All my history is that all institutions that have a primary goal of earnings growth get into trouble ... I'll never know when it happens until it's too late -- Warren buffet talking about his sale of Feddie mac years before its problems . link
Buffett has said that he will generally pay 7x EV/EBIT for a good business that is growing 8-10% per year. link
The single most important decision in evaluating a business is pricing power. If you've got the power to raise prices without losing business to a competitor, you've got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you've got a terrible business.
There’s no shame in losing money on a stock. Everybody does it. What is shameful is to hold on to a stock, or, worse, to buy more of it, when the fundamentals are deteriorating.
More money has probably been lost by investors holding a stock they really did not want until they could 'at least come out even' than from any other single reason -- Phil Fisher link
The key to Avoiding Investment Traps is to invest in solidly profitable companies with strong balance sheets. -- Whitney Tilson link
A high short interest should always be a huge warning flag, as the short sellers I am aware of are extremely smart and analytically rigorous, in marked contrast to the majority of Wall Street analysts (read: cheerleaders). Shorts aren't always right, but if you're going to bet against them, you'd better be awfully sure of yourself. -- Whitney Tilson link
Whitney Tilson: Our favorite shorts generally involve some or all of the following characteristics: outright frauds (our very favorite), industries in decline or facing major headwinds, lousy or faddish business models, bad balance sheets, and incompetent, excessively promotional and/or crooked management. In general, we prefer to short businesses with these traits, even when their stocks trade at seemingly low valuation multiples, rather than shorting the stocks of good businesses with strong managements, even at high valuations. Sometimes, however, the valuations become so extreme that we will short the latter, but generally only when we believe there is a catalyst that will impact the company and cause the stock to fall. link
Whitney Tilson: Since we rarely buy a stock at the very bottom or short one at the very top, having a position move against us, at least initially, is a common occurrence. When this happens, we re-evaluate our analysis and investment thesis and make one of three decisions: add to the position, do nothing, or exit. Making the right decision here is critical - it's often more important than the initial investment decision - and there's no easy answer or rule of thumb. (In our experience, we'd guess that we add to a position 40% of the time, do nothing 40% of the time, and exit 20% the time.) link
Martin Whitman: "Safe and cheap" companies often have the problems of low return on equity (ROE) due to concentration in underutilized assets positioned too conservatively. ... One of the things that Whitman found with having competent management is that, the strong balance sheet allows them to be opportunistic. The management's ability to opportunistically take advantage of market inefficiencies has probably accounted for Whitman's 10 baggers more than anything else. When ultra conservative balance sheets meets opportunistic and able managers, a number of low ROE stocks turned into 10 or 20 baggers for Whitman as excess cash was converted into future earnings. ... "If I recommend something, it soon goes down 20 percent," says Marty Whitman. ... He would consider selling a security in the open market if: excessively over-weighted, grossly overvalued, company experiences, or appears to have the potential for, a permanent impairment of capital, their analysis was flawed link
Bruce Berkowitz likes paying 10X free cash flow, provided he can't think of a way to kill the business.
One suggestion that came up on the Magic Formula board: if you are worried that intangibles are distorting ROC calculations, then insist that at they form at most 10% of intangibles. It will stop flattering highly acquisitive companies.
Author: Mark Carter Created: 01-Jan-2011 Updated: 11-Apr-2011