The Dhandho Investor - Mohnish Pabrai

[npg]

Q: Why sell something you have gotten at a huge discount?
A: Because you don't trust your own analysis.

And quite right so. An estimate that relies on projecting a future PE is bound to be off by miles. Learn how to estimate intrinsic value and get off the roller coaster.

[quiet investor]

Technical support and resistance on a stock chart does not prevent a stock from moving towards its intrinsic value in the long-term whether that is above a technical resistance level or below a technical support level. Wouldn't it be better to determine the true cash value for your stock and buy at a discount and then wait until price follows value? Then when it goes down significantly from where you first bought, you can invest in more stock and have a lower average discount instead of feeling that you were wrong and paying that money to brokers for commissions. It's nice to be happy when your stock goes down and buy more instead of adding to your expenses. Just my thoughts.

[NewMoney]

Originally Posted by npg

Q: Why sell something you have gotten at a huge discount?
A: Because you don't trust your own analysis.

And quite right so. An estimate that relies on projecting a future PE is bound to be off by miles. Learn how to estimate intrinsic value and get off the roller coaster.

NPG,

What method do you use for calculating intrinsic value?

I do admit that I am not 100% confident in Phil's method. But I do see a lot of merit in using his big 5 numbers to determine the overall health of a company.

AAII back-tested Phils strategy all the way back to 1998. Take a look at their results:

http://www.aaii.com/journal/200710/images/sschart1.gif

[NewMoney]

Originally Posted by quiet investor

Technical support and resistance on a stock chart does not prevent a stock from moving towards its intrinsic value in the long-term whether that is above a technical resistance level or below a technical support level. Wouldn't it be better to determine the true cash value for your stock and buy at a discount and then wait until price follows value? Then when it goes down significantly from where you first bought, you can invest in more stock and have a lower average discount instead of feeling that you were wrong and paying that money to brokers for commissions. It's nice to be happy when your stock goes down and buy more instead of adding to your expenses. Just my thoughts.

What you say makes a lot of sense. I'm honestly curious though how you would rationalize riding a stock down with a major downturn in the market such as occurred after 9/11? Wouldn't you want to stop-out of a stock and preserve capital? (presuming someone would buy as the market tanked)

[Xyvern]

Originally Posted by NewMoney

NPG,

What method do you use for calculating intrinsic value?

I do admit that I am not 100% confident in Phil's method. But I do see a lot of merit in using his big 5 numbers to determine the overall health of a company.

AAII back-tested Phils strategy all the way back to 1998. Take a look at their results:

http://www.aaii.com/journal/200710/images/sschart1.gif

I'm not npg but have a suggestion about calculating intrinsic value, try this web site below

Joe Ponzio's F Wall Street

[quiet investor]

NewMoney,

I think that it is very hard to try and time the cyclical moves in the economy. However, I am wrestling with this question also. I feel that
a cyclical bear market would tend to pull down even undervalued stocks because some people would have to cover margin calls on their other over-valued stocks. I'm thinking that if, and that's a big "if", one can call the general area of a cyclical bear market top in the overall market then one might hop out for 3 months or so and enter back in at a better price. There are tax implications to consider also. You can also consider buying puts on an index such as SPY to hedge. If you don't buy on margin it really shouldn't matter at all to ride out a cyclical bear market if you are holding for value and your time horizon is at least 3 years, preferrably 5. I do think that most cyclical bear markets occur because the Fed decides to slow down the economy because of inflation concerns and changes monetary policy towards tightening. That last string of Fed rate hikes was just to normalize rates not to slow an economy growing above a non-inflationary rate. A recession occuring outside of a Fed tightening is unlikely in my humble opinion. I'm not an economist so I hope you take my words with a grain of salt. I would definately ask NPG for his thoughts. They are quite sound.

[petekoch]

Originally Posted by petekoch

... Also looking at a beaten down mortgage insurer, MGIC (MTG).

Patience has its virtues. Thought I'd wait this guy out for a much better price and it got beaten down even more on news of big 3Q loss. Outlook is for more of the same through 2008.

Back burner for now. Single digits, anyone ???

Meanwhile, I still haven't received my *>%$#@& book!

[NewMoney]

Originally Posted by quiet investor

NewMoney,

I think that it is very hard to try and time the cyclical moves in the economy. However, I am wrestling with this question also. I feel that
a cyclical bear market would tend to pull down even undervalued stocks because some people would have to cover margin calls on their other over-valued stocks. I'm thinking that if, and that's a big "if", one can call the general area of a cyclical bear market top in the overall market then one might hop out for 3 months or so and enter back in at a better price. There are tax implications to consider also. You can also consider buying puts on an index such as SPY to hedge. If you don't buy on margin it really shouldn't matter at all to ride out a cyclical bear market if you are holding for value and your time horizon is at least 3 years, preferrably 5. I do think that most cyclical bear markets occur because the Fed decides to slow down the economy because of inflation concerns and changes monetary policy towards tightening. That last string of Fed rate hikes was just to normalize rates not to slow an economy growing above a non-inflationary rate. A recession occuring outside of a Fed tightening is unlikely in my humble opinion. I'm not an economist so I hope you take my words with a grain of salt. I would definately ask NPG for his thoughts. They are quite sound.

QuietInvestor,

Great comments. I'm of the opinion we are in a recession now and that it will be getting much worse. About 2 years ago I started to sense an impending recession and at the time I did not know anything about the economy or stocks.

One thing about a recession is that the FEDs can't control whether it happens or not. The Feds only control short term interest rates. Interest rates in other Countries can force our long-term rates to have to go up or down. The FED can perhaps put off a recession by a quarter or two by lowering rates but they can't stop it. A recession is necessary and good. A recession is a correction for an economy that was too strong for too long with too many excesses. Both Greenspan and Bernanke think dropping rates and printing money is the solution to our problems. The reality is it only makes the recession worse when it hits. Not only that, but by devaluing the dollar it means foreigners don't want to own the dollar.

Just wait until the Suadis and other Countries uncouple from the dollar and PEG off the Euro. Talk about it hitting the fan.

[npg]

Originally Posted by Xyvern

I'm not npg but have a suggestion about calculating intrinsic value, try this web site below

Joe Ponzio's F Wall Street

Indeed. Joe explains this very well. I tend to give a bit more weight to CROIC when it comes to estimating future growth, rather than go by the growth in free cash flow.

He also gives some very good other valuations. Have a look at his Wal Mart analysis.

If you want to hear it from the horses, mouth then read Mr Buffetts 1994 Letter to Shareholders.

Either way, you won't end up estimating ridiculous figures like EPS and PE. I hope you are aware that capital expenditures (ie overheads) are not part of the earnings reported. If you go by earnings you are effectively putting a company earning 10$ per share but with 11$ capital expenditures per share on the same par as a company earning 10$ with capital expenditures of 3$. Clearly, both companies are not the same. Whereas one is approaching ruin if it doesn't get capex under control, the other is producing a nice profit.

Why calculate intrinsic value using projected earnings multiplied by an anticipated PE? That's nuts. Furthermore, growth in book value does not equal growth in intrinsic value. Mr Town is misquoting Mr Buffett on that issue. Either way, that whole Rule1 thing does not make sense to me. You are better off with Joe's advice and services as well as with Buffetts essays.

[npg]

Originally Posted by NewMoney

What you say makes a lot of sense. I'm honestly curious though how you would rationalize riding a stock down with a major downturn in the market such as occurred after 9/11? Wouldn't you want to stop-out of a stock and preserve capital? (presuming someone would buy as the market tanked)

If you like eating hamburgers, why complain when they are suddenly 50% cheaper for a period of time?

This should only be a concern to you when you are on the sell side. I am on the buy side. I will be on the buy side for at least another 20 years.

Mr Buffett can explain that much better than I. You may want to dig in his BRK reports a little.