should do? 5 years 10 years? or 20 years for predictable ones?

[d.o.g.]

d.o.g how many years of discounted cf or cf evaluation we should do? 5 years 10 years? or 20 years for predictable ones?

I do not have the answer. For myself, I only do DCF when the cash flows are certain AND finite i.e. at some point they run out.

Most operating companies are organized as perpetual going concerns, this means you need to take a view on the next 30 years - or more. I have no confidence in my ability to see the future 30 years from now. So I don't normally do DCF on going concerns.

I normally use DCF only for limited-life entities e.g. mines, oil/gas leases, shipping trusts, highway concessions etc. For such entities the limited life simplifies the problem considerably since I do not need to project cash flows beyond the termination date.