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Subject:  Re: What's Your Portfolio's PIV-ER? Date:  1/27/2007  6:28 PM
Author:  VPMan Number:  1259 of 1817

Rich,

It's no problem. There are many roads to Damascus and your beliefs are what they are. I'm very familiar with Fisher too. His books do have a place in my library.

Interestingly, as recently as a few months ago Buffett says he's "85% Graham and 15% Fisher." The investment approach that Buffett mentions in his 1977 letter was post his partnership years and also the start of Mungers influence on him (pay up for quality). Buffett's truly phenomenal returns came during his partnership years where he often invested in companies that were merely statistically cheap.

Buffett's need for continuity and Mungers influence gave way to a transition in his investment framework. Buffett has said without the leverage he's had with the insurance float he probably would have had much more moderate returns in Berkshire. Even then, his truly stellar returns came in the 50's per Buffett himself.

Companies that can do that and which happen to sell at a discount to IV at the time of purchase make very attractive long-term holdings (5, 10, 15 years, or a life time).

True enough. But held over the very very long term and your return will roughly equal the companies return on equity. One of the very best with this approach I believe is Ruane/Sequoai Funds, and if you subracted their holding in Berkshire, the long term return of the Sequoui fund would have been around 13%. So one of the very very best at this particular long term buy and hold route averaged about 13%. I also think it takes far more of a crystal ball to envision what companies will be great 15 plus years from now than it is to handicap your odds with a 2-5 year mathematical outlook.

If we are throwing out numbers. I've had companies double in a year too. 200% in two years. 80% in six months. Still, I'm not getting it. Maybe I'm too dense.

Hey, if you got something growing at a gazillion percent per year and a stock price rocketing to the moon, maybe its justified. But if that is the case, I might suggest that even you can't guess at the companies value that closely anyway. Plus or minus one or two hundred percent might be all that's doable.


I'd say I've been very very good at estimating IV of companies I can figure out (circle of competence) well within the parameters you're putting forth. However, the majority of publicly traded companies I have no idea what their IV's are and my answer is to not own them. I think once you really get a sense of a companies rough IV you'd realize that you might be costing yourself some very real upside in your portfolio by suggesting that a company that increases in value a great deal over a short period of time shouldn't be fully re-analyzed. Buffett regrets a great deal that he didn't sell Coke in 2000.

Personnally, I don't believe that great returns can be achieved by trading in and out of stocks on a monthly, quarterly or even yearly basis. It is thinking like that that got me out of mutual funds and picking my own stocks in the first place.

I think there is a large difference between "trading" based on mere price quotations and making allocation decisions based on receiving more value than one is paying for. Peter Lynch's turnover was 300% -- he averaged 29% FWIW. Graham was not a buy and holder, Buffett in his partnership years had a good amount of turnover, etc. But I wouldn't charaterize any of their behavior as "trading" nor do I of my own portfolio management style. As Buffett has said of the Graham and Doddsivillers, they simply exploit discrepencies between price and value -- "that is the one common theme." To exploit it, you must act on it.

There are many roads to Damacus and I'm not suggesting any of them are the absolte right answer - but I do beleive the best returns that come from the Greenblatt's, the Greens, the Buffett Partnership years, have a tendency to move money around far more than you may be comfortable with.

VP




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