He didn’t just buy some Pinnacle. He kept buying all the way down and tried to catch a falling knife. Erm did he needed to lose 20 million to realise that airlines are a bad business? Feel free to check his previous claims on Pinnacle quote “Frontline was obvious. Stewart Enterprises was obvious. Level 3 was obvious. Pinnacle Airlines was very obvious.” not exactly a small gliche.

Now just for the record some commodity indexes (not a specialised manager, a simple index) returned a 31% annualized over the last 10 years. This is much more than Pabrai did. Without any particular time consuming research (and an hefty 1 or 5 Million to invest in a black box) you would have done better than him (and virtually every mutual fund manager/hedge fund genius) by buying a well diversified commodity index (now tradable via the ETN ticket “RJI”.

I feel that every good investor can achieve a good return by picking a basked of commodities /ETF and run his own little portfolio. Looking always at the Hedge funds as the “God’s” is wrong. These folks made money thanks to all these people too lazy to manager their own wealth. Do they deserve anything else than losing it ?

When I got to the last entry, I wanted it to go on forever – the never-ending discussion. IF I could only analyze stocks, as logically as you guys parse through these wonderful ideas. Everyone’s so generously sharing their thoughts – very Buffett like. This is a pure privilege to experience, and a great treat. It’s a great gift that Google brought me to this marvelous place in search of Pabrai. I’m am very proud of every one that has joined in. I hope more will share in a like manner around the world!

That is exactly true. I doubt if there is any viable business out there trading for working capital but as your NVDA example all you have to do is let time do the work. Take a company like DELL. Its been growing its share in shrinking industry and makes billions doing so. Their expanse is reaching the globe via the net and 12000 stores. At current rates no matter how how many pessimistic IV assumptions I put in my calculations you can probably make a good return on it even if you buy it above 20….if you hold it for long enough. “DISCLOSURE: I own shares of DELL.”

Problem with most market investors is their inability to sit around and do nothing. And sitting on the position long enough is what gets rewarded.

WB is an unmatched stock analyst…he could have sold off See’s Candy for a couple of hundred million.

But in his genious analysis is coupled with the patience of an elephant.

Phil said,

Buffett has unique talents. Period! Talents that, in my opinion, are not transferable to others. Bits and pieces yes. But the whole, no. Those people who try like hell to replicate the secret formula are probably wasting their time.

Here’s my thought: Buffett turned his $100 investment in his original partnership to $60 billion and counting. Nobody — and I mean nobody — will do that again in our lifetimes. As Pabrai said in his meeting, Buffett is one of those “once in a century” people that will never be replicated. Much like an Einstein or Ben Franklin.

That said, I disagree that others are wasting their time. I liken it to Stephen Hawking. He’s a brilliant scientist who has shaped the way the world thinks about space, time, and more. And yet, he lives in the shadow of Einstein’s reputation. Should Hawking give up? Should he stop using his brain and talents because people compare him to Einstein at every turn?

I would hope not.

We will definitely see a lot of Buffett followers grow wealth from $10,000 to $1 billion or $20 billion. We’ll also see them grow it to $200 million or $20 million. Over the course of fifty years, $10,000 into $10 million is a very impressive 16.4% annual return. Tell that investor, “You’re no Warren Buffett,” and you’ll likely hear, “Who gives a hoot? I’ve got $10 million!”

Buffett did not practice or preach broad diversification because broad diversification is bad business. Why would you put any of your money at risk in a GM or AMLN when you can focus that money on good businesses and opportunities?

Peter Lynch went the opposite way — growing his fund from 40 positions to more than 1,400. As the story goes, they used to tease him that there was not a stock he didn’t like. Stupid? No — because Lynch’s data and reasoning told him that every purchase was highly intelligent and was not afraid to make big decisions and investments when the odds were in his favor.

I pose this question to all of you — Buffett followers or not: How much diversification is “enough”? Five positions? Five hundred?

The truth is that everyone preaches diversification, but nobody can look at a portfolio and definitely say, “Yep — this one’s well diversified.” Munger and Buffett have both said that most investors would do well to own five or six big, “safe” companies. Buy the biggest and best at an attractive price, and then hang on for dear life. (That’s why we put 20% in JNJ and in WMT, but only 5% or 10% in the other opportunities.)

Today, Buffett says people should buy an index fund. I don’t think it’s because Buffett truly wants people to own index funds. Instead, Buffett is the conssumate realist and knows that (i) most mutual funds are doomed to lose to the markets, and (ii) most people will never have the time, desire, or iron constitution needed to buy and hold stocks in times of maximum pessimism.

Five and ten years from now, today’s buyers of stock — using intelligent valuations and methods — will look very smart. But, you have to have that iron constitution that a Buffett has — the kind of stomach that allows you to pull the trigger in scary times because your data and reasoning are right.

Anyways — my two cents.

There’s nothing wrong with that thinking, thats good for a preliminary, 4 second analysis. However, obviously the market doesnt expect the future FCF streams to match the average of the past 3 years.

While the market may be wrong, you should not automatically assume that the company’s earnings next year will be reflective of their performance in the past few years. I don’t believe that markets are efficient, and I know nothing about the company you mentioned, but it seems that you simply assume that they’ll have high FCF streams in the future simply because they did in the past. Again, I know nothing about that company, but if they have negative FCFs in the coming years, that investment does not look so good. The main thing I’m trying to say is, worry about projecting future FCF, dont simply rely on what happened last year because it is likely that the market is pricing it low for a reason (may not be a good one, in which case it becomes a good investment opportunity).

I think most people agreed that no one can be Buffett. But that doesn’t mean you can’t stride to use his “mental models” for investing as Amit mentions. I think that’s obtainable. In his writing “Superinvestors of Graham-and-Doddsville” he points out that this “ability” can be learned and it’s not a fluke. All the investors in there came from different educational, social, economical backgrounds. They all also had different investing styles and brought different stocks.

I think most people here are just trying to be “Superinvestors of Buffett-and-Mungerville” even though we’ll never be exactly like Buffett. It’s naive to think you can invest exactly like Buffett. I read Pabrai book and watched his interviews and I don’t get the feel that he says he’s the next Buffett.

Even Buffett (this is more 1980s Buffett) conceded in his 2007 Annual Report, when he brought See’s Candies that it was not an awesome business (annual growth was in the single digits). But what he did see was it’s ability to generate cash. The 30 million he pay for See’s ended up generating over 1.3 billion in pre-tax cash for BRK. That’s over 40X return over his original cost of capital. Since he allocated the cash to other investments it compounded even more! Now that’s thinking like a business owner.

With the recent downturn in the markets, there are a lot of companies selling for single digit P/FCF as noted in the meeting notes. Some as cheap as 3X P/FCF, which means you get the company for free in 3 years!

As an example, look at NVDA (nVidia). Priced recently at 4.37B, it has 1.66B in cash, 0 debt. They have 3 year FCF average of 630.4M. If you subtract the cash on hand, you can price it at 2.71B, that’s 4.29 Price-to-FCF! If they survive for 5 years even with shrinking FCF, you get the company for free at current prices. DISCLOSURE: I own shares of NVDA.

I am not saying that it is an easy feat but my bet that if you took a random stock portfolio of less than 20 shares you will get a number of portfolios which will consistently beat even the supercharged SP500 by a few points every year by chance. Wrapped around with a sound value investing strategy investor money flows in…believing that the performance is due to skill. And this might further strengthen the belief of both the practitioner and the investor….doing more of what is working.

WB invests the way he does because of his current predicament of not only having billions of capital now but also new billions coming in every year(every day!) from profits from private business holdings and insurance float. Some of the stocks he bot recently went straight down…like KMX, BAC which would not have done much good if he was only an all out stock picking focused fund manager with nervous investors.

Would he be buying the BNIs and JNJs of the world if he had a few million $? Maybe ….but I doubt it.

If WB stayed a money manager with hot money investors I am more than certain WB would have been a top performer(especially given the general market tailwind) but whether he would have avoided this down draft is a hypothetical question…..so degrading his disciples is not really comparing like for like.

I have not read every detail of how WB made is near50% returns in the 50s and 60s but it was very few of what he does today and more of buying and selling cigar buts or taking large positions in arb situations and riding the generals(I guess with large discounts to his estimated IV) when the general market was moving up.

Cigar but investing works…if the stock is cheap enough. If you go around and look in the private business for sale ads I dont see too many corner sandwich shops/grocers/pharmacies/liquor stores with no national brand selling for much more than 5 pe….or 3 for that matter. That is if the company stays in business…which in many cases depends on the owner getting up in the morning.for a couple of years at least. But you will get your money back and sometimes in spades in some cases if you can go on for many years.

He doesnt have to worry about how the funds are doing in a quater or a year. His investors are permanently locked. This is what Buffett described when he said- “…having loaded gun and waiting for big elephants”!

Other guys have to raise and retain capital – they will see redemptions whenever they are down for few quaters. WEB just doesnt have to care even if he is not making any investment in a year or two!