An easy question but perhaps not a simple answer

[MrB]

MrB,

Accounting and our attempts of analysis does not even try and account for that,

Excellent point, I agree and you gave great feedback for me to play around with.

If I interpret what you are saying correctly then; just as you can't compensate for risk or create MoS by simply increasing the discount rate, you cant define risk of debt in absolute terms since it comes in different forms and variations.

 

giofranchi, many thanks for input and putting value on the table.

 

Kraven

When one thinks "like an owner" I believe this means that one envisions themself as if they owned the company.  What would they pay?  That kind of thing.  There is an amount of ownership (control wasn't the right word, I intended to mean level of ownership) where I think that one moves on the spectrum from a creative fiction to a reality.

 

You provide very good arguments and I thank you for it. It is a pleasure to get inputs from other angles. That said, you know when Graham said that "investing is most intelligent when it is most businesslike" and then later Buffet said that "these are the nine most important words ever written about investing." Maybe I take this to the extreme but hear me out. I have a company that has cash as an asset (portfolio) and, if I use that asset to buy 100% of a company, it would be natural for both investors and accountants to consolidate that new capital structure into the company. So is it then not logical to think that buying 1% would should create the same pattern, even if accounting states it differently? When I invest, I write down how much my shares generate, ie I own 1/100 and the company earns 100 dollars, my shares generated 1 dollar, regardless of fluctuations in market price and where the price will be year end. I also sum up how much equity in x amount to see how much that is covered from company failure, it would be illogical to leave out the debt since all three financial statements are integrated. I might be wrong, but it helps me to view things as a businessman.

 

Best,

 

I do not want to sound as if I am trying to speak for Kraven, but I don't think he faults your logic. However, you have to be acutely aware of limitations of that thinking, because you can only take it so far. Overstep the boundaries and you will probably notice a funny smell when you get into the car  ;D

[Rabbitisrich]

 

I have a company that has cash as an asset (portfolio) and, if I use that asset to buy 100% of a company, it would be natural for both investors and accountants to consolidate that new capital structure into the company. So is it then not logical to think that buying 1% would should create the same pattern, even if accounting states it differently? When I invest, I write down how much my shares generate, ie I own 1/100 and the company earns 100 dollars, my shares generated 1 dollar, regardless of fluctuations in market price and where the price will be year end. I also sum up how much equity in x amount to see how much that is covered from company failure, it would be illogical to leave out the debt since all three financial statements are integrated. I might be wrong, but it helps me to view things as a businessman.

 

Best,

 

It's not literally the same, and the literal differences can be very important. For example, in most cases, debt held in a portfolio company is non-recourse, and the relevant uncertainty is in the operating cash flows. If you hold debt in your account to hold an equivalent amount of stock, even if the debt is non-recourse, you have to consider uncertainty in market valuations.

[Kraven]

MrB,

Accounting and our attempts of analysis does not even try and account for that,

Excellent point, I agree and you gave great feedback for me to play around with.

If I interpret what you are saying correctly then; just as you can't compensate for risk or create MoS by simply increasing the discount rate, you cant define risk of debt in absolute terms since it comes in different forms and variations.

 

giofranchi, many thanks for input and putting value on the table.

 

Kraven

When one thinks "like an owner" I believe this means that one envisions themself as if they owned the company.  What would they pay?  That kind of thing.  There is an amount of ownership (control wasn't the right word, I intended to mean level of ownership) where I think that one moves on the spectrum from a creative fiction to a reality.

 

You provide very good arguments and I thank you for it. It is a pleasure to get inputs from other angles. That said, you know when Graham said that "investing is most intelligent when it is most businesslike" and then later Buffet said that "these are the nine most important words ever written about investing." Maybe I take this to the extreme but hear me out. I have a company that has cash as an asset (portfolio) and, if I use that asset to buy 100% of a company, it would be natural for both investors and accountants to consolidate that new capital structure into the company. So is it then not logical to think that buying 1% would should create the same pattern, even if accounting states it differently? When I invest, I write down how much my shares generate, ie I own 1/100 and the company earns 100 dollars, my shares generated 1 dollar, regardless of fluctuations in market price and where the price will be year end. I also sum up how much equity in x amount to see how much that is covered from company failure, it would be illogical to leave out the debt since all three financial statements are integrated. I might be wrong, but it helps me to view things as a businessman.

 

Best,

 

I do not want to sound as if I am trying to speak for Kraven, but I don't think he faults your logic. However, you have to be acutely aware of limitations of that thinking, because you can only take it so far. Overstep the boundaries and you will probably notice a funny smell when you get into the car  ;D

 

MrB has it right.  I am not faulting your logic Anders.  What you say is technically accurate.  But while I think it is technically correct, I think the reality is you are misleading yourself.  You can write down your pro rata portion of a company's earnings and cash or whatever all you want, but it's a fiction in that you don't have it and never will.  So in that respect all you do own IS a piece of paper.

 

Yes, Graham said investing is most successful when it's most businesslike, but you take those words to mean what you want them to.  You have assumed he means only that one essentially brings on to their "personal" balance sheet their pro rata portion of all of their holdings.  I don't think that's what he meant at all.  I think he meant that stock ownership and investing should be conducted in a serious manner.  He was making a point that many people simply will buy on a whim.  In his day (and in ours), people didn't always take security analysis seriously.  He was making a case for it as a profession and serious business. 

 

Further, I think he meant that when investing one should be act in a careful manner.  This is part of his defintion of investing - that is, to invest after thorough analysis, etc.  So one might envision a small store.  Say a hardware store.  The nails are in this aisle, the hammers over there, the rakes in back, etc.  But one doesn't need to envision themselves as working in the factory that makes the nails and hammers.  They arrive, they are placed in the appropriate spot and so forth.  So when I buy a stock believe me it is serious business.  I do envision what might happen if I bought the entire company as part of my valuation process, but I don't think I actually own it in the sense you mean.  I am not actually getting a check with my pro rata portion of earnings.  I can't call up the CFO and ask for a check for my portion of the cash in the bank. 

 

It's kind of funny in a way because there is ownership and there is ownership.  Yes, by holding shares we own a part of a company.  But it's kind of in name only.  We can exercise only those rights given to us by the constituent documents of the company (articles, by-laws and such) and by law.  That is it. 

[giofranchi]

Hope I made some sense.

 

You surely did Kraven! And thank you very much!

Please, understand that people like anders and me put great emphasis on capital allocation, enjoy security analysis very much and take it seriously, but are not professional money managers. Like anders wrote, cash is just one of our assets.

So, while certainly we have much more to gain listening to you than vice versa, we try to contribute to the discussion, adding some thoughts from a perspective that might be a little different.

 

giofranchi

[anders]

MrB, Kraven,

 

Great points!

 

You are right, I took it to the extreme, I realize that now :-[.. but I got a whole lot wiser than I was when I woke up :)

Re-reading BRK letter -77 about look-through earnings, the picture became crystal clear.

 

Giofranchi - thanks for input!