Monday, January 12, 2009

Billytickets intervie part 2 with a billionaires student

Billytickets: How do you invest now?

Student: What do I do now? First of all, I deal with seasoned companies. By that I mean companies that have been around for long enough to have a record that shows how the business behaves in various economic environments—a business that has been through good times and bad, through recessions, inflations--and see how the business performs. I look for companies that have a long enough track record so what you are looking at present can’t possibly be an aberration. Pretty much unavoidably these are pretty big companies. These are big companies and they have been around long enough to be seasoned by my definition, they are successful and they are not tiny, little companies. The insight that I bring to these companies is that their stock prices—this is historically demonstrable--are much more volatile than their underlying values.

Billytickets: many say that there is not big profits in large caps like there is in small caps?


Student: Laughs. Well that is if you are skilled enough to pick the small caps. Even Warren was mistaken on Berkshire Hathaway the textile company . And while I can’t prove it, it would appear that stock prices are much more variable than the changes in their underlying intrinsic values. I refine or restrict my list to companies with superior financial characteristics. We will talk about what that means. But in general these are companies that are cash generating, with free cash flow, businesses that are more than self-financing. They generate cash in excess of their cap/ex and reinvestment needs. Because they are cash generating, they tend to have lower debt

Billytickets: So how important is trying to find the next Apple or Crocs or RIMM?

Student: All those stocks have been profitable but the investor can not say with certaintity that these investments would be 99.9% profitable. I am also no longer interested in companies where there is a story or a narrative. I am not interested in a company that is going to do something new and different. I am interested in its long record. I presume that a company of a certain size has a long record. We will talk about specific examples in a few minutes when we look at some Value Lines. I am not talking about long-term growth, I am talking about long-term high profitability, consistent profitability and consistent cash generation.

Billytickets:But isn't it true that everyone knows the best large caps and they never become cheap?

Student:Now, if I said to you, almost no company doesn’t have some degree of cyclicality in its operations. Wall Street because of its short-run obsession is very twitchy. You see these stories every so often like IBM, an enormous company, reports earnings that are a penny or two higher or lower than expectations, will move the stock price of these enormous companies 3% to 5% in a day. For sure, the value didn’t move 5% but the price did. Not in a single day, but over a series of days, you can have the divergence between price and value. The opportunities for value investors can and do present themselves

2 comments:

  1. Sir,

    I really enjoy reading your posts on this blog and Seeking Alpha. Do you have any separate blog where you discuss about individual stocks?

    ReplyDelete