Warren Buffett Says Apple Should Buy Back Stock, Ignore Einhorn's Calls for Preferred Stock

[Avatar74]

So AAPL are at 93% and you don't think that's worth investing in. Just our o curiosity where do the following sit;

Google
Microsoft
Samsung

As a lay person I'd bail on MS because they seem oblivious to their mistakes and ignorant of what's going on around them. I'd support Samsung because they're the opposite. Google. I don't know what google is. And that bothers me so I'm only interested in them if they produce strong income. My gut feeling is hey probably don't as a percentage yield.They do seem to have contra of a market though.

I'm not really interested in examining Google or Microsoft because a good deal of their business involves presence in things like search and other ecosystems the monetization of which is somewhat of a mystery, and the future of which is uncertain.

Samsung is more of a manufacturer but the problem is that they're a foreign based operation which presents several complications:

As an ADR, Samsung actually resides on another exchange. They're subject to different reporting requirements than American Corporations and their management has been at the center of some fraud scandals concerning their financials. Already I'm at a total disinterest there, but even if management had no such history, I wouldn't feel comfortable about my lack of visibility to Korean financial idiosyncrasies which include their reporting requirements, accounting standards and the fact that the ADR shares expose you to currency risk (the changes in the currency rate add another layer of fluctuation to the value proposition).

I feel that these are all unnecessary obstacles to put in front of yourself... And judging from your earlier post, I'd steer you away from individual securities. You're not likely to beat an index fund so I'm not sure you're gaining anything by taking risks on securities, particularly in the tech market which is subject to a lot of irrational volatility in large part due to its popularity.

 

[thundersteele]

Even if you don't hold AAPL shares, you might want to look at where your parents and other older relatives have their retirement savings parked, and what stocks those funds hold.

I'm from Europe. I know that there are some retirement savings plans that invest some fraction of the money into stock, but usually this goes into bundles that follow e.g. certain indices. This might include AAPL stock in a few cases, but will still dominantly follow the overall market.
Things might be different here in the US.

because alot of people here are not just customers, they are shareholders as well.

Ok, that's a good point of course.

 

[ActionableMango]

The problem with using P/E is that you're not telling me what a shrewd person should pay for future cash flows... you're telling me what the masses of imbeciles are paying, right now.

Unless all the imbeciles are going to leave the stock market suddenly and forever, then the opinions of imbeciles, in mass, are actually quite important, since they will be buying your stock when you sell it.

 

[IJ Reilly]

Unless all the imbeciles are going to leave the stock market suddenly and forever, then the opinions of imbeciles, in mass, are actually quite important, since they will be buying your stock when you sell it.

You put your finger on something I was perhaps being too kind to point out myself. As the old expression goes, "everybody is crazy but thee and me, and I'm not so sure about thee." Being human it is only natural for us to think that we're smarter than average. If I've learned anything in life, it's that the only people who are likely to be smarter than average are those who admit that they might not be.

 

[TallManNY]

There's no such thing as Hulu or Amazon Prime outside of the USA. In Canada, even with its even smaller selection of movies and TV shows, Netflix is by far the cheapest option.

And before you ask, there's no over-the-air signals where I live.

Well then Netflix must be great for you. But even if Netflix has a great position where you are at, the fact is that Netflix didn't make much in the way of profit last year. Best case, is they continue to get your business, but make very little money of it. Worst case is that more competition moves into your market.

Show me the path where Netflix goes from making $20 million a year, to 100 times that at $2 billion a year. Then it will start to make sense to acquire it for $15 billion or so. But I doubt Netflix will ever increase its profits 100 fold.

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Well I definitely can't wait for Apple to report its next quarter. I want to see if the Market has in fact sniffed something out. The market price obviously suggests a view that Apple's profits are going to contract. If this is another growth quarter (as compared to last year, obviously it won't actually be a growth quarter compared to the holiday quarter), then the price will certainly rise.

And also, if it was a good quarter, I want to hear another round of justification for why Apple needs to have $145 billion or so in cash.

I also can't wait to see how Blackberry is going to do. They will give their results at the end of the month. Word is that Z10 is selling quite briskly, with a black market trade and some carriers in the UK even raising the price from the initial launch price.

And finally we have the launch of the GS4. It is supposed to be the phone that finally unseats the iPhone. But I bet people are going to be a little disappointed by it as it will end up just being another 5" Android 4.2 phone.

 

[davidhunternyc]

Listen to the man! I love Warren Buffett.

Ask the former factory workers in Bedford, Massachusetts how much they love Warren Buffet!

 

[Avatar74]

Ask the former factory workers in Bedford, Massachusetts how much they love Warren Buffet!

First he needs a time machine to go back to the 1950s.... I'm sure they've gotten over it by now.

 

[Avatar74]

Unless all the imbeciles are going to leave the stock market suddenly and forever, then the opinions of imbeciles, in mass, are actually quite important, since they will be buying your stock when you sell it.

Well, that would mostly bankrupt a good portion of the entire financial system to the point of rendering fiat money moot... in which case the banks no longer exist to foreclose on me, people start looting crap and I grab my spear and my best loincloth and go forage and hunt.... along with the rest of anyone else who knows you can't eat or wipe your ass with gold bars (the value of which is almost entirely derived from the paper markets since gold's tangible utility is nowhere near its market price).

*shrug*

But unless that happens, the distribution of imbeciles to concentration of wealth will remain negatively correlated... and a good portion of that concentrated wealth will consist of people who are somewhat less panicky... So there will likely be buyers with the resources to snatch up assets I purchased at a discount in the foreseeable future.

But if not, I'm ok with the Daniel Quinn scenario... I have things but I'm not particularly attached to them. That's part of the beauty of being an unemotional investor... I'm unemotional about a lot of other things.

 

[IJ Reilly]

Calling people who don't think exactly like you do imbeciles, requires no small amount of imbecility.

 

[lildimsum7]

Forecasts are not dart throwing... My current role involves numbers that roll up to finance and accounting and pretty rigorously tested formulas on customer retention to get the "where might we land" scenario... It's not magic. It's arithmetic. We know what our funnel looks like. The other driver is the pressure that sales organizations have to meet those projected numbers, so unless something goes horribly wrong with operations, supply chain management, etc. on so many levels, every company of this scale has a pretty good idea of where they will land for the next four or five quarters.... they just don't always tell you until it's legally required of them.

It may seem mathematical to you, but I just think it's mathematical gibberish. Many variables could change a lot over time. No one can reliably predict future cash flows. Not even Warren Buffett or the smartest team of analysts could forecast a year ahead. DCF isn't a good way to estimate intrinsic value at all, but it's a good way to be precisely wrong. Otherwise, analysts wouldn't be way off so often. Also, a small change in the discount rate and a prediction could throw your value way off. I just think DCF is a poor way to get an idea of intrinsic value because you're adding good information with bad information. You might as well do a multiples valuation, which would be just as reliable. And if you're just sticking a higher margin of safety to allow for how wrong you are, that's nonsense. That's not even mathematical at all. If you're doing that, then it's going to be really hard to compare how sensible one investment is to another.
We could look at some of Buffett's recent purchases. Do you think you would keep buying IBM and PCP at their 52 wk high prices if you use DCF? I doubt you'd have a good enough margin of safety to consider them a buy. But I believe Warren Buffett would say there's a large margin of safety, which is why he doesn't mind buying them at their highs.

 

[IJ Reilly]

It may seem mathematical to you, but I just think it's mathematical gibberish. Many variables could change a lot over time. No one can reliably predict future cash flows. Not even Warren Buffett or the smartest team of analysts could forecast a year ahead. DCF isn't a good way to estimate intrinsic value at all, but it's a good way to be precisely wrong. Otherwise, analysts wouldn't be way off so often. Also, a small change in the discount rate and a prediction could throw your value way off. I just think DCF is a poor way to get an idea of intrinsic value because you're adding good information with bad information. You might as well do a multiples valuation, which would be just as reliable. And if you're just sticking a higher margin of safety to allow for how wrong you are, that's nonsense. That's not even mathematical at all. If you're doing that, then it's going to be really hard to compare how sensible one investment is to another.
We could look at some of Buffett's recent purchases. Do you think you would keep buying IBM and PCP at their 52 wk high prices if you use DCF? I doubt you'd have a good enough margin of safety to consider them a buy. But I believe Warren Buffett would say there's a large margin of safety, which is why he doesn't mind buying them at their highs.

Apparently you missed the part where people who don't accept the methodology are deluded. Or imbeciles. Or both.

While Intrinsic Value calculations might be a good way to discover value stocks, they aren't going to capture a growth story. What's more, even diehard value investors are going to come to different Intrinsic Value conclusions for value stocks, depending on the methodology they choose. I also have a huge problem with even talking about Book Value as an investment criteria. Just about the only time even a value investor is interested in Book Value is when the company is so severely undervalued that it is a ripe takeover target. AAPL was in this place when I invested in 1997, but it wasn't the sole criterion for investing.

So how does this apply to AAPL today? Apple has a habit of introducing new products on a fairly regular basis that succeed in the marketplace in ways that nobody could have accurately predicted. This is the driver of Apple's growth. You invest in the stock not by crunching numbers so much as by determining whether the company can continue to release new breakout products. This decision is not driven by data, but by another kind of knowledge -- of what the company does best.

 

[Avatar74]

Calling people who don't think exactly like you do imbeciles, requires no small amount of imbecility.

Context. I never said it was about people who think differently than me... It was the fact that there are no shortage of people who make irrational, even idiotic decisions on the market. *shrug*

But for what it's worth I think that feigning disgust is a rather transparent way of tap dancing around what you seem to be implying, i.e. that a valuation that tends higher usually works in the buyer's favor. It doesn't. Not usually. Not mostly.

Regarding what companies do best and growth stories.... that's to be examined if the company meets the base criteria of "are they a purchase or not". What you're conflating is the difference between trying to prophesy the future versus simply trying to find the good deals before others do.

These catastrophe scenarios are cute, but they kind of ignore the reality that regardless of the distribution of shrewd or naive players in the market, most people generally reward companies that continue to have favorable operating results. My entire point has always and only been that if you scan through the companies that are underpriced relative to their operating value, which is also an indicator of the operating performance itself, you'll find companies that are likely to be rewarded by the market before the other guy does.

We aren't talking in any case about dogs... because there's a slew of other things that I look at. Maybe I don't lay out all those steps because there's never one formula for success... It's just that I've taken apart businesses for 20 years and I do the bulk of the analysis in a very short span of time. Someone with a different background might need more time, but I can't teach someone "Business Acumen 101" in fifteen minutes, or on a post.

In that earlier analogy about "all the imbeciles moving at the same time".... That very few people are keen on value investing actually has worked to the value investor's advantage, for every decade that there have been value investors.

 

[Avatar74]

We could look at some of Buffett's recent purchases. Do you think you would keep buying IBM and PCP at their 52 wk high prices if you use DCF? I doubt you'd have a good enough margin of safety to consider them a buy. But I believe Warren Buffett would say there's a large margin of safety, which is why he doesn't mind buying them at their highs.

Buffett has a few weapons at his disposal that most of us don't. First, he is able to secure warrants with companies like Goldman and BOA that ensure that as long as they are doing too poorly to buy back the warrants, they have to pay him a huge sum of guaranteed dividends -or- they can do well and he can dispose of the warrants at a premium. Result: He wins either way.

With IBM, he may be looking at several factors: IBM's stability and moat in enterprise environments. IBM's stability of long term performance and how it applies to dividend payouts.... Again, they don't necessarily need to be a growth "stock" to be a cash machine. Additionally, when you purchase as large a stake as Berkshire often does, you have the power to influence the very performance of that investment in very tangible ways. This is one of the reasons why many of Berkshire's acquisitions today are whole. And there's also one other factor... Buffett knows that an acquisition stake of the size Berkshire can make in IBM can move the needle of the entire market, which benefits his other investments.

For me it's not that I don't look at the other factors, but my benchmark to determine whether I look any further is rooted in my view of operating value and thus my view of operating potential.... In most cases, if you don't have the right engine, you can't continue to generate the needed acceleration. I'm not going to look at a dog that only looks cheap and conclude, "Wow, their return on equity is terrible, they had five straight quarters of operating losses but hey their P/B is great!"

If someone else wants to use what everyone else is doing as their benchmark, that's great.... but that leaves you a step behind because it doesn't tell you whether they have the potential to keep going. It just tells you what premium the market has already slapped on it before you got to the party.

Most of the private equity guys I know do glance at P/E as part of their triangulation... but that's exactly what valuation is... it's a triangulation of a number of factors. But DCF analysis is part of that process whether you agree with it or not.

 

[Dave00]

At 93 percent of their intrinsic value (which takes future cash into account vis-a-vis discounted cash flow analysis), yes.

Here is the problem with using future cash.
Imagine it is 2001. What is the future cash flow, in 10 years, of
(1) AAPL
(2) Lehman Brothers
(3) BAC
Short term predictions are hard enough. Long term predictions are next to impossible.

The problem with using P/E is that you're not telling me what a shrewd person should pay for future cash flows... you're telling me what the masses of imbeciles are paying, right now.

Actually, the stock price is telling you what the masses of imbeciles (and everyone else) is paying, right now. P/E tells you the relationship between that price and how well the company is actually doing, which reflects what Mr. Market feels as far as the future. A low P/E means Mr. Market feels future earnings will go down, a high P/E that future earnings will go up. To justify the current stock valuation, you'd have to be virtually certain that earnings will go down. At current earnings, the pile of cash would exceed market value in a few years if the price stayed the same. I happen to think Mr. Market is wrong, and affected by short-term pressures on mutual funds. But eventually, it will become more efficient and the price will rise (unless earnings do contract significantly). When will it happen? I don't know, but until then I'll collect my dividend and wait patiently. I see all the angst over no new products, but just look at how profitable the iPod is - a device that no longer has cache and was originally introduced 12 years ago.

 

[Avatar74]

Here is the problem with using future cash.
Imagine it is 2001. What is the future cash flow, in 10 years, of
(1) AAPL
(2) Lehman Brothers
(3) BAC
Short term predictions are hard enough. Long term predictions are next to impossible.

I'm not looking ten years into the future. I'm looking maybe five quarters. There isn't a manufacturing operation that doesn't have some reasonable estimate of what their cash flows five quarters forward should be, because they know what's in their funnel from inventory to sale.

Is there some possibility that the estimation is wrong? Yes. However, its a more conservative approach than looking at sector multiples. What if a company is at or below the industry multiple average but all companies in that sector tend to be grossly overpriced? Is it strategic to just hop on the fast moving bus and hope it has some acceleration left in it without looking at the engine and kicking the tires?

To me, using P/E multiples is analogous to skating to where the puck is.

Actually, the stock price is telling you what the masses of imbeciles (and everyone else) is paying, right now. P/E tells you the relationship between that price and how well the company is actually doing, which reflects what Mr. Market feels as far as the future. A low P/E means Mr. Market feels future earnings will go down, a high P/E that future earnings will go up.

Correlation doesn't imply causation, and even the correlation itself between price and earnings is weak... all the P/E ratio really tells you is, and this is what I meant by "what they're paying right now".... is what premium did the market believe was worth paying in excess of earnings.

But why would I use that as a gauge if my goal is to make an acquisition not at a premium but at a discount to the operating value (and ideally sell it later if/when the market overprices it).... if operating performance continues to be solid, the tendency on a less known, discounted company is that it will become more known (not even less known than now), and when it draws that attention the market will give it a premium in excess of my purchase price... but until they do, I'll collect dividends.

Ideally what I look for is not an irrational return but an adequate return, and companies whose tangible operating value appreciates also see an appreciation in stock price. Price is more positively correlated with performance than negatively. Once in a while there's a stock that takes off but I'm not banking on them as an investment strategy... they're the nice occasional surprise.