Buffet can only buy substantial blocks of shares otherwise he would end up with an unmanageable jumble of small holdings and multiple positions in thousands of companies. The cost of management and the risk of getting out of touch would be astronomical. Investing in small stock even if they triple in one year is not sufficient. Just consider, for example, if Berkshire Hathaway bought Dawson Geophysical (now valued at $600 million) whole hog when it was a $300 million company. That $300 million double to date would have moved Berkshire’s $73.6 billion equity portfolio just 0.4%. Investors of all sizes will agree there’s no point in researching an idea if it will provide just 0.4% potential gains.
Buffet said at the annual meeting, “The problem is that what has worked well in the past will cease to work in the future. To the contrary, we believe that our formula – the purchase at sensible prices of businesses that have good underlying economics and are run by honest and able people – is certain to produce reasonable success”
One of grahams methods of selecting stock, the net asset value method, leans heavily on balance sheet information.
“the market is there only as a reference point to see if anybody is offering to do anything foolish. When we invest in stocks, we invest in businesses.”
Greencore 2006 assets much greater than liabilities
Sweeney – Carlow site €1 bn , market capital €700k – mallow, thurles and sussex proper for free
Ignorance increases the chances of getting dumped. Too little knowledge makes all of us nervous, suspicious and ultimately resentful if something goes wrong.
The more you know the less the risk
Traditionally high returns go hand in hand with high risk.
Great growth prospects.
High quality balance sheet;
Competent and shareholder-oriented management;
Understandable and honest disclosure documents;
Priced at 50 to 60 cents on a dollar
The value investor is adverse to speculation, they never try to anticipate movements on the stock market.
Knowing that your capital is safe and you can expect a suitable return requires some investigation and analysis. Information on which to base the decision is readily available.
Margins of safety by evaluating the asset of the business or evaluating the earning power or through diversification. Some gain a safety margin by requiring a company to have a large cache of working capital; other study cash flow and some look at patterns of dividend payment.
Value investing as explained earlier, is the search for sound securities that sell below their “intrinsic value”. These investments are then held until there is strong incentive to sell them.
Value investing principles can apply to all classes of securities, including preferred stocks, municipal bonds, corporate bonds and mutual funds.
that Graham & Dodd talked more about quantitative instead of qualitative issues about the balance sheet.
to use quantitative valuation techniques such as arbitrage, asset-based approaches, and the earning power method, and you will effectively combine those tools with strategic methodologies for estimating a method of fully exploiting available data for making investment.
• Develop a process for systematic valuation
• Strengthen your ability to evaluate growth and risk
Every rose has its thorn
Individual investors who invest dollar amounts in the thousands, however, should be scouring the markets every day for the next Dawson Geophysical. It’s the only way to even approach those aforementioned 50% annual returns.
But be forewarned: Small-cap stocks are volatile. While a large cap like Nike (NYSE: NKE) has built sufficient brand equity and financial strength to weather a few fashion faux pas, a bad year can mean the end for smaller competitors such as Steve Madden (Nasdaq: SHOO) or Kenneth Cole (NYSE: KCP).