Measure Downside Risk and Don't Worry Much About Future Earnings Estimates.
It seems patently obvious that the Tisch family did not really do any complicated future discounted cash flow analyses/estimates of the companies they invested in or acquired. What they did carefully calculate is the potential downside of each business. For instance, James talked about the Tisch's famed investment in oil tankers back in the 70's. He noted that the investment decision was primarily based on the fact that the ships were selling at or near their scrap value. As such, there was little, to no downside risk in investing in these ships at the time. It clearly did not matter what the day rates of these ships would be in a year, two years, or even ten years. The investment entailed little to no risk, so the Tisch's could have patience to let the upside take care of itself in due time or never (if it did not happen they still would not have lost any money). In fact, James mentioned that their philosophy was simply: Our Day Will Come.
In other words, the trick is to invest in situations where the downside is very minimal, and where there is a chance of upside (even though the probability and magnitude of that upside is not quite [certain] or quantifiable). Simply, spend most of your time calculating and quantifying downside risk. The upside can then be estimated in quite simplistic terms, and you can safely throw out the DCF spreadsheets. You don't even need to really know your upside, if you know your downside and know that there are decent odds of upside.
Keep Your Investment Thesis Simple.
It was shocking to hear that James mention that they decided to invest in certain ships by just visiting the ship once, looking around the dock and applying a exceedingly silly $5 million (or $50 million, I forget which) test: "You mean we can get all this for only $50 Million." It truly seemed as if he was making these stories up, but after you heard him say it several times, you realized that these guys were no geniuses (they even appear to be foolish) and in fact their one true genius was in keeping things simple. They knew the cost of scrap metal, they knew how much scrap metal was in the ship, so the cost of the ship was easy to calculate. If the cost was near scrap value and did not value the ship as a "tanker" they bought. Very simple. It's something you could have explained to someone in two minutes.
Locate potential new investments by scanning the new low list.
James specifically suggested scanning the new low list to look for good investment ideas. This is where the hard work comes in, since many stocks on the new low list deserve to be there. But if you keep your eye on industries that are doing poorly, but have potential growth, it is possible to find stocks in those industries that are financially sound and have little downside risk. You can then safely invest in those stocks, and wait for your time to come.
As long as you have invested in a low risk situation, and face little to no capital loss, you need to have patience to wait for the market to come back or to recognize what you see as value. James kept on coming back to that one statement: "Our Day Will Come."
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