Banned on Twitter and why does no one invest like Buffett when everyone idolises him?

a post risk world and a podcast interview!

Hello everyone!

Twitter Ban

In recent months, Twitter has become worse and worse. The search function is more often broken than working, the "For You" feed has been getting more irrelevant each day, rising racism/anti-semitism and many have chosen to leave it given Musk's antics.

Now I was banned for no reason at all.

Twitter doesn't provide a reason and they auto-deny all appeals with no other way to contact them. Additionally they don't even respond to GDPR requests using their official forms requesting the deletion of my data. So much for a "working" social media platform.

Sadly that also means that I have lost a lot of great contacts, where Twitter was the only point of contact.

Their exact handles remain a mystery and given that the contact search function now also works differently - instead of showing the people that other people you know follow, it shows the most popular ones - it is basically impossible to find them again.

So if we have been in contact, or you want to just talk, you can either respond to this blog post mail, or write me on Signal. My user name is: mroiss.01

Podcast interview.

I recently did a podcast interview with Brandon from Value Hive. Value Hive has been one of my favorite podcasts since I discovered it in mid 2022 and it was an honor to be interviewed there.

I talk about my investment process and what I have learned from my mistakes. Timing wise it was a bit unfortunate as I was banned on Twitter the day the interview was released. However I am still happy that I was on!

Post risk world

The US market is a bit in a risk-free world phase with valuation that are very close to historical all-time highs (especially when you adjust for taxes).

For example both Apple and Microsoft are up a lot despite EU, DOJ and FTC investigations. Apple trades at a whopping 34 PE, which is pretty much the highest it has ever been and that despite revenue growth disappearing. Add the EU and DOJ investigation and the market seems to not price in any risks for the company.

Tesla is another one that choose to defy gravity. Today it reported a 5% delivery decline, and apparently "beat" expectations. Well it didn't if you take just last months numbers. Furthermore Tesla trades a 10x premium compared to other car companies and at a 8x premium to BYD.

BYD reported a 35% growth in deliveries yesterday and was down in HK. Tesla added a whole BYD the last two days if we include premarket. 8x P/S for a shrinking car business, despite all the massive price cuts the last year is brave. Free cash flow turned negative last quarter, and shareholders are getting diluted 10% - giving the CEO a pay package that is worth more than $10 000 per car that the company ever produced - more that the company ever made.

ARM's valuation is out of this world, and Nvidia prices in perfection with 55% of their revenues coming in from just 4 customers. Coinbase is worth more than many of the best banks, despite ongoing battles with the SEC and Microstrategy still trades at an insane premium to Bitcoin. Data centers a very cap-ex heavy industry trade at 8x P/S.

The baffling thing is that some previous connections are completely breaking down. For example FedEx was up a lot on their earnings, but Chinese e-commerce went down the same day. Apparently they only transport parsnips now.

Boeing got sued for fraud and was up the next day, but let a Chinese regulator sneeze and the stock is down 15%. That may be justified given the risk in China, but the risk-free attitude of the market certainly is an ongoing theme.

Furthermore companies like Lufax and Huya return insane amounts of money to shareholders, but they don't have the explosive share price growth as someone like Palantir - because they are not US.

Small and mid caps in the US are historically cheap, it is just the tech or what seems to be "quality" that have insane valuations.

For example WD40 and Costco have absolutely unjustifiable valuations for their growth. And the market doesn't discount news properly anymore.

Rivian went up 7b on news that VW will make a 1b investment with the potential to go up to 5b until 2026. Rivian burns around 1.4b a quarter. Additionally details emerged that this investment will bring a 10% dilution to existing shareholders, making it seem that Rivian is getting desperate with their cash burn. The stock did go down a bit from the initial 50% surge, but it is still up over 30% in the last 5 days.

The US stock market prices in absolute perfection and no risk for profit disruption. I think that tech, tech adjacent industries and "quality" are in a huge bubble in the US market.

Luckily with small caps, European stocks and Hong Kong trading so cheaply, there are more than enough opportunities so one can still invest.

Here is a Buffett quote from his partnership letters from 1959.

Everyone idolizes Buffett - so why does no one invest like him?

Speaking of Buffett.

There is probably no investor in the world has been studied as much as Warren Buffett has and yet seemingly nobody invests like him.

Now there is a whole swarm of Buffett copy-cats that take his current approach of buying durable companies under around 15x Free Cash Flow (although they usually pay significantly more) and then holding them for a long period of time. The thing is that they don't invest on how Buffett would have invested given their size.

Buffett only changed his approach, because the net-nets that he has bought became a smaller and smaller portion of his portfolio as it grew so quickly. If you adjust it to today's prices, Buffett's portfolio when he changed his approach was already over $250 million. A far cry from many of his imitators. Yet while they are obsessed with his current ideas, they seem to discount his old approach.

Dissecting his approach

Young Buffett had three approaches. The first one were general undervalued stocks, which he called generals. Pure value was enough, a catalyst wasn't required.

The second one were work-outs, which are special situations like mergers, liquidations, spin-offs etc.

The third one were control situations, where he took a substantial amount in an undervalued stock, that would have previously been a general and then forced them to divest assets to pay out dividends or clean up the operation. Given that I can't do activist investing due to my small size, I will focus on the first two.

Generals

These are companies that are severely undervalued. From his writing, we know that these were mostly net-nets. Furthermore an investment in the control approach show us what the minimum discount is. There the entire business was very profitable and they had assets in stocks and bonds. The whole company traded at less than 70% of the NAV of the portfolio completely ignoring the profitable business or the assets of the business. Buffett had control of the company and forced the payout, it is very likely that in an uncontrolled situation, his required discounts would be even higher.

The generally undervalued companies are usually the largest section of the portfolio, with 5-10% in 5-6 positions with small positions in another 10-15. Quite often he sold before it reached his fair value as the discount was so high. We can also observe that he also bought into companies that had severe governance problems, sometimes going activist on the management teams.

Workouts

Workouts would be called special situations today. The amount of workouts in a portfolio would depends on the valuation of the market. With a rising market, the special situation allocation would increase to protect against a potential re-rating.

Given the information we have about the portfolio from his letters, they could be up to 20% for a single position - but most of the time he had 10-15 positions with an allocation of 2-3% so that the majority of the portfolio would still be the generals.

Finding them

Anyway for finding these net-nets an easy screen would be running everything under 0.4 P/B or everything under 0.5 P/S and then looking at the ones that have a great balance sheet. For those generals I have quite a few companies from Hong Kong, the most undervalued one being probably Lufax - who recently paid out over 52% in dividends. I am currently going over gold miners and European tech companies to find potential generals too.

For Workouts, I haven't paid too much attention recently. So if you have any sources there, please let me know and connect to me via mail or Signal!