Bud Labitan

Book Review: Bruce Greenwald's Value Investing Does a Great Job Teaching Readers

I too am a fan of this book. His stepwise approach to valuation is mentioned briefly in my book "The Four Filters Invention of Warren Buffett and Charlie Munger " www.amazon.com/dp/0615...
I also enjoyed reading about the other approaches to value investing in the back third of Professor Greenwald's book.

Book Review: The Four Filters Invention of Warren Buffett and Charlie Munger (Two Friends Transformed Behavioral Finance)

I think these academic papers help to explain why Buffett and Munger's Four Filters Process outperform the conventional "framing effects" on decision making.

Takemura,K. 1992 Effect of decision time on framing of decision: A case of risky choice behavior. Psychologia, 35,180-185. (In English)

Takemura,K. 1993 The effect of decision frame and decision justification on risky choice. Japanese Psychological Research, 35, 36-40.(In English)

Takemura,K. 1994 Influence of elaboration on the framing of decision. Journal of Psychology, 128, 33-39. (In English)

Takemura,K. 1994 An theoretical explanation of the framing effect: Contingent focus model of decision making under risk. Japanese Psychological Review, 37, 270-291.(In Japanese with English abstract)

Book Review: The Four Filters Invention of Warren Buffett and Charlie Munger (Two Friends Transformed Behavioral Finance)

I think these academic papers help to explain why Buffett and Munger's Four Filters Process outperform the conventional "framing effects" on decision making.

Takemura,K. 1992 Effect of decision time on framing of decision: A case of risky choice behavior. Psychologia, 35,180-185. (In English)

Takemura,K. 1993 The effect of decision frame and decision justification on risky choice. Japanese Psychological Research, 35, 36-40.(In English)

Takemura,K. 1994 Influence of elaboration on the framing of decision. Journal of Psychology, 128, 33-39. (In English)

Takemura,K. 1994 An theoretical explanation of the framing effect: Contingent focus model of decision making under risk. Japanese Psychological Review, 37, 270-291.(In Japanese with English abstract)

Book Review: The Four Filters Invention of Warren Buffett and Charlie Munger (Two Friends Transformed Behavioral Finance)

The Four Filters: U + SCA + ATM + MOS

Jake,

Thanks for a balanced and critical review. The Buffett and Munger innovation was in how they "framed" their investing decision before making it. The liberal use of quotes (which Mr. Buffett approved) was intentional... so that the reader would feel that he was listening to Buffett and not the author Labitan.

I tried to hide my own biases; but a little leaked out in the SOAP process described in chapter 3. The intent there was to show the reader that we can form a general impression of managers using both feelings and facts... using both subjective and objective data.

Here is an old audio clip of Mr. Buffett mentioning the 4 decision filters: [frips.com]

I think the key to appreciating the filters as I do, is to imagine what each of the 4 clusters really represent. 1. Develop an understanding of the economics of the business and its products. 2. SCA is really about Customers. 3. ATM, Able and Trustworthy Managers and 4. Ben Graham's Margin of Safety by buying below Intrinsic Value.

If we give credit to Ben Graham for filter four; then the real advance of the Buffett+Munger collaboration is in "U+SCA+ATM."

Here is an audio that hints at their "growth" in learning towards finding the "wonderful business." [frips.com]

Before we find the "wonderful business," look at the wonderful runner. Imagine a marathon runner and additive factors this way... endurance + strength + determination + experience will probably beat the runner with only endurance + determination.

I hope this explanation helps your readers appreciate the Buffett and Munger innovation of combining 3 qualitative steps with 1 quantitative step... in order to have a higher probability of a better outcome.

Bud

Book Review: The Four Filters Invention of Warren Buffett and Charlie Munger (Two Friends Transformed Behavioral Finance)

The Four Filters: U + SCA + ATM + MOS

Jake,

Thanks for a balanced and critical review. The Buffett and Munger innovation was in how they "framed" their investing decision before making it. The liberal use of quotes (which Mr. Buffett approved) was intentional... so that the reader would feel that he was listening to Buffett and not the author Labitan.

I tried to hide my own biases; but a little leaked out in the SOAP process described in chapter 3. The intent there was to show the reader that we can form a general impression of managers using both feelings and facts... using both subjective and objective data.

Here is an old audio clip of Mr. Buffett mentioning the 4 decision filters: [frips.com]

I think the key to appreciating the filters as I do, is to imagine what each of the 4 clusters really represent. 1. Develop an understanding of the economics of the business and its products. 2. SCA is really about Customers. 3. ATM, Able and Trustworthy Managers and 4. Ben Graham's Margin of Safety by buying below Intrinsic Value.

If we give credit to Ben Graham for filter four; then the real advance of the Buffett+Munger collaboration is in "U+SCA+ATM."

Here is an audio that hints at their "growth" in learning towards finding the "wonderful business." [frips.com]

Before we find the "wonderful business," look at the wonderful runner. Imagine a marathon runner and additive factors this way... endurance + strength + determination + experience will probably beat the runner with only endurance + determination.

I hope this explanation helps your readers appreciate the Buffett and Munger innovation of combining 3 qualitative steps with 1 quantitative step... in order to have a higher probability of a better outcome.

Bud

Book Recommendations by Gates, Buffett and Munger

These men are not going to recommend books about themselves. However, I wish to point out that my book attempts to carefully explain the genius of Buffett and Munger's contribution to Behavioral Finance.

In my view, Buffett and Munger advanced the area of "decision framing" and outlined a sensible approach to valuation by including all the important stakeholders in a four "decision cluster" process.

"The Four Filters Invention of Warren Buffett and Charlie Munger" paperback is available from Amazon.com and the audio cd version is available from Lulu.com here: www.lulu.com/content/5...

Here is a short audio clip for your readers to review. And, pay special attention to the last minute of the audio. It is a bit scratchy, but careful listeners will appreciate its historical significance.
frips.com/4m.mp3

Bud Labitan
frips.com

The "Four Filters" of Warren Buffett and Charlie Munger

"The Four Filters of Warren Buffett and Charlie Munger" is now available on the Amazon Kindle Reader here: www.amazon.com/dp/B001...

The Paperback is available here: www.amazon.com/dp/0615...

And, the 70 minute abridged audiobook cd is available here: www.lulu.com/content/5...


Enjoy !

The "Four Filters" of Warren Buffett and Charlie Munger

Friends,

My book is now on audio cd here: www.lulu.com/content/5...
Runtime=70 minutes. Read by the author.

This is the abridged version of the book: "The Four Filters Invention of Warren Buffett and Charlie Munger".
This book examines each of the basic steps Buffett and Munger use in "framing and making" an investment decision. It is a focused look into an amazing invention within "Behavioral Finance."

I hope you like it!

Bud Labitan
frips.com
www.lulu.com/content/5...

Barron's: Financials Weigh on Berkshire Hathaway

Intrinsic Value is more important than Market Value. And, in time, this high-quality portfolio will blossom again. Notice that Burlington Northern shows a
5-year average return on equity = 14.4 , If the growth assumptions used in
estimating the Intrinsic Value are accurate and sustainable, this may or may
not indicate a price-to-value ratio of 0.53 percent. The margin of safety may be around 55 dollars or 47 percent.... Just my opinion.

Value Investors: Stay Strong, and Follow Warren Buffett

Ever wonder about the investing and probability sensibilities of Buffett and Munger? My new book is really about “decision framing.” “The Four Filters Invention of Warren Buffett and Charlie Munger” ( www.amazon.com/dp/0615... ) examines each of the basic steps they perform in “framing and making” an investment decision. This book is a focused look into this amazing invention within “Behavioral Finance” that has been underappreciated by both the business and academic communities. The genius of Buffett and Munger’s four filters process was to “capture all the important stakeholders” in a “multi-variable” equation or formula. Imagine…Products, Enduring Customers, Managers, and Margin-of-Safety… all in one mixed “qual + quant” formula. In rolling two die for double-sixes, the gambler's odds are 1/36 and the house odds are 35/36 or 97%. When Buffett and Munger make a bet, they do so with house odds.
www.youtube.com/v/isB6...

Hiring a New Money Manager (in Omaha)

I would want a young manager who studied the best ideas of Buffett and Munger. You might enjoy "The Four Filters Invention of Warren Buffett and Charlie Munger." amazon.com/dp/06152412... It explains and honors the intellectual partnership of two brilliant men. The genius of Buffett and Munger's four filters innovation was to "capture all the important stakeholders" in one "multi-variable" four step process.

Bottom Fishers May Find Value in Housing Stocks Like Mohawk

I enjoyed your article and decided to add to your discussion this way.
Bottom Fishing is even more profitable when you swim with a fish expert holding a spear gun. So, this is the feeling I get when I read books about Buffett and Munger. Mohawk Industries is a producer of floor covering products for residential and commercial applications in the United States and Europe. The Company operates in three business segments: Mohawk, Dal-Tile and Unilin. The Mohawk segment designs, manufactures, sources, distributes and markets its floor covering product lines, which include carpet, ceramic tile, laminate, rugs, carpet pad, hardwood and resilient, in a range of colors, textures and patterns for residential and commercial applications in both new construction and remodeling. The Dal-Tile segment designs, manufactures, sources, distributes and markets a line of ceramic tile, porcelain tile, stone and other products used in the residential and commercial markets for both new construction and remodeling. Mohawk Industries , MHK has a (5-year annual average) net income growth rate of 19.96 . What competitive advantages does it have? Brand, Technology, Cost of Production, Distribution Network? Are possible advantages sustainable? Does MHK have a solid mix of Product, Pricing Power, Placement, and Promotions? When buying companies or common stocks, look for understandable first-class businesses, with enduring competitive advantages, accompanied by first-class managements.
MHK has a current market price is 39.59 Using an assumed growth rate of 5 percent, the estimated Intrinsic Value is 131 per share from ValuePro.net, and this may or may not indicate a bargain of 91 dollars. Is it a possible Value Trap? If the growth assumptions used in estimating the Intrinsic Value are accurate and sustainable, this may or may not indicate a price-to-value ratio of .31 , and a possible margin of safety of 69 percent. The current price/earnings ratio = 9.8 and It's current return on capital = negative 13.1 Using a debt to equity ratio of .6, Mohawk Industries shows a current return on equity of negative 22. But, that is the current environment and not necessarily the future one. Some industries have higher ROE because they require no assets, such as consulting firms. Other industries require large infrastructure builds before they generate a penny of profit, such as oil refiners. Generally, capital-intensive businesses have higher barriers to entry, which limit competition. But, high-ROE firms with small asset bases have lower barriers to entry. Thus, such firms face more business risk because competitors can replicate their success without having to obtain much outside funding. Growth benefits investors only when the business in point can invest at incremental returns that are enticing; only when each dollar used to finance the growth creates over a dollar of long-term market value. In the case of a low-return business requiring incremental funds, growth hurts the investor. The wonderful companies sustain a competitive advantage, produce free cash flow, and use debt wisely.
Automatic Warning, ( above 0.5 ) on this current debt to equity level of .6
Does Mohawk Industries make for an intelligent investment or speculation today? Time is said to be the friend of the wonderful company and the enemy of the mediocre one. Before making an investment decision, seek understanding about the company, its products, and its sustainable competitive advantages over competitors. Next, look for able and trustworthy managers who are focused more on value than just growth. Finally ask: Is there a bargain relative to its intrinsic value per share today? Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misapraised. In terms of Opportunity Cost, is MHK the best place to invest our money today?
I need to do more study into its competitive position. However, like I told my nephew, the bargains at charts like finviz.com/map.ashx?t=... will show up with the color red and not green.
And, thanks to "Mr. Market," there seems to be more opportunities with the "red" color these days.

After Wall Street's Broken, Who Pays the Piper?

Dr. Fiduciary and the Cancer Treatment Team
aka "The Labitan Solution"

Peter Cohan of Babson College recently wrote that "The problem we face now is fear of insolvency which leads to capital hoarding. Financial
Institutions do not know whether it is safe to do business with other FIs
because the others might be insolvent." He believes that "if they could be
confident that they were solvent, then they would lend to each other because they would be missing out on profit opportunities. However, there is more going on now that remind me of a young patient with cancer.

Warren Buffett has described the recent American economy like an athlete who has collapsed of cardiac arrest and needs resuscitating with a defibrillator. But, what if the cause of this collapse is a tumor close to
the economic heart? Tumors that originate in the heart are rare, but can be either benign or malignant. Because the heart is such an essential organ, even benign tumors can be life-threatening.

Myxoma, the most common benign tumor inside the cavities of the heart,
accounts for about half of the tumors that originate in the heart. Fibromas, which also develop in the myocardium or the endocardium. Malignant tumors that originated elsewhere in the body and spread to the heart are more common than ones that originate in the heart. Malignant tumors, including carcinomas, sarcomas, leukemias and eticuloendotheliar tumors, can spread to any heart tissue. Lung and breast cancers often invade the heart.

Treatment of myxoma is usually done by surgical removal of the tumor.
Treatment of malignant cardiac tumors usually involves radiation,
chemotherapy and management of complications. So, the bottom line is this:

If these "toxic derivatives of unknown value" are the tumor around the heart of advanced economies, then they need to be effectively identified, shrunk, and safely surgically excised from the healthy portion of these economies. Until a comprehensive treatment plan is devised to include radiation, surgery, and rehabilitation, the current infusion of extra blood is just keeping this patient alive.

Feel free to pass this on for critical discussion and debate.
Bud Labitan. Author of "The Four Filters Invention of Warren Buffett and Charlie Munger. Two Friends Transformed Behavioral Finance." which is available from Amazon.com

Dislaimer: medical portions of my talk here are taken from: [csmc.edu]

Buffett and Cramer Agree: It's Time to Buy Stocks

Buffett has said: "We like to price, rather than time our investments." And yes, I agree with you on BRK. You may also enjoy reading "The Four Filters Invention of Warren Buffett and Charlie Munger." It explains and honors the intellectual partnership of two brilliant men. The genius of Buffett and Munger's four filters innovation was to "capture all the important stakeholders" in one "multi-variable" four step process.
www.amazon.com/dp/0615...
I am not familiar with the other two companies. How is their record on free cash flow growth? What is the competitive situation there?
From the book I mentioned above, folks can get a better idea of how Buffett and Munger "frame" their investing decisions.

Irrational Stupidity

Benjamin Graham wrote about these market excesses many years ago and described a metaphor for these activities. He called it Mr. Market.
You may also enjoy the advancement in valuation ideas here: "The Four Filters Invention of Warren Buffett and Charlie Munger." It explains and honors the intellectual partnership of two brilliant men. The genius of Warren Buffett and Charlie Munger's four filters innovation was to "capture all the important stakeholders" in one "multi-variable" four step process. www.amazon.com/dp/0615...
Unwinding and unwinding of complex derivative contracts will occur. In time, market values will meet intrinsic values.