Ask Kraven!

[Yours Truly]

How has your strategy fared in the past 15, 10, 5 years?

 

What's your rule for selling?

 

Do you have an fixed margin of safety % on your picks?

[matjone]

Is your username a reference to you being craven in your attitude towards investing because you are always afraid of being fleeced? Or does it have something to do with a 2003 movie called underworld?  Or is it a reference to a cartoon superhero who wears cheeta print spandex pants?  The first guess is mine, he last two are from google.

[oddballstocks]

Is your username a reference to you being craven in your attitude towards investing because you are always afraid of being fleeced? Or does it have something to do with a 2003 movie called underworld?  Or is it a reference to a cartoon superhero who wears cheeta print spandex pants?  The first guess is mine, he last two are from google.

 

But the spandex signal macho-ness and authority.  I mean what wuss would wear spandex and a giant lion head cape?

 

I'm good friends with Kraven and I'm really glad to see this thread transpire, but it doesn't really do him justice.  What he posts on here is really the tip of the iceberg in terms of his abilities and knowledge.  When he speaks banks I listen, when he mentions any company I listen.

 

Kraven I think it's time for you to indulge the board with your "box" analogy.

 

Better than anyone I know he has shown that the Graham/Schloss methodology works today.  What he has is an extremely solid process, and he follows the process.  It's not a formula or a strategy, but a tried and true process. 

[giofranchi]

Kraven,

although my approach is clearly different from yours, I am enjoying this thread very much! Thank you! :)

 

It is difficult for me to understand why I should make the effort to

wash, rinse, and repeat

when I can invest in FFH at book, which washes, rinses, and repeats for me, and which enjoys the great advantage of having float. In other words, why should I spend a lot of time washing, rinsing, and repeating with $378, when I could hand those same $378 to Mr. Watsa and let him wash, rinse, and repeat for me with $1,289? Freeing up time for me to concentrate on extracting ever more free cash from my businesses? Cash that I would go on handing to Mr. Watsa, and that would go on translating into 3.4x worth of investments ("wash, rinse, and repeat" stuff), as soon as it gets to Toronto. And so on and on and on… I don’t know…

Anyhow, let’s put it this way: if you were running an insurance company, I would be extremely glad to invest alongside you and your team (your wonderful and very gifted sons!)  :)

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

 

[txitxo]

Anyhow, let’s put it this way: if you were running an insurance company, I would be extremely glad to invest alongside you and your team (your wonderful and very gifted sons!)  :)

 

giofranchi

 

 

Gio, I think that from what Kraven describes as his process, which puts no limit on company size, and his obvious knowledge of the subject, in principle he should be able to beat FFH's 15% target long term performance by 2-5% per year, and with probably lower volatility. Of course I don't know if he could do the same if he had to manage several B$, as Prem does.

 

And investing in several companies makes the whole thing much more relaxed than betting everything on just a few names, you don't lose sleep if your portfolio goes down by 0.5% because you chose the wrong company. Of course you don't get to brag about multiplying your money by 100% in a week to your nursing home buddies. But, hey, nada es gratis.

 

[giofranchi]

Anyhow, let’s put it this way: if you were running an insurance company, I would be extremely glad to invest alongside you and your team (your wonderful and very gifted sons!)  :)

 

giofranchi

 

 

Gio, I think that from what Kraven describes as his process, which puts no limit on company size, and his obvious knowledge of the subject, in principle he should be able to beat FFH's 15% target long term performance by 2-5% per year, and with probably lower volatility. Of course I don't know if he could do the same if he had to manage several B$, as Prem does.

 

 

Maybe… Sincerely, I think that to achieve a 17% to 20% annual return with great consistency is very tough for anyone! But Kraven is obviously very good at what he is doing. The problem, as always, is that we tend to extrapolate and generalize: just because Kraven could achieve a 20% annual return going forward, so also should we… Imo, that is a very dangerous thing to do…

 

Moreover, a 20% annual return, starting with $378, leaves you with $2,340.5 after 10 years. Vice versa, a 15% annual return, leaves you with $1,529.2. If, concentrating on my operating businesses, I am able to extract free cash equal to just 10% of equity in year 1 for each of the next 10 years ($37.80), and I keep investing that free cash in FFH at book value, at the end of the 10 year period I will be left with $767.5 more. My total equity at the end of year 10 will be: $1,529.2 + $767.5 = $2,296.7. Not much different from Kraven’s, who should be a Master at what he does to achieve a 20% CAGR for 10 years!

- If Kraven’s average return is lowered to just 19%, he will lag my returns.

- If I succeed in increasing the free cash my firm produces, instead of considering it always the same each year, my returns will surpass Kraven’s, even if he actually manages a 20% CAGR for 10 years.

 

And, please, remember how difficult it really should be to obtain a 20% unlevered CAGR for 10 years: if FFH increases BV per share at 15% CAGR, using a 3.4x leverage, it means that their annual unlevered return from investments will average just 6.6%. So, Kraven unlevered outperformance on Mr. Watsa’s returns should be circa 13.4% each year! ???

I am sure Kraven will accomplish such an outstanding feat! But, guys, to tell the truth, I feel way too dumb… sorry, not my game!

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

[Kraven]

I really like your store analogy! 

 

If I may, what percentage of your portfolio does your largest positions hold? Do you have a mental limit on how much that limit usually is?

 

Thanks.  I would say my largest positions right now are in the 1.5-2% range and there aren't too many.  I don't really have a mental limit on how high it can go, but with the way I do things it's kind of built in that it can't get too high.  I have though had much larger positions, although even my largest ever would be nothing like what some people on the board do as a matter of routine. 

[Kraven]

Is your username a reference to you being craven in your attitude towards investing because you are always afraid of being fleeced? Or does it have something to do with a 2003 movie called underworld?  Or is it a reference to a cartoon superhero who wears cheeta print spandex pants?  The first guess is mine, he last two are from google.

 

I could tell you, but then . . . you know.

[txitxo]

Anyhow, let’s put it this way: if you were running an insurance company, I would be extremely glad to invest alongside you and your team (your wonderful and very gifted sons!)  :)

 

giofranchi

 

 

Gio, I think that from what Kraven describes as his process, which puts no limit on company size, and his obvious knowledge of the subject, in principle he should be able to beat FFH's 15% target long term performance by 2-5% per year, and with probably lower volatility. Of course I don't know if he could do the same if he had to manage several B$, as Prem does.

 

 

Maybe… Sincerely, I think that to achieve a 17% to 20% annual return with great consistency is very tough for anyone! But Kraven is obviously very good at what he is doing. The problem, as always, is that we tend to extrapolate and generalize: just because Kraven could achieve a 20% annual return going forward, so also should we… Imo, that is a very dangerous thing to do…

 

Moreover, a 20% annual return, starting with $378, leaves you with $2,340.5 after 10 years. Vice versa, a 15% annual return, leaves you with $1,529.2. If concentrating on my operating businesses, I am able to extract free cash equal to just 10% of equity in year 1 for each of the next 10 years ($37.80), and I keep investing that free cash in FFH at book value, at the end of the 10 year period I will be left with $767.5 more. My total equity at the end of year 10 will be: $1,529.2 + $767.5 = $2,296.7. Not much different from Kraven’s, who should be a Master at what he does to achieve a 20% CAGR for 10 years!

- If Kraven’s average return is lowered to just 19%, he will lag my returns.

- If I succeed in increasing the free cash my firm produces, instead of considering it always the same each year, my returns will surpass Kraven’s, even if he actually manages a 20% CAGR for 10 years.

 

And, please, remember how difficult it really should be to obtain a 20% unlevered CAGR for 10 years: if FFH increases BV per share at 15% CAGR, using a 3.4x leverage, it means that their annual unlevered return from investments will average just 6.6%. So, Kraven unlevered outperformance on Mr. Watsa’s returns should be circa 13.4% each year! ???

I am sure Kraven will accomplish such an outstanding feat! But, guys, to tell the truth, I feel way too dumb… sorry, not my game!

 

giofranchi

 

 

We should let Kraven speak here, but I don't think it's a question of intelligence, beyond a certain point, more one of how much money you have to invest and of mental discipline. For me what Buffett or Klarman do is pure magic. I wouldn't know where to start.  On the other hand, getting ~10% over the index with < several millions to invest, it's not magic. You can do it in free style, as Kraven does, which sounds much more difficult to me, or you can reduce it to an algorithm, to a recipe. Of course, the latter sounds simple, but in practice it is very difficult to implement because of our cognitive biases.

 

In any case I understand your point very well, I use a mechanical investing strategy precisely because I want to have spare time to do other things, like writing papers about galaxies, dark energy and stuff like that.

 

[oddballstocks]

Anyhow, let’s put it this way: if you were running an insurance company, I would be extremely glad to invest alongside you and your team (your wonderful and very gifted sons!)  :)

 

giofranchi

 

 

Gio, I think that from what Kraven describes as his process, which puts no limit on company size, and his obvious knowledge of the subject, in principle he should be able to beat FFH's 15% target long term performance by 2-5% per year, and with probably lower volatility. Of course I don't know if he could do the same if he had to manage several B$, as Prem does.

 

 

Maybe… Sincerely, I think that to achieve a 17% to 20% annual return with great consistency is very tough for anyone! But Kraven is obviously very good at what he is doing. The problem, as always, is that we tend to extrapolate and generalize: just because Kraven could achieve a 20% annual return going forward, so also should we… Imo, that is a very dangerous thing to do…

 

Moreover, a 20% annual return, starting with $378, leaves you with $2,340.5 after 10 years. Vice versa, a 15% annual return, leaves you with $1,529.2. If concentrating on my operating businesses, I am able to extract free cash equal to just 10% of equity in year 1 for each of the next 10 years ($37.80), and I keep investing that free cash in FFH at book value, at the end of the 10 year period I will be left with $767.5 more. My total equity at the end of year 10 will be: $1,529.2 + $767.5 = $2,296.7. Not much different from Kraven’s, who should be a Master at what he does to achieve a 20% CAGR for 10 years!

- If Kraven’s average return is lowered to just 19%, he will lag my returns.

- If I succeed in increasing the free cash my firm produces, instead of considering it always the same each year, my returns will surpass Kraven’s, even if he actually manages a 20% CAGR for 10 years.

 

And, please, remember how difficult it really should be to obtain a 20% unlevered CAGR for 10 years: if FFH increases BV per share at 15% CAGR, using a 3.4x leverage, it means that their annual unlevered return from investments will average just 6.6%. So, Kraven unlevered outperformance on Mr. Watsa’s returns should be circa 13.4% each year! ???

I am sure Kraven will accomplish such an outstanding feat! But, guys, to tell the truth, I feel way too dumb… sorry, not my game!

 

giofranchi

 

 

We should let Kraven speak here, but I don't think it's a question of intelligence, beyond a certain point, more one of how much money you have to invest and of mental discipline. For me what Buffett or Klarman do is pure magic. I wouldn't know where to start.  On the other hand, getting ~10% over the index with < several millions to invest, it's not magic. You can do it in free style, as Kraven does, which sounds much more difficult to me, or you can reduce it to an algorithm, to a recipe. Of course, the latter sounds simple, but in practice it is very difficult to implement because of our cognitive biases.

 

In any case I understand your point very well, I use a mechanical investing strategy precisely because I want to have spare time to do other things, like writing papers about galaxies, dark energy and stuff like that.

 

I want to point out something that might be lost on a lot of readers.  Txitxo is clearly extremely brilliant, yet he also realizes his weakness in not having the ability to fund the Buffett/Klarman stocks and goes with an approach that is proven to give great returns and works.

 

May I suggest that we all do a gut check and ask ourselves if we're really as good as we think we are?  If the guy who is writing scientific papers on how the galaxy works is saying he can't figure out the Buffett method that speaks volumes.  I know I can't, but I understand Graham.  So far no one has successfully emulated Buffett's success in buying the same times of companies and becoming as wealthy as him.  Many have followed Graham and using his own methods have surpasses the master himself, Buffett included.

[Kraven]

Is your username a reference to you being craven in your attitude towards investing because you are always afraid of being fleeced? Or does it have something to do with a 2003 movie called underworld?  Or is it a reference to a cartoon superhero who wears cheeta print spandex pants?  The first guess is mine, he last two are from google.

 

But the spandex signal macho-ness and authority.  I mean what wuss would wear spandex and a giant lion head cape?

 

I'm good friends with Kraven and I'm really glad to see this thread transpire, but it doesn't really do him justice.  What he posts on here is really the tip of the iceberg in terms of his abilities and knowledge.  When he speaks banks I listen, when he mentions any company I listen.

 

Kraven I think it's time for you to indulge the board with your "box" analogy.

 

Better than anyone I know he has shown that the Graham/Schloss methodology works today.  What he has is an extremely solid process, and he follows the process.  It's not a formula or a strategy, but a tried and true process.

 

Oddball, thank you for the very kind words.  I will send you that $20 now.

 

Ah, the box.  In a nutshell, the box can be envisioned as just about everything you need to know about a stock.  The box is the financials of a company - those 3-4 pages.  The financials provide most of the story.  Everything else out there, whether it be the notes to the financials, management, headwinds, etc. simply add or detract from the box.  If the box doesn't look good and solid, then it's time to move on to something else.  As you've said, stock ideas are like buses, miss one and another one comes along 10 min later.  I have never seen the logic in the assertion that there's maybe one or 2 good ideas a year.  I have lists of things worth looking at.

 

 

[Kraven]

Kraven,

although my approach is clearly different from yours, I am enjoying this thread very much! Thank you! :)

 

It is difficult for me to understand why I should make the effort to

wash, rinse, and repeat

when I can invest in FFH at book, which washes, rinses, and repeats for me, and which enjoys the great advantage of having float. In other words, why should I spend a lot of time washing, rinsing, and repeating with $378, when I could hand those same $378 to Mr. Watsa and let him wash, rinse, and repeat for me with $1,289? Freeing up time for me to concentrate on extracting ever more free cash from my businesses? Cash that I would go on handing to Mr. Watsa, and that would go on translating into 3.4x worth of investments ("wash, rinse, and repeat" stuff), as soon as it gets to Toronto. And so on and on and on… I don’t know…

Anyhow, let’s put it this way: if you were running an insurance company, I would be extremely glad to invest alongside you and your team (your wonderful and very gifted sons!)  :)

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

Thanks Gio.  It's just a different approach.  You assume, maybe rightly, that FFH will continue compounding at the same rate it has in the past.  I don't necessarily think that.  I don't want to turn this into a discussion of the merits of FFH as an investment, that's not my point.  If you knew that FFH would keep doing what it was doing, you should make the investment as you said.  I don't feel that way about any stock or investor, I don't care whether it's Watsa, Buffett, Klarman, or whoever.  I believe very much in unknown unknowns. 

 

While I think the risk is small that Prem runs off to a country with all the money - some on the board would say its impossible - I don't feel that way.  Do I think he will?  Of course not, but I'm not putting all my money on that bet either.  It's just a different risk analysis.  One thing I never understand is how people can think they really know some of these guys.  "Warren would NEVER do that!"  "Prem would never do this!"  Probably 100% accurate.  However, you never know.  I won't get into details, but knew a guy with probably 40 years in his business.  A pillar of the community.  Never heard a bad word said about him.  He knew everyone and everyone liked him.  Years ago he was arrested for unspeakable crimes.  We can't know what we don't know. 

[Kraven]

Anyhow, let’s put it this way: if you were running an insurance company, I would be extremely glad to invest alongside you and your team (your wonderful and very gifted sons!)  :)

 

giofranchi

 

 

Gio, I think that from what Kraven describes as his process, which puts no limit on company size, and his obvious knowledge of the subject, in principle he should be able to beat FFH's 15% target long term performance by 2-5% per year, and with probably lower volatility. Of course I don't know if he could do the same if he had to manage several B$, as Prem does.

 

 

Maybe… Sincerely, I think that to achieve a 17% to 20% annual return with great consistency is very tough for anyone! But Kraven is obviously very good at what he is doing. The problem, as always, is that we tend to extrapolate and generalize: just because Kraven could achieve a 20% annual return going forward, so also should we… Imo, that is a very dangerous thing to do…

 

Moreover, a 20% annual return, starting with $378, leaves you with $2,340.5 after 10 years. Vice versa, a 15% annual return, leaves you with $1,529.2. If, concentrating on my operating businesses, I am able to extract free cash equal to just 10% of equity in year 1 for each of the next 10 years ($37.80), and I keep investing that free cash in FFH at book value, at the end of the 10 year period I will be left with $767.5 more. My total equity at the end of year 10 will be: $1,529.2 + $767.5 = $2,296.7. Not much different from Kraven’s, who should be a Master at what he does to achieve a 20% CAGR for 10 years!

- If Kraven’s average return is lowered to just 19%, he will lag my returns.

- If I succeed in increasing the free cash my firm produces, instead of considering it always the same each year, my returns will surpass Kraven’s, even if he actually manages a 20% CAGR for 10 years.

 

And, please, remember how difficult it really should be to obtain a 20% unlevered CAGR for 10 years: if FFH increases BV per share at 15% CAGR, using a 3.4x leverage, it means that their annual unlevered return from investments will average just 6.6%. So, Kraven unlevered outperformance on Mr. Watsa’s returns should be circa 13.4% each year! ???

I am sure Kraven will accomplish such an outstanding feat! But, guys, to tell the truth, I feel way too dumb… sorry, not my game!

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

Guys, I have never said I will make any certain returns a year.  I obviously expect that I can outperform or I wouldn't be doing this.  I'd be handing my money to someone else.  If I KNEW that FFH would compound in the way you describe, I would probably make it a large position, maybe very large.  But how can I know that?  Just because something has happened, doesn't mean it will continue to do so.

[Kraven]

Anyhow, let’s put it this way: if you were running an insurance company, I would be extremely glad to invest alongside you and your team (your wonderful and very gifted sons!)  :)

 

giofranchi

 

 

Gio, I think that from what Kraven describes as his process, which puts no limit on company size, and his obvious knowledge of the subject, in principle he should be able to beat FFH's 15% target long term performance by 2-5% per year, and with probably lower volatility. Of course I don't know if he could do the same if he had to manage several B$, as Prem does.

 

 

Maybe… Sincerely, I think that to achieve a 17% to 20% annual return with great consistency is very tough for anyone! But Kraven is obviously very good at what he is doing. The problem, as always, is that we tend to extrapolate and generalize: just because Kraven could achieve a 20% annual return going forward, so also should we… Imo, that is a very dangerous thing to do…

 

Moreover, a 20% annual return, starting with $378, leaves you with $2,340.5 after 10 years. Vice versa, a 15% annual return, leaves you with $1,529.2. If concentrating on my operating businesses, I am able to extract free cash equal to just 10% of equity in year 1 for each of the next 10 years ($37.80), and I keep investing that free cash in FFH at book value, at the end of the 10 year period I will be left with $767.5 more. My total equity at the end of year 10 will be: $1,529.2 + $767.5 = $2,296.7. Not much different from Kraven’s, who should be a Master at what he does to achieve a 20% CAGR for 10 years!

- If Kraven’s average return is lowered to just 19%, he will lag my returns.

- If I succeed in increasing the free cash my firm produces, instead of considering it always the same each year, my returns will surpass Kraven’s, even if he actually manages a 20% CAGR for 10 years.

 

And, please, remember how difficult it really should be to obtain a 20% unlevered CAGR for 10 years: if FFH increases BV per share at 15% CAGR, using a 3.4x leverage, it means that their annual unlevered return from investments will average just 6.6%. So, Kraven unlevered outperformance on Mr. Watsa’s returns should be circa 13.4% each year! ???

I am sure Kraven will accomplish such an outstanding feat! But, guys, to tell the truth, I feel way too dumb… sorry, not my game!

 

giofranchi

 

 

We should let Kraven speak here, but I don't think it's a question of intelligence, beyond a certain point, more one of how much money you have to invest and of mental discipline. For me what Buffett or Klarman do is pure magic. I wouldn't know where to start.  On the other hand, getting ~10% over the index with < several millions to invest, it's not magic. You can do it in free style, as Kraven does, which sounds much more difficult to me, or you can reduce it to an algorithm, to a recipe. Of course, the latter sounds simple, but in practice it is very difficult to implement because of our cognitive biases.

 

In any case I understand your point very well, I use a mechanical investing strategy precisely because I want to have spare time to do other things, like writing papers about galaxies, dark energy and stuff like that.

 

I want to point out something that might be lost on a lot of readers.  Txitxo is clearly extremely brilliant, yet he also realizes his weakness in not having the ability to fund the Buffett/Klarman stocks and goes with an approach that is proven to give great returns and works.

 

May I suggest that we all do a gut check and ask ourselves if we're really as good as we think we are?  If the guy who is writing scientific papers on how the galaxy works is saying he can't figure out the Buffett method that speaks volumes.  I know I can't, but I understand Graham.  So far no one has successfully emulated Buffett's success in buying the same times of companies and becoming as wealthy as him.  Many have followed Graham and using his own methods have surpasses the master himself, Buffett included.

 

Oddball and Txitxo summed it up nicely.  I think it is possible to outperform, as I said, or I wouldn't be doing it.  I have respect for those who implement a mechanical strategy especially when they have jobs they need to attend to.  I do this full time, so don't need to worry about that.

 

Good point too about the difference in portfolio sizes.  Clearly Buffett can't invest in small names, net nets, etc. This topic has been discussed repeatedly on this board and pops up every now and then.  This is his he could earn 50% a year with a million to invest.  I am sure he could!  I remember reading one story, maybe it was in Snowball, I don't remember about how in the late 70s I think he needed money.  Sure, he was rich, but it was all in stock and he had a cash shortage.  He put some money to work and relatively quickly made a few million bucks or something.  He said how easy it is to make money in stocks.  But with billions to work with constantly, it's really tough.  Not much one can do other than hunt for whales.

[biaggio]

Great thread guys! Keep the questions and posts coming.

 

I always value and appreciate Kraven's posts. Kraven, keep them coming.

 

 

 

[giofranchi]

In any case I understand your point very well, I use a mechanical investing strategy precisely because I want to have spare time to do other things, like writing papers about galaxies, dark energy and stuff like that.

 

txitxo,

this should be obvious, but I want to underline it anyway: I am not talking about doing less work to enjoy life more… I am talking about using my time the most rational way that I know of, to achieve my financial goals as easily as possible. Improving the operations of my companies and investing in good businesses that I understand is imo much easier than trading in cheap stocks and out of expensive stocks. That’s all. The number of hours I work would be exactly the same in both cases.

 

One difference, though, which has nothing to do with financial goals, is clear to me: I surely enjoy life much more, being productive and doing something really useful for society. Both my firm’s engineering operations and the professional master degrees we offer inside the Politecnico of Milan are sought out by many people who really need and appreciate our services. And that is something I am grateful for.

Even among long-term investing and trading, I would chose investing anytime… provided financial results stay the same.

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

[LC]

 

Ah, the box.  In a nutshell, the box can be envisioned as just about everything you need to know about a stock.  The box is the financials of a company - those 3-4 pages.  The financials provide most of the story.  Everything else out there, whether it be the notes to the financials, management, headwinds, etc. simply add or detract from the box.  If the box doesn't look good and solid, then it's time to move on to something else.  As you've said, stock ideas are like buses, miss one and another one comes along 10 min later.  I have never seen the logic in the assertion that there's maybe one or 2 good ideas a year.  I have lists of things worth looking at.

I like this mental model. Buy good "boxes", put them on your "store shelves", and someone will buy them for a good price.

[racemize]

Are there any companies that you would strictly avoid?  I guess other than the general framework, I'm still not totally certain what it is your process does.  Probably, that just means it is dynamic and somewhat unique in each case (even if it is still straightforward)?

[Kraven]

 

Ah, the box.  In a nutshell, the box can be envisioned as just about everything you need to know about a stock.  The box is the financials of a company - those 3-4 pages.  The financials provide most of the story.  Everything else out there, whether it be the notes to the financials, management, headwinds, etc. simply add or detract from the box.  If the box doesn't look good and solid, then it's time to move on to something else.  As you've said, stock ideas are like buses, miss one and another one comes along 10 min later.  I have never seen the logic in the assertion that there's maybe one or 2 good ideas a year.  I have lists of things worth looking at.

I like this mental model. Buy good "boxes", put them on your "store shelves", and someone will buy them for a good price.

 

I like it.  It's really a mix of Graham and Schloss.  The most extreme example of it that I know of is Tweedy Browne years ago.  Before Tweedy Browne became run of the mill value investors trying to invest billions in Microsoft and Wal-Mart, they hunted through the dusty corners of the market looking for bargains.  Talk about number of positions.  They would have literally maybe a thousand or more.  They would buy any stock that met their parameters no matter how small the position.  In the 70s they were only managing around $30-50 mil.  They would buy a position that was maybe $50 or $200.  It didn't matter to them.  Sure, they had larger positions, but nothiing more than a couple percent or so.  They weren't looking for catalysts or anythiing other than value creating its own catalyst.  As they say, buy cheap and something good might happen.

 

An interesting aside is that usually the response to this model is that it doesn't move the needle.  I mean who cares, right?  Buy a $200 position and so what it goes up 50% and you made $100!  Even in the 70s that wasn't meaningful in the grand scheme of things.  But it's the store analogy.  People get myopic on this topic.  You could say the same thing about a supermarket.  They sold that pack of gum for 75 cents!  Why bother?  They sold that carton of milk and probably made 3 cents on it.  That doesn't move the needle!  But do it over and over and over again, day in and day out.  No, this model isn't going to make the store a Tiffany's and from an investing standpoint it isn't going to result in having a year where you blow out the lights.  But it's stable (usually) and in the aggregate returns are very good.  Not the best, not the worst.  And if people decide tomorrow they no longer have a taste for Juicy Fruit gum or don't drink Diet Mountain Dew any more, who cares.  Move on to the next product.

[Kraven]

Are there any companies that you would strictly avoid?  I guess other than the general framework, I'm still not totally certain what it is your process does.  Probably, that just means it is dynamic and somewhat unique in each case (even if it is still straightforward)?

 

Not really.  If it's cheap, I'll look.  I don't really care what it does.  I just need to feel good that the future will look something like the past.  So nothing specific that I would avoid absent other data.

[onyx1]

Do tax considerations affect your sell decisions?

 

[giofranchi]

One thing I never understand is how people can think they really know some of these guys.  "Warren would NEVER do that!"  "Prem would never do this!"  Probably 100% accurate.  However, you never know.  I won't get into details, but knew a guy with probably 40 years in his business.  A pillar of the community.  Never heard a bad word said about him.  He knew everyone and everyone liked him.  Years ago he was arrested for unspeakable crimes.  We can't know what we don't know.

 

I think this is a bit misleading: trust is at the heart of every business dealings. Whenever I decide to start something new, a new project or a new service, my first thought is always the same: who am I dealing with? Can I rely on them, or not? If I cannot answer, I won’t even begin working on anything new. I would just quit! I am not saying it is easy, but it surely is what entrepreneurs do: shifting resources from the undeserving to the deserving. And I personally know a lot of people with a long track-record of doing it successfully. If trust were impossible, there would be no enterprise. Without enterprise there would be neither investing nor trading. It is that simple. And don’t tell me I know much better some people, because I have met them personally and I have shaken their hands… Vice versa, I think I know Mr. Watsa much better then many of them!

 

If the guy who is writing scientific papers on how the galaxy works is saying he can't figure out the Buffett method that speaks volumes. 

 

This is funny… because I think I know personally some of the most renowned Italian university professors in engineering… and, believe me, they have really great minds! They are extremely clever under a myriad of different points of view! Many times, when I hear them talk, I don’t even understand what their topic of conversation actually is! … and yet … I wouldn’t entrust a single dime of my firm’s equity to anyone of them! They just don’t get how business works! Probably, because they just don’t really care… txitxo is very brilliant, no doubt about it, and he is very interested in making money, and is a wonderful trader, not a single doubt about it either. But, imo, to run a business is something completely different. (txitxo, please, don’t get upset with me! :) )

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

 

[txitxo]

If the guy who is writing scientific papers on how the galaxy works is saying he can't figure out the Buffett method that speaks volumes. 

 

This is funny… because I think I know personally some of the most renowned Italian university professors in engineering… and, believe me, they have really great minds! They are extremely clever under a myriad of different points of view! Many times, when I hear them talk, I don’t even understand what their topic of conversation actually is! … and yet … I wouldn’t entrust a single dime of my firm’s equity to anyone of them! They just don’t get how business works! Probably, because they just don’t really care… txitxo is very brilliant, no doubt about it, and he is very interested in making money, and is a wonderful trader, not a single doubt about it either. But, imo, to run a business is something completely different. (txitxo, please, don’t get upset with me! :) )

 

giofranchi

 

Don't worry,  Gio, I won't get upset, but I think you are wrong there, I don't know about Italian University Engineering professors, but I have met quite a few scientists who could be excellent business managers, and the best example is probably your compatriot and Nobel Prize Winner, Riccardo Giaconni. Have a look at his bio, among other things he led the effort to put "glasses" on the Hubble Space Telescope, what probably saved NASA from very big budget cuts or even a worse fate. The person who came up with the "glasses" idea told me that, if he hadn't been an Astrophysicist, Riccardo would probably have ended up running a big US firm. Some scientists do actually own and run companies in their spare time, I know personally of three cases, an software engineering company, a food import business and a translation agency. And they make much more money from them that they do with their academic jobs. A significant fraction of the Russians who have made the Forbes list at some point have Science degrees, for instance in Physics (Deripaska), Chemistry (Khodorkovsky) or used to have one in Math (Berezovsky; he did publish many math papers and books before he turned oligarch). 

 

  The thing is that once you get to a certain level in science, you don't get to sit in an office and speculate about how many angels fit in a pinhead. You have to compete to get grants (selling), you have to hire people with them, make sure that they do their work, you have to get papers out (products), you have to make sure that the largest possible amount of people read these papers and then reference them in their own work (selling again), and then the cycle starts anew, applying for grants  based on the prestige these papers brought you, etc.  In the experimental sciences, any successful scientist has to be at least a part time entrepreneur. That's why Sheldon and Leonard are theorists; they would not last 5 minutes in a lab.

 

  And this does not happen in a vacuum, you are competing with extremely smart people, who will resort to all kind of dirty tricks, steal your results or your people, try to stop you from publishing, etc. You have to maximize the return you get from your resources, allocate physical and human capital to your best ideas, etc. Probably not so different from running an engineering firm...:)

 

  And if you fail, you are screwed. You won't get any more grants, you will lose your tenure, you will only be offered academic jobs at places like Bumblef*ck College, and once all hope is lost, you will be forced to get a quant job in Wall Street to feed your children...

 

 

[jay21]

Leonard is an experimentalist.

[zippy1]

If the guy who is writing scientific papers on how the galaxy works is saying he can't figure out the Buffett method that speaks volumes. 

 

This is funny… because I think I know personally some of the most renowned Italian university professors in engineering… and, believe me, they have really great minds! They are extremely clever under a myriad of different points of view! Many times, when I hear them talk, I don’t even understand what their topic of conversation actually is! … and yet … I wouldn’t entrust a single dime of my firm’s equity to anyone of them! They just don’t get how business works! Probably, because they just don’t really care… txitxo is very brilliant, no doubt about it, and he is very interested in making money, and is a wonderful trader, not a single doubt about it either. But, imo, to run a business is something completely different. (txitxo, please, don’t get upset with me! :) )

 

giofranchi

 

Don't worry,  Gio, I won't get upset, but I think you are wrong there, I don't know about Italian University Engineering professors, but I have met quite a few scientists who could be excellent business managers, and the best example is probably your compatriot and Nobel Prize Winner, Riccardo Giaconni. Have a look at his bio, among other things he led the effort to put "glasses" on the Hubble Space Telescope, what probably saved NASA from very big budget cuts or even a worse fate. The person who came up with the "glasses" idea told me that, if he hadn't been an Astrophysicist, Riccardo would probably have ended up running a big US firm. Some scientists do actually own and run companies in their spare time, I know personally of three cases, an software engineering company, a food import business and a translation agency. And they make much more money from them that they do with their academic jobs. A significant fraction of the Russians who have made the Forbes list at some point have Science degrees, for instance in Physics (Deripaska), Chemistry (Khodorkovsky) or used to have one in Math (Berezovsky; he did publish many math papers and books before he turned oligarch). 

 

  The thing is that once you get to a certain level in science, you don't get to sit in an office and speculate about how many angels fit in a pinhead. You have to compete to get grants (selling), you have to hire people with them, make sure that they do their work, you have to get papers out (products), you have to make sure that the largest possible amount of people read these papers and then reference them in their own work (selling again), and then the cycle starts anew, applying for grants  based on the prestige these papers brought you, etc.  In the experimental sciences, any successful scientist has to be at least a part time entrepreneur. That's why Sheldon and Leonard are theorists; they would not last 5 minutes in a lab.

 

  And this does not happen in a vacuum, you are competing with extremely smart people, who will resort to all kind of dirty tricks, steal your results or your people, try to stop you from publishing, etc. You have to maximize the return you get from your resources, allocate physical and human capital to your best ideas, etc. Probably not so different from running an engineering firm...:)

 

  And if you fail, you are screwed. You won't get any more grants, you will lose your tenure, you will only be offered academic jobs at places like Bumblef*ck College, and once all hope is lost, you will be forced to get a quant job in Wall Street to feed your children...

Man! This is so true.  :P