THE ARGUMENT FOR SPECIAL SITUATION INVESTING IN PURSUIT OF ABSOLUTE RETURNS
The past two years have largely been difficult ones for value investors. With interest rates near zero, expanding price earnings multiples, and a bull market growing long in the tooth; fewer securities are available at the substantial discounts to intrinsic value which value investors insist upon. Interest rates and asset prices are (usually) negatively correlated, so we find ourselves in an environment where uncomfortably high stock market multiples have been the (apparently) inevitable result of historically low interest rates. In this uncertain, and to our knowledge, unprecedented market environment, what are Benjamin Graham disciples to do? In this article, the Author proposes a partial solution for the Reader's consideration, and a real-time example investment with the potential for 100%-200% annualized returns over the next 6-24 months; to a large extent, irrespective of the course of the Market. Adding such situations to certain value investing portfolios may yield more than satisfactory results. The below is not investment advice, nor is it a recommendation to buy or sell any particular security. Rather, it is a philosophical and practical argument for value investors to consider.
This article will present the basic theory of, "The Argument for Special Situation Investing in Pursuit of Absolute Portfolio Returns using the Intellectual Framework of Value Investing", while our next article will feature a case study on Paratek Pharmaceuticals. We will not be offended if the Reader skips straight to the case study, but we believe the discussion in this article is essential to effective application.
The Argument for Special Situation Investing In Pursuit of Absolute Portfolio Returns using the Intellectual Framework of Value Investing
This article is comprised largely of sourced quotations to frame and support the fundamental investment premise and to describe an intellectual framework for applying the case study introduced in the upcoming article on PRTK. Please feel free to skip over the endnotes for the sake of readability. They are provided primarily to credit sources and to expand on certain topics without detracting from the focus of the article.
It is not the goal of most value investors to track the market indices, but rather to outperform them. More accurately, we seek to achieve an absolute return on investment, irrespective of whether the broader stock market is rising or falling. [i] In other words, we choose to ((also)) invest in securities that are likely to go up, even if the market goes down.[ii] By doing so, we seek to adequately hedge our investment portfolios against the occasional, and inevitable, market declines, which should allow us to achieve long-term, cumulative returns in excess of the market averages.[iii] One means of hedging our portfolios[iv] to achieve an absolute rate of return is to engage in special situation investing.[v]
Special situation investing is not new. Benjamin Graham and David L. Dodd addressed its merits in their foundational work Security Analysis.[vi] In the appendices to this work, we are provided with a proposed definition.
"In the broader sense, a special situation is one in which a particular development is counted upon to yield a satisfactory profit in the security even though the general market does not advance. In the narrow sense, you do not have a real "special situation" unless the particular development is already under way…."[vii] (Emphasis added)
"The essence of a special situation is an expected corporate (not market) development, within a time period estimable in the light of past experience."[viii] (Emphasis added)
Warren E. Buffett ("WEB", "Buffett" or "Warren Buffett") included special situations[ix] as one of several investment categories in his Buffett Partnership, Ltd. (BPL), used in part as a hedge to contribute absolute returns to the Partnership's investment portfolio even during market declines. Buffett described its purpose and functionality in a section of his annual letters, originally entitled Our Method of Operation.[x] An excerpt of one such letter follows.
"Our second category consists of "work-outs". These are securities whose financial results depend on corporate action rather than supply and demand factors created by buyers and sellers of securities. In other words, they are securities with a time table, where we can predict, within reasonable error limits, when we will get how much, and what might upset the applecart. Corporate events such as mergers[xi], liquidations, reorganizations, spinoffs, etc., lead to work-outs….
"This category will produce reasonably stable earnings from year to year, to a large extent irrespective of the course of the Dow. Obviously, if we operate throughout a year with a large portion of our portfolio in work-outs, we will look extremely good if it turns out to be a declining year for the Dow, or quite bad if it is a strongly advancing year." [xii] (Emphasis added)
Note, in his BPL, Warren Buffett deliberately targeted relative out-performance[xiii] rather than absolute returns, but ended up achieving both results. Although his stated goal in managing the limited partnership was to outperform the DOW by 10 percentage points per year, a goal which theoretically would be obtained by delivering a ten percent decline when the DOW experienced a twenty percent decline[xiv]; over a thirteen year period, WEB managed to achieve absolute returns in each and every year[xv], while at the same time beating the Dow, but we digress.
Special situation investing has more recently been popularized by Joel Greenblatt's You Can Be a Stock Market Genius: Uncover The Secret Hiding Places of Stock Market Profits.[xvi] Joel Greenblatt and his Partners' initial hedge fund, Gotham Capital, famously returned 50 percent annualized, using primarily special situation investing, over a nearly 10-year period from 1985 to 1994, all without experiencing a single down year.[xvii] Greenblatt's book is focused exclusively on special situations, both as a means of obtaining absolute returns irrespective of market forces, and as a means of investing in areas where average returns outperform the average Market.
Seth Klarman raised this concept in his work Margin of Safety. "Investors can manage portfolio cash flow (defined as the cash flowing into the portfolio minus the outflows) by giving preference to some kinds of investments over others. Portfolio cash flow is greater for securities of shorter duration (weighted average life) than those of longer duration. Portfolio cash flow is also enhanced by investments with catalysts for the partial or complete realization of underlying value."[xviii] Mr. Klarman then proceeds to discuss the merits of special situation investing.
Dr. Michael Burry, of Michael Lewis' The Big Short fame, appears to have frequently incorporated special situations and value stocks into his Scion Capital portfolio, which delivered out-sized, absolute returns even in the dot.com busts of 2000 and 2001.
The list of successful incorporation of special situation investing, both as a market hedge and as an asymmetrical risk/reward investment area in its own right, continues. So how do we use special situation investing as a market hedge in achieving absolute returns? Let's focus on the components of a special situation derived from the words of Buffett above.
Special situations, therefore are those which, in no particular order, possess the following characteristics:
A. are securities with a time table for an expected corporate action,
B. where we can predict, within reasonable error limits, (in other words, when we will get how much),
C. what might upset the applecart (e.g. risk factors),
D. while producing reasonably stable earnings year-to-year, to some extent, irrespective of the course of the Market as a whole.
Methodology of Selecting an Investment or an Intellectual Framework for Making Investment Decisions
In the Preface to the Fourth Revised Edition to Benjamin Graham's The Intelligent Investor, Warren Buffett wrote "To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What's needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that intellectual framework. This book precisely and clearly prescribes the proper framework. You must supply the emotional discipline."
Investment Selection Criteria
We prefer to select a special situation in much the same way that we would undertake any value investment, namely, by following the instructions and examples of great investors and corporate insiders.
Borrowing an example of a quote, often repeated by Warren Buffett and Charlie Munger:
"We select our marketable equity securities in much the same way we would evaluate a business for acquisition in its entirety. We want the business to be (1) one that we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) available at a very attractive price."[xix]
We will explore each of these evaluation criteria in our case study of Paratek Pharmaceuticals.
As value investors, the two most important considerations are: value and price. In the exercise of value investing, the determination of value is the first step the value investor must take; therefore, we will take a little more time here. Again quoting WEB:
"You also have to have the knowledge to enable you to make a very general estimate about the value of the underlying businesses. But you do not cut it close. That is what Ben Graham meant by having a margin of safety."[xx] (Emphasis added)
Note the use of the phrase "a very general estimate about the value of the underlying businesses". We expand on this below by repeating a note on valuation estimates by Seth A. Klarman:
"Many investors insist on affixing exact values to their investments, seeking precision in an imprecise world, but business value cannot be precisely determined….
"Not only is business value imprecisely knowable, it also changes over time, fluctuating with numerous macroeconomic, microeconomic, and market-related factors. So while investors at any given time cannot determine business value with precision, they must nevertheless almost continuously reassess their estimates of value in order to incorporate all known factors that could influence their appraisal.
"Any attempt to value businesses with precision will yield values that are precisely inaccurate. The problem is that it is easy to confuse the capability to make precise forecasts with the ability to make accurate ones." [xxi] (Emphasis added)
So we must incorporate a business valuation estimate into our investment analysis. Attempting to arrive at accurate estimates is the critical trick. This valuation exercise may be conducted using one of several approaches: the income statement/cash-flow method; the balance sheet method; and the market value/comparable price method. In some cases we may reasonably apply the several methods, and select the method that provides the most conservative outcome. In some cases, it may not be possible, or appropriate, to apply all methods. For example, it will be difficult to accurately estimate the value of a company with no predictable earnings/cash-flows using the discounted cash-flow (DCF), net present value (NPV) methods. Likewise, it may be very difficult (if not impossible) to arrive at a reasonable estimate of value using a balance sheet method (e.g. liquidation value or break-up value) if that business has very few tangible assets on its balance sheet. Finally, using a market value/comparable sales method is subject to its own challenges and carries numerous potential for inaccuracy. We prefer to use several approaches, keeping in mind the question: What would we (personally) be willing to pay for the entire business? Upon completion of that exercise, and knowing that our estimate is almost certainly inaccurate, we will insist on a substantial discount to the estimated value. After all, that is the exercise we are undertaking as value investors.
Margin of Safety
Of course, we must keep first and foremost in our minds the two most important principles in value investing. Rule #1 - If one doesn't lose money; all other alternatives are likely to be favorable.[xxii] Rule #2 - The best way to avoid losing money is to insist on a price significantly below the value of the underlying business. [xxiii] In short, we must insist on a margin of safety.
To again quote Benjamin Graham:
"The margin-of-safety idea becomes much more evident when we apply it to the field of undervalued or bargain securities. We have here, by definition, a favorable difference between price on the one hand and indicated or appraised value on the other. That difference is the safety margin. It is available for absorbing the effect of miscalculations or worse than average luck. The buyer of bargain issues places particular emphasis on the ability of the investment to withstand adverse developments. For in most such cases he has no real enthusiasm about the company's prospects."[xxiv]
This last sentence applies to the cigar butt stocks that most commonly comprised Benjamin Graham's "bargain securities", generally sub-par businesses that were either on their last legs, or lacked a durable competitive advantage, but still traded at a substantial discount to their net working capital. In instances where we do possess a real enthusiasm about the company's prospects, and may purchase its securities at an attractive price, we must take advantage.
To quote Warren Buffett:
"The common intellectual theme of the investors from Graham-and-Doddsville is this: they search for discrepancies between the value of a business and the price of small pieces of that business in the market…
"Our Graham & Dodd investors, needless to say, do not discuss beta, the capital asset pricing model, or covariance in returns among securities. These are not subjects of any interest to them. In fact, most of them would have difficulty defining those terms. The investors simply focus on two variables: price and value.[xxv]
"Buffett further states that we must always remember that we "are, mentally, always buying the business, not buying the stock."[xxvi] This mentality leads invariably to the question: "What is the business worth?"[xxvii] By vigilantly maintaining this mentality, we are best positioned to "exploit the difference between the market price of a business and its intrinsic value."[xxviii]
Asymmetrical Risk/Reward Ratio
We seek to invest in situations where a negative correlation exists between risk and reward. "The greater the potential for reward in the value portfolio, the less risk there is."[xxix] [This statement was made in the context of, if a company is worth X, and one can buy it for 20%*X or 60%*X, it is obviously less risky to buy it for 20%*X, which yields a greater margin of safety (.8X rather than .4X).] We wish to invest in securities where we may plausibly expect to achieve above-market-returns, without accepting an undue risk of loss. In fact, we wish to accept only below-average risk of permanent capital impairment.
Examine the Shareholder Base
Buffet continues, "Since you don't have your hands on the (entire investment), you want to be sure you are in with honest and reasonably competent people, but that's not a difficult job."[xxx]
On this last point, we may respectfully disagree with Mr. Buffett. Such a task may not be a 'difficult job' for WEB, but for us the exercise often leads to an ambiguous result when we undertake the question of competence and honesty. Therefore, we take some comfort in trades where the institutions involved have solid reputations and favorable track records because management/boards are more likely to act in the best interests of its shareholders when the shareholder base is active, and has good track records for engaging with management/boards when necessary.
It should go without saying that in order to achieve absolute returns, we need to avoid the permanent loss of capital. When a permanent loss of capital is present, entering into such an investment must be accompanied with the more likely potential for outsized gains. To be clear, value investors do not like to invest in securities where it is possible to incur a permanent loss of capital, but we may argue that if the risk/reward ratio is compelling, and if one sizes such an investment appropriately, and can invest in a basket of such risk/reward profiles (though we would obviously prefer less risk in other complementary alternatives, and have those alternatives reside in various industries and spaces), we may mathematically expect to end up with an acceptable result, in aggregate. This is a good segue into our next topic.
Sizing Investments & Portfolio Allocation
Let's go back to Warren Buffett's BPL letters one last time, where he references work-outs.
"This category will produce reasonably stable earnings from year to year, to a large extent irrespective of the course of the Dow. Obviously, if we operate throughout a year with a large portion of our portfolio in work-outs, we will look extremely good if it turns out to be a declining year for the Dow, or quite bad if it is a strongly advancing year.
"We were fortunate in that we had a good portion of our portfolio in work-outs in 1962. As I have said before, this was not due to any notion on my part as to what the market would do, but rather because I could get more of what I wanted in this category than in the generals. This same concentration in work-outs hurt our performance during the market advance in the second half of the year.
"Over the years, work-outs have provided our second largest category. At any given time, we may be in five to ten of these; some just beginning and others in the late stage of their development. I believe in using borrowed money to offset a portion of our work-out portfolio, since there is a high degree of safety in this category, in terms of both eventual results and intermediate market behavior."[xxxi] (Emphasis added)
In other words, the allocation of our investment capital to traditional, long value securities, to cash, and to special situations is more a function of available opportunities than it is to fixed and discrete percentages. The (relative) scarcity of bargain stocks may therefore serve as a timely indication that the price level of stocks generally has reached dangerous highs, while the prevalence of bargain securities is an indication that stocks may generally be oversold.[xxxii] As we enter calendar 2017, and as the DOW flirts with 20,000, it is prudent to hedge market risk by considering investments most likely to appreciate independently of broader market forces (and to hold cash reserves).
To sum up, when traditional value-based bargain securities become infrequently available, we will naturally direct a greater percentage of investment capital to special situations and to cash holdings. This may serve to provide capital when we need it most (i.e. when broader market declines result in more prevalent bargain securities).
A Note on the Opportunity Costs of Special Situation Investing and Readily Available Alternatives
Our first day in Macroeconomics 101 (or 1010), our Professor stated "that there is no free lunch"; that there is an opportunity cost to every action. We subscribe to this philosophy. If we are concerned about the inevitable market corrections, what is one of the safest investments readily available to us? One might respond with the answer "holding cash", and we tend to agree with that answer. Certainly, maintaining significant cash balances, or un-invested capital, for opportunistic deployment, is one way in which master investors such as Seth Klarman and his Baupost Group have returned significantly above average returns for extended periods of time (decades). This practice is worthy of emulation. However, some asset managers prefer to be fully-invested at any given time. Dr. Michael Burry's Scion Capital (of the 00's decade) provides a good example of an enormously successful, full capital deployment strategy.
In any event, in the existing low-interest rate environment that has persisted for so long, and may presumably continue to exist for the short-to-mid-term, one must take into account the loss of purchasing power associated with such a cash hedging strategy. Let us assume, for example, that the risk-free rate for holding cash over the next year is 1%, while real inflation is 2%. If we were to allocate 100% of our available capital to cash, we would have a nominal return of 1%, but a real rate of return of -1%, and this diminishing loss of capital is very real, even if it doesn't show up on published returns in annual investor letters.[xxxiii]
Let us also remember, that our stated purpose (in this article) for special situation investing is to provide a partial hedge against broader market declines, and that there is a very real cost of most such hedging policies (e.g. carrying costs for short positions, regardless of how they work out; costs for purchasing put options on market indices, which on average, rise over time; etc.).
We believe there is a logical and supportable argument for investing in a number of time-specific, special situation investments. In the (hopefully) unlikely event that one or more of our designed special situation investments do not work out, we may have a permanent impairment to investment capital irrespective of the market's direction. However, as already stated, there is a carrying cost, or real cost, associated with most alternative hedging strategies with which we are familiar. When the special situation investment works as designed, which we believe to be likely (and preferably probable if we are designing and implementing them correctly), when the broader market declines we are more likely to achieve our positive, absolute returns that we target. If the special situation investment works as designed, and the broader market does not decline, then we are more likely to achieve our secondary goal of out-performing the market indices against which our performance is invariably compared.
To wrap up this section, it is our personal preference to vary the basket of special situation investments across the various alternative buckets. We believe that there is greater safety within the spinoff universe, than without it, but that doesn't preclude us from occasionally venturing outside our favorite spinoff playground, with defined and limited capital, when we see an attractive alternative.
To summarize, in this article we have presented an argument for special situation investing in pursuit of absolute portfolio returns by taking a value-investing approach as articulated by some of the foremost value investors. In our upcoming article on Paratek Pharmaceuticals, we will propose what we believe is a compelling, real-time special situation to be used in our example case study to demonstrate application of the above investment criteria and principles.
[i] The primary downside to investing solely in index funds is that, by definition, the index fund is bound to mirror the index, or the market averages. [We recognize this is no mean accomplishment in itself, and we congratulate all that have achieved the above result!] In other words, when the broader index declines, the investor is guaranteed to see his or her investment decline in value, too, in any given year. This isn't necessarily troubling for the long-term, dollar-cost-averaging, index investor, but it does not meet our admittedly lofty objective of achieving positive absolute returns in each and every year. That fact that so few portfolio managers fail to consistently achieve this objective over extended periods of time doesn't seem to deter them from attempting the feat. It isn't only the pursuit of financial rewards that drives us to undertake this journey, but rather the sheer enjoyment that is derived in the course of the journey itself.
[ii] We acknowledge that it is not so important to achieve positive absolute returns every year, as it is to seek to avoid permanent negative returns, or permanent loss of capital, in any given investment. After all, we are not overly concerned with temporary price fluctuations and markdowns in an investment; indeed, we may even welcome it as an opportunity to take advantage of the additional bargain purchase in an unduly depressed security, the value of which we are confident to be far in excess to our purchase price. However, in aggregate, we seek positive absolute returns in our portfolio each and every year, and so we seek investments that may assist us in this endeavor.
[iii] Special situations may also serve as a mechanism (alternative to, and in addition to, say, short-selling or holding cash) to provide ready investment capital at the very moment when we wish to lower our average cost in our favorite securities by taking advantage of temporary markdowns in those securities' shares. Having investments with set timeframes, which may be reasonably expected to provide positive returns at the investments' maturity irrespective of the broader market, is one means, if imperfect, of meeting this need.
[iv] We do not suggest that special situation investing is the only means of targeting absolute returns, as various vehicles are available, which may or may not be a more effective means of achieving this objective. Holding cash, investing in gold, shorting overvalued or fraudulent securities, engaging in paired trading, investing in distressed debt, investing in bonds, etc., etc., all have their place in certain portfolios. Special Situation Investing is merely the focus of this particular article.
[v] Please note what this article is not. This article is not investment advice, nor is it a comprehensive investment thesis on the investment merits, or risks, associated with an investment in either Paratek Pharmaceuticals , or any other security mentioned in this article. This article merely serves as an introduction to one or more approaches to special situation investing, and highlights a proposed, real-world, real-time case study in the pursuit of said practice. This disclaimer is intended to pre-empt the inevitable criticisms asserting that we failed to include either a discounted cash-flow model (NYSE:DCF) for the commercialization of Omadacycline, or other developmental drugs mentioned in this article, or other discussions of various valuation models, and other investment exercises that may be prudently undertaken as part of a comprehensive investment thesis.
[vi] See specifically, Note 48 (p. 631 of the text), pp 729-734 in the classic 1951 edition, in which is included the reprint of SPECIAL SITUATIONS, an Article from the Analysts Journal, Fourth Quarter, 1946 (with Sequels Added).
[vii] Ibid. pp. 729-730. (emphasis added)
[viii] Ibid. pp. 734. (emphasis added)
[ix] Buffett referred to these special situations as "work-outs", and much of his work in this area appears to have involved merger arbitrage.
[x] The (originally) three categories of investments first appeared in the BPL 1961 Annual Letter and were outlined under the subsection Our Method of Operation. This practice continued each year through 1964. The categories were then more generally discussed under the heading Trends in Our Business in 1965, and were finally regrouped under the heading Analysis of 1966 Results, Analysis of 1967 Results, and Analysis of 1968 Results. Note the limited partnership was dissolved in 1969. Incidentally, the other two original categories were Generals and Controls. The Generals consisted (initially) of traditional net-nets, or stocks selling for less than their net working capital, after deducting all liabilities; though they became to be selected as appropriate investments more and more by incorporating qualitative factors into the largely quantitative analysis originally taught to Buffett by Graham. Later, beginning in 1964, Buffett was compelled to bifurcate the Generals category into Generals-Private Owner Basis and Generals - Relatively Undervalued. The latter category became necessary with the diminishing number of available net-nets and cigar-butts as the stock market regained popularity, and value-investing began to gain a broader and more numerous following, in the early-to-mid-sixties. WEB refers to "the development and implementation of a new and somewhat unique investment technique designed to improve the expectancy and consistency of operations in this category". Whether this 'new and somewhat unique investment technique' refers to the practice of paired trading (i.e. selling short the shares of a relatively overvalued, inferior competitor while buying long the shares of stock in the relatively undervalued, superior company) or to a specific and fundamental financial accounting equation, we have not yet confirmed, and we welcome any insight the Reader may have on this score. The Controls were comprised of just that, control positions in companies, which may or may not have originally commenced as positions in the traditionally undervalued Generals, but which positions were accumulated for so long, and to such an extent, that Buffett could choose to assert control over the Board and/or Management, by engaging in shareholder activism where warranted. The Controls were another category utilized, in part, as a hedge against the broader market declines. In his BPL 1966 Partners Letter (p. 7), Mr. Buffett said: "We were undoubtedly fortunate that we had a relatively high percentage of net assets invested in businesses and not stocks during 1966. The same money in general market holdings would probably have produced a loss, perhaps substantial, during the year. This was not planned and if the stock market had advanced substantially during the year, this category would have been an important drag on overall performance…"
[xi] The examples Buffett provides in his annual partnerships letters indicate that the bulk of his "work-outs" were merger arbitrage situations, though we are left to wonder how many of the other special situation vehicles he utilized, and how frequently he did so. For our part, merger arbitrage is not our game, and we take no deliberate part in it, though we often find that our spinoffs tend to be acquired on occasion.
[xii] Buffett Partnership, Ltd. 1962 Annual Letter, pp. 6-7. It is important to note that WEB, at various times, cautioned his partners on the need to exercise considerable care in this area (specifically merger arbitrage), as it took deliberate care in order to avoid losses.
[xiii] For the bulk of the duration of his Limited Partnership, WEB expressed the goal of out-performing the DOW by 10 percentage points per annum, and the general partnership achieved this goal, and then some, in most years.
[xiv] One example discussion of this principle is contained in pp 1-3 of the Semi-annual 1962 Buffett Partnership Ltd. Letter, which, incidentally, contains one of our favorite lines ever penned by a portfolio manager: "…during the first half of 1962 we had one of our best periods in our history, achieving a minus 7.5% result before payments to partners, compared to the minus 21.7% over-all result on the Dow." (emphasis added) There is an important lesson here in managing expectations. Out of context, describing a -7.5% semi-annual return as 'one of our best periods in our history' would strike many investors/limited partners as absurd; however, Warren Buffett was vigilant enough in educating and informing his limited partners as to the 'yardstick' against which his performance was being measured, that WEB could include such a statement, not only while keeping a straight face, but with a deserved sense of accomplishment and with pride.
[xv] Note an absolute return was not achieved by BPL in every semi-annual or rolling six month period as illustrated in the endnote above. This observation is not meant derogatorily, but rather serves to provide the active investor some sense of comfort when our own results fail to meet our objectives.
[xvi] Greenblatt's You Can Be a Stock Market Genius is a classic that many value investors keep right next to Graham and Dodd's Security Analysis and Benjamin Graham's The Intelligent Investor, Phil Fisher's Common Stocks and Uncommon Profits, Peter Lynch's One Up On Wall Street and Beating the Street, and Seth Klarman's Margin of Safety. Note Seth Klarman's Margin of Safety is available primarily via online .pdf copy, which is more easily stored electronically than in hardback or paperback on the bookshelf. Therefore, we prefer to keep our well-marked up version of Klarman's work in a folder alongside the well-marked up Buffett Partnership, Ltd. Letters and the Berkshire Hathaway Annual Shareholder Letters. If the Reader has not yet carefully studied each and every one of these publications, we strongly encourage them to do so.
[xvii] Greenblatt, You Can Be a Stock Market Genius, First Fireside Edition 1999, p 271.
[xviii] Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor, Harper Business, Seth A. Klarman, p. 115.
[xix] Berkshire Hathaway Annual Letter 1977, 1978, etc.
[xx] Ibid. p 300.
[xxi] Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor, Harper Business, Seth A. Klarman, pp. 118-119.
[xxii] A concept attributable to Benjamin Graham and articulated and practiced by Warren Buffett, Seth Klarman, etc.
[xxiii] Also a concept attributable Benjamin Graham and practiced by Warren Buffett, Seth Klarman, etc.
[xxiv] The Intelligent Investor, Fourth Revised Edition, Copyright © 1973 by Harper & Row, Publishers, Inc. pp. 281-282.
[xxv] Excerpt from an edited transcript of a talk given by Warren E. Buffett at Columbia University in 1984 commemorating the fiftieth anniversary of Security Analysis. Reprinted in the Appendixes of Benjamin Graham's The Intelligent Investor, Fourth Revised Edition, Copyright © 1973 by Harper & Row, Publishers, Inc. p. 294.
[xxvi] Ibid. p. 299.
[xxvii] Ibid. p. 298.
[xxviii] Ibid. p. 299.
[xxix] Ibid. p. 300.
[xxx] Ibid. p. 300.
[xxxi] Buffett Partnership, Ltd. 1962 Annual Letter, pp. 6-7.
[xxxii] There is, however, something to be said about relativity. When viewed against the current, near-zero interest rate environments, leading to PE multiple expansion, in which we have been the past number of years, the height of the market is somewhat ambiguous. As we enter 2017, with the Dow flirting with 20,000, we are finding the odd bargain, but we aren't tripping over them, and they aren't discounted to the levels of, say, late 2008 and early 2009, or even 2010 or 2011.
[xxxiii] Here we will readily admit that the probabilities of limited partners and investors becoming upset at a published nominal loss of 1% greatly exceed the chances of limited partners and investors becoming upset at a real, but unpublished loss of 1% in purchasing power, so for political, real-world purposes, most investment managers will prefer the unpublished loss if forced to choose between the two.
Disclosure: I am/we are long PRTK.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.