Balt, that's fine with me.
So, as far as you and Sean are concerned, Intrinsic Value doesn't exist. That's great, then there is no need to continue to waste time and words discussing it. Happy Holidays to you and yours.
Oh, by the way, thanks for bringing PKW to my attention. No, I have no intention of buying it, but it is something worth watching. YTD, it looks like it has beat both SPY and BRK-B by more than 1200 basis points.
« there is no intrinsic value »
Sean, I'm really disappointed in you
WEB says there is.
(By the way, "coupons" is a euphemism for distributions, i.e., dividends, and, IMO, his choice of a discount rate is incredible lame!)
GORDON: Let me ask one of Mr. Buffett (laughter). What about what I see as a wedge between intrinsic value – which we understand what you mean by that – and negotiated value – which I’m not sure what you mean by that or what the connection is with intrinsic value or whether it troubles you that negotiated value might be higher than intrinsic value.
BUFFETT: Negotiated value is where a transaction will take place today under all the normal economic assumptions and circumstances – a willing buyer and a willing seller, et cetera. Intrinsic value can differ materially from negotiated value. Negotiated value represents hopes and fears and intrinsic value – admittedly, no one is going to know it precisely. But the intrinsic value is if the company itself were a bond and you could see all the coupons printed out between now and judgment day, if you discounted those back at government bond rates since you would know the certainty, the same certainty that you would have on a government bond what the number would be. Those numbers differ. I would say that now negotiated values on balance relative to intrinsic values are probably higher than they were ten or fifteen years ago, but that’s just a function of the different kind of environment we’re in. They move around a lot over time.
[End of Excerpt]
“The Essays of Warren Buffett: Lessons for Corporate America”, published by the Cardozo Law Review, pp 752-753, excerpt from “Buffett Conversations”, which took place between October 28-29, 1996.
« I think using a discount rate of 7.5% is liable to lose you money. »
In you opinion, is 7.5% too high or too low?
And what would you recommend?
Good morning, hc.
I just don't get it. Why would anyone want to own an increasing larger stake in a dying elephant? I would rather be paid handsomely while the elephant is still alive.
IMO they should stop buying back shares and increase the payout ratio from ~25% to ~60%. Note that under that scenario the price per share would not have to drop. An initial annual dividend of $9.00 per share, growing by 2.5% per year into perpetuity, discounted by 7.5% would have an INTRINSIC VALUE of $180.00 per share.
That certainly appears to be the case with IBM.
The Value Line analyst expects absolute revenue growth of only ~2.6% per year over the next five years (2012-2017) from 104.507 B$ to 119 B$. That's not much above the expected rate of inflation. So what is he saying? That IBM's real growth is close to zero? But by buying back 2.2% of their shares per year over the same time period they fix that, their revenue PER SHARE growth rate miraculous increases to a respectable 4.9% as a result.
Morning hc, I'm still trying to see what HE sees in IBM.
I've been rethinking axpkocop's comment about free cash flow, but no epiphany to date.
WEB has always been in empire building mode, so that should come as no surprise.
A low growth to no growth company can still be a good stock investment. Maybe he was just too early.
Good advice for the ultra wealthy. If you are ultra wealthily, then two to three percent of your investment portfolio in cash does makes sense, right? That's what, probably ten years worth of living expenses? And if the market does correct you're only going to move down the ladder one notch, from ultra wealthy to extremely wealthy.
My beef with IBM is that, in my opinion, its' nominal revenue per share growth rate is a joke.
My calculations suggest that the nominal compound annual growth rate for the past 19 years (1993-2012) has been about 6.8% per year. That's impressive at first glance, but a deconvolution of the whole into its' component parts reveals that only about 0.3% of that is REAL, 2.4% is due to inflation, and, finally, 3.8% is attributable to share reductions via buy backs, (1+0.3%)*(1+2.4%)/(1-3.8%)-1 = 6.8%.
LOL!, Hypothetically speaking, a publicly traded Amish buggy works could post those numbers.
I, for one, am not allowed to post links, equations, Excel fragments, or make disparaging remarks about BRK, WEB, or IBM. Only happy talk allowed here!
« in general I tend to agree with WB that the risks of being out of the game are huge compared to the risks of being in it. »
That's true if, and only if, your holding period is as long as WEB's. Do you plan to hold forever?
Thanks for the heads up, hc. I don't regularly read Mauldin, but I did see the link to his article over on the other board and I did read it. Being something of a history buff, I really enjoyed the "Monkey Hangers of Hartlepool" story
His estimate that the prospective nominal annualized total return for the S&P 500 over the next decade is likely to be 2.3% works for me.
I get 2.1% using the following assumptions: buy today at 160% of sales, sell ten years from now at 100% of sales, and, during that decade, sales grows 4.5% per year and one collects a dividend each year equal to 3% of sales.
With regard to my INTC bet:
What % of my portfolio did I commit?
What price per share did I pay?
What day did I make the buy?
Ask the censor, S/He knows.
OK, I guess that's it for me today. The censor clipped the end of my last post in mid-sentence.
Just off the top of my head, the absolute amount (~10 B$ T4Q) that AAPL pays out should NOT decrease in the future.
IMO, investors expect the dividend per share to be "sticky". Either pay the same amount next year, or preferable, more, but NO reductions allowed!
To make money available to buy back shares investors are involuntary giving up a fraction of their potential dividend per share TODAY, hoping for a larger dividend per share in the FUTURE. They're trading income today for growth tomorrow. If that doesn't happen, they'll justifiably punish the stock's price per share in the future.
FYI, I made a small bet on INTC, last month,
Sorry, hc, I don't know the answer to that one.
What I do believe is that buying back shares at a price per share below IV (Intrinsic Value) per share does increase IV per share, but only for those equities whose valuation is based on a projection of their future distributions (DIVIDENDS PER SHARE AND THEIR GROWTH PER SHARE).
That buying back shares at a price per share greater than Book Value per share decreases BV per share which in turn decreases iV (imaginary Value) for those equities whose valuation is based on using a multiple of Book Value per share.
JMO, hope that helps.
In spite of the fact that most of what he writes is over my head, I am a James Montier fan.
His latest white paper is a gem, but I am not allowed to discuss it here.