Interview With Bud Labitan, Author and Investor

by: Mariusz Skonieczny

Bud Labitan is a fellow value investor and the author of Valuations – 30 Intrinsic Value Estimations in the Style of Warren Buffett and Charlie Munger. I recently met with him on the campus of Purdue University Calumet at their School of Management. I found his story interesting because he is a medical doctor, but he is transitioning from his current profession into a full-time investor and writer.

Mariusz Skonieczny: Classic Value Investors: Bud, you are a doctor – how did you become interested in value investing?

Bud Labitan, Investor and Author: In 1995, I read Roger Lowenstein’s book, Buffett – The Making of an American Capitalist.

Mariusz Skonieczny: Classic Value Investors: What made you want to pick up a book about value investing? Was it because you were dissatisfied with your financial advisor or was there another reason?

Bud Labitan, Investor and Author: I was searching for a better and more rational lifestyle. I was instantly hooked to wanting to learn more about this style of rational decision making.

Mariusz Skonieczny: Classic Value Investors: You are not only reading and practicing, but you are also writing about investing. You published three books, The Four Filters Invention of Warren Buffett and Charlie Munger, Price To Value, and your most recent one, Valuations – 30 Intrinsic Value Estimations in the Style of Warren Buffett and Charlie Munger. I would like to ask you about your newest book, but, before I do that, tell me about your first two books and why you wrote them.

Bud Labitan, Investor and Author: , The Four Filters Invention of Warren Buffett and Charlie Munger is about their method of decision framing and decision making. I think they developed a special process that is not yet fully appreciated by academic finance and behavioral finance. Price To Value is a look into intelligent versus unintelligent speculation. First, the Price To Value book presents the four investing decision filters in simplified terms. Then, it extends these ideas by looking into the intelligent speculation ideal described by Benjamin Graham in his tenth lecture of 1946.

Mariusz Skonieczny: Classic Value Investors: Recently, I was talking with a friend who told me that he wished that there was a book with case studies, and then I meet you and learned that you had published a book, Valuations, that features 30 intrinsic value estimations in the style of Warren Buffett and Charlie Munger. What motivated you to write this type of book?

Bud Labitan, Investor and Author: A few years ago, I was talking with the writer and investor Charles Mizrahi about my desire for a book with several case studies with real valuation examples. I first suggested to Charles that he do such a book because I like the way Charles writes in a clear and easy to understand style.

As a book, Valuations, came about in my mind after I had posted a few example valuations at seekingalpha.com. I wanted a book that showed cases on how to sensibly value a business. Previously, I had designed software for myself that captures data and generates a template report that reads like a conservatively written document. The reports are full of warnings.

Mariusz Skonieczny: Classic Value Investors: What companies are featured in this book?

Bud Labitan, Investor and Author: Here is a list:

Chapter 1 : AAPL, An estimated valuation of Apple Inc.

Chapter 2 : ABC, AmerisourceBergen Corp

Chapter 3 : APOL, Apollo Group Inc.

Chapter 4 : BDX, Becton Dickinson & Co.

Chapter 5 : BUD, Anheuser Busch Inbev ADR

Chapter 6 : CMCSA, Comcast Corp.

Chapter 7 : CSCO, Cisco Systems Inc.

Chapter 8 : CX, of Cemex ADR

Chapter 9 : DIS, Walt Disney Co.

Chapter 10 : DOW, Dow Chemical.

Chapter 11 : EBAY, eBay Inc.

Chapter 12 : FO, Fortune Brands Inc.

Chapter 13 : GCI, Gannett Co Inc.

Chapter 14 : GD, General Dynamics Corp.

Chapter 15 : GE, General Electric Co.

Chapter 16 : HD, Home Depot Inc.

Chapter 17 : INTC, Intel Corp.

Chapter 18 : IRM, Iron Mountain Inc.

Chapter 19 : JEC, Jacobs Engineering Group Inc.

Chapter 20 : JNJ, Johnson & Johnson

Chapter 21 : KO, Coca-Cola Co.

Chapter 22 : LOW, Lowe’s Companies Inc.

Chapter 23 : MCK, McKesson Corp.

Chapter 24 : MMM, 3M Co.

Chapter 25 : MSFT, Microsoft

Chapter 26 : PEP, Pepsico Inc.

Chapter 27 : PG, Procter & Gamble Co.

Chapter 28 : TAP, Molson Coors Brewing Co.

Chapter 29 : UNH, UnitedHealth Group Inc.

Chapter 30 : YUM, YUM! BRANDS INC.

Mariusz Skonieczny: Classic Value Investors: This book seems to focus on estimating intrinsic values using a two-stage DCF valuation.

Bud Labitan, Investor and Author: You are right. First, I applied the basic focus of the Buffett and Munger valuation style on to Free Cash Flow and Shares Outstanding. Then I added commentary on the other qualitative aspects of each business. As you know, Buffett and Munger state that before we make a purchase decision, we must decide if XYZ business is a high quality business with good economics. The case samples used in this book all produce free cash flow.

Mariusz Skonieczny: Classic Value Investors: How do you define free cash flow?

Bud Labitan, Investor and Author: Free Cash Flow or FCF is calculated as operating cash flow minus capital expenditures. Free cash flow (FCF) represents the cash that a company is able to generate after spending the money required to maintain or expand its asset base.

Mariusz Skonieczny: Classic Value Investors: How do you perform qualitative valuations of intrinsic value?

Bud Labitan, Investor and Author: As you know, Buffett and Munger state that before we make a purchase decision, we must decide ( filter #1 ) if XYZ business is a high quality business with good economics. Does XYZ business have ( filter #2 ) enduring competitive advantages, and does XYZ business have ( filter #3 ) honest and able management.

For the quantitative valuations of intrinsic value, I focus on FCF and Shares. For example, in the case of Apple Computer, starting with a base estimate of annual Free Cash Flow at a value of approximately $9,500,000,000 and the number of shares outstanding at 909,900,000 shares, I used an assumed FCF annual growth of 13 percent for the first 10 years and assume zero growth from years 11 to 15. Review the Free Cash Flow record here, and think about its sustainability.

The resulting estimated intrinsic value per share (discounted back to the present) is approximately $243.12. On the date it was performed, the Market Price = $255.9 Intrinsic Value = $243.12 (estimated). Therefore, while Apple is a great company with great products, on that day, it was not a super bargain.

Mariusz Skonieczny: Classic Value Investors: How did you go about your research?

Bud Labitan, Investor and Author: I read a lot. I read their letters to shareholders. So, a lot of the research was already done for my first book, The Four Filters Invention of Warren Buffett and Charlie Munger: Two Friends Transformed Behavioral Finance. The big challenge was to take what they said and imagine a reasonable estimating method based on my assumptions of the individual business’s growth potential. I tried to lean on the conservative side.

Mariusz Skonieczny: Classic Value Investors: What is the most important concept that you want readers to take from your book?

Bud Labitan, Investor and Author: Combine the best of qualitative thinking and quantitative estimation. Acquiring this ability can raise your attitude and thinking effectiveness. Before running your valuation estimations, decide ( filter #1 ) if XYZ business is a high quality business with good economics. Does XYZ business have ( filter #2 ) enduring competitive advantages, and does XYZ business have ( filter #3 ) honest and able management.

Mariusz Skonieczny: Classic Value Investors: Who is your newest book targeted towards?

Bud Labitan, Investor and Author: Readers interested in valuation case samples and intrinsic value estimations. Valuations also repeats the mental “decision framing” steps discussed in Four Filters.

Mariusz Skonieczny: Classic Value Investors: Do you have a website or blog that readers can follow?

Bud Labitan, Investor and Author: I have a few articles at gurufocus.com and seekingalpha.com and my articles can be found via a Google or Bing search on my name.

Mariusz Skonieczny: Classic Value Investors: Where can readers find your books?

Bud Labitan, Investor and Author: Amazon.com and Lulu.com and frips.com

Mariusz Skonieczny: Classic Value Investors: Bud, thank you for taking the time to answer my questions. Do you have any final thoughts for our readers?

Bud Labitan, Investor and Author: My pleasure, Mariusz. Thanks for having me. These valuation cases are estimations written in a style that emphasizes a focus on free cash flow and the number of shares outstanding. In reality, these businesses may outperform or they may underperform any of my projections. I hope that my Valuations book may be considered as a supplementary text for college classes in business and business valuation.