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None of this is new news, this is exactly what The Intelligent Investor and Margin of Safety are based on: that the market is irrational. To go further, this i

None of this is new news, this is exactly what The Intelligent Investor and Margin of Safety are based on: that the market is irrational. To go further, this is what Warren Buffett made his first few millions off of what is considered "cigar butt" investing. These are stocks trading below their Net Current Asset Value (NCAV). That means take all of their cash, real estate, equipment... those are your net current assets. Now take a subset of those stocks, and you find some at such steep discounts that they are trading below the cash they are holding. How is that possibly rational? To put that in perspective with a contrived example would be Apple, currently trading at $153 with a market cap of nearly $800B, $250B of that is in cash. Now imagine Apple is trading at $45 a share. That would value Apple at $235B...but if they liquidated the company, they would have more than that in the cash alone! And that is exactly the kinds of companies that folks like Ben Graham and Warren Buffett invested in, because they were so cheap, and probably not even great businesses, but had "one less puff" (hence cigar butt) in them before they closed up shop, were acquired, etc. Now, one retort might be that these guys were investing in two of the worst markets in the history of the US economy - Ben Graham came out of the Great Depression and Warren Buffett from the bear market of 61-62. But there are still examples of this today. Seth Klarman's fund (which still exists today) has only had 3 down years and is considered to be one of the greatest investors since Buffett. These investments still exist, and it's all based on buying cheap when the market has irrationally priced them at a sale.

Retric 9y ago
Don't forget your looking at the winners not the median returns for that category of investor. A company with 100 Million in liquid assets can easily be facing a 200 Million dollar lawsuit tomorrow.
- tome 9y ago
  Yeah I've never understood how value investors account for hidden liabilities. Perhaps you have to be very good at reading financial statements.
  - valuearb 9y ago
    Public companies are required to report on all of their liabilities. You read the quarterly and annual reports and intelligently assess which risks are significant or not, and how to discount for them. Beyond that you spend time thinking about their business and what could go wrong. If there is something obvious to you they didn't disclose, that would tend to mean management is untrustworthy or incompetent, two other huge risks. Buffett spends lots of hours reading reports away from CNN and computers and distractions. I'm sure he talks to Charlie and others regularly about things that concern him and gets different perspectives.
    - Retric 9y ago
      Again, a lot can happen in a week let alone 3 months between annual reports. The secret of Buffet's success is not limited to value investing he had quite a bit of early leverage and of course is also quite old now which give plenty of time to compound gains.
      - prewett 9y ago
        It's difficult to compound gain at 19% for 50 years--the S&P only did 10%. The secret of Buffett's success, which he explains in every letter, is that he bought an insurance company. As long as you are diligent in writing non-money-losing policies, you get the premiums up front and pay later. So you have all this float that you can do something with. But he also picks good companies, picks good managers, and is careful to make sure that the financial incentive for the manager is the same as the financial incentive for Berkshire, which is not the case with most executive packages.
        Retric 9y ago
        Exactly, leverage happened to work out really well for him, but true big the same idea can easily end up with you broke.
        valuearb 9y ago
- valuearb 9y ago
  The company would have a reserve for their expected costs of the suit. If they reserved $200M, then they would have a negative net worth. As an investor you should make your own estimates as well.
  - Retric 9y ago
    Your assuming the company know about this, and it's public information, both of which add quite a bit of lag time and thus investor risk.
    - valuearb 9y ago
      Assessing risk is an important part of valuing companies. Lawsuits usually don't materialize out of thin air, and when they do, they usually aren't very strong cases. One great historical case for Buffett was the Salad Oil Scandal. American Express stock plummeted because it had guaranteed loans backed by salad oil inventories that turned out to be fraudulent. It was facing a huge loss for the time, some were even afraid it might go out of business. But Buffett went to lunch and saw customer after customer still using Amex cards to pay for their meals. He realized that the charge card part of Amex was still really valuable, and did the math on what the credit card business was worth and their maximum possible losses from their loans would be, and realized the stock was hugely undervalued and bought a ton. Every business has remote risks of crazy bad things happening, it's why you diversify your portfolio if you are an active investor.
- acconrad 9y ago
  Most value investors you've heard of aren't really value investors, they're activist hedge fund managers who try to "catalyze the unclaimed inherent value" in a company by bullying them (through board seats) to course-correct the company...or they're a fund that's trying to match the market rather than beat it (most mutual funds), because they're so risk-averse or have such a poor strategy that they don't have faith it will work.
FLUX-YOU 9y ago
>but if they liquidated the company, they would have more than that in the cash alone! Someone has to buy that though, right? I'm sure a ton of people would buy a lot of pieces of a liquidated Apple, but what other effects on the economy does a suddenly-liquidated Apple have since it's such a major company? Does Apple take any other companies with it? The only way to insulate yourself completely and still benefit is to only own Apple shares, otherwise, Apple going down is going to affect the rest of your position. What if they continue to trade below the cash that they are holding for 10+ years? Plus, since they use tax havens, what happens to that cash if someone did liquidate Apple? Wouldn't it have to come back to America and would be taxed heavily?
- valuearb 9y ago
  Real cigar butts are usually tiny companies that no cross effects on the economy at large. Their risk is that they hold the cash for 10 years, or worse, burn it all trying a whole new business model (self driving cars!). The returns can be very good, but you do need to diversify out to 10 to 20 holdings to limit risk from one going south or taking forever. Buffett stopped investing in cigar butts because his portfolio got too big and the risk/return ratio wasn't always great. His big change was leaving Graham's philosophies for Mungers, and focusing on getting great businesses at a fair price rather than fair businesses at a great price.
static_noise 9y ago
Could it be the moral cost that is factored in when valuing companies under their cash value? Some companies come with liabilities that are not in the books; such as having promised to guarantee their workers wages or retirement for decades. If you buy the company and close up shop, you might either be liable to cover these "soft costs" or you might cause political harm to your own operation.
hackunomatter 9y ago
Yahoo, for long, had a market cap much below the value of all of its assets (including $BABA). One reason why it was undervalued was because the market didn't believe that they could dispose of their $BABA assets without incurring a huge tax penalty.
- oskarth 9y ago
  Interesting example. Do you have a link to more info? In general, where do you read such analysis? Seems like the kind of thing that would be discussed on a HN for finance people.
  - hackunomatter 9y ago
    Just search around in HN for, say, "Yahoo core business", in the last couple of years. Here's one story: https://www.usatoday.com/story/money/markets/2015/12/03/yahoo-worthless-math-divest/76721586/ https://www.usatoday.com/story/money/markets/2015/12/03/yaho...
  - imrehg 9y ago
    Some of Matt Levine's Bloomberg finance newsletter touches on that, and there's a bigger writeup as well: https://origin-www.bloombergview.com/articles/2015-12-02/yahoo-is-looking-for-a-new-way-around-alibaba-taxes https://origin-www.bloombergview.com/articles/2015-12-02/yah...
ice109 9y ago
I've been reading intelligent investor and there's something I don't understand - maybe you can explain. I get that the point here is if the company were liquidated you would get a positive return but how often does that happen? Yes in principle you're getting something at a discount but you can't exit - not like it can go to Apple HQ and demand a withdrawal commensurate with your equity? So why does it matter?
- acconrad 9y ago
  They are not as common today because we are in a huge bull market, but they can still be found: https://www.oldschoolvalue.com/stock-screener/net-asset-current-value-ncav-stock-screen.php https://www.oldschoolvalue.com/stock-screener/net-asset-curr...

Retric 9y ago

Don't forget your looking at the winners not the median returns for that category of investor. A company with 100 Million in liquid assets can easily be facing a 200 Million dollar lawsuit tomorrow.

tome 9y ago
Yeah I've never understood how value investors account for hidden liabilities. Perhaps you have to be very good at reading financial statements.
- valuearb 9y ago
  Public companies are required to report on all of their liabilities. You read the quarterly and annual reports and intelligently assess which risks are significant or not, and how to discount for them. Beyond that you spend time thinking about their business and what could go wrong. If there is something obvious to you they didn't disclose, that would tend to mean management is untrustworthy or incompetent, two other huge risks. Buffett spends lots of hours reading reports away from CNN and computers and distractions. I'm sure he talks to Charlie and others regularly about things that concern him and gets different perspectives.
  - Retric 9y ago
    Again, a lot can happen in a week let alone 3 months between annual reports. The secret of Buffet's success is not limited to value investing he had quite a bit of early leverage and of course is also quite old now which give plenty of time to compound gains.
    - prewett 9y ago
      It's difficult to compound gain at 19% for 50 years--the S&P only did 10%. The secret of Buffett's success, which he explains in every letter, is that he bought an insurance company. As long as you are diligent in writing non-money-losing policies, you get the premiums up front and pay later. So you have all this float that you can do something with. But he also picks good companies, picks good managers, and is careful to make sure that the financial incentive for the manager is the same as the financial incentive for Berkshire, which is not the case with most executive packages.
      - Retric 9y ago
        Exactly, leverage happened to work out really well for him, but true big the same idea can easily end up with you broke.
        valuearb 9y ago
valuearb 9y ago
The company would have a reserve for their expected costs of the suit. If they reserved $200M, then they would have a negative net worth. As an investor you should make your own estimates as well.
- Retric 9y ago
  Your assuming the company know about this, and it's public information, both of which add quite a bit of lag time and thus investor risk.
  - valuearb 9y ago
    Assessing risk is an important part of valuing companies. Lawsuits usually don't materialize out of thin air, and when they do, they usually aren't very strong cases. One great historical case for Buffett was the Salad Oil Scandal. American Express stock plummeted because it had guaranteed loans backed by salad oil inventories that turned out to be fraudulent. It was facing a huge loss for the time, some were even afraid it might go out of business. But Buffett went to lunch and saw customer after customer still using Amex cards to pay for their meals. He realized that the charge card part of Amex was still really valuable, and did the math on what the credit card business was worth and their maximum possible losses from their loans would be, and realized the stock was hugely undervalued and bought a ton. Every business has remote risks of crazy bad things happening, it's why you diversify your portfolio if you are an active investor.
acconrad 9y ago
Most value investors you've heard of aren't really value investors, they're activist hedge fund managers who try to "catalyze the unclaimed inherent value" in a company by bullying them (through board seats) to course-correct the company...or they're a fund that's trying to match the market rather than beat it (most mutual funds), because they're so risk-averse or have such a poor strategy that they don't have faith it will work.

FLUX-YOU 9y ago

>but if they liquidated the company, they would have more than that in the cash alone! Someone has to buy that though, right? I'm sure a ton of people would buy a lot of pieces of a liquidated Apple, but what other effects on the economy does a suddenly-liquidated Apple have since it's such a major company? Does Apple take any other companies with it? The only way to insulate yourself completely and still benefit is to only own Apple shares, otherwise, Apple going down is going to affect the rest of your position. What if they continue to trade below the cash that they are holding for 10+ years? Plus, since they use tax havens, what happens to that cash if someone did liquidate Apple? Wouldn't it have to come back to America and would be taxed heavily?

valuearb 9y ago
Real cigar butts are usually tiny companies that no cross effects on the economy at large. Their risk is that they hold the cash for 10 years, or worse, burn it all trying a whole new business model (self driving cars!). The returns can be very good, but you do need to diversify out to 10 to 20 holdings to limit risk from one going south or taking forever. Buffett stopped investing in cigar butts because his portfolio got too big and the risk/return ratio wasn't always great. His big change was leaving Graham's philosophies for Mungers, and focusing on getting great businesses at a fair price rather than fair businesses at a great price.

static_noise 9y ago

Could it be the moral cost that is factored in when valuing companies under their cash value? Some companies come with liabilities that are not in the books; such as having promised to guarantee their workers wages or retirement for decades. If you buy the company and close up shop, you might either be liable to cover these "soft costs" or you might cause political harm to your own operation.

hackunomatter 9y ago

Yahoo, for long, had a market cap much below the value of all of its assets (including $BABA). One reason why it was undervalued was because the market didn't believe that they could dispose of their $BABA assets without incurring a huge tax penalty.

oskarth 9y ago
Interesting example. Do you have a link to more info? In general, where do you read such analysis? Seems like the kind of thing that would be discussed on a HN for finance people.
- hackunomatter 9y ago
  Just search around in HN for, say, "Yahoo core business", in the last couple of years. Here's one story: https://www.usatoday.com/story/money/markets/2015/12/03/yahoo-worthless-math-divest/76721586/ https://www.usatoday.com/story/money/markets/2015/12/03/yaho...
- imrehg 9y ago
  Some of Matt Levine's Bloomberg finance newsletter touches on that, and there's a bigger writeup as well: https://origin-www.bloombergview.com/articles/2015-12-02/yahoo-is-looking-for-a-new-way-around-alibaba-taxes https://origin-www.bloombergview.com/articles/2015-12-02/yah...

ice109 9y ago

I've been reading intelligent investor and there's something I don't understand - maybe you can explain. I get that the point here is if the company were liquidated you would get a positive return but how often does that happen? Yes in principle you're getting something at a discount but you can't exit - not like it can go to Apple HQ and demand a withdrawal commensurate with your equity? So why does it matter?

acconrad 9y ago
They are not as common today because we are in a huge bull market, but they can still be found: https://www.oldschoolvalue.com/stock-screener/net-asset-current-value-ncav-stock-screen.php https://www.oldschoolvalue.com/stock-screener/net-asset-curr...