Upon seeing that The Avid Hog is a monthly newsletter, someone asked this question:
…how do you expect to find suitable candidates every month? Is the supply of good companies that large?
The supply of good companies is enormous. If you don’t have any restrictions on market cap or country, there are always good companies out there. Supply is never the problem. Knowing that supply well enough is.
Although I consider myself a value investor, I don’t get ideas the way most value investors do. You can see a good example of how a value investor looks for ideas in this video of Michael Price’s presentation at the London Value Investing Conference. Another good example is this quote from Nate’s latest post at Oddball Stocks:
I value banks like I value companies. I find a bank that’s clearly undervalued, then I work to either confirm or deny the valuation. This is the opposite of someone who might research and value a company and once the valuation is done look at the market value. I start with the market value, I’m not looking for franchise companies, I’m looking for companies that appear cheap, and I want to confirm they actually are cheap, if so I invest. This means I don’t have a Watchlist of banks or companies I’d like to buy if the price were right. Rather I continually trawl low P/B stocks and pick up what’s on sale that week or month
Let’s contrast that with the ideal I strive for. In a perfect world, my approach looks more like how Warren Buffett described his analysis of PetroChina to Fox Business. He told Fox Business the important parts of his approach are that:
- He tries to look at the business first, without knowing the price
- He decides what he would pay for the entire company
- He compares the price he would pay to what the entire company is trading for in the market
- If the price he would pay is a lot higher than what the whole company trades for in the market, he buys it.
That’s the ideal approach for me. I’ve found personally that it’s the one that works best. If I appraise the entire business with fairly little preconception of where the stock should trade, has traded, etc. and then I compare my appraisal to the market price I’m on the firmest footing in terms of knowing I have a bargain.
The hypothetical I often pose when talking to Quan about a stock is:
Imagine you are running a family holding company. The assets of all your family members are tied up in this company’s stock. You can put 25% of the value of your holding company into buying this business in its entirety. Would you do it?
In other words, is this a business you want to be in forever? Is the price good? And would you be willing to put 25% of the money of the people you care most about into it?…Read more