Monthly Archives: April 2012

Links of Interest – April 27, 2012

A conversation between Dr. George Athanassakos and Mr. Francis Chou following Mr. Chou’s Presentation at the 2011 Value Investing Seminar.

Value Investing World: Value Investing: Investing for Grown Ups? – By Aswath Damodaran

Portfolio14: My investment checklist

Notes from the Meeting Dr. George Athanassakos and Ivey MBA and HBA students had with Mr. Warren Buffett

The Secret Billionaires’ Club: Why Study Warren Buffett

Yacktman Q1 2012 Letter

Is This Company the Next Berkshire Hathaway? – DailyFinance

Energy in 2050: Shell’s Peter Voser – Forbes

To Win Big, It Helps to Be a Little “Nuts” – Bill Taylor – Harvard Business Review

Links of Interest – April 20, 2012

Dick Bove: Everything Is Going ‘Right’ with Banks

Longleaf Q1 2012 letter

Jeremy Grantham Explains How To “Survive Betting Against Bull Market Irrationality” | ZeroHedge

Peter Thiel’s “Startup” Course at Stanford

RIM’s hard choices: Five ways to rescue Canada’s tech icon – The Globe and Mail

Why Steve Romick Owns WellPoint (WLP): Stock of the Week ~ market folly

Jonah Lehrer on Decision-Making | FiveBooks | The Browser

A quick – and important – thought on P/E ratios

I am in the process of going back and carefully reading everything Buffett has to say about valuing assets.

If you have followed Buffett, you have probably read that he is not a big fan of P/E ratios. P/E ratios are a kind of shorthand. The problem is, that for all they may tell you about a business, there is a lot that they leave out, which brings me to my quick point.

When looking at a P/E ratio, train yourself to carefully look at how much capital was required to produce the “E” (earnings). This can tell you a lot about the quality of the earnings. A business producing $1 million of earnings utilizing $4 million in tangible assets is far different from a business producing $1 million of earnings that requires $9 million in tangible assets.

Both may have the same P/E. The P/E of the second business may even be lower, but that does not necessarily mean that it is cheaper.

Assume these are growth companies that you project to grow at 10% over the next ten years. From a GAAP perspective each business will generate about $17.5 million in “earnings” over the ensuing ten years, but there is a big difference in the economics of the two businesses. Assuming consistent returns on equity, the first business will require an additional $6 million of capital while the second business will require an additional $14 million.

All growth businesses are not created equal.

P/Es are a useful tool to make the first cut. But it is essential to go deeper and look at the amount of capital it took – and will take – to produce those earnings.

Free copy of my new Kindle Book

I was recently interviewed by The Manual of Ideas, which, if you are not familiar with it, is one of the best research and idea generating tools there is for serious value investors.

They have now generously offered to give away 1,000 copies of my new Kindle book How To Become a Better Investor. (The book was previously available here as an eBook entitled Ten Ways to Improve Your Investment Process, but I have moved it to Amazon to reach a wider audience.)

Professional value investors spend a lot of time on the investing process, and I think this little book contains some very useful ideas for improving your own process and becoming a better investor. These ideas are drawn from my study of the great value investors and from my own experience as an investor.

One last thing. If you do take the offer, although there is absolutely no obligation, I would be most grateful if, after you read it, you would write a quick review over on Amazon. Please call it like you see it.

I hope you get something out of the book and thank you for your continued readership of this blog.

Here is the link to get your free book:


Links of Interest – April 13, 2012

Investing Great Donald Yacktman Answers GuruFocus Readers’ Questions

Distressed Debt Investing: Speech Notes: Howard Marks at NYSSA

What Will Happen to RIM: 4 Real Possibilities

Julian Robertson (Rare, Full Interview) on Election 2012 | ValueWalk

The Real Leadership Lessons of Steve Jobs – Harvard Business Review

Time to Read Annual Reports – Tom Brown,

The Aleph Blog » Blog Archive » Book Review: The Indomitable Investor

Developing Razor Sharp Focus with Zen Habits Blogger, Leo Babauta | Learning Fundamentals

Small miracle: HP PCs outgrow Mac for Q1 — Apple News, Tips and Reviews

Portfolio holdings of legendary investors – DATAROMA – Value investing – Steven Romick – FPA Crescent Fund

Contrary Call: Sell Apple (Nasdaq: AAPL) « SumZero News

Bruce Berkowitz’s Investment Thesis on AIG (Slideshow Presentation) ~ market folly

DirecTV’s Buyback Plan Pleases Investors as Growth Slows – Bloomberg

Inside Amazon’s Idea Machine: How Bezos Decodes The Customer – Forbes

Berkshire Hathaway normalized after-tax look-through earnings at $18 billion

By my estimate, Berkshire Hathaway’s normal earning power after tax is approximately $18 billion. This puts the stock at an adjusted P/E ratio of 11x based on today’s share price.

To get there, I assume the following:

  • Redemption of GE, GS and Swiss Re preferred
  • Normalized but still low interest rates
  • Normalized dividend for Wells Fargo and U.S. Bancorp
  • 2012 dividend increase per consensus estimates
  • IBM full-year dividend
  • Full-year earnings for Lubrizol
  • A more normal housing environment

Following Buffett, I also include undistributed earnings from Berkshire’s large equity holdings.

No adjustment has been made for Berkshire’s large cash holdings which I expect will approximate $40 billion after Q1, 2012, assuming no major purchases. This equates to almost $25,000 per A share.

Here is my data.











I welcome your comments on these adjustments and your thoughts on Berkshire Hathaway’s valuation.

Links of Interest – April 6, 2012

Q1 2012 Letter to clients | Motiwala Capital

The Apple Conundrum: When To Sell? ~ market folly

Philippe Laffont’s Coatue Management: Technology Trends Presentation ~ market folly

Rhetological Fallacies

Investing Lessons From Richard Rainwater ~ market folly

James Montier White Papers 2002 – 2011 | ValueWalk

Business sales of Macs are growing as companies like CBS increasingly buy them for employees – The CIO Report – WSJ

Alpha Hunter Lauren Templeton on Generating Alpha from Value Investing | AllAboutAlpha: Hedge Fund Trends & Alternative Investment Analysis

Bruce Berkowitz’s Check List: Survival, Earnings, Integrity, Reputation, and Growth

Peter Cundill’s Reading List

The Intelligent Investor: Keynes: One Mean Money Manager –

Analysis: RIM CEO’s brave face masks limited options | Reuters

BlackBerry Fans Cite Reliability as They Snub Competitors – Bloomberg

Lessons from the King of Blackjack | Mercenary Trader

Likely Buyers for RIM? Amazon and Microsoft/Nokia – Forbes

Stock Focus: Dell

Dell Looks Undervalued With Significant Upside – Seeking Alpha

A few years ago, we initiated a broad transformation of the company to become an end-to-end technology solutions company… Since the beginning of Fiscal 2011, we have acquired more than ten companies whose offerings and intellectual property enhance our solutions business…

Greenlight Capital Q4 2011 Investor Letter – See Einhorn’s discussion of Dell on page 4 of letter

Why David Einhorn Owns Dell (DELL): Stock of the Week ~ market folly

Dell Reinvents Itself to Survive a Post-PC Universe (DELL)

The Phoenix Principle: Avoid Value Traps – Sell Dell and Hewlett Packard

Multimedia Commentary: Southeastern Asset Management, Inc. – See comments from Mason Hawkins under Southeastern Analysts’ Comments From Client Meeting – July 26, 2011

Whitney Tilson Agrees With Me, Dell Is Dirt Cheap – Seeking Alpha (September, 2011)

Gurufocus – DELL Stock Quote – Dell Inc Stock News, Research

Dell’s Q4 12 Earnings Presentation Slides