Contrarian arguments for SNS

[Mark Jr.]

From a contrarian standpoint, I do like what I'm seeing in terms of reaction to the SNS plans.

 

It's clear whether the Freemont deal goes through or not, that SNS will be buying them or some other insurer and incorporating a float into their capital allocation methodology. So the apparent "failure" of the freemont deal may hit the SNS price enough to yield an attractive entry point.

 

Then there's the media's reaction to the move. For the most part derisive and condescending.  If everybody is calling it the genius move of the century, it would be a signal for caution for me. Instead they are picking up on the maxim  that capital need not be deployed into the same segment it came from and calling it "diworsification". Good.

 

 

 

This Week's 5 Dumbest Stock Moves:

 

 

 

3. From buffet to Buffett

Steak n Shake (NYSE: SNS) has big plans. A 1-for-20 reverse stock split went into effect on Monday morning, even though the company's stock was trading in the double digits before it decided to swap out every 20 shares for a single share at 20 times the price. Why not go with a 1-for-6,000 reverse to truly catch up to Berkshire Hathaway's (NYSE: BRK-A) (NYSE: BRK-B) organic and hard-earned share price?

 

Then it truly showed its Warren Buffett ambitions when it announced its intentions to acquire a small Michigan-based insurer on Monday night.

 

"Simply because profits are generated in the restaurant business doesn't mean the money must be reinvested there," the company's chairman wrote earlier this month in his annual letter to shareholders.

 

He's right, but at what point does diversification fall into the realm that Peter Lynch coined as diworsification? Just because Buffett successfully transformed his company into a diversified holding company with a strong insurer base, that doesn't mean we can all be Buffett.

 

I think when Peter Lynch talked about that (diworsification) he was right about a lot of it: Companies expanding into operating businesses where they had no core competence and at best tenuous synergies. I've always thought that was different from Buffet-style capital allocation, where he deferred to competent management to continue operating a diverse suite of businesses and worried primarily about aligning the management's interests with the owners.

[Parsad]

"Beating the Street" was one of the first books on the stock market I read.  In hindsight, especially in light of the results I garnered after reading it, it was a book full of relatively useless and awful advice.  There was no coherent framework for the intellectual pursuit of investing, and I did not fully grasp or undestand that until I read Buffett's letters and the Intelligent Investor.  Cheers! 

[Mark Jr.]

"Beating the Street" was one of the first books on the stock market I read.  In hindsight, especially in light of the results I garnered after reading it, it was a book full of relatively useless and awful advice.  There was no coherent framework for the intellectual pursuit of investing, and I did not fully grasp or undestand that until I read Buffett's letters and the Intelligent Investor.  Cheers! 

 

You know, now that you mention it. It was also one of the first I read, and I read it probably 5 years or more before I even heard of value investing or began to formulate a coherent investment philosophy. It was so long ago that it is possible my impressions of that book are out-of-date.

 

Over the years whenever I started looking at a stock from a Lynch standpoint: i.e. what are people lining up to buy in the super-market - I've never seen one actually pan out. Not that I ever invested in any of them.

[Guest ValueCarl]

Deworsification is a silly principle whilst tying it to a master financier like Buffett, possibly, Biglari, too, assuming he follows suit. So far, Biglari has needed to get his hands dirty aside from finance, as part of "running the businesses." 

 

In the case of Buffett, his operating companies are "decentralized" while he takes control stakes in businesses he can understand at prices he can stand, along with best of breed managers who can do their own things (autonomy) while running the businesses successfully and sending the "perpetual cash flows" to Warren for deployment. 

 

If done correctly, it's a perpetual CASH FLOW MACHINE of great businesses with a financing guru, or gurus (succession) compounding that cash intelligently over time.

 

Most importantly, as he buys businesses for prices he can "stand," i.e., DIRT CHEAP, be they private or public beforehand, as multiples expand under his Berkshire umbrella, more or less tied to "INFLATION" which often times has less effect on his businesses, so DOTH his "stock price" eventually.

 

As I understand Warren Buffett, he has admitted to being a buffoon at truly "running the businesses" he buys for his holding company. Of course, he might simply be "lowering expectations" in the public venues where he discounts himself while paying homage to his underlying managers who work like slaves.

 

Remember, "It's so simple," as per Charles T. Munger puts it, and "You don't need a high I.Q." according to Warren E. Buffett.

 

If you believe you do, though, best to give them your MONEY!  ;D 

 

     

[Uccmal]

As I understand Warren Buffett, he has admitted to being a buffoon at truly "running the businesses" he buys for his holding company. Of course, he might simply be "lowering expectations" in the public venues where he discounts himself while paying homage to his underlying managers who work like slaves.

 

I am sincerely doubtful about this.  IMO Buffett is probably one of the best operations managers in business.  He knows exactly how to motivate people, and knows exactly when to interfere and when not to interfere.  He is also one of the most ruthless businessmen out there.  You simply dont stay at the top of the heap for 50 years any other way. 

[Guest ValueCarl]

I wouldn't doubt what you say one tiny bit!

 

However, Warren routinely states publicly that, "I couldn't run those businesses!" In addition to joking with Gates about how he'd be in trouble if he had been born during Cave Man times, where jungle like behavior ensued, somewhat akin to those silly GEICO Cave Man commercials and corresponding success, which DIED, I suppose!  :P

 

Then again, JUNGLE LIKE BEHAVIOR always ENSUES even in more modern times like today, where it shows up in various degrees or levels depending upon ones sophistication, I GUESS!     

 

<Of course, he might simply be "lowering expectations" in the public venues where he discounts himself while paying homage to his underlying managers who work like slaves.>

[Parsad]

Over the years whenever I started looking at a stock from a Lynch standpoint: i.e. what are people lining up to buy in the super-market - I've never seen one actually pan out. Not that I ever invested in any of them.

 

That's exactly the experience I had.  Lynch had some ideas, and they worked for him, but Buffett took it a step further...instead of "deworsification", Buffett used "concentration"...instead of "buy what you know", Buffett used "circle of competence".  And then Buffett, and Graham of course, extrapolated exactly how you go about valuing a business and then applying a margin of safety...which is the core concept of everything Graham taught.  It's the single, greatest lesson of my life!  Cheers!