The stock markets, the US ones in particular, at this late stage in a bull market, seem to be increasingly influenced by speculators. Warren Buffett and Charlie Munger have long argued against speculation in shares, saying that share buyers should thoroughly understand what they buy (understand the underlying business, the managers and finances). So the following question about the latest manifestation of the ancient human tendency toward speculation posed little intellectual challenge to Buffett and Munger (speaking 1st May 2021).
Q: What do you think about Robinhood and other trading apps or fintech companies enabling all ages and experience to participate in the stock market.
BUFFETT: “It [Robinhood, the “free” brokers] has become a very significant part of the casino group that has joined into the stock market in the last year, year-and-half. They have attracted 12% or 13% of casino participants.
“You know, I looked up on Apple the number of seven day calls [options], 14 day calls outstanding. And I’m sure a lot of that is coming through Robinhood. They’re gambling on the price of Apple over the next seven days.
“There’s nothing illegal about it; there is nothing immoral. But I don’t think you build a society around people doing it.
“I mean, if a group of us landed on a desert island and we knew that we’d never be rescued, and I said, ‘well, I’ll set up an exchange over here, and I’ll trade our corn futures and everything!’ [Laughing].
“I think the degree to which a very rich society can reward people who know how to take advantage of essentially the gambling instincts of not only the America public, but the worldwide public…it’s not the most admirable part of the accomplishment.
“But I think what Americans have accomplished is pr…………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
“If you’re not a little confused by what’s going on you don’t understand it. We’re in unchartered territory.” (Charlie Munger)
Warren Buffett and Charlie Munger were recently asked whether the current boost to fiscal and monetary stimulus will lead to higher inflation, the consequences of which could be significant for the equity markets.
BUFFETT: “The answer is we don’t know...the best we can do is recognise that we don’t know and proceed in a way where we get a decent result no matter what happens.
“We do not think that we can make money by making macroeconomic predictions."
When asked about the conditions currently being experienced by Berkshire companies he said “We’re seeing very substantial inflation. It’s very interesting; we’re raising prices, people are raising prices to us. And it’s being accepted.
“Take home-building. We’ve got nine home builders in addition to our manufactured housing operation (which is the largest in the country). The costs are just up, up, up. Steel costs…just everyday they’re going up…the wage stuff follows...
“It’s an economy really that’s red-hot. And we weren’t expecting it. I mean, all our companies when they were allowed to go back to work…you know, the furniture stores can’t stop people from buying things, and we can’t deliver ‘em. But they say ‘well, that’s OK because nobody else can deliver them either, and we’ll wait for three months’. But the backlog grows.
“We thought it would end when the $600 payments would end [additional unemployment benefit each week] around August of last year. You know, it just kept going, it keeps going and it keeps going.
“I get the figures every week...and it just won’t stop. ………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
It is important to clearly distinguish between rates of return on capital employed by operating businesses and potential rates of return available to those buying shares at various prices. It’s perfectly possible for a very high return on capital company (small amounts of money used internally relative to profits) to have shares so expensively priced that they offer any new shareholders poor rates of return on their money. This phenomena makes most high rates of return on operating unit companies impossible for value investors to buy.
BUFFETT speaking at Berkshire's AGM 1st May 2021:
“We’ve always known that the great business is one that takes very little capital and grows a lot. Apple and Google and Microsoft and Facebook are terrific examples of that. Apple has $37bn in property, plant and equipment, Berkshire has $170bn or something like that.
“They’re going to make a lot more money that we do…it’s a much better business than we have. And Microsoft’s and Google’s business are way better businesses than we have.
“We’ve known that a long time; we found that out with See’s Candy in 1972. It just doesn’t require that much capital – it has a couple of manufacturing plants – but it doesn’t have big inventories, it doesn’t have a lot of receivables.
“You know, those are the kind of businesses, they’re the best businesses but they command the best prices too.
“We’re looking for them all the time. And we’ve got a few that are pretty darn good, but we don’t have anything as big as the big guys.
“But that is what everybody is looking for, that’s capitalism. It’s about people getting a return on capital and the way you get it having something that doesn’t take too much capital. I mean if you really have to put out tons and tons of capital…
“Take the utility business. It’s not a super-high
………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
At Berkshire Hathaway’s Annual General Meeting (1st May) Warren Buffett warned investors to keep a close eye on managerial quality because it is there that the biggest risk resides.
In the lead up to that statement he talked about how, when you’ve made a mistake and put money into a badly managed firm or in one with poor industry economics it may not be too serious for your overall portfolio result because your good decisions will come to dominate your overall result.
First the basic principles:
BUFFETT: “Any time we’re look at buying a business we look at evaluating the competitive strengths of the business; the price we have to pay; the management we get”
Mistakes will be made, but that’s OK
BUFFETT “And I’ll continue making mistakes. And we’ve got some wonderful deals and some terrible deals.
“The nice thing is when we’re disappointed in a business it usually becomes a smaller and smaller percentage of our business [portfolio]. And when we get a successful business like a GEICO – doing 15 times as much business as when we bought control – they become proportionally a much more important part of our mix.
“So you really get, just through natural forces, more of your money in the things that have developed more favourably than you thought. You actually end up getting a greater concentration in the ones that work out.
“It’s not like having children, where the bad ones cause you more problems. Bu………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
Buffett and Munger – we are living in “the most interesting movie, by far, that we have ever seen in terms of economics”, but it could end in “disaster”
Warren Buffett, speaking at the Berkshire Hathaway AGM, said: “The Fed moved with speed and a decisiveness on March 23rd 2020, that changed the situation, where the economy had stopped. Then Congress acted very, very big, so you have fiscal and monetary policy that responded in a way that was incredible, and it did the job...better than anybody expected. I mean, this economy right now, 85% of it, is running in super high-gear and you’re seeing some inflation.
“Interest rates have fallen to very little…If present rates were destined to be appropriate those [hi-tech] companies are bargains. They have the ability to deliver cash at rate that if you discount it back, and you’re discounting at present interest rates, stocks are very very cheap.
“Now the question is what will interest rates do over time? It’s a fascinating time; we’ve never really seen what shovelling money in on the basis that we’re doing it - on a fiscal basis following a monetary policy - with close to zero interest rates. It is enormously pleasant.
“But in economics there is always one thing to remember: you can never do one thing, you always have to say, “And then what?”.
“And we’re sending out huge sums…e.g. $1,400 cheques...and so far we’ve had no unpleasant consequences from it. People feel better – the people lending money feel very good - and it causes stocks to go up, it causes businesses to flourish, it causes an electorate to be happy.
“And we’ll see if it causes anything else. And if it doesn’t cause anything else you can count on it continuing in a very big way.
“But there are consequences to everything in economics…and people feel good and will become numb to numbers, you know, trillions don’t mean anything to anybody, and $1,400 does mean something to ‘em. So we’ll see where it all leads. Charlie and I consider it the most interesting movie, by far, that we’ve ever seen in terms of economics”
MUNGER: “Yes, and the professional economists, of course, are very surprised by what’s happened. It reminds me of what Churchill said about Clement Atlee, he said he was “a very modest man who had a great deal to be modest about”.
“And that’s exactly what happened with the professional economists. They were so calm about everything. It turns out that the world is more complicated than they thought…I don’t think any of us know what’s going to happen with this stuff. I do think there’s a good chance that this extreme conduct is more feasible than everybody thought, but I do know that if you keep on doing it without any limit it will end in disaster.”
BUFFETT: [Many funds such as SPACs] “have to buy within two years or give it back. The managers of these benefit from doing deals but get nothing if there is no deal. It’s an exaggerated version of what we’ve seen in gambling-type markets. In fact, I have a quote from Keynes, it really sums up the problem:
“Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.” (The General Theory, 1939).
“Well, we’ve had a lot of people at the casino in the last year. You have millions of people set up accounts where they day trade, where they’re selling puts and calls. I would say that you’ve had the greatest increase in the number of gamblers essentially.
“They’ve had cash in their pocket, they’ve had action and they’ve had a lot of good results.
“And if they just bought stocks and held them they’d do fine.
“But the gambling impulse is very strong, and people worldwide, - and occasionally it gets an enormous shove – and conditions lead this to the place where more people are entering the casino than are leaving every day.
“And it creates its own reality for a while. And nobody tells you when the clock’s going to strike 12 and it all turns into pumpkins and mice.
“When the competition [to Berkshire loo………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
In the May 1st Annual General Meeting of Berkshire Hathaway Warren Buffett warned investors with little experience or sense of stock market history to be cautious. Investing in a way that allows you to out-perform is not as easy as it looks.
“I would like particularly new entrants to the stock market to ponder just a bit before they try and do 30 or 40 trades a day in order to profit from what looks like an easy game”
Buffett showed a slide of the current largest 20 companies as measured by market capitalisation with Apple, Saudi Aramco, Microsoft, etc., at the top (Berkshire is tenth) he then posed a question:
“How many are going to be in such a list in 30 years from now?” Obviously the question cannot be answered, but to make a point he showed a slide of the largest companies in 1989.
The top companies then were predominantly Japanese (whereas no Japanese were in the 2021 list) headed by Industrial Bank of Japan, Sumitomo and Fuji Bank. The important point is that none of the top 20 in 1989 were still in the top 20 in 2021...zero (out went companies such as Royal Dutch Shell, Toyota, IBM and Philip Morris.
Buffett said in 30 years from now some of the current top 20 will get onto the 2051 list, but the 1989 example “it is reminder that extraordinary things can happen…We were just as sure of ourselves as investors and Wall Street in 1989 as we are today. But the world can change in very dramatic ways”.
Are rising industries sure bets?
He offered another example to ponder: “People get enormously attracted to various industries. They think if the company says it’s in XYZ industry, and it's a popular one, it can sell IPOs, sell SPACs; you as an investor can [therefore] disregard sales numbers, earnings numbers because ‘it’s the place to be’”.
The place to be in 1903 was in the new technology of the internal combustion engine. So Buffett asks us to remember the that investment history when we are contemplating investing in the c
………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
Yesterday’s newsletter showed that Fletcher King (LSE:FLK) is trading below its net current asset value. In addition, its share price has fallen so much that it is now only 7.5 times average earning per share over the last ten years (excluding the Covid period).
This newsletter describes the five types of property-related services it offers clients; shows the returns made on special property investment projects (SHIPS) and considers where the company goes from here under its new generation of leaders.
Fletcher King offers various services to investors in property, lenders and tenants:
Fund management Asset and property management Capital Markets Valuations Ratings
Undertake purchases and sales according to the client’s requirements. Then ensure each asset is intensively managed to retain and maximize income flow and spot opportunities to enhance future capital growth.
Advisory and discretionary mandates.
Statistical information, market analysis on commercial property market, to enable fund manager to make informed judgements.
Provide detailed reports covering management of the portfolio.
Long-term tenant relationships
Work proactively to meet tenant needs, rather than see them move elsewhere.
95% of rent is collected within three days.
Services are delivered by our Facilities Managers (outsourced).
Letting process through agents.
Refurbishment & redevelopment.
Managing the building fabric.
Richard Goode, formerly an executive director, now a NED, ran this business. Now Paul Morris, a ten year veteran has been promoted to Head of Investment
Buy and sell commercial property in UK.
Act for both in-house clients and out-of-house clients.
Act for property companies, lending institutions, pension funds, private investors, developers and owner / occupiers and provide clear, robust advice
Expert witness litigation.
FK on the valuation panels of most UK clearing banks, overseas banks and other financial institutions
Valuations for Income and Corp Tax, Cap. Allowances, CGT and IT purposes. Negotiations with the HMRC.
Claims resulting from the compulsory acquisition of land and negotiate with the acquiring authority.
Bob Dickman is Head.
Assist clients understanding of UK taxation, and manage their liabilities.
Take advantage of appeal processes or by simply understanding the complexity of the ever-changing reliefs and exemptions
Bob Dickman is head.
Comments in Reports and Accounts on trading in each area
Regular income comes from Fund Management and Asset & Property Management, which are both sectors affected by recession to some degree but not too badly. Capital Market business and Valuations are greatly hurt by downturns. Ratings grinds along with its frustrations with the government Valuation Office but earns a relatively steady fee income.…………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
I’ve bought Fletcher King (LSE:FLK) shares at an average price of 32.65p. This property advisory and property management company had cash at the bank of £3.1m (and no debt) at the last accounting date, which is more than its current market capitalisation of 9.2m shares x £0.3265p = £3m.
In addition, it owns a stake in an office building in the City worth about £630,000. In October receivables pretty much matched all liabilities, leaving the net current asset value, NCAV, including the office building stake at £3.645m or 44.4p per share.
Even if we allow for the losses since October induced by the Covid-19 impact on the property market I reckon the share is under-priced relative to NCAV.
(Because it is such a thinly traded share I had to build up my stake over a long period, Feb 2020 – May 2021)
Net current asset value
£000’s Oct 2020 April 2020 April 2019
Cash 3,113 3,624 2,001
Receivables 501 680 1,809
Total current assets 3,614 4,304 3,810
Minus 20% of receivables (Ben Graham conservative approach) -100 -136 -365
Conservative current assets 3,514 4,168 3,445
Minus all liabilities (ignore lease liabilities and assets) -499 -724 -1,228
NCAV 3,015 3,444 2,217
Add property 630 630 1,603
NCAV + property 3,645 4,074 3,820For the current year, FLK has already reported a loss for the first half (until 30th October) of £0.41m, and in a recent trading update the directors say they expect that they’ll report in second half of the year a trading loss.
On top of that we have the prospect of a write down of some of the property value, which still has two floors vacant. All in all, “the Company believes that losses for the second half may potentially be similar to the first half” (Trading update 3 March 2021).
So, from the above NCAV + property number I’ll deduct a further £0.41m to leave £3.235m or 35.16p per share.
It’s often the case that NCAV shares show a history of losses which induces investor fear that the losses will continue and therefore the cash and other assets will be whittled away.
But with Fletcher King we see a history of earnings. The last year was an exception but can be regarded as a one-off bolt from the blue for a company that thrives from commercial property transactions, of which there were few in 2020 and early 2021. There are good reasons for expecting the company to return to profit once the crisis is …………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
I'm a full-time investor running my portfolio. I invest other people's money into the same shares I hold under the Managed Portfolio Service at Henry Spain. Each of my client's individual accounts is invested in roughly the same proportions as my "Model Portfolio" for which we charge 1.2% + VAT per year. If you would like to join us contact Jackie.Tran@henryspain.co.uk
investing is about making the right decisions, not many decisions.