Category Archives: Great Investors

A Peek into Ted Weschler’s Thought Process

On March 3, 2014 on CNBC’s Squawk Box, Ted Weschler discussed Berkshire’s investment in DaVita Healthcare Partners.

Weschler listed three broad filters he uses for investing in healthcare stocks.

  1. Does the provider deliver better quality of care than someone could get anywhere else?
  2. Does the company deliver a net savings to the healthcare system?
  3. Do you get a high-return on capital, growth and a shareholder friendly management? Presumably, Weschler looks for these same characteristics in other industries.

Weschler began studying the dialysis industry right out of college. Therefore he knows the industry well. The lesson here is to look for insights by studying an industry deeply over a sustained period of time. This echoes lessons from Warren Buffett.

Finally, Weschler is long-term oriented. He has no idea how DaVita will do in the short term (two years out) but he is confident that in five years it will be a more valuable franchise.

The takeaway: a value-oriented rational framework applied consistently over time will deliver (very) satisfactory results.

Notes from Philippe Laffont, founder of Coatue Capital Management on Bloomberg

  • tries to find companies that will be cheap based on earnings in five years
  • many cheap tech companies are cheap for a reason
  • Google looked expensive in 2004 but was trading for 2x 2013 earnings
  • tech stocks are historically cheap (March 4, 2013)
  • in tech investing it is important to look for new trends
  • there are many tech trends today and they are not dependent on the economy
  • Apple is cheap by any measure
  • the key is to think about what would get Apple to $800/sh.
  • believes Apple to needs to go on offense; believes this will happen
  • Apple’s use of cash will help determine value
  • Apple could benefit by acquiring companies with new ideas and talent
  • Apple is very open to listening to shareholders
  • Contrarian bets in tech sector can become value traps
  • Google is an infrastructure play on eCommerce
  • Google’s margin of safety is that it is trading for 5x future earnings (5-7 years)
  • Apple, Google and Samsung are the top tech companies
  • they are looking for short candidates among companies that will be negatively impacted by the paperless office
  • the desktop food chain will be hit be developments in tablets
  • he likes the storage theme, for example, being able to retrieve files ubiquitously in the cloud
  • took a pass on Yahoo because he can not value the U.S. business
  • Samsung and Twitter are candidates to be great tech companies
  • Twitter is hard to value: huge strategic value but little revenue
  • The are investing in video content. Smart phones will lead greater consumption of video and more ways for content companies to monetize their libraries.
  • Sometimes these new trends are uncovered from insights based on a few words from industry leaders. Jeffrey Katezenberg recently said that in the future we will pay for content by the “square inch”.
  • This may mean that in the future users may pay $.50 for watching a movie on a smart phone, $1.00 on a tablet, $5 on the TV etc. which could lead to large new markets and ways to monetize content.
  • It is very hard to make content. There are a handful of these companies in the U.S. and they excel at making content.
  • He likes Time Warner, CBS and News Corp.

Original Interview


A good deal of what I write about deals with investing principles, which by their nature are not dated. Here’s a couple past blogs on Glenn Greenberg –  one of the best investors out there – that are worth reading, if you missed them, and worth a second look, if you’ve already read them.

Glenn Greenberg at Columbia: How a Great Investor Thinks
Glenn Greenberg at Columbia: How a Great Investor Thinks (Part 2)

Answers From Tom Gayner’s Interview With GuruFocus

Great interview from Gurufocus with Tom Gayner. It is worth a careful read.

Tom Gayner, a renowned investor, has been executive vice president and chief investment officer of Markel Corp and president of Markel Gayner Asset Management, the investment subsidiary of Markel Corp., since 1990. He manages about $2 billion.

Recently, he joined GuruFocus for an interview and took question from readers. His answers are below:
GF: How did you get started with value investing?

TG: Well, I started out life as an accountant, from the University of Virginia. Then a CPA, working at PriceWaterhouseCoopers. I found as I got into accounting that I was more interested in dollars than numbers, so investing seemed to be a little more in tune with business itself and the world of finance. Now, I think accounting is a phenomenally good way to begin to be an investor because accounting is the language of business, and you need to understand the language and what accounting entries mean in economic sense. But once I had that language down, I found the craft of investing was just very attractive to me. So that was sort of my mental switch. There was a local investment firm in town called Davenport and Company of Virginia, which was a small group here in Richmond. They had an interesting practice where they were brokers, and they did research on regional companies in Virginia and North Carolina. I had the opportunity to go there and work as a stock broker, and as a research analyst covering companies in Virginia and North Carolina, to be exposed to a lot of different industries, a lot of different companies, and I enjoyed it thoroughly. One of the companies that I covered starting in 1986 when they went public was Markel. I got to meet Steve Markel, and from 1986 through 1990, I covered the company. He was doing acquisitions for Markel, then Markel did the second half of the Shand acquisition, which more than doubled the size of the company and the investment portfolio. Steve was managing things himself and decided that he would like a wingman to help him out. He mentioned something to me about coming out here, and I said, “Great,” because I saw an insurance company that I liked and respected, that made underwriting profits, and was willing to invest underwriting profits for the long term. I knew that that was the formula that Buffett, at Berkshire practiced. And I got to stay right here in Richmond, Virginia. That sounded great, sign me up. That is the short story of how it happened.

GF: So you made it all the way up to the Chief Investment Officer and President. But, we know that accounting is different from value investing, right. Over the process, were there any persons or books that influenced you?

(continue reading)


Horizon Kinetics (Murray Stahl) on the market’s high level of volatility and what it means

Following the market swings experienced in August, many investors are understandably rattled. Despite the last-minute agreement to raise the U.S. debt ceiling and avert default, one of the major credit rating agencies downgraded U.S. government debt one notch below its highest AAA rating to AA+. Most agree that the risk of U.S. default on its securities remains remote. However, the protracted negotiations around the debt ceiling, fears about the prospects for corporate profits and continued concerns regarding austerity measures and solvency in some European countries contributed to wide market fluctuations. In just a few days, the S&P 500 gave back its year-to-date gains and then some. In this month’s commentary, we offer our thoughts on recent market conditions as compared to those experienced during the last period of high volatility: the financial crisis of 2008.

(continue reading)

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7 timeless lessons from Peter Cundill’s biography

I just finished reading Peter Cundills biography There’s Always Something to Do: The Peter Cundill Investment Approach. It’s the story of a great investor who lived life on his own terms and who had a great joie de vivre.

The book contains several timeless investing lessons.

1. Follow your passion with conviction and success will follow. Cundill discovered Ben Graham after knocking around in the dark for several years and that was it. He followed the path laid out by Graham with unwavering gusto and built one of the great long-term track records in the process – a compound annual rate of return of 15%+ for over thirty years.

2. Operate from a value-oriented framework and you will make money. This is a time-tested approach that has proven to make big money slowly but surely. The track records of many great investors attest to this fact.

3. Search widely for value. The more rocks you turnover, the greater your chances of finding something worthwhile. Cundill became a global investor and scoured the globe looking for deep value.

4. Get good at scuttlebut. Information is the lifeblood of sound investment decisions. Read broadly. Develop your network. Focus. Cundill was a master of the power of scuttlebut which he used to insure he understood a situation thoroughly before committing precious capital.

5. Be patient. Cundill wrote, “The most important attribute for success in value investing is patience, patience, and more patience. The majority of investors do not posses this characteristic.” Coming from a man like Cundill, this speaks for itself.

6. Keep a journal. Cundill kept a detailed investing journal throughout his career that provides the basis for the book. The process of writing worked to clarify his thoughts and allowed him to look back and grow from his experience and mistakes.

7. Do a yearly post-mortem. Each year, Cundill did a critical analysis of his decisions and performance during the prior year. This was conducted with honesty and humility in an effort to continue to raise the level of his game.

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Intrinsic Value: a range, not a precise figure

Yesterday, I wrote a blog post that described Tom Gayner’s approach to valuing Berkshire Hathaway. Gayner is a great investor with deep knowledge of Berkshire, in particular, and the insurance business, in general. In the post, I used Gayner’s framework to calculate a range of intrinsic value for Berkshire.

The blog post was also published on, where it received some criticism for the range of intrinsic value being too wide, and, buy extension, not particularly useful.

Admittedly, the range produced (for the B shares) is a wide: $55 to $208. Arguably, an analyst could pin that range down by narrowing the range of assumptions and/or tweaking the model.

On the otherhand, such a wide range may be useful to an investor if the stock is trading near, or below, the low of that range.


Because the wider the range, the greater the probability that the value is actually within that range.

Put more precisely, the greater the range, the greater the probability that the ACTUAL future free cash flows discounted by the ACTUAL future prevailing interest rates will be within that range.

If you can buy a security at a discount to this range you may have found a winner and, equally important, you’re unlikely to loose your capital.

When you insist on a margin of safety when buying a stock – for example, requiring at least a 30% discount to your estimate of intrinsic value – you are implicitly making allowance for the fact that your estimate of value may be materially higher than the business’s actual intrinsic value. This is really just another way of looking at intrinsic value as a range.

Here’s what Graham had to say on the matter in Security Analysis.

“The essential point is that security analysis does not seek to determine exactly what is the intrinsic value of a given security. It needs only to establish that the value is adequate – e.g., to protect a bond or to justify a stock purchase – or else that the value is considerably higher or considerably lower than the market price. For such purposes an indefinite and approximate measure of the intrinsic value may be sufficient.”

Here’s what Seth Klarman had to say on the matter in Margin of Safety.

Many investors insist on affixing exact values to their investments, seeking precision in an imprecise world, but business value cannot be precisely determined. Reported book value, earnings, and cash flow are, after all, only the best guesses of accountants who follow a fairly strict set of standards and practices designed more to achieve conformity than to reflect economic value. Projected results are less precise still. You cannot appraise the value of your home to the nearest thousand dollars. Why would it be any easier to place a value on vast and complex businesses?

Not only is business value imprecisely knowable, it also changes over time, fluctuating with numerous macroeconomic, microeconomic, and market-related factors. So while investorsat any given time cannot determine business value with precision, they must nevertheless almost continuously reassess their estimates of value in order to incorporate all known factors that could influence their appraisal. Any attempt to value businesses with precision will yield values that are precisely inaccurate. The problem is that it is easy to confuse the capability to make precise forecasts with the ability to make accurate ones. [emphasis added]

Although I stress that the valuation range for Berkshire is based on my assumptions using Gayner’s framework, Gayner’s approach exhibits wisdom when viewed through the lense of Graham and Klarman.

See also:

Ben Graham on the Role of Intrinsic Value in Analyzing Stocks (Part 1)

Ben Graham on the Role of Intrinsic Value in Analyzing Stocks (Part 2)

Tom Gayner’s approach to valuing Berkshire Hathaway

The June 30, 2011 edition of Value Investor Insight includes an interview with Tom Gayner, the President and Chief Investment Officer of Markel Corporation. Gayner is a highly respected value investor.

In the interview, Gayner explains his approach to valuing Berkshire Hathaway. Per, Markel has a 7.15% equity weighting in BRK.B and a 6.39% equity weighting in BRK.A. Combined, Berkshire Hathaway is Markel’s largest equity position.

Gayner uses a sum-of-the-parts analysis and looks at the company in three parts: 1) the investment portfolio, 2) insurance operations, and 3) non-insurance operating businesses.

Gayner’s approach is of particular interest not only because he is a great value investor, but also because of his expertise in the insurance business.

For the investment portfolio, he considers a range of values. On the low end, he figures it will earn 3% up to a high-end of 10-12%.

For the insurance premiums, he considers a low case where Berskhire does not earn an underwriting profit, a middle case where its earns a 4 to 5% profit on insurance premiums, and a high case where it earns 8 to 9%.

Finally, he calculates his estimate of normalized earnings for the non-insurance operating businesses. He does this by looking at Berkshire’s cash flow over the past three years and then trying to estimate what this will look like over the next few years.

He then sums the earnings from the three parts and applies a 10x, 14x and 18x multiple. This gives him a range for his estimate of Berkshire’s intrinsic value.

I used Gayner’s general approach to value Berkshire and came up with a intrinsic value range for BRK.B of $55 to $208 with an average value of $128. Here is my data (click to enlarge).








I used Berkshire’s investment portfolio value from the 2011, first quarter 10-Q. To calculate insurance earnings, I used Berkshire’s 2010 insurance premiums. For normalized operating earnings, drawing upon Buffett’s own estimate of normalized earnings given in the 2010 shareholder letter, I used $9 billion as my estimate of normalized after-tax earnings for the non-insurance operating businesses.

I stress that this is my own estimate of intrinsic value based on Gayner’s approach as put forth in the interview. I am not privy to Gayner’s input data, particularly his estimate of Berkshire’s future cash flows for the operating businesses.

In the interview in Value Investor Insight, Gayner stated that based on his estimates, “At even the low ends of the range, the resulting value is significantly higher than today’s share price.”

The absolute low of my range, $55, is actually lower than Berkshire current share price of around $76. However, Berkshire is certainly selling near the bottom of my range of intrinsic value.

In closing, Gayner made an interesting observation that, although Berkshire is widely known, many don’t get around to actually analyzing the company. There are Buffett devotees who are “all in” because of Buffett, and those who dismiss the stock because they’ve already made up their minds without looking at the facts.

Perhaps that creates opportunity for those of us willing to do a little math.

Notes on David Herro: Global, Disciplined and Loves Diageo

On May 20, 2011, David Herro, Morningstar’s International Stock-Fund Manager of the Decade and value investor, appeared on Consuelo Mack’s WealthTrack. Herro manages the Oakmark International fund.

Here are my notes from the interview:

  • David Herro’s fund earned 9%+ 10 yr annualized returns.
  • Investing in the U.S. is no longer enough.
  • What does it take to be successful?
    • A sound philosophy
    • Discipline – you can’t get rattled. You need patience to make it work. You will be tempted to abandon it at the wrong time.
  • Value is something that is cheap based on free cash flow to enterprise value. Value also means a quality business that can generate good long-term results and a management team that can make sound capital allocation decisions.
  • People abandon common sense when macro trends disrupt them. In late 2008 everyone knew that the economy was soft, that the consumer was fearful and wasn’t spending. Mr. Market acted as if this was a permanent condition but this was already priced into stocks. Herro bought stocks with a balance sheet strong enough to make it though the recession and business model that would continue making money. The crowd saw a recession and dumped all stocks that were based on consumer spending [Greg Speicher: this is a great example of time arbitrage].
  • The value of a business is not based on what it will do over the next few quarters but over the next ten years.
  • He is known as a contrarian because often the stocks that meet his criteria have been abandoned. He cautions investors not to conclude that all abandoned stocks are good investments.
  • He is finding value in Japan. Even before the earthquake it was trading below book value and 8x cash flow. No one wants anything to do with it. It’s gone from being totally in fashion in the 80’s to totally out of fashion. The corporate behavior of Japanese corporations is improving.
  • In Japan, he likes Daiwa Securities. They have brokerage offices all over Japan and they serve as a conduit to invest Japanese savings.
  • People make a mistake in not investing in Europe because they treat it monolithically. The individual countries are very different. There is no “one Europe”. Germany is growing strongly. Scandinavia was almost unscathed by the crisis.
  • When evaluating a business, you shouldn’t just look at the country where it is based but the countries where the business makes money.
  • He only has 2-3% in emerging markets because they are too expensive. People are not looking at what they are buying. The corporate governance in emerging markets is often opaque and sometimes bad.
  • Approximately 20% of portfolio company revenues comes from emerging markets and probably a higher percentage of growth. The revenue percentage from these markets will grow over the next five years.
  • During the recession, he was optimistic because he felt that emerging markets would ultimately drive global economic growth
  • Small caps U.S. stocks are more expensive than U.S. large caps. This is not true internationally. These are more volatile and you need a thick skin if there is an earnings miss. There are opportunities here and small caps should outperform by a few percentage points over time.
  • The one stock everyone should look at is Diageo, the world’s largest drink company with a great stable of brands. A lot of people consume alcohol and as people age they go from beer to spirits. There are growth opportunities in emerging markets. The profit dynamics are great and the company is well managed – good at allocating capital – and you can buy it a relatively good valuation of 10x gross cash flow. Unless you think there will be global prohibition, the stock should do well. It’s a good company with moderate long-term growth prospects and minimal financial risk.

Additional info from David Herro/Oakmark International Fund:

Why Japan and Why Now? – 12/16/2010

Oakmark International Fund Letter to Shareholders – 3/31/2011

Commentary on The Oakmark International and International Small Cap Funds – 3/31/2011

Oakmark International Fund – Holdings – 3/31/2011