The Single-Best Metric: EV/EBITDA

The Single-Best Metric: EV/EBITDA

Buffett's annual letter: What you can learn from my real estate investments

http://finance.fortune.cnn.com/2014/02/24/warren-buffett-berkshire-letter/

"I tell these tales to illustrate certain fundamentals of investing:

• You don't need to be an expert in order to achieve satisfactory investment returns. But if you aren't, you must recognize your limitations and follow a course certain to work reasonably well. Keep things simple and don't swing for the fences. When promised quick profits, respond with a quick "no."
• Focus on the future productivity of the asset you are considering. If you don't feel comfortable making a rough estimate of the asset's future earnings, just forget it and move on. No one has the ability to evaluate every investment possibility. But omniscience isn't necessary; you only need to understand the actions you undertake.
• If you instead focus on the prospective price change of a contemplated purchase, you are speculating. There is nothing improper about that. I know, however, that I am unable to speculate successfully, and I am skeptical of those who claim sustained success at doing so. Half of all coin-flippers will win their first toss; none of those winners has an expectation of profit if he continues to play the game. And the fact that a given asset has appreciated in the recent past is never a reason to buy it.
• With my two small investments, I thought only of what the properties would produce and cared not at all about their daily valuations. Games are won by players who focus on the playing field -- not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.
• Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important. (When I hear TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle's scathing comment: "You don't know how easy this game is until you get into that broadcasting booth.")

My two purchases were made in 1986 and 1993. What the economy, interest rates, or the stock market might do in the years immediately following -- 1987 and 1994 -- was of no importance to me in determining the success of those investments. I can't remember what the headlines or pundits were saying at the time. Whatever the chatter, corn would keep growing in Nebraska and students would flock to NYU."

Note also that Buffett made the purchases in both cases AFTER the burst of the asset bubbles.

Investor's DNA

The ABCs of Investors’ DNA

"In a speech at Babson College in 2010, the renowned value investor Seth Klarman remarked that research on fruit flies showed that most of them will swarm toward a light—but that a small minority appear to be genetically programmed to stay away from it.

Mr. Klarman, president of the Boston-based Baupost Group, which manages $26 billion in hedge-fund assets, jokingly called these flies “tiny contrarians,” the insect equivalents of “deep value investors.”

He went on to speculate that most people might possess “a dominant gene” for chasing hot performance and overhyped assets, while only a minority have “the recessive value gene” that confers a patient preference for whatever is battered and unpopular.

Mr. Klarman told me this past week that he still holds the same view."

Painting By Numbers - An Ode To Quant
The superiority of models over human judgement.

It is in the gene

Your ancestor, Your fate

 "...Across all of them, rare or distinctive surnames associated with elite families many generations ago are still disproportionately represented among today’s elites.

Does this imply that individuals have no control over their life outcomes? No. In modern meritocratic societies, success still depends on individual effort. Our findings suggest, however, that the compulsion to strive, the talent to prosper and the ability to overcome failure are strongly inherited. We can’t know for certain what the mechanism of that inheritance is, though we know that genetics plays a surprisingly strong role. Alternative explanations that are in vogue — cultural traits, family economic resources, social networks — don’t hold up to scrutiny."

How to make money from the stock market?

"Buy Right, Sit Tight"
- Jesse Livermore

More nuggets of wisdom from one of the all time great stock market traders.  More here:
http://www.ritholtz.com/blog/2014/02/nine-surprising-things-jesse-livermore-said/

In order to buy right, one of course has to be able to value an investment objectively.  Here is a musing from valuation guru Aswath Damodaran:
Facebook buys Whatsapp for $19 billion: Value and Pricing Perspectives

Again, even one can get valuation right, it is still the mental framework and temperament to "Sit tight" that  makes money for the investor.

“It was never my thinking that made the big money for me, it always was sitting.”

Some food for thought! Happy Friday!

Morning Reads

1. MEAN REVERSION: THE MISUNDERSTOOD “MYSTERY METHOD” BEHIND BIG MARKET BLUNDERS

2. Einhorn Says Don’t Be Fooled as Companies Beat Estimates

3. Facebook Values WhatsApp Like Miracle Drug: Real M&A: $19 billion buyout.

4. Remember George Goodman, aka, "Adam Smith" of the Money Game. http://blogs.wsj.com/totalreturn/2014/02/17/remembering-adam-smith/

"If you are not automatically applying a mechanical formula, then you are operating in this area of intuition, and if you are going to operate with intuition – or judgment – then it follows that the first thing you have to know is yourself. You are — face it — a bunch of emotions, prejudices, and twitches, and this is all very well as long as you know it…. A series of market decisions does add up, believe it or not, to a kind of personality portrait. It is, in one small way, a method of finding out who you are, but it can be very expensive. That is one of the cryptograms which are my own, and this is the first Irregular Rule: If you don’t know who you are, this is an expensive place to find out.

- The Money Game (1968 edition, p. 26)"

Take the long view

Morning read:
1. Money management lesson from a mountain climber:
http://www.nytimes.com/2014/02/18/your-money/money-lessons-from-where-the-air-is-thinner.html?ref=business&_r=0

2. Advanced Beta  - this is the way to go.
http://www.ssga.com/library/resh/674831_Beyond_Active_and_Passive_Advanced_Beta_Comes_of_AgeCCRI1391091364.pdf

3. Nobody can predict the twist and turns of any market consistently, but over the long term equity market surely outpaces inflation.  So take the long view is paramount.
http://www.ritholtz.com/blog/2014/02/seeing-the-big-picture/