Historically, a normal price for a stock has been about a P/E of 15.
And historically, stocks have outperformed other assets.
Therefore, it makes sense to buy above average businesses when their shares trade at a P/E of 15.
Right now, I see 3 above average businesses trading at about a P/E of 15:
Cheesecake Factory (CAKE)
Omnicom (OMC)
Howden Joinery
I’m not buying any of these stocks personally right now.
However, if you asked me right now whether or not I think you should buy a certain stock, I’d say “no” to 99% of the stocks you can name.
Those 3 belong to the 1% of stocks I’d say “yes” to.
I’ve never seen a time when it’s as difficult to find a good stock to buy without overpaying as what I see right now.
But, I don’t think that means you should be 100% in cash. I think it means you should be in stocks like:
Cheesecake Factory (at $41 as I write this)
Omnicom (at $73 as I write this)
And Howden Joinery (at 412 pence as I write this)
If the market as a whole is overpriced, it will fall. And when it does fall: it will take stocks like Cheesecake, Omnicom, and Howden with it.
In time, they will recover.
And you will be able to look back – 5 years or more down the road – and say that buying stocks like these at today’s “not overpriced” levels and holding them wasn’t a mistake.
You don’t need to get out of the market.
But, you do need to be more selective than ever now that the market is more expensive than ever.…
Historically, a normal price for a stock has been about a P/E of 15.
And historically, stocks have outperformed other assets.
Therefore, it makes sense to buy above average businesses when their shares trade at a P/E of 15.
Right now, I see 3 above average businesses trading at about a P/E of 15:
Cheesecake Factory (CAKE)
Omnicom (OMC)
Howden Joinery
I’m not buying any of these stocks personally right now.
However, if you asked me right now whether or not I think you should buy a certain stock, I’d say “no” to 99% of the stocks you can name.
Those 3 belong to the 1% of stocks I’d say “yes” to.
I’ve never seen a time when it’s as difficult to find a good stock to buy without overpaying as what I see right now.
But, I don’t think that means you should be 100% in cash. I think it means you should be in stocks like:
Cheesecake Factory (at $41 as I write this)
Omnicom (at $73 as I write this)
And Howden Joinery (at 412 pence as I write this)
If the market as a whole is overpriced, it will fall. And when it does fall: it will take stocks like Cheesecake, Omnicom, and Howden with it.
In time, they will recover.
And you will be able to look back – 5 years or more down the road – and say that buying stocks like these at today’s “not overpriced” levels and holding them wasn’t a mistake.
You don’t need to get out of the market.
But, you do need to be more selective than ever now that the market is more expensive than ever.…
“For the past months I’ve dug into your posts on Gurufocus…in this article you write about Warren Buffett’s early years:
‘Warren Buffett was thinking about compounding wealth. He was interested in getting rich.’
This sentence piqued my curiosity a little. What (are) your goals and objectives in the stock market? Is it getting rich, saving for retirement, or something not money related?”
I have zero interest in getting rich. Investing is a purely intellectual exercise for me. I love writing and I love investing. My only financial goal is to make enough money so I never have to do any work that isn’t either writing or investing.
A lot of people email me asking if I’d ever be interested in managing money.
The answer is no.
If I was interested in getting rich, the answer would be yes. The way to get rich in the stock market is to manage other people’s money and manage it well. That’s what Buffett did.
For myself, I’d be really happy if I could:
Save some money every year
Put all the money I saved that year into just one new stock
Keep that stock for the rest of my life
Repeat annually till dead
I can do the likely compound math and see that would ensure an adequate result in my case. I’d like the intellectual challenge of picking one and only one stock a year and never being able to reverse that decision. But what I’d really love would be never being troubled by the constant irritation of active portfolio management.
The only thing I like about investing is picking stocks. Nothing else about it appeals to me.
So, those bullet points are the routine I’d follow if I was just investing for myself and not having to write about it for anyone else.…
I planned to do a quick re-visit of my own experience investing in Weight Watchers (WTW). However, since announcing my plan to do that, I’ve gotten a lot of emails from people telling me about their own experience either investing in that stock on their own or following me into it.
So, I’ve decided to do a post that includes those experiences. If you owned Weight Watchers stock – or even considered buying the stock but ultimately deiced to pass – at any time between 2013 and 2017, please send me an email detailing your experience.
Try to include:
1. How did you first find out about the stock? (Was it my blog, my newsletter, someone else’s write-up online, a news report, your own experience trying to lose weight, Oprah’s investment, etc.)
2. When did you buy the stock? (what date, at what price, etc. – to the best of your memory)
3. What factors drove your buy decision?
4. When did you sell the stock? (what date, at what price, etc. – to the best of your memory)
5. What factors drove your sell decision?
6. And most importantly: How did holding this stock make you FEEL? (what emotions did you cycle through and what influence did these emotions have on your decision to buy, hold, or sell?)
7. Do you think you learned anything from this experience?
I will quote from the emails sent to me. I will edit only for clarity and brevity.
Please rest assured: I will anonymize all quotes. Your name will not appear anywhere in the post.
I’m in the midst of summer vacation. So, you have till the end of August to send in your personal history investing in Weight Watchers stock. I will post this at the start of September regardless of how much feedback I get. I don’t want to hold off any longer than that. So, if you want to submit – submit now.
If you invested in Weight Watchers, please do consider submitting your thoughts.
I think you’ll find the experience of summarizing your experience and sending it off to me to be cathartic.…
Founded in 1965, RLI Corp. is a specialty insurance company with a niche focus. Initially, the company was called Replacement Lens Inc.*, as the company started out as an insurer for contact lens. They were once the largest insurer of this product in the world. In 1976, RLI expanded beyond contact lens insurance into property and casualty insurance.
Fast forward to the present, they now offer insurance coverages in both the specialty admitted and excess and surplus markets. Through 3 subsidiaries, they operate their insurance business nationwide in the US.
Coverages in the specialty admitted market, such as their energy surety bonds, are for risks that are unique or hard-to-place in the standard market, but must remain with an admitted insurance company for regulatory or marketing reasons. In addition, their coverages in the specialty admitted market may be designed to meet specific insurance needs of targeted insured groups, such as professional liability and package coverages for design professionals and stand-alone personal umbrella policy.
The excess and surplus market, unlike the standard admitted market, is less regulated and more flexible in terms of policy forms and premium rates. This market provides an alternative for customers with risks or loss exposures that generally cannot be written in the standard admitted market. This typically results in coverages that are more restrictive and more expensive than coverages in the standard admitted market. Often, the development of these coverages within the excess and surplus market is generated through proposals brought to them by an agent or broker seeking coverage for a specific group of clients or loss exposures.
RLI distributes their insurance products through their own branch offices that market to wholesale and retail producers. The top 3 states for RLI are California (16% of total direct premiums earned in 2016), New York (14.1%) and Florida (10.4%).
Description
To understand an insurance company, it’s important to look at both its insurance operation and investments.
Let’s begin with a more detailed look at its insurance operation.
In terms of market segment, RLI categorizes them into 1) Specialty Admitted Insurance Market, 2) Excess and Surplus Insurance Market and 3) Specialty Property and Casualty Reinsurance Markets.
As mentioned, in the Specialty Admitted Insurance Market, most of the risks they underwrite are unique and hard to place in the standard admitted market, but for marketing and regulatory reasons, they must remain with an admitted insurance company. This market is more regulated than the other two markets RLI are in, particularly regarding rate and form filing requirements, as well as restrictions on the ability to exit lines of business. In 2016, this is the biggest market for RLI, representing about 67% of their total gross premiums written.
Excess and Surplus Insurance Market is the second biggest market for them, contributing 30% of the gross premiums written in 2016. This market focuses on hard-to-place risks, with more flexible policy forms and unregulated premium rates. For the overall property and casualty industry, this excess and surplus market represents about 5% …
I get a lot of emails from people asking how to become a better investor. They usually have very specific ideas about what would help them improve. For example, they think they need to get better at reading 10-Ks and that would fix their problem. Or they think they need to get better at deciding which stock to research in the first place. The truth is that most of the people I’ve talked with and tried to help improve as investors suffer from the same mental block.
They think there is a right way and a wrong way to analyze a stock. They have – whether they realize it or not, and I think usually they do not – a kind of moralistic view of how investing ought to be done. They believe that if you do what you’re supposed to do, work hard, etc. you will get a good outcome. Investing doesn’t work like that. Stock analysis doesn’t work like that. It really doesn’t matter whether you are a very hard working, diligent researcher of stocks or a lazy but brilliant one. There are no points for effort. Nor is there any degree of difficulty modifiers. Often, the best ideas are easy to come up with. They don’t take much time to research. They are 99% inspiration and 1% perspiration type ideas.
So, what do you need to be a good stock analyst? What is the key to hunting for and finding the right ideas to bet big on?
You need a different, better way of seeing the stock than most investors do. I’ve talked about the importance of “framing” an investment problem before. In my discussions with readers, I’ve realized they really underestimate the importance of this. Yes, I read the footnotes to financial statements, and I take notes on the 10-K, and I put together Excel spreadsheets. But there’s really nothing in any investment thesis that’s going to flip the correct answer of whether to buy a certain stock from a “no” to a “yes” or vice versa depending on whether the P/E is 14 or 18, the projected future growth rate is 4% or 6%, the Net Debt / EBITDA ratio is 1.5 or 2.5. If something as small as that can change your decision to invest – this stock probably isn’t worth your time.
The investment ideas really worth having are all “framing” problems. You have to find a stock where the way you frame the entire problem of analysis and appraisal is different from the way other people frame that same problem.
Let’s start with two examples from my own portfolio. Right now, I have 40% of my portfolio in Frost (CFR) and 25% of my portfolio BWX Technologies (BWXT). No other stock accounts for more than 6% of my portfolio. So, these are really the only two stocks that matter in my portfolio. In both cases, I framed the problem of appraising those stocks differently than most investors probably did.
“I have read some of your Singular Diligence content and one of the most interesting parts of the reading are the notes that you and Quan used and published in those reports.
So one of the most remarkable things that I have noticed in the notes is that you did not use a lot of information in the annual reports. And this sounds intriguing to me since I am a regular reader of your blog and you have always emphasized how important it is to read (the) 10-K, annual reports, (and) quarterly reports. Having said that, it would be good to understand why did you not use more info from those sources. Moreover, I was actually curious how do you allocate your time when doing research? I am currently also doing research so I was looking to see which sources you prioritize?”
Answer
It depends on what you mean by prioritize? If a top priority is the thing you read first, then I make 10-Ks a top priority. If a top priority is the thing you spend the most time on, then SEC filings are a low priority. And then, if a top priority is something you quote a lot – as you mentioned – SEC filing are a very low priority for me.
I’ve said before that I always read the newest 10-K and the oldest 10-K of a stock I’m researching. So, imagine I am researching a U.S. stock that has been public for a long time. The SEC’s database of company filings – which includes 10-Ks (annual reports), 10-Qs (quarterly reports), and “going public” or spin-off documents if the company has any of those. If the company has been public in its current form for a long time, the oldest annual report (10-K) will be something from maybe 1994-1996. That’s around the time companies started being required to file electronic copies of their 10-Ks with the SEC. As a rule, a U.S. company that has long been public will now have about 20 years of annual reports for you to read in full.
Don’t do that. I just read the 2016 (last year’s) annual report and then the 1994 or 1995 or 1996 – or whatever the oldest report you can find is – annual report. I want to get a sense of how the business has changed.
The 10-K – when read on its own – is of limited value when making an investment. All of the financial data that Quan and I used to create the “datasheet” of a Singular Diligence comes from the 10-K. So, the financial statements – especially the income statement, the balance sheet, and the cash flow statement – are useful. The datasheet we presented was usually a 15-25 year history of a company’s finances. It’s by far the most important thing in those reports. It may be possible to make an investment based purely on the financial statements if you have both income statement and balance sheet data for …
A Focused Compounding member asked me this question:
“…what are the factors we should be thinking about when assessing the bargaining power of a given business relative to its customers and suppliers?”
In an earlier memo, I talked about “market power”. My definition of market power is the ability of a company to make demands of its customers or suppliers without fearing that such demands will end their relationship. Why would a supplier or customer agree to demands without considering ending the relationship?
Dependency.
Recently, it was reported that Wal-Mart will start fining suppliers for delivering early as well as delivering late. Wal-Mart wants to manage inventory in their stores. So, they want to make sure that orders arrive on-time and in-full. Many suppliers to a retailer like Wal-Mart don’t have a good track record when it comes to making sure 100% of the order is there on the scheduled day. This causes problems for retailers. For example, I was at Costco last week and picked up the very last box of Eggo waffles available in that store. A few days later, there were several dozen boxes of Eggos – all containing 72 waffles each – stacked sky high. Everyone who came to Costco after I did was either looking for their usual supplier of frozen waffles and didn’t get them – or they have no idea Costco even sells Eggo products. Getting a supplier to deliver on time and in full sounds like a small thing, but a business model like Wal-Mart depends on keeping inventory at the right level. Wide selection in store is Wal-Mart’s main advantage. In most of the towns Wal-Mart is in it’s the offline “everything store” that Amazon aspires to be online. It is the only place to make a true one-stop shopping trip. If shelves are bare of any items at all – shoppers go away disappointed. Too much inventory obviously causes problems for shareholders – it ties up more capital and lowers free cash flow for the year – but it’s also a problem for employees. Because of the way Wal-Marts are run, employees spend a lot of time in areas shoppers don’t see. Sometimes, those areas aren’t the most pleasant places to work. When they are overcrowded with inventory, they became very unpleasant places to work.
Wal-Mart has a lot of bargaining power with some suppliers. Mostly, these seem to be suppliers that have gradually become dependent on Wal-Mart over time. This could happen for a few reasons. One of the most common reasons you see is chasing high growth in slow growth industries. So, if a company was in the soda business or the cereal business and Wal-Mart was quickly expanding around the nation during the 1970s, 1980s, 1990s, and early 2000s – such a company might have tried to grow faster than its category by selling a greater share of its product to faster growing retailers like Wal-Mart. This sounds like a good idea at the time. It allows …
