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08-01-2011, 02:29 AM
This is very theoretical post.
The general idea is to get at a margin of safety, and the amount of effort needed to make such a valuation is can be vastly different.
Buffett saying: "Try to play a fair price for a good company, not a good price for a fair company" is an oversimplification - he was buying companies at 1x earnings when younger. People continue to make good money buying distressed stuff - which is usually crappy to start with.
Professionals invest in all kinds of complicated situations: banks (Buffett & successor, Temasek), conglomerates (Bill Ackman), energy (Li Ka Shing) etc etc
Very obvious situations: companies trading below cash, net-nets (incidentally of the S-chips found out for fraud, not too many were net-nets).
Moderate situations: companies trading below RNAV or some multiple of earnings
Not obvious situations: conglomerates, financials, distressed, etc
The not obvious situations can be valued by putting lots of time. Like counting all the properties and estimating all their values. For more specific examples, analysts attempt this all the time with conglomerates e.g. F&N, Jardine and then call it a 'sum-of-the-parts' valuation.
E.g. Bruce Berkowitz suggests that for him to analyze AIG he had to not have a social life
Seth Klarman had one analyst to do nothing for 3 years to analyze Enron debt
Most of us with day jobs shouldn't bother with the not obvious situations.
The general idea is to get at a margin of safety, and the amount of effort needed to make such a valuation is can be vastly different.
Buffett saying: "Try to play a fair price for a good company, not a good price for a fair company" is an oversimplification - he was buying companies at 1x earnings when younger. People continue to make good money buying distressed stuff - which is usually crappy to start with.
Professionals invest in all kinds of complicated situations: banks (Buffett & successor, Temasek), conglomerates (Bill Ackman), energy (Li Ka Shing) etc etc
Very obvious situations: companies trading below cash, net-nets (incidentally of the S-chips found out for fraud, not too many were net-nets).
Moderate situations: companies trading below RNAV or some multiple of earnings
Not obvious situations: conglomerates, financials, distressed, etc
The not obvious situations can be valued by putting lots of time. Like counting all the properties and estimating all their values. For more specific examples, analysts attempt this all the time with conglomerates e.g. F&N, Jardine and then call it a 'sum-of-the-parts' valuation.
E.g. Bruce Berkowitz suggests that for him to analyze AIG he had to not have a social life
Seth Klarman had one analyst to do nothing for 3 years to analyze Enron debt
Most of us with day jobs shouldn't bother with the not obvious situations.