Have an obsession for cash flow conversion. What is the free cash flow of the company?

Charlie Munger:  If you take a business that is a GOOD business but not a fabulous (GREAT) business, they tend to fall into TWO categories:

One is the business where the whole reported profit just sits there in surplus cash at the end of the year and you can take it out of the business and the business will do just as well without it, as it would if it stayed in the business

The second business is one that reports the 12% (return) on capital but there's never any cash.  (This) reminds me of the used construction equipment business of my old friend John Anderson and he used to say in my business every year you make a profit and there it is, sitting in the yard.   There are awful of businesses like that where just to keep going (and) to stay in place, there is never any cash.  Now that business doesn't enable headquarters to drag out a lot of cash and invest it elsewhere.  We hate that kind of a business.  Don't you think that is a fair statement?

Warren Buffett:   Yeah, that is a fair statement.

https://www.facebook.com/reel/507646045755285

Summary:

2 types of Good Businesses:

One that generates a lot of free cash flows; you can take this cash out of the business and the business will just do as well without it.

One that generates little or no free cash flows, as it requires a lot of working capital or capex to maintain and sustain its business.

Valuation cheat sheet. What are some of your favourite metrics?

 

Valuation Cheat Sheet

What are some of your favourite metrics?

1.  How to think about valuation

All intelligent investing is value investing:  you try to buy stocks for less than what they're worth.

Here are some valuation ratios you can use:

P/E ratio:  stock price / earnings per share

EY (Earnings yield):  earnings per share / stock price

P/B ratio:  stock price / book value

PEG ratio:  P/E ratio / yearly EPS growth

FCF yield:  free cash flow per share / stock price

2.  Always buy stocks at a discount

When you go to the mall, you like to buy your favourite products on sale.

The same goes for stocks.  You want to buy a stock at its cheapest possible price and valuation.

The beautiful thing about the stock market is that Mr. Market often acts as a Manic-Depressive.  You can use this volatility to your advantage by buying when there's blood running through the streets.

3.  Short term versus long term

Over a one-year period, most stock price fluctuations are driven by changes in valuation. 

versus 

In the long run, stock prices are driven by the evolution of the intrinsic value of a company.

This means that in the short term the valuation you pay for a company is very important while in the long term the rate at which a company can grow its earnings per share is the crucial factor.

Markets are Competitive

Passive Management

Holding a highly diversified portfolio

No attempt to find undervalued securities

No attempt to time the market.

Active Management

Finding mispriced securities

Timing the market

The biggest mistake that investors make

The biggest mistake that investors make is not sticking with the plan when the market goes down.

What you do when the market goes down is more important than what you do as it is rising.  WHY?

Because the worse days are followed by the best days.

Manage your emotions

When it is our own money, we think it is math, but it is actually not.  Just because we learn about money in math class doesn't mean it is math to us.  It is actually very EMOTIONAL. 

One of the things that we need to do is manage the emotion, because we do feel the pain of a loss more than the euphoria of a gain.  

Manage the emotion and just keep plodding along, paddling along in the markets for a long time.

Catherine Keating

Global Head of BNY Wealth

Bloomberg Interview

Emotional Intelligence

Conflict between our thinking and our feelings makes things complicated.   

Instincts, feelings and personal values take over and become a major part of our actions and behaviour. 

Gut instincts or intuition rely a great deal on emotion and feelings.  

Both feelings and instincts are major influences on our behaviour in the real world.

How can you benefit from improving your emotional intelligence?   

Doing so, will also make life easier for those who have to interact with you.  

Emotional intelligence is a valuable set of ideas you can use everyday and everywhere:  in the workplace and in the home; as a parent, teacher or manager.

It is about being aware of feelings in yourself and in others, understanding them and managing their impact.

It is about being in control, interpreting body language, coping with negativity, working with others and building psychological well-being.

Emotional Intelligence

Emotional Intelligence is an assortment of mental abilities and skills that can help you to successfully manage both yourself and the demands of working with others.

Developing your own emotional intelligence enables you to:

• Know yourself reasonably well
• Control your own emotions
• Show empathy with the feelings of others 
• Use social skills in an effective as well as simply pleasant way.

How to develop your own emotional intelligence?

This involves:

• Mindfulness: being aware - understanding yourself and others
• Being in control of your own thoughts, emotions and needs
• Being positive and self motivated particularly in the face of setbacks
• Using empathy:  being able to put yourself in others' shoes
• Communicating effectively to build productive and positive relationships
• Using emotional reasoning:  being able to use emotions to enhance rather than restrict your thinking.

What are the components of emotional intelligence?

Emotional intelligence incorporates at least these two:

Cognitive intelligence - the ability to think rationally, act in a purposeful way and manage your environment.  It is your intellectual, analytical, logical and rational skill set.

Social intelligence - the ability to understand and manage situations which involve other people.  It is your ability to be aware of yourself, to understand yourself, to manage relationships and understand the emotional content of behaviour.

Importance of emotional intelligence for our own mental health

In everyday life, people universally experience the difficulties of both coping with their own emotions and the practical difficulties created by those of others.

Emotional disorders affect huge numbers of people.  

• It is estimated that 15% of people will have a bout of severe depression at some point in their lives.
• 2% of teenagers are diagnosed with emotional disorders before the age of 18.
• Emotional disorders in old age is also a major and increasing problem.

Emotional intelligence is important for our own mental health and gives us the capacity to understand both ourselves and how we deal with the pressures we face.

The Next Global Crash is Inevitable - Top Economist Professor Linda Yueh (An excellent video)

12 Aug 2024 Making Money Linda Yueh is Professor of Economics at London Business School and a Fellow at Oxford. She’s written a book called The Great Crashes: Lessons from Global Meltdowns and How to Prevent Them (https://www.penguin.co.uk/books/31558... )

Chapters: 00:00-00:34 - Intro 00:34-08:23 - Why crashes are inevitable 08:23-14:00 - What causes an economic depression? 14:00-18:51 - How credible leaders stop crashes 18:51-19:36 - Vanta ad 19:36-25:30 - Lessons we haven’t learnt 25:30-30:00 - Who gets bailed out? 30:00-32:34 How often do global crashes happen? 32:34-37:42 - What’s the biggest risk today? 37:42-38:41 - Manual ad 38:41-43:06 - What can we do to stop a great crash? 43:06-46:34 - How a crash in China could have global consequences 46:34-51:51 - Why are crashes more frequent now? 51:51-56:55 - Is AI a bubble? 56:55-59:53 - Can cults of personality cause crashes? 59:53-01:04:00 - The great reset 01:04:00-01:08:34 - Could climate change cause the next great crash? 01:08:34-01:13:17 - We need to learn from history and not repeat mistakes 01:13:17-01:15:03 - Financial coaching 1:1

Selling is often a harder decision than buying

 Selling is often a harder decision than buying

"If you have bought a good quality stock at bargain or reasonable price, you can often hold forever."

Investing is fun. For every rule, there is always an exception.

The main reasons for selling a stock are:

1. When the fundamental has deteriorated permanently, (Sell urgently)
2. When it is overpriced, whereby the upside gain will be unlikely or very small and the downside loss will be big or certain.

We shall examine reason No. 2 through the property market. The property market is also cyclical. There were periods of booms and dooms.


If you have a good piece of property that is always 100% tenanted and which gives you good consistent return (let's say 2x or 3x risk free FD rates), would you not hold this property forever? The answer is probably yes.

Then, when would you sell this property?

Note that the valuation of property, as with stocks, is both objective and subjective.

Would you sell when someone offered to buy at 500% above your perceived market price?

Probably yes, as this is obviously overpriced. You could cash out and probably easily re-employ the money to earn better returns in another property (or properties) or other assets.

Would you sell when someone offered to buy at 50% above your perceived market price?

Maybe yes or maybe no. You can offer your many reasons.

However, all these will be based on the perceived future returns you can hope to get from this property in the future. This is both objective based on past returns obtained and subjective and speculative on future returns.

However, unlike reason No.1 when you would need to sell urgently to another buyer to prevent sustaining a permanent loss, you need not sell just because someone offered to buy the property at high price. (However, there are also those who "flip properties" for their earnings; they will sell quickly for a quick profit.) You will not suffer a loss but only a diminished return at worse. You can take your time to work out the mathematics.

You maybe surprised that you may still achieve a return higher at a time in the near future by rejecting the present immediate gain based on the present high price offered.

Also, you would need to price in the lost opportunity cost when the property is sold at this price, even though it is 50% above the perceived normal market price. Could you buy a similar quality property with the same sustainable increasing income or return by offering the same price?



Similarly, the same line of thinking can be applied to your selling of shares.

When should you sell your shares?

Yes, definitely when the fundamentals have deteriorated permanently. The business has suffered for various reasons and going forward, the earnings will be permanently impaired and deteriorating.

Yes, when the price is very very overpriced. However, you need not sell your shares in good quality companies that you bought at fair or bargain price. As long as the fundamentals are strong and the business is adding value, selling now at a higher price may mean losing the return that you could have obtained in the future years from owning this stock and the opportunity cost of reinvesting the cash into another stock of similar quality and returns.

Once again, the importance of sound reasoning and doing the mathematics in making a decision whether to sell or not.

Is it not true, that the really big fortunes from common stocks have been garnered by those

• who made a substantial commitment in the early years of a company in whose future they had great confidence and
• who held their original shares unwaveringly while they increased 10-fold or 100-fold or more in value?

The answer is "Yes."

http://myinvestingnotes.blogspot.com/2012/07/my-18-points-guide-to-successfully.html




Additional notes:

Other reasons for selling a stock (or property) are:

• To raise cash to reinvest into another asset with better return.
• A certain stock (or property sector) may be over-represented in your portfolio due to recent rapid price rises and you need to reduce its weightage to reduce your risk of over-exposure in this single stock (or property sector).

Footnote:

This is a true story. 

A rich man was approached by a buyer to sell his property. A few neighbouring lots were sold for $1.6 m the last 2 years. 

A buyer asked.  "What offer will ensure that you sell your property to me? Please let me know." 

The unwilling owner replied, "$5 million". There is a lesson here too. :-)

Profit from Inflation

 

The best investors have a process. Masters of the Market: featuring Alex Green

0.00  Intro

2.14  What did you learn from your career

6.54  Investing is a long game

9.41  The best investors have a process

12.45 Smart money in hedge funds

14.18 Is Wall Street trustworthy

18,13  How to deal with fear

23.30  How to pick stocks

28.39  How to judge management

30.14  How to build a portfolio

34.02  Do dividends matter

37.05  What are we missing

39.13  Option oriented ETFs

41.40  Trends investors are overlooked

48.15  Small Cap Stocks

51.29  Biggest Mistakes

56.14  My Biggest Mistake

57.54  Top 3 Positions

Age of Easy Money (full documentary)

Supply Shocks and Stagflation

Box: Supply Shocks and Stagflation

If a supply shock is sufficiently large or persistent, it not only causes cost‑push inflation, but can noticeably reduce both the current and potential level of output in an economy. In this case, there can be the unusual combination of a period of ‘stagnation’ as output declines at the same time that prices are rising. This combination of stagnant growth – with high or rising unemployment – and high inflation is referred to as stagflation. Stagflation can become entrenched when inflation expectations are not well anchored.

The 1970s were a period of stagflation that featured two oil price shocks. In October 1973, the members of OPEC (the Organization of Petroleum Exporting Countries), as well as Egypt and Syria, imposed an oil embargo on industrial nations that had supported Israel in the Yom Kippur War of the same period. The embargo resulted in a quadrupling of oil prices and energy rationing, culminating in a global recession in which unemployment and inflation surged simultaneously. Central banks did not target inflation at this time, and this was the start of a prolonged period of high inflation in many economies.

https://www.rba.gov.au/education/resources/explainers/causes-of-inflation.html

Inflation expectations

 

Inflation expectations

Inflation expectations are the beliefs that households and firms have about future price increases. They are important because expectations about future price increases can affect current economic decisions that can influence actual inflation outcomes. For example, if firms expect future inflation to be higher and act on those beliefs, they may raise the prices of their goods and services at a faster rate. Similarly, if workers expect future inflation to be higher, they may demand higher wages to make up for the expected loss of their purchasing power. These behaviours, sometimes called ‘inflation psychology’, can contribute to a higher rate of actual inflation so that expectations about inflation become self-fulfilling.

Given that inflation expectations can influence actual price and wage setting, the extent to which inflation expectations are ‘anchored’ has implications for future inflation outcomes. For example, if households' and firms' expect that inflation will return to the central bank's inflation target at some point in the future, regardless of what current inflation is, we describe their expectations as being ‘anchored’ to the inflation target. When expectations are anchored, a period of higher inflation – perhaps resulting from a cost‑push event – will not cause households and firms to change their behaviour and, as a result, inflation is likely to eventually return to its target. But if the inflation psychology of households and firms shifts and inflation expectations move away from the central bank's inflation target (i.e. they become ‘unanchored’), a period of higher inflation will become persistent because households and firms will expect inflation to be higher in the future and adjust their behaviour accordingly. Consequently, it is much easier for a central bank to manage inflation if inflation expectations are anchored rather than unanchored.

Illustrative Example of Anchored and
Unanchored Inflation Expectations

‘Anchored’ inflation expectations

Inflation expectations over the longer run remain little changed in response to a period of higher inflation. Households and firms expect the increase in inflation to be temporary and do not change their behaviour, seeing the actual rate of inflation return to the central bank's inflation target.

‘Unanchored’ inflation expectations

Inflation expectations over the longer run move higher in response to a period of higher inflation. Households and firms adjust their behaviour as they expect the increase in inflation to be more persistent, eventually leading to a higher rate of actual inflation.

While inflation expectations have an important influence on actual inflation outcomes, they are not directly observable. Instead, policymakers such as the Reserve Bank have to rely on measures of expected inflation that are based on surveys (where people are asked their views about the inflation outlook directly) or financial assets like government bonds (where the price of the asset reflects assumptions made about the future path of inflation, see Explainer: Bonds and the Yield Curve).