(14-04-2019, 03:05 PM)Squirrel Wrote: [ -> ]- there is a fourth way to allocate capital, which is to set it aside for potential opportunities that comes the way of the company. Why else would Berkshire Hathaway hold onto so much cash? Both Charlie Munger and Warren Buffett love to have cash around when opportunities presents themselves.
Certainly, if we wish to be very specific, your argument is not incorrect. But apart from semantics, this does not change how Penguin deprives the shareholder in order to grow itself. And as mentioned, there is nothing wrong in doing so. Penguin's move to acquire 8% of MPM could prove to be a very smart move if at some later time they flip it at a large profit. Or it could prove to be a dud, in which case it would have been better if it was distributed to shareholders. Which is going to happen? As mentioned, I do not know. What is important here is for (prospective) shareholders to know what Penguin is doing with its money, so that they can set realistic expectations of the company.
(14-04-2019, 03:05 PM)Squirrel Wrote: [ -> ]- you compare individual waste spending on cars and gourmet coffee to be the same as corporate distributing dividends. In my humble opinion, these are just two very vastly different acts! How can they be lumped together as the same? They serve absolutely different purposes. Period..
From the perspective of the money manager -- whether it be an individual managing his own finances, or a CEO managing the finances of a company -- money that is distributed as dividends or money that is spent on unproductive personal expenses has the same effect of leaving one with less money for productive use, in the present and future. WB's thrifty spending habits and his opposition towards distributing BH's money comes from the same desire to use assets to grow more assets.
(14-04-2019, 03:05 PM)Squirrel Wrote: [ -> ]- you made another analogy of making a blind bet on Fulham against an unknown opponent. If it’s me, I won’t place it as well because it is second bottom of the league table! Remember the first rule? Don’t lose money. Remember the second rule? Don’t forget the first rule. This in itself is another bizarre analogy. Penguin’s balance sheet speaks for itself with nearly zero debt and low PB ratio. Is it akin to placing a bet on Fulham? Definitely no because you stand to lose everything on the bet but in the stock market, there is skewed returns to the upside. Especially in this case being buffered on the downside by cash, inventory etc.
Certainly, gambling is not exactly the same as investing, but the concept of assessing probability of success vis-a-vis the pay-off applies to both. And while stocks seldom go to zero, the portion of net worth an individual places in a stock can be many times larger than the same individual places on the roulette wheel. So realising a 50% loss on your stock can be even more damaging than a 100% loss on a proportionally smaller gamble. In other words, a stock pick gone wrong is just as bad (if not worse) than a lost bet.
The point I was making is that investors should always be very clear on risks of any particular company. If I told you now that Fulham will be playing Home United, and the payoff for a Fulham win is still 2 to 1, will this not make for an attractive bet? Of course, but that is only because we are able to identify and assess the risk.
Penguin's zero debt and large cash balance, while admirable, does not completely protect it from adverse market conditions. It may prevent Penguin from going to zero, but it is unlikely that it can prevent Penguin from experiencing a large drawdown. The recent past tell us as much. And a large draw down is enough for a shareholder to lose his sensibilities.
Hypothetically, if most of Penguin's customers walk away just as the order are about to be delivered -- and it is unable to find other buyers for them -- there will be big impairments on its receivables/inventory. Share price will then adjust accordingly. Yes, Penguin has shown to be able to move its inventory. But why is it able to do so, and will it be able to do so again, when market conditions become adverse?
A low P/B ratio is also insufficient to protect from large draw downs. Indofood Agri was trading at a P/B of about 0.35 before going down to a P/B of 0.25. And now it is being privatised at P/B of 0.35. What about the shareholders who bought Indofood Agri at P/B of 0.5, thinking it was a steal (plantation going at half price!)? Penguin is now trading at a P/B of 0.6, but it was way much lower 3 years back.
(14-04-2019, 03:05 PM)Squirrel Wrote: [ -> ]- lastly if you think this is purely a shipbuilding business which you have analyzed above do think twice. Take a good look at their latest AR and see where profits are coming from
Yes, I do not 'take a good look' at every company; only the ones I am ready to put some money into. There are way too many details, and there are so many companies. As I have mentioned on other occasions, prospecting companies is not too different from prospecting a spouse, or a company looking to make a hire (if relationships are not your thing); you only need as much information to decide on whether you are interested, or not. Shortlist those that meet your basic criteria, then go on to scrutinise the details on those you have shortlisted.
I suppose you are referring to Penguin's ship chartering segment. While this is separate from the shipbuilding segment, they are primarily driven by the same market forces; demand for, and supply of, vessels. Chartering, while often perceived as a more stable source of income, is also exposed to market forces when the lease expires. There are a number of shipping trusts which failed/performed poorly, partly as result of recontracting at much lower charter rates. Much of the risk also depends on the contract duration and price that Penguin's ships are chartered. Are they short term at high rates? Or long term at high rates? Or long term at low rates? I have no idea.
(14-04-2019, 03:05 PM)Squirrel Wrote: [ -> ]I have seen better analysis from you prior and am thankful for it. Honestly, in recent posts you seem to log in and proceed to simultaneously bash multiple stocks on the way out. Is it because you think that valuations in general are fat at the moment? What stocks would you think are value buys now? Just curious what stocks currently satisfy your criteria of understanding all material risks involved and thus would not be akin to blind betting and speculation. I believe that would greatly benefit fellow valuebuddies. You must have done something right to get 50 recommendations on your posts. So would be great to hear more.
If it is the desire of an investor to pick stocks, then the assumption is that all stocks are not the same, and that some must possess qualities and characteristics that are better than others. Many people actually do not do this, although they think that they are. What these people do is pick stocks mainly based on valuation metrics (P/E, P/B, EV/EBITDA, etc), or 'pay-off,' with some knowledge of the business, but without seriously considering where the risk are. Hence, my Fulham (or whichever your favourite team is) analogy.
In the course of performing my research, I pay particular attention towards identifying and assessing the risks. The product of which may at times come off as 'bashing.' But really, this 'bashing' is simply looking at the same thing, but from angles that few people care to look. Yet, if one is serious about making (or not losing) money from picking stocks, this is what one must do. If one only wishes to look at their stocks through rose tinted lenses, it is impossible to make money over the long-term. The alternative is to wait for bad things to happen and then some horse-behind-canon bystanders will say, 'Oh yeah, you can totally see this coming. See, here, here and here...' What good does that do? I prefer to know when bad things are going to happen, not after.
The people in VB are generally open-minded, generous, tolerant, and even encouraging. They give me little star stickers for my vigorous yet unprofessional attempts to provide any analysis or insight, as if to say, 'good try!' the same way one would eat the cookies baked by kids and go 'yum!' For that, I feel grateful. I understand that you feeling aggrieved after seeing what must look very unpleasant to you. You are not the first to be offended by what I have written, and if my past behaviour is any indication of my future actions, there will certainly be others. I hope you understand that none of what I post in VB is intended to be personal or offensive, and see it as what it is intended to be; angles that few people care to look at. And if the risks that I have identified is proven to be wrong, or that my conclusion is errorneous, wouldn't you be glad then that Penguin is therefore a superior investment candidate?
As for your other questions, I have written about them in my previous posts. I have spent way too much time on this and I'm not being paid like those course sellers that provide life-time support/coaching.