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  • Warren Buffett Hates Bonds, Loves Cash [View article]
    Dale - one reason BRK has $50 billion in cash is the opportunity to buy entire companies. Keep in mind that BRK total assets now total more than $500 billion so the cash is only 10% of assets. Good to keep that in perspective.

    BRK has been outspending their competitors in CAPEX in the railroad and energy industries. A company like that is a first choice for an employee, so chances are they have the best people as well.

    One challenge they have is the immense growth in cash flow through the years. Every time BRK buys a whole business they tend to take on companies that throw off billions in cash. That seems like the right problem to have but it does have its consequences regarding an ability to effectively deploy capital. But they seem to be handling that well.

    I bought BRK during the era. At the time I made my purchase Yahoo had a higher market cap than BRK. BRK has been almost consistently undervalued since then - it varies between being substantially undervalued to fully valued which makes it "easier to buy than to sell."
    Aug 21 10:52 AM | Likes Like |Link to Comment
  • One Thing Is Odd [View article]
    Gary J - I am well aware of how things play out after nearly four decades of investing. I also saw how some dot-com speculators got out before the crash and became near-billionaires based upon essentially worthless companies. Nothing new here-speculation does work for a small minority of speculators-simple statistics dictates so. AMZN may be that great company as you say - earnings may someday catch up with share price - but there is a high degree of uncertainty in that regard.

    Regarding changing the channel - I may buy AMZN some day when I can determine that the value exceeds the share price. But that is not this day.

    Aug 20 03:03 PM | 1 Like Like |Link to Comment
  • One Thing Is Odd [View article]
    "Big funds get things wrong too" That is so true! Also huge funds often have multiple managers who handle different portions of the fund. So you might have a "value guy" working with a "growth guy." That is why a fund like GFAFX may have a decent track record (although not extremely exciting) even while making some questionable decisions.

    Having seen many bubbles I am not surprised to see another one like AMZN. They all seem to end the same - but the question is when and how. I don't invest in AMZN but am interested to see how this plays out.
    Aug 20 01:13 PM | Likes Like |Link to Comment
  • Retirement Strategy: When Taking A Position In A Beaten Down Stock Makes Sense [View article]
    RS - this seems like "deep value" investing to me. The return rates can be very high but you can also lose the entire investment in deep value type investments. They require a very detailed understanding of everything about the company and its history. The reports from these companies try to depict things in a much more rosy sense than they are. So I would be careful. I would recommend reading at least the last 10 years of annual reports and various news articles (also going back 5 years or so) and piecing together how the company reached their current state - if possible - and make sure you feel comfortable about the situation. I lost a lot of money when I was younger on deep value plays and learned a few things the hard way.
    Aug 20 10:51 AM | 1 Like Like |Link to Comment
  • One Thing Is Odd [View article]
    GFAFX mostly invests in companies with solid earnings & valuations (GILD, GOOG, HD, ORCL, AAPL, MSFT, ETC.) The fund has a decent track record for a mutual fund (7% total return over 15 years). The nearly $6 billion AMZN stake seems like an anomaly. Big funds like GFAFX typically have pretty deep research teams - but as you know it is all in the premises.
    Aug 19 09:03 PM | Likes Like |Link to Comment
  • One Thing Is Odd [View article]
    Paulo-One other factor is that some big institutions have not yet jumped ship on Amazon. For example:

    (1) GFAFX (Growth Fund of America) - has more than 17 million shares of Amazon representing 4.2% of a $140 billion fund. In fact, GFAFX recently bought an additional 1.8 million shares of Amazon making it the top investment in the fund.

    (2) Morningstar gives Amazon 4 stars on valuation - estimating a value of $400 per share with a high uncertainty factor. They quote:

    "Our discounted cash flow-derived fair value estimate is $400 per share. We've reduced our 2014 GAAP operating margin forecast to 0.4% because of heavier-than-anticipated technology, content, and international infrastructure investments planned for the third quarter, but the impact will offset by an uptick to our 2015 operating margin assumptions to 1.5%. In Amazon's case, we do not believe traditional price/earnings and enterprise value/EBITDA metrics are meaningful given the impact that investments will have on near-term margins."

    Personally I don't own any Amazon and have found plenty of great opportunities among companies with traditional valuation metrics. Also I don't agree with the reasoning of GFAFX or Morningstar on this issue - but my point is that there are still highly respected heavyweights that show confidence in the company - if these players were to lose confidence then that would probably be the pin the pops the balloon.
    Aug 19 08:09 PM | 1 Like Like |Link to Comment
  • Wal-Mart: Where Is The Company Investing? [View article]
    Thank-you for another great article Tom! This is a company that I have followed for decades. The greater attention to domestic sales is encouraging.

    That said - it was disappointing to see cost-cutting reach the point of not managing in-store inventory. That has to be a factor in the replacing the head of US operations. The good news is that they are working to deal with the issue. At one point they were looking at RFID to automate stocking but apparently that endeavor did not work out.

    The smaller formats will be interesting - to see how they are able to leverage their distribution system. They have been experimenting with smaller formats for a long time and I always wondered why they weren't rolling out these formats more aggressively. Now they are accelerating that effort. I wonder what changed.

    One factor is the difficulty with international expansion where margins have always been lower than US (except for CA and MX). In recent years there was apparently a decision to focus more capital on the US. There is no point in expanding in a region unless you have an economic advantage and there have been some false starts overseas.

    Long WMT for a long time - but I have taken haircuts when I thought the stock was fully valued and incrementally bought when it was beaten down.
    Aug 19 03:59 PM | Likes Like |Link to Comment
  • Update: DirecTV Is Still Good Value [View article]
    Well, we certainly can't argue with Charlie Munger. By the way - you can Google it - Munger gave a speech at Harvard - "Charlie Munger on the Psychology of Human Misjudgement" - you can find the PDF. An enlightening and entertaining read.

    Regarding DTV - I agree that the risk of default is probably low and certainly lower than a highly cyclical materials company with huge litigation liabilities. But going forward I would not expect the share buy down to continue at the prior rate. The forward looking situation does not look all that compelling to me - I see other companies with less leverage that have similar forward looking prospects. At the moment IBM is one of my favorite risk/reward candidates although when investors warm up to that one is anyone's guess. I rather hope that investors stay negative on IBM a while longer so that they can buy back more shares...
    Aug 18 11:17 AM | Likes Like |Link to Comment
  • Update: DirecTV Is Still Good Value [View article]
    Yes - USG. The company declared bankruptcy due to the asbestos suits. At one point I had purchased some USG for roughly 4X earnings and was well aware of the risks but decided that the risk of bankruptcy was low and that the reward/risk profile was favorable. I was wrong.

    Unfortunately that was not the only costly error made in investing. After doing a multi-year review on a decade or so of investing I concluded that my return on investment would be much higher by avoiding downside risk of companies with weak balance sheets or other potentially harmful factors.

    With DTV, keep in mind that long term debt is over $18 billion which is roughly 7X FCF. Debt rose 612% while revenues rose 178% over the last 9 years. Taking on this amount of debt to buy back shares does not seem prudent to me - the average interest they are paying is roughly 4% - what happens to the 3X coverage if rates rise? Then you have to be pretty certain about the business model and I prefer to avoid stocks that require that kind of certainty.

    With Qualcomm for example, selling at a forward PE of less than 14, having no debt, a massive cash position, and a commitment to returning more cash to shareholders - even if the business has glitches the risk of default is essentially zero for the next 5 years or so. I can sleep easier with that type of investment.
    Aug 17 06:46 PM | Likes Like |Link to Comment
  • Update: DirecTV Is Still Good Value [View article]
    ER, I concur that DTV looks like a good value. There is one factor that concerns me - the reduction in shares using debt and the resultant debt. Currently some numbers:

    FCF: $2.6 billion (2013)
    Cash and cash equivalents: $2.2 billion (end of 2013)
    Interest Expense: $840 million (2013); higher run rate in 2014

    So FCF is only about 3X FCF. While I realize that earnings predictability is very good I tend to prefer stocks in which the ratio is more like 10X or higher. 3X does not give much room for error.

    I have a small position in DTV (which has done well) but factors like the leverage have prevented me from making this a core position.

    Compare this with:

    IBM: FCF is about 30 to 40 X interest (and they have a finance business too). This is a core investment with very little financial risk. Having experienced a bankruptcy in the past - with a company that was also held by Berkshire Hathaway by the way - I have become very conservative regarding a company's balance sheet.

    Aug 17 03:03 PM | Likes Like |Link to Comment
  • This REIT ETF Remains The Prettiest On The Block [View article]
    One factor to consider - VNQ is cap-weighted and will tend to have proportionally more higher quality REIT's. These tend to have less share dilution, more stable, and better dividend per share growth but less yield than others. There tends to be a tradeoff between yield versus growth and quality in REIT's just as there is in stocks. Also as bryan.g pointed out below the quoted yield is less than a typical distribution.
    Aug 17 02:31 PM | 1 Like Like |Link to Comment
  • Is This The Right Time To Buy Devon? [View article]
    Note to the author - I recommend a follow-up article to shed more specifics on the debt. Here are a few things worth considering - for 2013 and 2013 ending numbers:

    Operating Cash Flow: $5.4 billion
    Cash Position: $6 billion (not net cash)
    Interest Expense: $417 million

    Therefore the operating cash flow is more than 12 X the interest expense. This is easily manageable.

    Also the latest big purchase was Eagle Ford acreage which is a low risk development project. Of course a big prolonged downturn in oil prices would make the net present value of the investment negative (in other words the time value of the cash spent would be more than the investment made). But so far the estimated production from Eagle Ford has been rising since the investment was made.

    Bottom Line: An investment in Devon is primarily an investment in non-conventional (tight oil and oil sands) North American oil. Devon can execute very well given this comparatively narrow focus. If you think oil prices are going to plummet then this is not a good investment. If you think that they will be fairly stable then this looks like a good investment.
    Aug 17 02:15 PM | 1 Like Like |Link to Comment
  • Signs Of An Approaching Bear Market [View article]
    Mateo, I would not argue against your premises.

    However, I think that certain non-cyclical stocks that steadily grow earnings and dividends (e.g. JNJ, KO, WMT, etc.) may tend to do well in a very sluggish recovery or marginal recession. Such stock are referred to as the "safety trade." Other stocks that may do well are those with fairly high dividends (e.g., T and certain REIT and mREIT stocks). Bonds and preferred stocks will, of course, also hold up well.

    What may suffer are highly cyclical economically sensitive stocks and those that are overpriced relative to earnings. The relatively high PE of the market is partly based on these - but there are great companies that are still moderately undervalued.

    So, rather than refer to it as a "bear market" I would prefer to call it a treacherous market in which we need to be very selective. Someone "selling everything" in order to catch the next fall may sit on the sidelines and watch certain stocks advance to new records. It might make more sense to re-allocate to a combination of stalwarts, high income generators, and cash to a limited extent.
    Aug 16 04:49 PM | 2 Likes Like |Link to Comment
  • Wells Fargo: Buying Opportunity In A Good Yielding Stock [View article]
    Hi Ray,

    WFC is the largest holding of VWELX (Vanguard Wellington) for which the equity portion is run by Edward Bousa - for whom I have a lot of respect. He is interviewed below:

    WFC is also the second largest equity holding of Vanguard Wellsley which is another great fund-and they have been adding to their position recently.

    The "forward PE" of WFC still seems modest compared to the market as a whole despite a huge price run-up. WFC's earnings portfolio seems quite diverse and conservative. My feeling is that it is a "hold" because it already represents 3.9% of my pretax portfolio factoring in funds. So I am not inclined to add more but have not yet decided to "take a haircut." Anyway - always appreciate your perspective - and I follow Arie Goren who is a wonderful author of solidly written articles.

    Aug 13 08:13 PM | 3 Likes Like |Link to Comment
  • PepsiCo: Wide Moat Dividend Champion To Hold Forever [View article]
    Long KO and PEP in my taxable account also. Yes the stock valuation is unexciting but no reason to sell at this point.
    Aug 13 07:49 PM | 2 Likes Like |Link to Comment