Let me first set up my next article for anyone who might be new to the site. I only take into consideration with my valuations and analysis what I can see now, and pay almost no attention to rumored future possibilities or estimates of revenues and margins.
The only time future possibilities play any role in my articles are in situations where there is a clear catalyst: Activist/value investing firm or individual involved, the company is undergoing some kind of strategic review and is owned and controlled by a few people as in the case with Dole (DOLE) before I bought it, or the company’s management is trying to figure out ways to unlock the companies undervaluation by asset sales or spin off as in the situation with Vivendi (VIVHY.PK) before I bought into them. Even in the above situations I still only valued the assets and operations as they are presently.
Generally, any other future potential I see in the company plays no part in my valuations or analysis, and is treated as the proverbial icing on top of the cake.
I like as much of a margin of safety as possible as I am a very conservative investor. I see future possibilities and analyst and company estimates of the future generally as highly and unrealistically optimistic, which makes them wrong a lot and is why I have learned not to pay much attention to them.
Having stated all of that, I have begun my next article which is on Jack in the Box. I hope to have the article up as soon as possible.
Good article. A framework that you stick with is definitely super important! Personally I’m a bit skeptical of not taking into consideration future potential.
The reason I feel this way is because I believe “economic moats” are very real things. When a company possesses a wide economic moat, conservative estimates of future cash flows are of little risk. For example, I can count on Coca-Cola to still be selling plenty of coke 5 years from now.
As for my philosophy about the future . . . If a company has a wide economic moat I go ahead and forecast, albeit conservatively. If a company does not have an economic moat I do not forecast at all.
I too believe in economic moats and sustainable competitive advantages.
My thinking is like this though: Mainly if Warren Buffett says he cannot forecast out months or years in advance I certainly do not think I can. Secondly, I do not want to have any future potential counted in my valuations because the future is highly unpredictable and I want as much of a margin of safety as possible from today’s stock price.
Your rule about only forecasting wide moat companies does make some sense to me though. It just makes me a bit uneasy factoring in future potential since I got burned badly when I first started investing in companies that had “Huge future potential.”
Well investing in a company because it has “Huge future potential” and an economic moat would be a terrible reason for an investment. A margin of safety must still be required. Many people love to invest based on the fact that a company has a durable competitive advantage and huge catalysts and throw price out the window. That’s just plain crazy.
I’m not sure where you have heard that Warren Buffett doesn’t forecast more than a few months out. How would there be any value in Berkshire’s largest stock purchase this year (IBM) if Buffett and Munger are not counting on years of sustainable growth?
The same goes for Burnlington Northern Santa Fe Railroad, Berkshire’s largest acquisition ever. In fact, I’m pretty confident that when Buffett made the acquisition that he said he bought it thinking of the benefits that will be incurred beyond his lifetime.
What about his Coke (KO) investment? It wasn’t viewed as undervalued at the time either. He bought on expectations of international expansion.
Finally, he’s famous for adhering to the advice, “the best holding period is forevor” and better to buy a “wonderful company at a fair price than a fair company at a wonderful price.”
I understand your argument, but I wouldn’t try to relate it to Buffett. It is more closely related to Ben Graham.
Yeah what I was doing when I first started investing real money I would now consider speculation and led to me losing money. Luckily after losing some money I decided to really start learning about value investing more.
The statement could have been from Graham or Klarman as well since I am having no luck finding the quote right now, or maybe it was a quote I read from Buffett’s partnership letters. Either way my overall point still remains, if any of the three say they cannot forecast out months or years in advance, and they are all certifiable geniuses, I certainly do not think that I am smart enough to do so.
So far I have narrowed down my philosophy to what I stated in the above posting and how I structure my portfolio. Currently I have two parts to my portfolio: The long term hold portion where I plan to hold companies with competitive advantages which lead to at least a narrow moat, are undervalued by at least 30% to my estimate of intrinsic value, etc which I plan to hold for years and hopefully decades. Altria, Philip Morris, and Intel are some of my core holdings in this part of the portfolio.
The special situations portion of my portfolio as of right now is mainly companies that have said they are going to spin off or sell assets to unlock undervalued assets. I still need at least a 30% margin of safety for these and would prefer 50%. These companies I plan to hold for a few months to decades depending on how the company is structured after the asset sale or spin off. Vivendi and Dole are two that I own in this portion of my portfolio.
Currently the bulk of my investment philosophy I have taken from people like: Graham, Buffett, Klarman, Greenblatt, and Greenwald.
Recently I have been turning more towards the huge moat, competitive advantages, undervalued companies, but they are becoming increasingly hard to find since the market only keeps going up right now.
My process and investment philosophy are still evolving as I am relatively new to dedicating myself to the craft and the above is where I am at currently.
That’s definitely some great reasoning. I’m sure you will see plenty of success with a framework like this… keep the good content coming please!