Walter Schloss Archive

Source: The Walter Schloss Archive, Elevation Capital

Walter Schloss was a legendary value investor who started on Wall Street as a runner, when he was 18 years old. Lots of reading there and useful stuff for those interested in value investing. Thanks to Elevation Capital.

The Walter Schloss Archive

Todd Combs on How Failure Is Useful (Preferrably Early in Life)

A good quote from Todd Combs in the FSU Alumni Association Magazine:

« you really just have to find your passion in life. Warren says to find the the job you would do if you didn’t need a job. The earlier you find that, the better – because it won’t seem like a chore to follow your dream, and you’ll outwork everyone in the process. Don’t be afraid to fail. In fact, you kind of want to fail early and often because it doesn’t cost you much when you’re young – and you learn a lot more from failure than success. »

I found it reading this good BBG article on how Combs was a key in setting up the partnership between Berkshire Hathaway, Amazon and JPMorgan.

Technology Outperformance No Longer Supported By Fundamentals

Source: Morgan Stanley

A word of caution from Morgan Stanley’s equity strategists:

« The latest burst of Tech outperformance has not been accompanied by superior EPS trends. Just now Tech shows few signs of stopping (or even slowing); for example: i) post its largest 1m outperformance versus the S&P since 2012, the NASDAQ is now 2.7SD above its 12M relative average; ii) 80% of constituents of MSCI ACWI’s IT index outperformed the market over the last month, the highest breadth reading since 2003. Amid all this euphoria we’d encourage investors to keep a close eye on EPS trends as the latest burst of price outperformance has not been accompanied by EPS outperformance. »

It seems investors have started noticing.

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Where There Is Music There Is Melody – Leonard Bernstein

I like finance AND music. Music is very important to me and I think it helps a lot in life. I’m a big fan of rock music, but I also like jazz and classical. So from time to time I’ll post musical stuff. Hope you like it. Best.

I’ve never seen a great composer/director be so kind and easy at explaining music. I wish we had more like him.

Being a « Biography Nut »

« I am a biography nut [myself]. And I think when you’re trying to teach the great concepts that work, it helps to tie them into the lives and personalities of the people who developed them. I think you learn economies better if you make Adam Smith your friend. That sounds funny, making friends among ‘the eminent dead,’ but if you go through life making friends with the eminent dead who had the right ideas, I think it will work better for you in life and work better in education. It’s way better than just giving the basic concepts. »

Charlie Munger

Sauce: Poor Charlie’s Almanack, Expanded Third Edition, 2005

Paul Tudor Jones Bearish on Bonds; Prefers Cash, Commodities and Real Assets

Goldman Sachs latest Top of Mind publication is about the bond bear market, and there are a number of opposing views on whether yields are going to continue climbing, or if inflation is going to accelerate or stay under control.

One of the most bearish views on bonds came from Paul Tudor Jones, the founder, CIO and principal of Tudor Investment Corporation, which has c$11 bn of assets under management according to Pitchbook.

Here are some of the most interesting quotes in the interview.

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Understanding P/E

Source: Pixabay

P/E remains one of the most used metrics to value stocks. It is very easy to compute. But it’s not always easy to interpret. « Most investors fail to have a clear sense of what a particular multiple implies about a company’s future financial performance and don’t understand how multiples change over time », according to Michael Mauboussin and Dan Callahan in a report published in 2014 by Credit Suisse (this article is mainly based on their note which you can read here).

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What Options for Buffett Who Has $90 Billion To Invest?

Short answer:  Not Many.

Facts: Cash & cash equivalents at Berkshire Hathaway (BRK) reached $116 billion at the end of 2017, compared with $86.4 billion at the start of the year. Per Morningstar’s Gregg Warren estimates, Buffett finds himself with « around $90 billion in dry powder that could be committed to investments, acquisitions, share repurchases and dividends. » Continuer la lecture de « What Options for Buffett Who Has $90 Billion To Invest? »

Berkshire Hathaway : Lollapalooza Earnings & The Bet

Numbers are staggering. Berkshire Hathaway, the holding chaired by Warren Buffett and Charlie Munger, earned $44.94 billion last year vs $24.07 billion in 2016, in large part thanks to tax cuts decided by the Trump administration. Operating earnings actually declined to $14.46 billion from 17.58 billion a year ago, mainly because the insurance business lost money. Tax cut contributed $29.11 billion to results, which « derives from a reduction of net deferred income tax liabilities that arose as a result of the reduction in the U.S. corporate income tax rate from 35% to 21%. »

A more meaningful number for understanding the valuation of BRK is the evolution of the net asset per share or book value per share. Last year, the number grew 23% to $211,750, outperforming S&P 500 by 1.2%. CAGR return for book value per share over 1965-2017 is 19.1% vs 9.9% for S&P 500. Patience, discipline, opportunistic approach, great deal of focus on price and knowing his circle of competence explain such an amazing performance.

The most important part of BRK release of its annual report is Buffett’s letter to shareholder. This year, Buffett covers the following topics :

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Ingenico : From Conquest to Caution

Source: Pixabay

Ingenico hast lost its mojo. A 7% miss on market expectations on EBITDA for both 2018e and 2020e has been severely sanctioned by investors. Shares of the payment terminal manufacturer lost 16% of their value on Feb 22, leaving the market cap of the company at €4.8 billion. At first glance, the fall looks excessive. But it’s probably deserved.

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Quick View on What’s on Investors Mind and in their Portfolios

Source: Pixabay

Merrill issued its latest Fund Manager Survey last week, right after the sell-off in equity markets. The message to take out is: don’t buy on dips (well my view is that you always have to think long term, understand the fundamentals of any asset class and have a view on valuation, otherwise, don’t invest at all – but that’s not the point here, I think this survey is useful to gauge market sentiment).

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The Psychology of Happiness – James Montier

Source: Pixabay

This is a classic read although rather unusual. I had the chance to attend a presentation by James Montier (now at GMO) at a Morningstar conference in Amsterdam a couple of years ago. In his intro, Daniel Needham unearthed his note on happiness. Although it probably has little to do with value investing, it is interesting to see that as an equity strategist at DkW, Montier had the liberty to write on such an important topic in life…

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Review the Basics: Thoughts on Valuation (1997) – Mauboussin

Michael Mauboussin is a highly respected investor, teacher, speaker and book writer. I came across a number of his notes in the past (including this one which I liked a lot). Thanks to the Internet and the many people who share good thinking, most of his notes are there to grasp and read.

While re-populating my blog, I came into his 1997 reflections on valuation. As Graham/Buffett nicely put it: price is what you paid, value is what you get. So to earn decent return when investing, you need to know the value so you can pay a price that gives you a good margin of safety.

The full note is available to read here. I just wrote down a couple of remarks that make sense to me and hopefully give you a quick overview of why it might be useful and what you will find inside.

Key purpose of the note is to defend the value-based approach of investing,  to keep in mind what really matters in valuation and not to fall into « market myths ».

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No Sign Yet of Central Banks Balance Sheets Declining

sea, wave

Total assets held by major central banks are above $20tn. While Fed’s balance sheet has stabilized, the balance sheets of ECB, Bank of Japan and Bank of China have been increasing steadily.

Of course, the reduction in Fed’s balance sheet, expected to effectively start in 2018, will have a material impact on financial markets – the recent spike in volatility might be seen as a sort of recognition of that fact.

But global monetary base is still growing, which will in the end limit the potential for higher rates going forward and sustain high valuations in financial markets.

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Rising Real Yields Are the Real Threat

https://pixabay.com/en/dollar-american-currency-money-17527/
Source: Pixabay

Deutsche Bank’s strategist team published a report to figure out what’s currently priced in by financial markets after the bout of volatility. Rising real yields are a clear threat to the rebound in equity market. But having recently talked to fund managers in other asset classes, real yields are a threat to many asset classes where lots of money have flown other the last years (EM debt for instance).

Here’s DB’s take on European equities:

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Equities: Where Do European Sectors Stand (Valuation/Fundamentals)?

Source: Pixabay
Source: Bank of America Merrill Lynch

Recent market sell-off has given a bit more breathing room to European equity markets. On average, the 12 month forward P/E for the Stoxx Europe 600 index currently stands at 14.4x, which looks reasonable when you consider that the market expects 10.1% EPS growth this year + 3.6% Dividend Yield.

But but but…

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