Zebra’s run in packs and he analogizes them to PM’s who have the same risk/reward as a zebra pack.
Nifty fifty – P/E’s fell from 48 to 13.5 and Buffett gave the quote “like an oversexed guy in a whorehouse, this is the time to start investing” – October 1974. The strong upturn didn’t happen until 1982 but he was still there for it. The bull market started because all managers wanted to be there at the same time – herd instinct.
Most money managers work and move in herds, all owning the same thing.
“In the 1950’s and 1960’s, the interstate highway was built which opened up entirely new sections of America. The highways suburbanized the country’ people abandoned city apartments for single family housing. Everybody then needed at least one automobile, and probably more than one. Drive in fast food places sprang up on every corner where there wasn’t already a gas station. And the shopping mall was born. Ten years after the malls came, Sears Roebuck became the number one retail company in the country, and stayed that way for a long time, because it understood the trend and anchored countless malls.“
IBM wasn’t the best computer but, ‘He liked and trusted the IBM sales person.” They held a dominant niche in the market until the landscape changed. The personal computer cost $2,000 instead of $5MM and no longer did executives make the decision but mid-level guys did.
Don’t by microcap stocks since one misstep and they are out. Look for companies that have been around for a bit and have management that has proven they can run a company. Financially stable companies with strong balance sheets are a must. Find a company with a niche, something they are good at. Examples are geography (regional banks, utilities, railroads) or even a top notch marketing team.
dea: Design a portfolio with certain percentages in small, mid, large cap stocks, and bonds. When small cap lag for instance, increase exposure there to companies you like. Can also add or reduce bonds/equity weight base off macro features in CFA book
GARP – growth at a reasonable price
Second Law of Thermodynamics – some processes are reversible: you can turn water into steam, which drives an engine, and then turn the steam back into water again. But other processes only go in one direction.
Entropy is the measure of the degree of disorder created?
The Cockroach Theorem
The chance of a company’s having one and only one bad quarter is equivalent to the chance of your kitchen’s having one and only one cockroach. – fallen growth stocks
Trees don’t grow to the sky – companies can’t continue to grow at 25% forever
Stocks at the top of the growth list will eventually ‘revert’ to the mean and drift to the middle of the list. (John Thompson strategy)
Because a stock moves up considerably doesn’t mean you can’t buy it – could still have multiyear gains ahead
IGT – was a big winner for him. The industry was considered low-growth and cyclical and the stock was very cheap. His homework concluded that they were transforming the company from routine mechanical slot machines into high-tech electronic ones that required no maintenance and would also allow casinos to hook up lottery components. They didn’t just improve the old games, they introduced something new.
The key is to let your good businesses run and not sell after a double
Stocks and the market got hit after Three Mile Island and Skylab, when meteors were supposed to kill people.
During the time when growth stocks were at 75 P/E, everyone hated value. Then growth corrected and value with a big dividend was all that people wanted
Even though he is a ‘stock picker’ he looks a lot at top down so the environment was good for his companies
Look for stocks with 3-5 year trends in their favor. Don’t worry about quarter to quarter since everyone else on the street is doing that. A beat by .02 doesn’t make a difference since our 3-5 year story is in check.
Smaller groups have typically outperformed larger ones because the more you scale out, the less accurate/talented they become
Trend Spotting: He concentrated on areas that all benefited from strong economic, social, or technical trends. Trends sometimes stare you in the face. “The growth of a middle class in developing countries is a very simple – but – powerful – way to think about the future. “ – here, the middle class will travel more, vacation more, spend more, watch more TV etc.
Social security being in trouble says, “I’ll do it myself” and drives individual investors to T Rowe Price
Harley Davidson is a sole maker in the U.S. – talk about brand name, people tattoo it on themselves
“I seldom own the companies that go into the new technologies, rather the makers of the semiconductor chips that go into them.”
“I’ve bought the stocks of companies that buy, use, and exploit the computers and electronics to reduce costs, revitalize their businesses, and add functionality to their products.”
“Even if you invent a brand new sixty-four meg chip you’ll still be surrounded by competitors. But if you have the only channel that can show Home Improvement at 7 p.m., you have a monopoly.
Going downstream – investing in the businesses that will benefit from the new technology
The steam locomotion was a huge invention that in theory would have made someone a fortune. As it did make people money, the real wealth was created from land owners in Chicago where the rails all came. “Manufactures who built the train made $5, the guy who built the railroad made $50 and the land owners made $500.”
The fax machine wasn’t profitable until it explode with profitability. One person couldn’t use the machine unless another had it. Once ‘EVERYONE’ had it, profits were then made. (Network effects)
Wsj – horizontal drillers, etc ???
Conservative accounting???
If debt for a manufacturing or retail company is more than half of the company, there’s a problem
Balance sheet: look at pension liability, are they generating cash or simply accounting earnings. Look at goodwill and intangibles (why?). Examine inventories and receivables’ and their relation to revenues and keep an especially share eye out for changes in those numbers. If a company normally has inventories running 25% of sales and suddenly you see inventories at 50% of sales, you’d better start asking some questions. It’s possible the company is expanding rapidly and sales haven’t shown up at its stores yet; that could be all right, just a sign of growth. But many times it’s a sign of impending doom. It means the company has a growing stockpile of merchandise it can’t sell.
Interest rates falling from 12 to 7% sent stock prices and P/E’s up. Growth stocks, most of whose payoff is in the future, went up faster than dividend-paying value stocks.
Look at stocks as cash flow plus or minus an option.
- Oil company has stable cash flows from their wells plus an option on finding a new patch of oil
- Drug companies have a put and call option, FDA won’t approve a drug and FDA approves
- Tobacco has stable cash flow and a put value, regulatory will come down on them
Back in the eighties, hard disk drives were invented and so were 70 or so companies. Each company had to obtain 20% or so of the market share to survive. Simple math tells you what happened.
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