Paramount Global (PARA) is a global media brand which owns CBS, Comedy Central, Channel 5, MTV, Showtime and much more.
Paramount Pictures has the rights to iconic movies like The Godfather, Top Gun, Iron Man, the Titanic, Mission Impossible and more.
Paramount+ streaming service has ~40 million paid subscribers and plans to reach 75 million by 2024.
Berkshire Hathaway Bought shares in Q122, at an average price of $34/share.
Paramount Global (NASDAQ:PARA) is a global media brand which owns CBS, Comedy Central, Channel 5, MTV and much more. Berkshire Hathaway bought shares in Q122, at an average price of $34/share. Warren Buffett is now the largest shareholder in the company, as he now owns 10% of shares outstanding with an approximate value of $1.9 Billion at the time of writing, down from $2.6 Billion reported. Mario Gabelli of GAMCO investors was also buying shares in Q1, 2022. He increased his position by 152% and now owns 655,913 shares in Q1.
The stock price dropped to a low of $26/share on the 11th May and is up 8% in pre market trading. Let’s dive into the Business Model, Financials and Valuation to find out why Buffett has invested.
Leading Business with a Moat
Paramount Global (PARA) is a global media brand which owns CBS, Comedy Central, Channel 5, MTV, Showtime and much more. Buffett likes to invest into companies with a “moat” or competitive advantage. In this case, Movie studios Paramount Pictures has the rights to leading Iconic movies which should act as a strong moat. These include; The Godfather, Top Gun, Forrest Gump, Iron Man, the Titanic, Star Trek, Mission Impossible, Transformers, and more.
The company even has partial ownership of the rights to the Indiana Jones Franchise along with Disney. These movie rights give the company the ability to do multiple future remakes and keep cashing in. For example, a new Top Gun movie has recently premiered in 2022. All four theatrical releases this year have reached #1 at the box office, which shows they have no sign of slowing down.
paramount-plus-movies-1
Brief History of Name Changes:
The company has been through various mergers and name changes over the years. In 2019 they were called ViacomCBS Inc. due the re-merger of the CBS Corporation and the “new” Viacom. In February 2022, they announced they would be changing their name to “Paramount Global” to represent all that they do, and being “Paramount” in the media landscape.
Paramount Media Studios
On the television side, Paramount Global is a market leader CBS is the #1 Broadcast network and has been for the past 14 years. While Comedy Central was rated the #1 cable entertainment network and includes iconic shows such as South Park. Nickelodeon produces nine of the top 10 kids shows which include “Paw Patrol.” Over the past few years the company has spent a fast amount of time acquiring an extensive library of Spanish speaking content, which is the 4th most popular language in the world.
paramount_global_by_ethanishere_df05goe-pre
Growth in Streaming:
Paramount+ was launched in 2014 as CBS All Access. After the Viacom remerger in 2019, their Media Networks brands such Comedy Central. MTV, Nickelodeon and Paramount Pictures were integrated into CBS All Access. In 2021, the P+ was rolled out in 25 markets including Latin America, Canada and Australia. In 2022, they plan to launch in the UK and South Korea. With further launches planned in Italy, France, Germany, Switzerland and Austria.
As of their Q1 earnings report, P+ generated 6.8 million in new subscribers which was above expectations. Currently they have just under 40 million paid subscribers, and have plans to reach 75 million by 2024. To put this into perspective the market leader in streaming Netflix (NFLX) has 221.6 million subscribers, while Disney+ has 137 million subscribers. Now although Paramount is late entering the “steaming wars” but due to the low cost nature of these streaming services, it would not be unsurprising for households to subscribe to multiple services. These would act like “television channels” and means we have come full circle! Paramounts differentiated and Iconic “content is king” is appealing (who doesn’t love the Godfather) and thus I believe subscriber growth will continue inline with their recent figures.
viacom-cbs-streaming
The company also owns Pluto TV, which they acquired in 2019. This service added 3.1 million Monthly Active Users (MAUs) in the quarter, bringing their total to over 68 million. They specialize in free, ad-supported streaming services (FAST) which gives Paramount a range of distribution methods appealing to different audiences.
This service generated close to $1B in revenue, which is a 1400% increase over the past 3 years. Paramount also has a major opportunity to expand into India and offer their service to the growing middle class population. CEO Bob Bakish stated in Q1 earnings: “we’re going to enter India in 2023, in a very capital-efficient, hard-bundled way”. They are aiming for IPL (Cricket rights) but will enter either way.
Stable Financials
Paramount Global generated $28 billion in revenue as of Q421, up ~12% YoY. Gross profit came in at $10.8 billion, + 5% YoY. While operating income dips slightly to $4 billion, down 16%.
As of Q1, total revenue was $7.32 which represented a 1% decrease year over year, due to a decline in advertising and licensing revenues.
Adjusted OIBDA declined 44% from the prior year’s quarter to $913 million.
Selling, general and administrative expenses increased 13.9% year over year to $1.61 billion.
According to their Q1 earnings call (Page 8). Paramount+ segment saw strong revenue growth, up 150% to $585 million, with domestic and international ARPU both higher quarter-over-quarter and year-over-year
As a media business the company operates with a healthy 35% gross margin and ~14% operating margin. The company ended Q1 with $5.3 billion of cash and total debt of $16.8 billion. This is fairly high debt but not surprising for a mature company. In terms of valuation, the GF Value line which analyzes historic multiples indicated the stock was “modestly undervalued” with pre market trading was priced in, the stock is now “fairly valued”. The stock also trades at a EV to EBITDA multiple of just 5,.4 which is at a similar level to Netflix (EV to EBITDA = 4.68) after their recent decline. While Disney is much more expensive with an EV to EBITDA = 22.9.
Final Thoughts
Paramount Global is a tremendous company, with a strong competitive advantage thanks to their Iconic movie selection. They are also leaders in Network TV across a variety of platforms and have strong growth plans for the future. The stock is undervalued relative to historic multiples and trades close to “cheap” competitors such as Netflix and thus it’s no surprise Buffett loaded up on shares in Q12022.
The Oracle of Omaha is back. Warren Buffett often hailed as the greatest value investor of all time, and his right-hand man Charlie Munger held the Berkshire Hathaway annual meeting of shareholders in person for the first time since 2019.
Buffett, who is now 91 years old, discusses a variety of topics from why he is bearish on Bitcoin to investing during inflation and finding value opportunities. Munger also joins the talk with his classic wit, wisdom and humor.
“I look at Berkshire as a painting. It’s unlimited in size; it’s got an ever-expanding canvas, and I get to paint what I want,” reflected Buffett.
Here are my top six takeaways from the meeting.
1. Bitcoin doesn’t produce anything
Buffett and Munger have been notoriously bearish on Bitcoin and cryptocurrency in general. At the Berkshire Hathaway annual meeting for 2022, Buffett’s views were the same, although he framed his argument in a different way as, in his words, he “didn’t want to step on anybody’s windpipe.”
Before making his statements on this topic, Buffett caveats his words with a jokey comment regarding he “probably shouldn’t answer questions on [Bitcoin]… but I will anyway.” Buffett has never considered himself knowledgeable in the technology industry as it is “outside of his circle of competence,” despite the large investment in Apple, which he sees as a consumer goods company.
Buffett then proceeds to outline a lengthy analogy on productive vs. non-productive assets, with Bitcoin naturally falling in the non-productive category:
“If the investors in this room owned all the farmland in the United States, and you offered me the chance to buy 1% of it… I would pay… roughly $25 billion… I will write you a check now…
If you were to offer me a 1% stake in all the apartment houses in the United States… I would pay, lets say $25 billion and write you a check now, it’s that simple.
If you were to offer me ALL of the Bitcoin in the world… I wouldn’t pay $25 for it, as it doesn’t produce anything.”
Buffett then goes on to explain that if he owned all the Bitcoin, he would have to sell it to someone else in order to make any money, referring to the “greater fool theory.” Buffett states this is just “moving money around.” However, the brokers which facilitate the trades take “real commissions.” In Buffett’s usual style, he said, why not issue “Buffett Coin,” and proceeded to opine that those who believe cryptocurrency will replace the U.S. dollar are “bonkers” as that is the “only real currency” in Buffett’s eyes.
Munger then pipes up later on at the meeting and states to a young kid asking a question, “In the future when your investment manager tells you to put all your retirement money into Bitcoin, SAY NO.”
2. Investing when inflation is high
Inflation is a major topic on investors’ minds right now. Buffett started with stating the obvious, going into the main reason behind the current high inflation environment: “You print loads of money, and money is going to be worth less.” However, he also called Jerome Powel a “hero” and stated “he did what he had to do,” so it seems Buffett believes high inflation is a fair price to pay for rescuing the nation’s most highly-indebted businesses from the pandemic-fueled recession.
Buffett commented that inflation “swindles everybody,” including “the guy who keeps cash under his mattress” as well as investors. Then, referring to capital requirements for certain businesses, Buffett states things now cost “10 times more,” referring to the combo of higher input costs and higher interest rates. However, Buffett did state that companies with low capital expenditure and pricing power can just “raise prices,” though “most businesses can’t.”
A young kid then asking a question regarding the “best stock to beat inflation,” and Buffett swerved the question to instead offer some valuable life advice:
“The best thing you can do, is to be exceptionally good at something. If the best doctor in town, lawyer in town… whatever it may be. It doesn’t matter whether people are paying you with a zillion dollars, they are going to give you some of what you produce in exchange for what you deliver…
Whatever abilities you have can’t be taken away from you… they can’t be inflated away from you…
The best investment is by far, anything that develops yourself.”
3. Don’t time the market
Buffett states at one point, “We have not been good at timing.” He also said, “We haven’t the faintest idea what the stock market was gonna do when it opens on Monday.” Thus, Buffett and Munger don’t make investment decisions by guessing what the market or the economy might do, as “We don’t know.”
What Buffett also said is, “We’ve been reasonably good at figuring out when we were getting enough for our money.” Even if Buffett doesn’t know where the market is going, he knows where it is at one specific point when it comes to valuing a company. What really matters is a company’s earnings power, as that is the best inflation protection.
4. Finding opportunities
Buffett was apparently an active buyer during the volatility of the first quarter of 2022. In total, Berkshire purchased over $51 billion in stock and sold only $10 billion, a change from net selling in previous quarters. In a rare move of transparency, the Oracle revealed that the quarter’s buying included Chevron . He also mentioned HP Inc and Occidental, though investors already knew about those two from SEC filings.
Berkshire also agreed to purchase insurance conglomerate Alleghany which has been called a “mini Berkshire,” for $11.6 billion.
Buffett also said his company has increased its stake in gaming leader Activision Blizzard (ATVI), which Microsoft (MSFT) plans to acquire, in order to take advantage of the arbitrage opportunity.
Buffett noted, “We have so much trouble finding good ideas that we can’t afford to ignore any. But they do have to be sizable.”
5. Robinhood is gambling
Buffett and Munger slammed Wall Street for encouraging speculation in the stock market and turning it into a “gambling parlor.”
“They make a lot more money when people are gambling rather than investing,” Buffett noted, then went on to say large U.S. stocks became “poker chips” and criticized brokers encouraging the use of call options.
Munger, in his usual outspoken style, then slams Robinhood as “short-term gambling and big commissions and hidden kickbacks and so on… It was disgusting. Now it’s unravelling. God is getting just.”
Munger is referring to the substantial decline in Robinhood’s share price, which is down by 88% from their highs in August 2021. This has been driven by inflation, declining active users and higher first-quarter losses.
6. Investing in China
Many were hoping to hear more of Buffett and Munger’s opinions on Chinese stocks, but the leaders of Berkshire didn’t spend very long on this topic. Munger sees a better risk reward profile when compared to the U.S., stating, “I get so much better companies at so much lower prices, and I’m willing to take a little bit more risk to get into the better companies with the lower prices.”
Final thoughts
Warren Buffett is an incredibly inspiring person. At 91 years old, he is still devoting his time to speak to shareholders and the world. Buffett has inspired generations with his wisdom and educated millions more with his simple but effective investment strategy. Munger is also incredibly witty with great intelligence and humor. The pair have run this incredible double act for decades and still state they “love what they do.”
For those interested, I have made a supercut of the meeting; you can find it on my YouTube channel, Motivation2Invest.
Micron Technology is the 4th largest semiconductor company in the world and a leader in DRAM.
Mohnish Pabarai has been adding to this stock in recent quarters, and it now makes up 78.4% of his U.S. holdings!
A global semiconductor shortage hit the supply chain, could this company be poised to benefit?
Micron makes 71% of its revenue from DRAM and 26% from NAND, which is used in solid state hard drives (SSDs). These have many applications, including computers, mobile, automotive and even Cloud.
The market for 5G cell phones is an especially interesting tailwind for the company, as 5G-enabled phones have 50% higher DRAM and double the NAND content versus 4G phones. Revenue from 5G smartphones is expected to reach $337 billion for the industry by 2025, up from $108 billion in 2021, according to Juniper Research.
Micron has 13 Manufacturing sites, 14 customer labs and 40,000 team members. They have multiple sites internationally in the U.S., Europe, India, Malaysia, Taiwan, Singapore, Japan and China.
As a technology company, Micron must continually innovate to stay ahead. Thus, they are investing heavily into R&D, dedicating 10% of revenues, or approximately $2 billion per year. According to their investor relations presentation, the company’s strategy going forward includes reducing manufacturing costs and increasing density per wafer.
Micron produced strong earnings results in 2021, with revenue jumping 29% to $27 billion. Gross margins also increased to 37% of the revenue, while net income increased by an amazing 118% to $5.9 billion. The firm’s cash position also increased to $8.6 billion. In addition, Micron’s investments are paying off well as the firm’s return on capital is 14.6%.
Artificial Intelligence is an extremely broad term which involves the use of computational tools & algorithms in order to complete tasks, which in the past required human level sophistication. In other words computer systems are being designed to mimic human intelligence.
Artificial intelligence (AI) is a term which was developed from classical philosophers attempting to explain human thinking as a symbolic system. Then in 1956, Dartmouth College officially coined the term “Artificial Intelligence” at a conference.
Since then Artificial Intelligence generally took a sleepy 25 years where researchers ruminated & computing technology gradually developed & costs declined, thanks to Moore’s Law &the 7 stages of AI.
Today AI has exploded in popularity, according to International Data Corporation (IDC) global spending on AI will jump from $85.3 billion in 2021 to over $204 billion by 2025! That is a compounded annual growth rate (CAGR) of a massive 24.5%, making it one of the fastest growing technology fields in terms of investment.
The global pandemic has served as a catalyst which has accelerated existing trends in the technology. Companies have reassessed there technology stack & began to use AI as a tool or service to improve back office systems & customer facing user interfaces.
According to a 2021 survey by Mckinsey, 56 percent of all respondents reported AI adoption in at least one business function, the results also suggest emerging market economies such as India, China, the middle east & north Africa report increased adoption acceleration up 57 percent in 2021, from just 45 percent in 2020.
Impact on the Bottom Line
The cost savings & revenue increases from AI has resulted in at least 27% of the companies surveyed by Mckinsey reported at least 5 percent of their earnings before interest and taxes (EBIT) attributable to AI systems.
What is Fintech?
Fintech is the use of technology in financial applications. Finance has had a symbiotic relationship with technology for many years from online banking which started over 20 years ago to todays “Insurtech” companies.
The finance industry intermediates money & risk, transferring it from those who don’t want it, to those that can manage it profitably such as insurance, banking etc.
Financial Firms sit at the neck of an hour glass and thus are in a lucrative position to collect economic rents, the use of technology & in this case AI allows this to be done more accurately, efficiently and at a lower cost.
Finance industry sits at the neck of an hour glass. Image Created by Author Ben Alaimo at www.Motivation2Invest.com
AI Applications
AI has a broad spectrum of applications, these are in areas where computer automation technology can do a better, faster or cheaper job than a human.
According to a 2021 AI Survey by McKinsey, the top three use cases are:
Service/operations optimization
AI based enhancement of products
Contact Center Automation
The largest percentage point increase in the use of AI was for companies to allocate their spending budget on areas such as marketing.
AI Applications in Fintech
1. Personalization
Personalization is the key to profits, from marketing campaigns to custom user experiences. Many smart fintech app’s and wallets are now offering custom/personal consumer experiences. The same way Youtube’s algorithm shows you videos on the home page which “people like you” also watched, the same personalization is occurring in the finance industry.
i. Personalized Expense Tracking
Fintech companies such as Brex offer expense tracking which can used to help small businesses make optimisation decisions much easier, which means no more excel!
BREX expense tracking. Source: www.Brex.com
There are many applications for this for example you can spot a certain expense is growing rapidly and may need to be curbed. As a personal example, I am an investor into a Barbershop business and noticed the PPE expenses had risen massively in 2020 and were now eating heavily into the business profits.
Now although some of these expenses were necessary & vital for the health of customers others weren’t so much. I noticed the business provided free masks to every customer, rather than encouraging the customer to bring their own like many large retailers.
Thus we changed our policy & most people were happy to bring their own masks which helped lower the PPE costs especially as prices of health care related PPE had inflated to extortionate levels.
Many incumbent U.S. banks such as Bank of America, JP Morgan Chase & Wells Fargo, have also launched mobile banking app’s which allow customers to track their expenses, pay bills and communicate with their bank in a frictionless way.
ii. Personalized Financial Advice (Robo Advisors)
Financial Advice is going through a period of democratization, historically a consumer would have to set up a meeting with an expensive financial advisor to discuss their options and then pay large fee’s for the service or indirectly through product recommendations. However, today Robo Advisor services are offer low cost financial advice in a fast, efficient & personalized manner.
iii. Personalized Investing Advice
Taking things one step further from Financial Advice, Robo advising applications can offer investment advice and various portfolio types based upon the persons lifestyle, income & risk tolerance.
In terms of Trading, Bloomberg launched Alpaca Forecast AI Prediction Matrix, an AI powered app which provides short-term market price forecasts for major markets such as USD/JPY, EUR/USD etc.
Major intuitional Investors such as the secretive Renaissance Capital have been using AI models for many years to beat the market consistently.
2. Credit Decisions & Alternative Data
Traditional Credit scoring systems only use tradition data such as past loans and credit cards etc. However, the collection of alternative data such as information about utility payments, rental payments and consumer habits offers a whole new level of service.
This vast data set can be analysed with Artificial Intelligence to create accurate models of the potential borrower and thus offer them competitive & low cost credit decisions.
This can also help to increase Financial Inclusion & avoid bias which may occur in traditionally human managed systems. However, the AI systems must include what is called “Explainability” the ability to explain how the AI model (Black Box) has analysed the data.
Many Digital Banks& lenders have begun to implement AI & Alternative data to make improved credit decisions.
Personalized Loans
Companies such as Square (now Block) (NYSE: SQ) and Brex are offering personalised loans to small businesses from the data collected on company, by tracking their business expenses and finances. This has a multitude of benefits for both the consumer & financier.
For the consumer (small business), this means faster loan approval, better rates & flexible payback periods with revolving credit. For the lender, AI & big data allows lower cost customer service, scalable platforms and lower underwriting risks.
3. Customer Service
As the 2021 McKinsey Survey noted, Contact Centre Automation was a top 3 application of AI in 2021. The use of Cloud Contact centres & smart chats bots are providing faster customer service & lower costs for the businesses incorporating them.
Now although many people who I have asked personally about this say they prefer to speak to someone on the phone there is no doubt that the feasibility of offering physical customer service at scale is almost impossible. For example, Google (Alphabet) is famous for not really having any formal phone customer service. They prefer to setup Forums, support requests etc.
According to a Study by Super Office, the most important attribute of the customer experience to customers is a fast response time (at 75%) above just 37% who opted for a “person to speak with”.
Human Call Center workers also experience a terrible time in many cases, as they are the first point of contact for angry customers. According to a study by QATC .
The average turnover rate for a call center is 30 to 40%, but some centers see figures as high as 100% in a single year! This is mainly down to the excessive demands & high stress levels of the job. Buzz Feed offering an interesting post which shares “Call Center horror stories“.
I thought it was common knowledge, but apparently it’s not: when a call center puts you on hold, we can still hear you! 😅 Shady sales folks will use what you say on hold against you, stay safe outchea lol.
High staff turnover results in higher recruiting & onboarding costs in addition to lower employee morale. There is also the risk that one day, a call center worker may “crack” and lash out back at a customer, this could cause major brand damage especially for high ticket customers.
Thus the use of AI chat bots can solve this issue offering a faster service & saving for the revolving door that is staffing contact centres.
4. Natural Language Processing (NLP)
Natural language processing (NLP) is a branch of artificial intelligence which focuses on helping computers to understand human writing and speech. This is a challenging task as it involves a lot of unstructured, non uniform data.
Natural language processing (NLP)technology has improved massively over the years and the service is set to become more “human like” and accurate. The most common examples include Voice controlled Virtual Assistants such as Amazon Alex, Google Home and Apples Siri.
Amazon Alexa even offers the ability to check balances & make payments. For Example, if you shop with your Alexa-enabled device and Amazon Pay, you don’t have to waste time inputting your payment or shipping information and can pay instantly. For example, you can say “Alexa, Buy two movie tickets”
ALEXA AND AMAZON PAY. Source: https://pay.amazon.com/
5. Risk Management
AI allows the analysis of big data to create more accurate models for underwriting. This could be to increase the accuracy of those people who are selected eligible for loans as mentioned with Squares small business loans.
AI can also be used to more accurately analyse financial risk for actuaries. For example, Insurtech company Cytora is said to be building the “Underwriting of the future” through the use of AI and big data. They have developed a “Risk Engine” which ingests data from thousands of sources to obtain a more comprehensive view of the market than any single insurer provides. Read full report here, Cytora Risk Engine.
The use of Telematics to track customers driving and increase the accuracy of risk models is becoming increasingly popular. For example, Metro Mile is company which charges auto insurance based upon how often you drive & where you drive, rather than time of policy. ByMiles in the UK offers a similar service.
Even incumbents such as Metlife are offering an Auto & home usage based insurance program called MyJourney. This uses a smartphone app to monitor customer driving.
METLIFE MY JOURNYE APP. Source: https://appadvice.com/app/metlife-my-journey/1199480580
The app tracks total miles driven, time of day, road type, conditions, hard braking, harsh acceleration and even phone based distraction! The beauty of this system is it doesn’t just improve the accuracy of customer profiles & lower underwriting risk but it also improves the driving of the people using the app.
As the financial incentive may encourage you to drive in less harsh conditions or check your phone less as you know it is impacting your wallet. The system calculates & immediately displays a score for each trip between 1 and 100 with 100 being the safest possible trip.
This adds a gamification to the system which should help people to lower insurance costs, example a consumer my say “last time I scored 65, next time i want to score 80+ and lower my insruance costs.
The backbone of this system is by TrueMotion (acquired by Cambridge Mobile Telematics) , a boston based company which specialises in combining mobile data and Artificial Intelligence to analyse areas of higher traffic accident risk.
Artificial intelligence is great at analysing patterns in data and anomalies in services and thus has been very successful in combating financial fraud.
i. Credit Card Fraud
AI is exceptional at preventing credit card fraud which has risen thanks to the growth in e-commerce. Fraud Identification systems analyze customer behavior, location & purchasing habits to trigger a security alert in the event of irregularities detected against the cost model of each person.
For example, using 6 months worth of data the AI system profiles Sally as living in the USA and spending approximately $100 per day on Coffee at her local Starbucks, Restaurants and at the local shopping mall. But then one day there is a large $1000 purchase reported in Sri Lanka…this would be detected as an anomaly in the system.
Years ago, systems such as these tended to overreact if for example you went on vacation it was usually best to inform your bank prior to avoid having your card blocked. However, these days your smartphone location data with the banking app can be used to detect your location & thus improve consumer experience & reduce false signals.
Cybersecurity & Fintech
ii. Money Laundering
Banks use artificial intelligence to expose and prevent money laundering. The Bank Secrey Act (BSA) is the primary U.S. anti-money laundering (AML) law. To help enforce this AI is used to detect suspicious activity (large deposits, withdrawals or international transactions) and then report this to the relevant authority for further investigation.
Data Aggregators like Floyd works with financial giants such as Goldman Sachs, American Express & Citi to create fraud-detection models. Plaid integrates bank with the client’s app to ensure secure financial transactions.
Conclusion
AI as a tool or service is rapidly changing the business landscape across the financial industry. This is applicable across a vast array of applications on both the consumer facing & back end side of operations. As the technology improves in terms of speed, accuracy & increased data sources, the applications should also improve exponentially.
Technologies such as Blockchain & smart contracts could further expand range of potential applications but also disrupt incumbent finance as it mitigates the need for an intermediary.
The increased popularity of the “Metaverse” and VR should offer a range of new experiences such as self help Virtual reality systems.
Back office systems can be streamlined & cost lowered freeing up human capital to focus more on the complex problem solving which is still better to suited to human judgement….at least for now.
Value Investing is an investing strategy categorised by two aspects, the first is finding the “Intrinsic Value” of a stock or asset, then the second is aiming to buy below that “intrinsic value”.
There is also “Deep Value investing” which entails buying a stock for below it’s net asset value “net-nets” popularised by the Father of Value Investing Benjamin Graham, Warren Buffett’sformer professor, whom wrote the famous book “The Intelligent Investor”.
Value Investing correlates most with traditional business logic. The Idea is simply to “buy cash flows cheaply” or “buy one dollar for 50 cents” as Warren Buffett would say.
“All Investing is Value Investing, who wants to pay more for something than it’s worth” – Charlie Munger (Billionaire Value Investor)
What is the Value of a Stock?
A stock is just a share of a company, thus the value of the company is present value of the companies future cash flows.
As the old saying goes “A bird in the hand is worth two in the bush”. Thus cash in hand today is more valuable than “promised” cash in the future. This is because of uncertainty/risk to cash flows, in addition to inflation & opportunity cost.
1. Benjamin Graham
Benjamin Graham (1894- 1976) is known as the “Father of Value Investing” as he pioneered the strategies of deep value investing.
Graham wrote the book the intelligent investor of which his prodigy the Legendary Warren Buffett widely cites as the “best investing book ever written”.
Warren Buffett studied under Benjamin Graham at Columbia University and was his top student (no surprise).
Benjamin Graham averaged a compounded return of approximately 20% annually between 1936 to 1956. During the same period the general market returned just 12.2% annually on average.
Benjamin Graham Investing strategy
Benjamin Graham’s deep value investment strategies although simple were game-changing for those who adopted them, concepts include:
Recognising a Stock is a portion of a Business
Margin of Safety (Valuing a company then buying below than fair value)
Mr Market (The concept that the Market is governed by a bipolar person which fluctuates from Fear to Greed)
Deep Value Investing.
Deep Value investing generally involves looking for “Net Nets” a stock selling for a price below its net current asset value (NCAV).
Fun Fact: A series of unfortunate events led to Buffett’s encounter with Graham. As one of the richest people on this planet was TURNED DOWN by Harvard Business school in 1950.
Buffett stated: “I spent 10 minutes with the Harvard alumnus who was doing the interview, and he assessed my capabilities & turned me down,”
Benjamin Graham Quotes Gallery
2. Warren Buffett
Warren Buffett is the greatest investing legend of all time & a wealthy billionaire.
He is the epitome of a classic Value investor. Valuing Companies not stocks, with an extremely disciplined approach to his trades. His strategy focuses on risk minimisation & long term investing gains.
This has paid of substantially with an annualised compounded portfolio return of approximately 20% since 1964, for his investing conglomerate Berkshire Hathaway.
Overall returns from 1964 to 2021 = 2,855% (approximately).
Fun Fact: If you invested $1000 in 1964 into Berkshire, that would be worth an incredible $28,855. Close to a 29X Return!
Buffett studied at Columbia University under Benjamin Graham (The father of value investing) who authored the bible of investing, the Intelligent investor & Security Analysis.
Warren Buffett Quotes (8). You can use this image if credit with clickable link: www.Motivation2invest.com/Warren-Buffett-Quotes
“Be Fearful when others are greedy and greedy when others are fearful” this is another way of saying
observe the masses and the do opposite. This is the essence of a contrarian investing strategy where you have to bet against the consensus but also be right.
This also encourages you to buy during a stock market crash when people are fearful (but stocks are cheaper!) and sell during speculation/greed when things are actually the most risky.
Warren Buffett Quotes Gallery
3. Charlie Munger
Charlie Munger is a famous Value Investor with a net worth of $2.2 Billion. Munger is an exceptional investor with great Witt, Wisdom & no filter when it comes to saying what he thinks!
Munger is also a great friend & Business partner of Warren Buffett. Buffett often jokes about himself & Munger knowing “what each other are thinking” like former Siamese Twins & they used speak on the phone almost daily.
Munger is credited to have helped Warren Buffett invest into “Wonderful companies at fair prices”, rather than just deep value investments, using the Benjamin Graham method.
Buffett had traditionally done cigar butt strategy investing, where he looked to buy companies trading below net asset value, with “one last puff” in them.
Charlie Munger Quote “Happiness quote” Copyright: Motivation2invest.com Youtube (Credit if used) https://www.youtube.com/c/Motivation2Invest/videos
Warren Buffett and Charlie Munger first met in 1959.
The famous investors were introduced to each other at a dinner, with the referral coming from a popular family doctor of in Omaha.
The story is Legendary, In 1957 Doctor Edwin Davis had a meeting with Buffett and agreed to allow him to manage his money…because he reminded him of someone named “Charlie Munger.”
In a CNBC Interview, Buffett stated: “Well, I don’t know who Charlie Munger is, but I like him”
Charlie Munger Quotes Gallery
4. Joel Greenblatt
Joel Greenblatt is a legendary Value investor with a net worth of approximately $500 Million. Joel is a classic value investor and is style has been widely influenced by the teachings of Benjamin Grahamand Warren Buffett.
Legendary Value Investor Joel Greenblattgiving an example for why he is a value investor, paraphrasing his quote below:
” If you were buying a house would you buy a house which has recently gone up in price & is thus more expensive (that is momentum investing) or would
you quantify the cash flows from rental income & aim to buy a house which was relatively cheaper than similar ones in the area…that is value investing. “
Joel Greenblatt Quotes Magic Formula for Investing. Credit: www.Motivation2invest.com/Joel-Greenblatt-Quotes
Magic Formula?
Joel Greenblatt’s Magic Formula is a quantitative method of investing into the stock market. The Magic Formula was popularised in his best selling investment book “The Little Book which beats the market”.
The formula works by screening for stocks with a low Price to earnings ratio (P/E) but also high returns on capital. Generally these two metrics offer a simplified method of buying “cheap stocks of good companies”.
Here is how the Magic Formula works:
1. Screen Stocks for Low P/E Ratio and High Returns on Capital (For example P/E Ratio less than 10, and Return on capital above 15%.)
2. Buy the top 20 of these stocks for diversification
3. Hold for one year (no matter what)
4. Then sell and repeat back to step 1.
Joel Greenblatt Quotes Gallery
5. Michael Burry
Michael Burry “Big Short” is a legendary contrarian investor, he is most famous for predicting the housing bubble of 2007 and subsequent financial crisis of 2008.
Burry’s Hedge Fund opened a “Big Short” position against the US Housing market, betting that it would fall. This contrarian bet paid off for his investors & was popularised in the Oscar winning movie “the Big Short” where Michael Burry was played by Christian Bale.
Seth Klarman is a legendary Value Investor nicknamed the “next Warren Buffett”. Klarman follows many of the traditional philosophies of Warren Buffett such as investing within his “circle of competence” and using a “Margin of Safety”.
He even wrote a book on the subject. Now Seth Klarman runs the Baupost group which focuses on traditional value investing with a few advanced investing techniques.
Seth Klarman Value Investor quotes (19) Credit. www.motivation2invest.com/seth-klarman-quotes
“When you adopt a value investing mindset, any other investment type feels like gambling” – Seth Klarman (Value investor) .
Value investing is simple to understand but hard to implement long term. You are basically looking Value a company (a stock is a portion of a company) , then buy below fair value ideally with a margin of safety.
This sounds simple however, many people (even intuitional investors) don’t value stocks and instead invest using momentum (what has gone up recently) and from news etc. That is the reason Seth Klarman says other strategies feel alot like gambling.
Seth Klarman Quotes Gallery
7. Sir John Templeton
Sir John Templeton (1912-2008) is one of the greatest Value investors in history. Templeton is most famous for making bold bets against the consensus and being right!
The Ultimate Contrarian (World War 2) Investment:
An extreme example of this includes a bold investment during World War 2!
In 1939, WW2 was just beginning and the stock market crashed as most people were in fear (understandably).
However, Templeton saw this volatility as an opportunity.
John Templeton MOTIVATION 2 INVEST Quotes (1) Credit: www.Motivation2invest.com/John-Templeton-Quotes
Templeton borrowed thousands to buy 100 shares of EVERY STOCK selling for less than one dollar, during Stock Market Crash.
At that point one third of the companies faced bankruptcy, but he held his shares firm. After which all but four stocks rebounded, which made him an incredible 400% return in just 4 years!
John Templeton Quotes Gallery
8. Mohnish Pabrai
Mohnish Pabrai is a legendary deep value investor. His strategy focuses on medium risk , high return bets.
Pabrai is one of the few Legendary investors who invests into volatile small cap stocks which offer greater potential for returns.
These include “10 Bagger stocks” , these are stocks which can earn 10 times your money!
Pabrai is also a contrarian investor who likes to “fish where others aren’t fishing” and bet against the crowd.
He does this by investing into emerging markets and areas which seem to be of higher risk such as India and Turkey.
In his book, Pabrai calls his investing Strategy the “dhandho” which is derived from Sanskrit word Dhana which means “endeavors that create wealth”.
In Mohnish Pabrai’s own words he looks for “no brainer opportunities for high investment returns.”
Fun Fact: Mohnish is widely influenced by the investment strategy of Warren Buffett and Charlie Munger, whom he is now good friends with after winning an auction for charity meal with Buffett many years ago.
Mohnish Pabrai Quotes Gallery
9. Walter Schloss
Walter Schloss (1916 to 2012) was one of the greatest value investors in History. As a known disciple of Benjamin Graham, Schloss focused on deep value investing.
Schloss took Ben Graham’s investment courses before going to work for him at the Graham-Newman Partnership, there he met Warren Buffett.
In 1955, Walter Schloss started his own fund and for over 45 years he delivered his investors incredible annual returns of 15.3% versus 10% for the S&P 500.
“He knows how to identify securities that sell at considerably less than their value to a private owner; And that’s all he does …
He owns many more stocks than I do and is far less interested in the underlying nature of the business; I don’t seem to have very much influence on Walter.
That is one of his strengths; No one has much influence on him.”
Walter Schloss closed his fund in the year 2000 and passed away at the age of 95 in February 2012.
Walter Schloss Quotes Gallery
10. Howard Marks
Howard Marks is a legendary Value investor with a specialism in deep value investing & special situations, such as credit & distressed debt investing. Marks is the founder of Oak Tree Capital .
Investment performance
Howard MarksOaktree capitalhas a history of exceptional performance. 18.8% IRR (Internal Rate of Return) vs the S&P 500 Annual Return of 10.4%. This is the annualised time weighted return since October 1988.
Mastering the Market Cycle Howard Marks
Howard Marks believes everything is governed by cycles, from investor moods to stock market crashes.
Howard Marks even wrote a best selling book on the subject called “Mastering the Market Cycle” & “the most important thing”. The later book lists “the most important things” to do when investing.
Howard Marks Quotes Gallery
11. David Dodd
David Dodd (1895 to 1988) is a legendary Value investor, who was one of Warren Buffett’s Super Investors of Graham & Doddsville!
Dodd was a colleague of Benjamin Graham at Columbia Business School and together they wrote the bible of deep value investing “Security Analysis” in 1934.
David Dodd focuses on Deep Value Investing which involves buying assets below their intrinsic value with a Margin of Safety. The strategy also involves looking for “Net-Nets” these are stocks trading below their net asset value.
How Buffett Met David Dodd?
In 1950, Warren Buffett was turned down from Harvard Business School (the Irony)
Buffett quoted:
“I spent 10 minutes with the Harvard alumnus who was doing the interview, he assessed my capabilities and turned me down.”
Luckily for Buffett he discovered that Benjamin Graham & David Dodd were teaching at Columbia Business School. Having read their books “Security Analysis” & “The Intelligent Investor” cover to cover multiple times.
Buffett called them up “I thought you guys were dead, but if not I would love to come and study at Columbia” . Buffett was their greatest student & top of the class (no surprise)
David Dodd Quotes Gallery
12. Bill Ruane
Bill Ruane (1925 to 2005) is a famous & historical Value investor who was one of Warren Buffett’s Superinvestors of Graham-and-Doddsville.
When Buffett closed his original fund in 1969 he even referred his investors to Bill Ruane’s Sequoia Fund, this is the ultimate referral!
Bill Ruane’s fund had a Value based strategy of buying “Wonderful Businesses at fair prices” , rather than the strict Ben Graham approach of “Cigar Butt” style, deep value investing.
Bill Ruane Quotes Gallery
Is Value Investing Dead?
Value investing has UNDERPERFORMED growth stock investing over the past decade which has lead many people to say “Value Investing is dead”. However in 70 years prior Value has OUTPERFORMED growth stock investing strategies.
Thus Value Investing has a greater track record of outperformance historically and as a strategy is as timeless as common sense and thus not dead. The fact that Value has underperformed growth over the past 10 years, has led some people to believe this is a systematic change, only time will tell.
Zillow Stock is primed for Value Investors after a recent decline, review our gallery below to find out whether the stock is undervalued, from our advanced valuation model. This is not financial advice.
