sure but I'm not buying them. I'm buying stuff like BRKB which has the best US companies. Plus Buffett should get some sweet heart deals
Global Macro Trading Journal
- Thread starter Daal
- Start date
He won't go bankrupt but he holds tons of airlines and banks which do have such a risk. And OXY has a chance of defaulting too. Berkshire will lose a lot should the domino defaults happen.
Generals fight the last war, banks are well capitalized this time.
My rough calculation shows I'm down -10% YTD. With SPX down -26% or so, its not so bad.
I still have 30% or so of dry power (cash + gold) left. I dont think I will have any bellow SPX 2350 cuz at that point, if you ain't buying you are just brain dead
Here is why I'm not too concerned too about coronavirus:
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Multistage Growth Model Formula
This model is used to depict a more realistic scenario where the dividends are not expected to grow at a constant rate so you must evaluate each year’s dividends separately and incorporating each year’s expected dividend growth rate.
Now, let’s assume that there’s a company we want to invest in stock, named DEF, and let’s assume that during the next few years the company’s dividends will increase rapidly and then grow at a stable rate. And we will calculate this by using the elements of the stable model, so here are the inputs:
And after that we apply the Gordon Growth Model formula to determine the value in the fifth year: $1.39 / (0.10 – 0.05) = $27.80
The present value of the stable period dividends are then calculated: $27.80 / (1.10)5 = $17.26
And finally, you add the present value of your company DEF future dividends to get the intrinsic value of the company’s stock: $0.91 + $0.88 + $0.89 + $0.90 + $17.26 = $20.84
After all this hassle we see that the DEF Company’s stock value is undervalued because it has a $20.84 intrinsic value compared to the $10 trading price.
It takes some time to master this model, but with a bit of practice, you’ll be able to calculate the dividend growth of any company in minutes!
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"And finally, you add the present value of your company DEF future dividends to get the intrinsic value of the company’s stock: $0.91 + $0.88 + $0.89 + $0.90 + $17.26 = $20.84"
Its easy to see that in terms of fundamental value (and a similar analsys can be made using cashflows instead of dividends), the value of a stock is dominated by what happens in the LONG-RUN not the first year or even the second year. Stocks are long-term assets, even though they look like short-term casinos if you are watching it intraday right now. This is also why Buffett is not concerned about coronavirus and is buying stocks. There wont be any significant impairment in the productivity capacity of the US economy as a result of this. Most of the deaths will be of people outside the labor force and a lot of the GDP shortfall will be made up in the rebound 1-2 years from now. Stocks are long-term assets! Also my biggest mistakes in my carreer have come about saying 'I wanna buy but I think its going lower so I will wait'. But the time things are obvious buys, they are dramatically higher
----------------------------------------------
Multistage Growth Model Formula
This model is used to depict a more realistic scenario where the dividends are not expected to grow at a constant rate so you must evaluate each year’s dividends separately and incorporating each year’s expected dividend growth rate.
Now, let’s assume that there’s a company we want to invest in stock, named DEF, and let’s assume that during the next few years the company’s dividends will increase rapidly and then grow at a stable rate. And we will calculate this by using the elements of the stable model, so here are the inputs:
- D1 = $1.00
- r = 10%
- ga (dividend growth rate, first year) = 7%
- gb (second year) = 10%
- gc (third year) = 12%
- gn (dividend growth thereafter) = 5%
- Da = $1.00
- Db = $1.00 * 1.07 = $1.07
- Dc = $1.07 * 1.10 = $1.18
- Dd = $1.18 * 1.12 = $1.32
- $1.00 / (1.10) = $0.91
- $1.07 / (1.10)2 = $0.88
- $1.18 / (1.10)3 = $0.89
- $1.32 / (1.10)4 = $0.90
And after that we apply the Gordon Growth Model formula to determine the value in the fifth year: $1.39 / (0.10 – 0.05) = $27.80
The present value of the stable period dividends are then calculated: $27.80 / (1.10)5 = $17.26
And finally, you add the present value of your company DEF future dividends to get the intrinsic value of the company’s stock: $0.91 + $0.88 + $0.89 + $0.90 + $17.26 = $20.84
After all this hassle we see that the DEF Company’s stock value is undervalued because it has a $20.84 intrinsic value compared to the $10 trading price.
It takes some time to master this model, but with a bit of practice, you’ll be able to calculate the dividend growth of any company in minutes!
------------------------------
"And finally, you add the present value of your company DEF future dividends to get the intrinsic value of the company’s stock: $0.91 + $0.88 + $0.89 + $0.90 + $17.26 = $20.84"
Its easy to see that in terms of fundamental value (and a similar analsys can be made using cashflows instead of dividends), the value of a stock is dominated by what happens in the LONG-RUN not the first year or even the second year. Stocks are long-term assets, even though they look like short-term casinos if you are watching it intraday right now. This is also why Buffett is not concerned about coronavirus and is buying stocks. There wont be any significant impairment in the productivity capacity of the US economy as a result of this. Most of the deaths will be of people outside the labor force and a lot of the GDP shortfall will be made up in the rebound 1-2 years from now. Stocks are long-term assets! Also my biggest mistakes in my carreer have come about saying 'I wanna buy but I think its going lower so I will wait'. But the time things are obvious buys, they are dramatically higher
I wouldn't extent this logic to some of the more troubled co's out there. Because they might be low in cash and i bet some of them go out of business (so you never get the long-run). But BRKB has over $100B in cash. SPY is probably safe too (because its so diversified, also one company's bk is another company's bonanza, etc) but I think BRKB will do better in bad periods. EWZ I like because if anything, this problem will only speed up the market reforms that are planned. And China ETFs I like because I diversified the crap out of them and they by and large controlled the problem (80K cases down to 16-17K, low daily cases, and there are reports of economic activity perking up, or 'green shoots')
In 2009 I had no idea how the recession would end, the bank weren't leading, asset values were going down and it was a self-feeding cycle. "If I cant see a way out of this, I will just sit on cash and shorts" or so I thought, and I got burned, big time. Well, because I couldn't see doesn't mean there wasn't a way out. Here is the same, I dont know how things will be solved, whether it will be new social norms, a new treatment, a vaccine or just weather changes but it will be solved. Because it always is. Humanity wont be permanently stopped because of a fucking virus with a 2% mortality rate, that's just insane. And the more people listen to 'experts' the more they will miss out on opportunities. I learned my lesson
“if you’re not willing to react with equanimity to a market price decline of 50% two or three times a century you’re not fit to be a common shareholder and you deserve the mediocre result you’re going to get compared to the people who do have the temperament, who can be more philosophical about these market fluctuations.” - Munger
I dont have as big as stomatch as Munger (to be long 100% at the top) but if you buy a lot AFTER a significant the decline, well you just decreased the future probable drawdown by a lot and that's what I'm doing
“if you’re not willing to react with equanimity to a market price decline of 50% two or three times a century you’re not fit to be a common shareholder and you deserve the mediocre result you’re going to get compared to the people who do have the temperament, who can be more philosophical about these market fluctuations.” - Munger
I dont have as big as stomatch as Munger (to be long 100% at the top) but if you buy a lot AFTER a significant the decline, well you just decreased the future probable drawdown by a lot and that's what I'm doing
Eventually they will panic, stock up on hand sanitizer, masks and stay home. In 2-3 months is likely things will be stable and improve a lot in 6-12 months. And stock markets looks forward! If you ever wondered why the market is 'crazy' in ignoring bad news, well, its not crazy. Its just that a lot of the time it should not have dropped that much in the first place. I mean, in the dividend example i posted yesterday. You wipe out the dividends of the first year and that stock is only worth 5% less. Maybe 7.5% less if the dividend in the second year is not that high. But that's about it
And it doesnt have to be dividends, the same is true for cashflow or earnings. Markets overshoot. lots of levered HFs had to sell, put sellers, etc. That doesnt mean that the fall was 'rational' in a fundamental sense