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"We’ve made 30 to 40 times on our money in both Dell and AOL. Most investors rarely hold companies long enough to make 30 to 40 times their money. They’re lucky if they make 50, 100 or 200 percent. We’ve got not only 10-baggers, but 20-, 30- and 40-baggers. (10-bagger is a term popularized by Peter Lynch for a stock that increases 10 fold from your purchase price.) You get those only if you actually invest in companies as opposed to trading them and trying to guess when the stock is going to pull back. We don’t spend time trying to guess stock price action. We spend our time trying to value businesses. "
"When we analyzed Dell, for example, in February 1996, that was a period when you had rumbles of Fed tightening and everybody thought we were going to have a recession. Investors had sold tech stocks down to levels that looked to us to offer an opportunity. Most value people at the time were buying paper, steel, and aluminum, which also were down in the dumps. When we did all the valuation work on those companies, we concluded thay were not terribly attractive or mispriced by the market. Their business fundamentals were poor and were likely to remain so. On the other hand, when we looked at Dell, trading at the time around $1-2 on a split-adjusted basis, we saw a company that had a superior business model, excellent competitive advantages, growing at 25 to 30 percent a year, earning 30 percent on invested capital, and trading at five times earnings. Why would we ever buy a paper company at five times what they hope to earn if paper prices go up if we can buy a terrific company at five times today’s earnings? When we got further into the detail of the business, it looked to us that the market had systematically misunderstood the potential of the company. Historically, PC companies traded between 6 to 12 times earnings. Even when value investors were buying PC companies, they would buy at 5 to 6 times earnings, and sell when they got to 12 times earnings because that was the peak multiple these companies historically had attained. When we analyzed Dell, we concluded it was worth at least 25 times earnings as a business. If you were to buy the whole company, you would pay up to 25 times earnings, whereas the market had peaked valuation out historically at around 12 times. We thought it was worth about five times what the market thought it was worth. It’s highly unusual to find things that appear to be that mispriced, so we loaded up on it. As it turned out, we were right. We actually underestimated the ability of management to execute what turned out to be a very superior business model. Fortunately, because what we do is dynamic valuation, our models are updated every quarter or more often as we get more fundamental data. We’re always trying to figure out the underlying business value and the intrinsic value of the company. Earlier in 1999, Dell reached a level where we thought it was moderately overpriced, so we sold a fairly significant portion of it."
“Sell a stock because the company’s fundamentals deteriorating, not because the sky is falling.”
“Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what’s actually happening to the companies in which you’ve invested.”
“If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.”
“Behind every stock is a company. Find out what it’s doing.”
“Owning stocks is like having children—don’t get involved with more than you can handle.”
“Never invest in a company without understanding its finances.”
“Everyone has the brainpower to make money in stocks. Not everyone has the stomach. If you are susceptible to selling everything in a panic, you ought to avoid stocks and stock mutual funds altogether.”
“Investing is fun, exciting, and dangerous if you don’t do any work.”
“Your investor’s edge is not something you get from Wall Street experts. It’s something you already have. You can outperform the experts if you use your edge by investing in companies or industries you already understand.”
“Over the past three decades, the stock market has come to be dominated by a herd of professional investors. Contrary to popular belief, this makes it easier for the amateur investor. You can beat the market by ignoring the herd.”
“Corporations, like people, change their names for one of two reasons: either they’ve gotten married, or they’ve been involved in some fiasco that they hope the public will forget.”
“During periods when mutual funds are popular, investing in the companies that sell the funds is likely to be more rewarding than investing in their products. I’m reminded that in the Gold Rush the people who sold picks and shovels did better than the prospectors.”
“As the price of the stock rose, the Wall Street analysts increased their earnings estimates for the company. This is an example of tailoring the means to fit the ends.”
“A sneaky method by which unscrupulous banks and S&L camouflage their problem loans. If a developer, say, asks to borrow $1 million for a commercial project, the bank offers him $1.2 million on the basis of an inflated appraisal. The extra $ 200,000 is held in reserve by the bank. If the developer defaults on the loan, the bank can use this extra money to cover the developer’s payments. That way, what has turned into a bad loan can still carried on the books as a good loan—at least temporarily……. If it’s right, it’s another reason to avoid investing in banks and S&Ls with large portfolios of commercial real estate.”
“Corporate managers often pay lip service to “enhancing shareholder value” and then go out and squander the money on fanciful acquisitions, ignoring the simplest and most direct way to reward shareholders—buying back shares.”
“The best stock to buy may be the one you already own.”
“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.”
“Stockpicking is both an art and science, but too much of either is a dangerous thing. A person infatuated with measurement, who has his head stuck in the sand of the balance sheets, is not likely to succeed. If you could tell the future from a balance sheet, then mathematicians and accountants would be the richest people in the world by now.”
“The newspaper had made a big deal of this “worst one-day drop since 1929,” even though the comparison was absurd. A 36-point drop with the Dow at 990 was not the same thing as a 36-point drop with the Dow at 280, which is where it stood before the Crash.”
“In stocks as in romance, ease of divorce is not a sound basis for commitment. If you’ve chosen wisely to begin with, you won’t want a divorce. And if you haven’t, you are in a mess no matter what. All the liquidity in the world isn’t going to save you from pain, suffering, and probably a loss of money.”
“The extravagance of any corporate office is directly proportional to management’s reluctance to reward the shareholders.”
“Pulling out the flowers and watering the weeds.”
“This is one of the keys to successful investing: focus on the companies, not on the stocks.”
“Japanese investors, we hear, paid little heed to earnings and focused their attention to cash flow – perhaps due to shortage of the former. Companies spend money like drunken sailors, especially on acquisitions and real estate, are left with a huge depreciation allowance and a lot of debts to pay off, which gives them a high cash flow/low earnings profile.”
“Japanese banks were making 100% loans on zero collateral for office buildings where in the most optimistic scenario the rents would barely cover the expenses.”
“It isn’t the head but the stomach that determines the fate of the stockpicker.”
“Good information is useless without the willpower. In dieting and in stocks, it is the gut and not the head that determine the results.”
“Keeping the faith and stockpicking are normally not discussed in the same paragraph, but success in the latter depends on the former. You can be the world’s greatest expert on balance sheet or p/e ratios, but without faith, you’ll tend to believe the negative headlines.”
“Just because a stock goes down doesn’t mean it can’t go lower.”
“You should not buy a stock because it’s cheap but because you know a lot about it.”
“There’s a Tolstoy story that involves an ambitious farmer. A genie of some sort offers him all the land that he can encircle on foot in a day. After running at full speed for several hours, he acquires several square miles of valuable property, more soil than he could till in a lifetime, more enough to make him and his family rich for generations. The poor fellow is drenched with sweat and gasping for breath. He thinks about stopping—for what’s the point of going any further?—but he can’t help himself. He races ahead to maximize his opportunity, until finally he drops dead of exhaustion. This was the ending I hoped to avoid.”
