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Newsletter - March 4th, 2023

Updated: Mar 24, 2023

Dear Reader,

Attached is our latest list of stocks generated from basic value screens (low p/e, ev/ebitda, debt/equity, etc.), which don’t meet our investment criteria - and our reasoning.

This may help you avoid a few ‘value traps’ or stocks that aren’t sufficiently attractive compared to the opportunities available today.

For reports of stock ideas that pass our quantitative and qualitative standards, join at the link below:


Notes from the past week below including breakeven multiples of quality growth stocks, the financial metric to look for, fat pitches, and more:


Berkshire Letter 2023

Warren's letters get shorter by the year but his investing wisdom is gold - some notes below:

No finish line (page 7)

We like his idea of having no finish line for your goals; think this is one reason for Warren's optimism and longevity.

Repurchases (page 5)

While the section this year may have been aimed at Joe Biden's buyback tax, Warren's thoughts on share buybacks/repurchases are simple and worth re-reading. Repurchases help the continuing investor when made at value-accretive prices i.e. below intrinsic value. Naturally this estimate will vary among investors but the general idea is clear. Among the undervalued stocks we seek, repurchases should add significant value.

His emphasis on "fully-informed" parties is important - this is a point Ben Graham lamented in Security Analysis when observing managements exploit selling shareholders without providing full information.

Operating earnings vs. net income (page 4)

Investors should naturally focus on the operating profits of a business rather than the bottom line primarily because fair value movements of some investments flow through the P&L - this makes screening for p/e ratios somewhat meaningless but you could still find genuinely undervalued stocks; and the aggregate bottom line over many years is important for investors.

Weeds wither, Flower bloom (page 4)

This is a pleasant thought - with the tailwind of equities, your mistakes gradually diminish over time as your winners grow. Just make sure you don't go in too heavy as mistakes are inevitable.

Munger's Wisdom (page 8)

- Exploit the gambling impulse inherent in stocks by being patient; that's the source of your profits.

- Invert: Find out how an investment could die, and don't go there.

- Focus: It takes conscious effort to avoid the plethora of distractions vying for your attention, and do meaningful work.

- Great companies, good long-term investments, more value over time: Heard Warren once say that he looks for businesses that generate more and more earnings over time - sounds simple when he says it; the trick is to avoid forecasting mistakes (which are very easy to make) and not overpaying.

- Don't count on getting rich twice: This is fundamental; You only have to get rich once, and it may not happen again. Crucial to be safe and careful in this business.


2008 Berkshire AGM

This meeting was in May 2008 before the Lehman crisis but after cracks started appearing in the mortgage securities market (including at Bear Stearns). Notes at timestamps below:

59:30 Pair Trading

Buffett refers to pair trading - shorting overvalued stocks and buying undervalued stocks in the same industry.

Ben Graham engaged in this technique in the 1920s and made money 4 out of 5 times but lost heavily on the fifth - he seemed to have given up on that strategy as he mentioned in the Intelligent Investor.

In Buffett's case, he shorted the general market to isolate the risk of market declines - An interesting strategy for those inclined. Of course investors could do it more easily these days shorting S&P 500 futures.

We've never shorted, just bought tiny amounts of puts for the experience. In general, the market is going to go up over time, so a policy of consistently shorting doesn't make sense. And market timing is a different business. It's simpler to philosophically accept large declines in the general market from time to time.

1:03:00 Municipal Bond Market Dislocations

Buffett highlights wide discrepancies in traded prices of the same municipal bond on the same day - yielding differences of 530 bps! This is supposedly where large investors with billions operate. Fascinating to see this level of market inefficiency. There's certainly hope for investors operating in smaller stocks.

1:18:30 Financial Statement Metrics

Buffett mentions buying stocks on the basis of just the financial statements - at 40% of intrinsic value (including liquidation value such as Sanborn Map, Dempster, and Berkshire Hathaway).

Munger: We prefer businesses that "drown in cash".

Buffett: It's easier valuing a business that mails you a check every month.

Keep it simple.

2:01:45 Munger on Oil

Munger's earlier views on oil, which is similar to today - that hydrocarbons are going to be incredibly valuable over time.

Contrary to market consensus and oil company executives' lip service, it's likely there's a lot of life left in the oil stocks.

2:24:45 Petrochina

Buffett on buying Petrochina solely after reading its annual report:

"Worth $100bn selling for $35bn"

As Ben Graham said in Security Analysis, identifying undervalued securities should be like determining if a man is overweight without knowing his exact weight or if a woman is old enough to vote without knowing her age.

3:23:00 RMBS and CDOs

Flashback to the subprime days: Buffett remarks on the extraordinary slicing and dicing of mortgage securities and their derivatives, and the reading required to understand them.

Fortunately in investing, degree of difficulty doesn't count towards performance.

3:54:45 Pharmaceutical stocks

On evaluating the pipeline of pharmaceutical companies: Though Buffett doesn't know which pharma company will come up with the next blockbuster drug, a group purchase at low earnings multiples makes sense here.

This logic could be extended to other unleveraged undervalued companies where group purchases negate the need to make accurate predictions on individual stocks.


Breakeven P/Es of 'Quality Growth' Companies

Terry Smith presents a chart at the 4-minute mark showing the breakeven P/E ratios for several quality companies over 46 years. For example, Loreal could've been purchased at 281x earnings in 1973 and still earned a market return to 2019 - this was eye-opening to us. Of course, an investor must be able to forecast such growth but it's certainly expanded our view on how high a price an investor can pay intelligently.


Until next time, Have a great week!


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