I don’t Like Being Screwed
I want to have the best chance at being successful and limit my chances of getting screwed. I also want to have the best chance at finding wonderful companies on sale. Looking at the quarter 1 2021 guru buys is a great way to do this. This the list of companies traded in the American stock exchanges that were purchased by my gurus this past quarter.
I am a shameless cloner as Mohnish Pabrai says. Cloning the ideas of the greatest investors in the world is simply the best way to do it. They have to be ideas I can understand though.
I’m a shameless copycat, everything in my life is cloned…. I have no original ideasMohnish Pabrai
How I Found the Buys
I used Dataroma to see what companies were purchased by the Superinvestors in quarter 1, 2021. I went to the “Grand Portfolio” page and selected “Qtr buys”. Then I sorted the list of companies by most buys to least buys by selecting the “Buys” tab. I recorded the companies on my “Quarterly Guru Buys” excel document to keep track of my findings.
For my first filter, I went through the list of 1075 companies and looked at Return on Invested Capital of the companies purchased by gurus that I follow. I want ROIC to be consistently above or around 10% over the last 10 years or since IPO. ROIC also needs to be above or around 10% over a 7 year, 5 year, 3 year and 1 year period.
I used the Rule 1 Toolbox on the Rule 1 website to quickly look at ROIC. The toolbox prevents me from having to input all the numbers into my excel document. I had to use my excel calculator for the companies that weren’t on the toolbox by getting the information from the financial statements in my TD Ameritrade account.
You can actually do this very quickly just using the toolbox. You can use a screener to filter the companies that gurus own with a good ROIC. A problem is that the website is delayed and at the time of writing this, it still only has the quarter 4 information. Another problem is that the companies that aren’t available on the website won’t show and I’ll miss them. This is why I used Dataroma.
This filter gave me 59 companies.
Ways to Help
I’m not perfect and there are probably flaws in the calculator that I haven’t found yet. I’m also not an expert in Microsoft Excel. I literally had to research how to create everything in the calculator and it took up no less than 20 hours of my weekend. You are welcome use this calculator if you’d like. If you find it beneficial, feel free to make a donation and support me on my path.
If you don’t already have a TD Ameritrade account and you’d like for me to receive $50 for referring you, shoot me an email with your first name, last name and email address, and we can do the “Refer A Friend” program. The qualifications are: you must be of legal age in your state of residence and you must fund your account with at least $3,000 within 90 days. If you don’t/can’t meet the qualifications or you just don’t want to help me out, then just click this TD Ameritrade link.
Checking Out the Financial Statements
For my second filter, I checked each company’s complete history of Book Value Per Share, Earnings Per Share, Sales Per Share, Operating Cash Flow Per Share, Return on Equity, Return on Invested Capital and the Long-Term Debt to Earnings ratio.
I was looking to see if I could make sense enough of the numbers to place a value on the company. If the numbers were all over the place, I passed on that company. All the numbers growing consistently year over year is awesome. Most of the companies had a down year or two, but rebounded back to normal.
I didn’t look to see what the growth rates of any of these numbers were. I would prefer a company that’s growing at over 10% per year, but it’s difficult to find that wonderful of a company on sale in this market. Warren Buffett has said you are sometimes better off buying a company that’s growing slowly or not growing at all than buying a fast grower. This is especially true if the company is taking on a lot of debt to fund the growth.
I believe in buying $1 of value for 50 cents no matter what kind of growth rate the company has. Mr. Market isn’t afraid for long and when he realizes he’s offering up a bargain, he raises the price. This price rise can allow you to make high percentage returns on slow growing companies.
This filter gave me 39 companies. Out of the 1,075 companies purchased by gurus, there are only 39 that I believe I could possibly understand and make a reasonable prediction on. I understand these companies on the surface of their financial statements. I still need to dig deep into the annual reports, quarterly reports, news articles, etc. This process is just a filter for me to find companies to begin researching.
This Could be A Lot Easier
Gurufocus could make my life so much easier and I will have a subscription when I save the money to buy one. It allows you to select the gurus that you want to follow and shows you the portfolios and activity from your gurus. This would cut the amount of companies I look at each quarter in half, because the gurus I follow usually purchase less than 500 companies combined each quarter.
On my quarterly guru buys list, I put the companies into categories of: “Less than 3 years of debt”, “3-5 years of debt” and “5+ years of debt”. I sorted the companies in these categories by “Number of Guru Purchases” and “Largest Portfolio Position”.
The Company Killer
I will start by researching the companies with the least debt. The reason I’m starting with the companies with the least debt is because debt kills. Warren Buffett once said “You never know who’s swimming naked until the tide goes out”. When a company leverages itself (takes on debt) and things don’t go as expected (The tide goes out), that’s when problems occur from the obligation to pay that debt (You find out who’s swimming naked).
You never know who’s swimming naked until the tide goes outWarren Buffett
In the inevitable market crashes, the overleveraged companies are the most likely to go bankrupt. When public companies go bankrupt, the holders of common stock get screwed. Obviously. I believe a company with less than 3 years of debt is less likely to be caught swimming naked.
Debt makes a company fragile. “Antifragile” companies, as Nassim Taleb explains in his book Antifragile, emerge from tough times stronger. Companies with low debt and high cash flow are likely the most “Antifragile”. When the market takes a crash, they can buy competitors or buy their way into new markets when everything is selling for below value. When the market rebounds, it is a much stronger company thanks to the crash.
This is what Buffett has to say about a market crash, “I feel like an oversexed man in a harem. This is the time to start investing.” This is why the greatest investors in the world and greatest businesses in the world love a market crash. It’s when wealth is made.
I feel like an oversexed man in a harem. This is the time to start investingWarren Buffett
Quick “Wrong” Valuations
The toolbox has a quick valuation calculator. I made a prediction just based on the historical numbers of what the intrinsic valuations could be. These valuations are 100% wrong and I do not stand behind the valuations at all. I have done no research into these companies, so I have no idea what the future prospects for each company look like.
For the companies not available on the toolbox, I had to use my excel valuation calculator.
Once again, I’m not perfect and there are probably flaws in the calculator that I haven’t found yet. I’m also not an expert in Microsoft Excel. I again had to research how to create everything in this calculator and it took up an entire weekend. You are welcome use this calculator if you’d like. If you find it beneficial, feel free to make a donation and support me on my path.
I Might be Making a Mistake
I am probably making a mistake just by doing quick valuations. It could persuade me into thinking a company is worth more than it really is. I am just trying to better my chances at starting my research with companies really selling at a discount right now.
I have a full-time job where I work 40+ hours per week, so I have to use my free time wisely until I’m able to turn investing into my full-time job. Investing wouldn’t really be considered a “job” to me though, because I’d be doing something I love. So, the companies that appear to “possibly” be selling at a discount are the first companies I will research.
The Problem Gurus Face
The reason I say I want to find the companies “Really” on sale is because some of the gurus face the problem of having their investors breathing down the back of their necks. This pressure from their investors causes them to buy companies at higher prices than they would like. Most people think if their fund manager isn’t constantly active, he/she isn’t doing a good enough job.
You, me and the investors in the funds of my gurus are constantly being fed “investing” news that makes us feel like if we don’t act now, we’re going to miss out. This “You better act now” news has created short-term thinking by most investors. 90+% of fund managers have a short-term investing method. They might say they’re long-term, but the reality is they rarely hold a stock longer than 1 year.
Charlie Munger says you make money when you wait. Some of the gurus know they should wait on a company to have a more depressed price before buying, but they buy with a smaller margin of safety to please their investors.
Look at those hedge funds – you think they can wait? They don’t know how to wait! I have sat for years at a time with $10 to $12 million in treasuries or municipals, just waiting, waiting…As Jesse Livermore said, ‘The big money is not in the buying and selling…but in the waitingCharlie Munger
The Wizard of Wall Street
Julian Robertson, the founder of Tiger funds, is considered one of the greatest hedge fund managers of all time, if not the best. From 1980 to 2000, Tiger funds had a compound rate of return after all fees of 31.7%. Nobody had a better record, and yet people started pulling their money away from him. There is a book about him. It is called Julian Robertson: A Tiger in the Land of Bulls and Bears.
These people pulled their money away from possibly the greatest hedge fund manager of all time with a better record than everyone because they wanted momentum and potential short-term gains in highly speculative stocks.
As you have heard me say on many occasions, the key to Tiger’s success over the years has been a steady commitment to buying the best stocks and shorting the worst. In a rational environment, this strategy functions well. But in an irrational market, where earnings and price considerations take a back seat to mouse clicks and momentum, such logic, as we have learned, does not count for muchJulian Robertson
My Advantage Over my Gurus
I don’t have investors breathing down my neck. I can wait until a company gives me a 50% margin of safety. Of these 40 companies, I am hoping for at least 1 that I can understand that is selling at a great margin of safety right now.
I will research the companies in the order of least debt, most guru purchases and highest percentage of a guru’s portfolio.
Here’s my Quarterly Guru Buys list of companies. I also have my list for quarter 4, 2020 in this document. These lists work with one another by showing what the gurus did with the quarter 4 purchases during quarter 1. If gurus are continuously purchasing certain companies quarter after quarter, that tells me to pay extra attention to those companies.
If you’d like to have a little more of an overview of the way I think about investing, check out one of my previous posts, This is an Overview of My Investment Style.
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