Diary: Buffett, Greenblatt

Indecent Haste

Fascinating post on 09-Feb-2010 at Eurosharelab about Buffett's returns. I was vaguely aware of its existence before, and I was keen to get hold of the statistics, but could never seem to find them. Anyway, here they are:

Year             Value of $10,000 invested in             Value of $10,000 invested in   

                     Berkshire Hathaway stock                 the S&P 500 index

1971                       $10,000                                                 $10,000
1974                       $5,708                                                   $7,456
1975                       $5,422                                                   $10,229
1976                       $13,392                                                 $12,643
1991                       $1,361,805                                            $92,940
2008 (17 Nov)          $14,387,737                                          $259,068

Profit and Value Strategy

Sketch notes of article on 21-Jun-2011.

PAV (Profit and Value) Stategry differs from MFI (Magic Formula Investing) in its method of determining value and quality. PAV ises book-to-market for value, and GPM (gross profitability) for quality.

GPM = (revenues - costs of goods sold)/ total assets

PAV turns out to be a slight winner of MFI. Gross profits to assets is explored:

I think it’s interesting that gross profits-to-assets is as predictive as book-to-market. I can’t recall any other fundamental performance measure that is predictive at all, let alone as predictive as book-to-market (EBIT / (NPPE +net working capital) is not. Neither are gross margins, ROE, ROA, or five-year earnings gains).

GPM and PBV produce volatile results. Greenblatt:

it is partially the leverage embedded in low book-to-market that contributes to the outperformance over the long term.

(Side note:  this is very interesting! It could mean that a lot of the outperformance by Greenblatt is simply due to taking on more risk. This could be one of those "it works until it doesn't" strategies).

O'Shanaughnessy is cautious on low PBV:

it’s virtually impossible to buy the stocks that account for the performance advantage of small capitalization strategies.

 A market capitalization of $2 million – the cheapest and best-performed decile – is uninvestable. This leads O’Shaughnessy to make the point that “micro-cap stock returns are an illusion”

Blogger concludes:

I’ve now abandoned book-to-market

Excellent post by Greenbackd.

Diary: Buffett, STB

Warren Buffett on the Best Buys

Notes from a video. the best buys have been when the numbers almost tell you not to - so you get a good company and not just a cigar butt. i owned a windmill at one time. and windmills are cigar butts, believe me. bought at one-third of working capital. he made money out of it, but there's no repetitive money to be made out of it. he understands qualitative the minute he gets the phone call. if you don't know enough about the business instantly, you wont know enough about it in a month or two months. you have to have a background, and know what you do and what you don't understand. if your circle of competence only has 30 companies in it out of thousands, and as long as you know which 30, then you're OK.

STB - Secure Trust Bank

This is another company for which I'm unsure as to how it landed on my "things to look at" pile. It's interesting that Sharelock Holmes hasn't any records for it.

STB is a regulated bank that provides banking services to customers in UK who may not be "adequately served by banks". Sounds iffy for starters. It has five segments: personal unsecured lending, motor finance (cars on HP), retail finance (unsecured finance for in-store and online retailers), and "One Bill", which helps customers with their household budgeting and payment processes (that almost seems deliberately vague). Perhaps it's a little ironic that the company is called "Secure" when it specialises in unsecured loans.

Seems to have been floated on 03-Nov-2011. According to Google it has a market cap of £109m and a PER of 21.23. There are 14.17m share in issue. According to Digital Look, there are no director shareholdings - which might be an inaccurate statement.

Obtaining financial statements seems an elusive endeavour, although I did bind a PDF of their Admissions Document. I see on page 51 that they have total shareholder equity of £16.5m. given a market cap of £109m, that would put the PBV at 6.6. Given that I can buy the UK's best banks (isn't that an oxymoron?) for less than book, this makes STB an easy avoid.

Diary

Buffett's portfolio strategy
I present a summary of a webpage that I saw about Buffett's early days. For the period 1957-1968, the DJIA returned 9.1% pa, compared with 31.6% pa for Buffett's partnership, and 25.3% for his Limited Partners. His method of operations for 1969 are broken down into the following ratios:

• 30% Controls -rarities, but of significant size. It happens where a cheap security does nothing for a long time, allowing a significant accumulation, allowing some or complete control of the company's activities.
• 20% Generals (Private Owner) - quantitatively undervalued stocks first, with considerable attention paid to qualitative factors second. There is often little to indicate immediate market improvement, and the shares lack glamour. He likes good management, a decent industry.
• 11% Generals (Relatively Undervalued) - companies trading relatively cheaply compared to securities of the same general quality.
• 23% Workouts -  sell outs, mergers, reorgs, spinoffs, etc.. The risks aren't primarily due to general market behaviour, but to unexpected developments. The profits and holding periods tend to be small per deal, with the occasional substantial loss. It produces steadier profits than generals, with the expectation of big relative gains in bear markets, and contrariwise in bull markets. The blog author warns that there will be blowups.
• 16% Misc/US T-Bills

The page also point the reader to futher information about workout opportunities.