Please don't dignify Valeant by connecting it to Outsiders. The Outsider CEOs are legends - they were not medieval barbaric plunderers.

Valeant CEO's point of view is that people should not plant trees. Instead raid the neighbor's orchard, pluck the fruit and burn the trees. Its great in the short term for Valeant shareholders, but I think that game is over. 

Allergan is a far better company than Valeant. It has much better organic growth than Valeant and is not leveraged like Valeant. It can easily buy an Irish company and do a tax inversion itself. It can also acquire other companies and put itself out of Valeant's reach. Allergan has lot more firepower than Valeant.

Anything Valeant buys from here on would have to be a public company to move the needle. Since Valeant's CEO is despised in the industry, any such acquisition of a public company would have to be hostile. Therefore a large premium would have to be paid implying a low rate of return. Glenn Greenberg also said the price for Allergan cannot generate a good return. 

People like Ackman and Pearson didn't become scientists and engineers because its too hard for too little money, requires more IQ than they have. Where are the families of scientists who get laid off supposed to go? Move to another state or change careers? Will they tell their kids to never get into R&D? 

Who will plant the trees that Pearson wants to strip and burn? Buffett is a desired acquirer, Pearson is a despised acquirer. Not good in the long term for Valeant shareholders.

  • Thanks for the input; I appreciate differing views here. I am not in the industry so don't have a view on your comment, but Pearson is well regarded by some investors I really respect and they do tend to kick the tires on businesses they invest in.

    Anyway, thanks for commenting.

  • A lot of those investors would have started selling in the wake of this news (like Glenn Greenberg). Jim Grant's and Jim Chanos's short thesis suddenly looks valid. 

    Valeant has low organic growth - most of their organic growth is annual price increase in the range of 6-10%, with very little volume growth. 

    They have no drug pipeline, no R&D. Their claim was that they can buy R&D cheaply, that R&D productivity in the industry was low. It looked believable to a lot of people. 

    What they didn't mention was that so far they had been buying small private or private equity-held companies and that they would now need hostile acquisitions of large, public companies to maintain their growth rate. Their lack of organic growth and pipeline will now scare more investors. Also remember that they are in the drug business, their products can get outdated pretty fast. 

    Ackman compares Valeant to Procter and Gamble. But Procter and Gamble's products don't get outdated like pharmaceuticals.

    Besides, why do we call Valeant the acquirer? Allergan has zero net debt whereas Valeant has 17 billion in debt. Allergan has more firepower right? Valeant had never done a hostile public company acquisition so far, suddenly Valeant's business model doesn't look as good as it used to. 

    Valeant had so far paid 2-3x sales, now with hostile public company acquisitions they are suddenly paying a lot more.

  • Thanks for commenting. It's good to hear the various views.



在2014年Ackman & Valeant剛啟動併購Allergan時這位匿名仁兄居然就對Valeant有此獨道見解,與蒙格的評論一致。

另外自從看到Brooklyn Investor Blog之後,每每看其文章都收穫滿滿。

這篇談到JPM的2013年annual report,我想如果一位投資者當時若很認真的去看JPM的年報將會很容易得出JPM很便宜的結論,

年報裡面Jamie Dimon很有邏輯的告訴其股東在未來3-5年內若利率溫和上升對於公司獲利的改善程度以及JPM正在ongoing之計畫未來可能對公司的改善程度。以及最後對QE的看法和評論

我只看Brooklyn Investor的review便大約可以感受到為何巴菲特會推薦Jamie Dimon的股東信了。


Comment on Valuation models:

  1. Speaking of off-topic: have you ever seen how involved and elaborate the valuations of Aswath Damodoran are? Is it even worth it to try to learn from him in your opinion?

    • Hi, sorry I didn't respond to this. I try to respond to all comments but I missed this one. I will respond to the new question below.

  2. to follow up on the above damodoran question but maybe make it less personal (ie not to attack damodoran)
    i'd be curious to hear your thoughts on the value of financial models. buffet has said that he never uses spreadsheets etc. others make ridiculously detailed models... that like all models are flawed by "garbage in, garbage out."
    i recently started working at a well known "value" shop and was surprised to learn that analysts here for the most part rely on quick and dirty operating models (ie basically just income statement, net income to FCF conversion (including working capital build), and then assumptions about use of capital like debt pay-down, buybacks or growth in order to get to next year's share count and net cash for EV purposes). there is no effort to build working 3 statement models, which makes life from an analysts point of view much easier.

    of course, at this shop they have always thought about what the business and earnings power will look like 3-5 years out rather than worrying about quarterly earnings which is really the only sensible way to operate in my view. 

    anyway - would love to hear from KK or other buysiders on their views of modeling and how important it is etc.

    • Hi, 
      I am one of those that believe that models don't blow portfolios up, people blow them up. A model carefully thought out and constructed will be exactly right, whether it be the Black-Scholes options model or a dividend discount model. Those are mathematically exact. If the future turns out exactly the same as your inputs, your valuation will be precisely correct. 

      The problem is not that the models are wrong, it's just that we just don't know what the variables are before the fact. And when we pretend that we *do* know what will happen in the future, that's when blowups will happen. Long Term Capital Management didn't really blow up because of flawed models, they just leaned on them too much and were overconfident in their "guesses" that they input into the models (which again, were probably all very correct and accurate; it's just that they were wrong on their inputs). 

      So this is similar to valuation models. They are obviously very accurate and useful if you can guess the cash flow streams and interest rates accurately out into the future. Some of the more elaborate models seem silly to me. Not academically / intellectually; they do make sense. The problem is how the heck are we supposed to come up with the inputs?

      As a hint, you can go back and read every great book written by a great investor (Stock Market Genius, Little Book that Beats the Market, Margin of Safety, Intelligent Investor, Securities Analysis, biographies and autobios of some of the great value investors in the past, interviews with great investors talking about their stock ideas etc... ) and you will notice that nobody ever mentions anything about financial models or cash flow models. Sometimes they augment their analysis with a comment like, the cash flow discount models puts fair value at $100/share or some such. 

      But that will never be central to their analysis. It will be more like, "We like xxxx trading at 12x p/e versus with a higher ROE and growth rate and margins than yyyy trading at 18x p/e" or something like that. 

      If you spend many hours reading stuff like this, you will almost never encounter these valuation models. And that is a big hint, for one. 

      Also, think about all the great investment errors in the past. It doesn't matter what it is. Your own. The market's in general. Buffett's mistakes and anyone else's. 

      And very few of those mistakes would have occurred due to not using a valuation model, or most of them were not due to lack of precision in getting to a valuation level. OK, some might argue that valuation models would have prevented people from getting caught up in the internet bubble. But then you really don't need models to tell you to stay away from stocks trading at 100x p/e or whatever.

      The biggest cause of investment mistakes are probably due to misunderstanding the economics /. nature of a business, misjudging management and things like that. 

      This is the sort of thing that guys like Buffett, Julian Robertson or any other great investor spend their time on. Evaluating the business and management is where you're going to make a difference in your performance. 

    • OK, so I couldn't fit it into one response so here's the rest of the above post: 

      Fine tuning valuation with intricate models where you don't even know what the inputs are going to be might be fun and it's a good academic exercise, I suppose, for teachers. But in the real world, I don't think it's a big factor at all. Like you notice, I don't think most value shops spend a lot of time on models, but most of their time on trying to evaluate the business. And the valuation would be much simpler; comparing valuation to peers/markets and figuring out a simple expected return etc... (for example, if you can buy something at a free cash flow yield of 10% and that is expected to grow, who cares what the theoretical value is? It's sounds like a good investment!). 

      So anyway, those are my thoughts. 

      Damodoran has created a franchise for himself by aggregating all sorts of valuation methods and I think that's great. But on the other hand, do I care about his models? Not really. It's good to have a general understand of some of that stuff, but I think there are better places to spend your time (namely, getting to understand people, businesses, industries etc...) 


Other comments on Valeant:

  1. Actually, I don't work in the drug or medical industry. It just seemed unjust. Note that the Outsider CEO's business plan wasn't hostile acquisitions, they made friendly deals. 

    Besides, if the market really believed this deal would go through, VRX would be trading at $200 instead of $134. Perhaps the big investors who hold VRX are selling right now. 

    Nowadays it seems that any CEO who takes on a lot of debt is called an Outsider.

  2. The strange thing is that Bill Ackman compares his amassing the Allergan stake to Buffett buying Coke stock in secret. 

    Buffett has hated greenmailers and activist investors all his life. Ackman is ruining Buffett's good name by saying its the same as Buffett.

    I can now see why Soros, Icahn, Loeb, Stiritz etc. took the opposite side in HLF - Ackman is really sneaky. The Starbucks CEO called Ackman "despicable" here 

    I owned Allergan until last week. I sold it at 125.4. I guess I must have sold it to Ackman. 

    Is what Ackman did legal? I mean if it is legal, why isn't everyone else doing it?

    • I don't think anyone can ruin Buffett's good name by comparing themselves to them so I wouldn't worry about that at all. Ackman is certainly a controversial figure; when you rock the boat and make a lot of noise, it tends to bother some people. 

      Ackman apparently had done a thorough check on the legal issues so I'm sure it's legal. Why else isn't everyone doing it? Well, you can imagine a lot of people are thinking about doing it now. 



Of course, it's not a good idea to bring in GS and other banks to defend KO; I can imagine the outcry of some folks (who think bankers are even more overpaid).  But Buffett is a large shareholder of GS and is well aware of this.  I also don't mind this stuff too much at financial firms as I tend to look at BPS growth over time, and all of this is reflected in shareholders' equity.   For example, if JPM has a high looking burn rate of 2.1% but has grown BPS in double digits, that's fine with me.


此篇brooklyn談到過去巴菲特的大交易案企業買價/pretax earnings都接近10, 以下的匿名者回應非常卓越! 除了AXP巴菲特當初買的非常便宜,並且其當初是買可轉換的優先證券,並在股價回升時不確定是否要脫手,他傾向脫手(1997年報),但是當他與一位CEO打高爾夫並運用"閒聊法"(scuttlebutt)後,那位CEO使巴菲特確定AXP的franchise非常強壯,故巴菲特非但一股都沒賣還轉買。如果對一有franchise的企業,就算其P/pretax earning自7倍上升到10倍多,約漲了5成,理性的投資人該作的是加碼而非賣出,巴菲特運用閒聊法得出結論後便反向加碼,此運用閒聊法的過程其在2017接受CNBC訪問再次提到過。 如果去看最近的Apple 和 航空股,我想其買價應也是接近 P/pretax earnings =  10x , 其亦以閒聊法確認Apple的franchise。巴菲特的進化令人驚嘆。


Thank you again!

I would like to add, that in 2007 Buffett bought almost 9 percent of the KFT at an average cost of 33,2 USD per share. Kraft's 2006-2007 net EPS was 1.73-1.56, pretax EPS was about 2.23 in the both years. So it seems multiple in this case was 14.4x. Perhaps one could say that at that time margins and earnings were depressed and using pretax EPS of say year 2003, which was about 3 USD, one would get to the 10.7 multiple, however later EPS temporarily would become even lower. At the same time this is kind of the business, which is a little bit different from banks (with leverage) or utilities (regulated, capital intensive) and I think he paid more than 13 pretax for J&J in 2006-2007 and again earlier even more fore BUD. So if you look only at these "very wonderful" and "very predictable" businesses, it seems that price Buffett was willing to pay, was even higher?

Now for the tangent: it appears that AXP price really was an outlier, but it seems, that at the time the company was more than just "unloved", just see this: "More recently the tarnished American Express card has been losing market share to Visa and MasterCard as Amex's principal consumer benefit--prestige--becomes a tougher sell. And the company's international business, say analysts, is in the doldrums." And Buffett himself, after being quite for some time about his rationale, later wrote in 1997 report "Our Percs were due to convert into common stock in August 1994, and in the month before I was mulling whether to sell upon conversion. One reason to hold was Amex's outstanding CEO, Harvey Golub, who seemed likely to maximize whatever potential the company had (a supposition that has since been proved -- in spades). But the size of that potential was in question: Amex faced relentless competition from a multitude of card-issuers, led by Visa. Weighing the arguments, I leaned toward sale. Here's where I got lucky. During that month of decision, I played golf at Prouts Neck, Maine with Frank Olson, CEO of Hertz. Frank is a brilliant manager, with intimate knowledge of the card business. So from the first tee on I was quizzing him about the industry. By the time we reached the second green, Frank had convinced me that Amex's corporate card was a terrific franchise, and I had decided not to sell. On the back nine I turned buyer, and in a few months Berkshire owned 10% of the company." So boy, it seems that at that time AXP future was looking really scary (in this light current IBM problems looks like peanuts?), so perhaps this 7x multiple could even be put into distressed category? 



Hi kk,

How will you relate this to the 15% hurdle rate that Buffett said numerous time in the past? 

  • That's a very good question. My guess is that he uses 10x pretax as a minimum hurdle but is not actually the expected return on an investment. Don't forget, he doesn't like to invest without growth opportunity. 

    Anyway, 10% pretax yield does not equal 10% expected return. 

    Look at WFC as an example. If he pays 10x pretax earnings, his return can be higher. If ROE is, say, 15% and dividend payout is 50% and the stock trades at 1.7x book value, his expected return might be 7.5% earnings growth (50% retention x 15% ROE) plus a dividend yield of 4.4% (7.5% divided by 1.7x book) for a total return of 11.9%. 

    So his 10x pretax might be his minimum return (assuming no earnings growth at all) while he hopes for better return from increased earnings over time. 

    He has said in the past that his favorite holding period is forever, and that stock prices will ultimately reflect earnings, if he expects to earn 15% on anything, then earnings must grow, over time, 15%. If that's per share, then this can of course be boosted by share repurchases etc... 


  • Oh, and by the way, the above growth rate/expected return is after tax (ROE is based on 'net' income, not pretax). So you can argue that the 12% or so expected return is after-tax (of course, not after tax net to BRK, but after tax nonetheless at the investee level). So if Buffett wants to make 15% pretax, that is like 9-10% after tax. So the above 12% expected return on WFC exceeds an expected return of 15% pretax.

    But then, yes, there is another layer of tax that BRK will have to pay both on the dividends it receives and the capital gains on the stock appreciation so the above is just one way of looking at it, and just one way to reconcile the 10x pretax price he is willing to pay versus his expected return. 



"I have absolutely enjoyed practicing all these styles of value investing. Over the years, I also learnt…about the idea of returns per unit of stress.
You can make a lot of money by being an activist investor, which I’ve done in the past. But it’s stressful. You can make a lot of money by shorting over-valued stocks of companies run by promotional and fraudulent managements. But it’s stressful…I found that investing in moats is not stressful. It involves a slow and more meaningful understanding of how a business creates value over the very long term. And boy does it work!
Moats are internal compounding machines. History shows that you get rich by just sitting on them because they do all the hard work for you. And I realized that over the years. Just as Mr. Buffett did when he too moved from classic Graham-and-Dodd to moats."

by Prof. Bakshi

Brooklyn Investor

Many thanks for your recent flurry of posts on Berskhire, market timing, and the 10% pre-tax earnings yield. Your posts prompted me to go back and re-read the original Buffett Partnership letters. It is amazing how you can see Buffett's transformation from Graham and Dodd (doing "work outs", etc.) to Munger-style buying great companies at a reasonable price. I believe Munger and Buffett were introduced just before the '60s, so it makes sense to see the change occur during the life of the Buffett Partnership.

At the same time, I was reading a post over at Value Investing World ( where India's answer to Bruce Greenwald, Sanjay B, talked about the effort required to do Dodd and Graham style investing. He was speaking from decades of experience:

"I have absolutely enjoyed practicing all these styles of value investing. Over the years, I also learnt…about the idea of returns per unit of stress.
You can make a lot of money by being an activist investor, which I’ve done in the past. But it’s stressful. You can make a lot of money by shorting over-valued stocks of companies run by promotional and fraudulent managements. But it’s stressful…I found that investing in moats is not stressful. It involves a slow and more meaningful understanding of how a business creates value over the very long term. And boy does it work!
Moats are internal compounding machines. History shows that you get rich by just sitting on them because they do all the hard work for you. And I realized that over the years. Just as Mr. Buffett did when he too moved from classic Graham-and-Dodd to moats."

That seemed reminiscent of what Buffett said when giving the reason for winding up his partnership:

"When I started the partnership I set the motor that regulated the treadmill at "ten points better than the Dow". I was younger, poorer and probably more competitive….Elementary self-analysis tells me that I will not be capable of less than all-out effort to achieve a publicly proclaimed goal to people who have entrusted their capital to me. All-out effort makes progressively less sense…An example of the latter might be the continued investment in a satisfactory (but far from spectacular) controlled business where I liked the people and the nature of the business even though alternative investments offered an expected higher rate of return. More money would be made buying businesses at attractive prices, then reselling them."

The end result was a sort of epiphany that it would be so much easier to just buy and hold compounders that were selling at reasonable prices rather than all the effort required in cigar-butt investing. One might give up a few percentage points of return a year, but one's sense of well being should be improved tremendously by partnering with great businesses. Add to that the fact that you can invest large amounts in wide-moat companies without worry. Whereas, with Graham and Dodd, I feel you need a larger basket which means more things to monitor (read: worry about). That does not mean that Graham and Dodd has not place in investing, it simply means that it is probably somewhere you look if you cannot find enough compounders (even Buffett recently gave Irish banks a go).

Finally, having read warnings by Seth Klarman and other respected investors, I was left thinking I should sit with cash on the sidelines and wait. However, that IS market timing as you suggest. The better way to operate is simply to see if there are any great businesses selling at fair prices -- and, as you pointed out, Wells Fargo is just sitting there at the moment. Doesn't matter what markets or market prices do for the next few years. WFC will continue to grow earnings.

In short, "thanks" for the great work you do -- please keep it up if for no other reason than you are a great teacher to real people out there who can benefit enormously from it.

Here's to Brooklyn ...

  • Thanks for the comment. 

    Yes, a lot of respected investors are warning of market levels for sure. But don't forget that if what you own is reasonably priced and generates a lot of cash flows, they will benefit from lower prices. Think of why Buffett is totally comfortable 99% invested in BRK (well, his 1% is enough to live so that's part of it too); if the market goes down, he has all that cash coming into BRK to put to work so he is happy. 

    The same is true with many companies. So depending on what you own, even if you are "fully invested", you aren't, really. 

    This is not to say, of course, that everyone should always be fully invested at all times. This is not true either; one should just be invested enough that a 50% drop wouldn't overly upset them etc... 


上述這段是我認為BRK below 1.2 PB 非常值得買進,就算是100%買入亦是如此,如果發生金融海嘯,BRK的內在價值只會成長的更快而已,Pabrai過去有個想法讓我認為很卓越,那就是把BRK當作現金部位,不知道他現在是否仍如此作,但我認為這個idea卓越到現在仍適用,甚至比以前更加適用。 當然前提是BRK未高估,也許1.3倍以下PB的BRK很適合當作現金持有。


Hi, great post you have there. Very interesting. Do you happen to know how and where did Warren Buffett get his magic "10%" pre-tax return investment requirement from? I suspected that there should be a common sense guide for this particular required return number which he used all these years. Was it from AAA/AA/A/BBB bonds yield? Was it 10/20/30 years duration? And did he Normalized the long term average yield from that bond yield? If yes, was it Normalized for 10/20/30 years cyclicality? Your insights on this would be appreciated. Thank you.

  • Hi, I don't know, but I think 10% has been sort of a reasonable rate of return over time in equities. Also, keep in mind that 10x pretax is list 15x after tax profits and stocks have traded at 14-15x p/e over time. So it sort of feels like Buffett is willing to pay an average price for an above average business, which makes a lot of sense. If his targets are better than average, then an average price is very reasonable.


簡單幾句道出buy decent business with reasonable price的道理和其安全邊際所在


Thank you for sharing your time and thoughts. For those of us who are just starting and do not have 7 or more figures (yet! :) could you write a post or a few words about small or micro caps and how you'd go about finding them? Many thanks!

  • Hi, 

    I don't know about small and micro caps too much. There was a time I spent a lot of time looking for them, but I would often find things that I couldn't evaluate unless I met management, but that wasn't in the cards for me. It is hard to find information on microcaps, I find. For example, if you wanted to evaluate COST, it's easy. There are a lot of public filings, long history, lots of articles in the news about the people, stores etc. You can actually go to the stores etc. But for microcaps, it's hard to find information about the business other than the usually limited filings. 

    That doesn't mean you can't find interesting things in that space. I'm no specialist in the area, but I used to really enjoy going through Walker's manual, for example. It was like a S&P stock guide but for microcaps. 

    Also, going through ideas at VIC (Value Investors Club) you can often find microcap ideas. Also look at the holdings of microcap mutual funds. You can screen stocks based on market cap and low valuation etc. There are a lot of things you can do. 

    Anyway, good luck! 

  • Hi,

    Thanks. I've been thinking awhile about your reply and you are right of course. I guess one can also call or send emails (I've sent to a few IR and always get a reply) but still the difficult part would be to figure out which questions to ask, especially qualitative ones. While with the big mcaps the questions are all around and can be even passively absorbed over time if you read enough.


我曾經思考過Philip Fisher的scuttlebutt在現今網路發達時代是否可以用廣泛閱讀得到資訊,巴菲特曾經說過他光靠閱讀就能打敗大多數的人,我想這部分在現今網路時代將更顯著,勤奮閱讀的人將有龐大競爭優勢。 上述觀點非常有insight


Buffett is no market timer. He looks at valuations. That much is obvious. He always gives his viewpoints of the *valuation* of securities and markets, and he never makes predictions about *when* the market will change. He doesn't have to, because if he is right about the valuation, then it will lead to a good investment return regardless of whether he gets the timing right. However, when the market gets really out of whack, it *appears* as if he is timing the market because severe over- or under-valuations are not a stable situation.

As Buffett once wrote:

“We try to *price*, rather than *time*, purchases. In our view, it is folly to forego buying shares in an outstanding business whose long-term future is predictable, because of short-term worries about an economy or a stock market that we know to be unpredictable. Why scrap an informed decision because of an uninformed guess?

We purchased National Indemnity in 1967, See's in 1972, Buffalo News in 1977, Nebraska Furniture Mart in 1983, and Scott Fetzer in 1986 because those are the years they became available and because we thought the prices they carried were acceptable. In each case, we pondered what the business was likely to do, not what the Dow, the Fed, or the economy might do. If we see this approach as making sense in the purchase of businesses in their entirety, why should we change tack when we are purchasing small pieces of wonderful businesses in the stock market?”
- 1994 Letter to Berkshire Hathaway shareholders

完全的真知灼見 在此篇Brooklyn 探討巴菲特是否是一market timer的評論


I think he has evolved over time. He said that he used to be more quantitative like Graham but gradually moved to the qualitative approach (away from cigar butts and to more moated businesses etc.). 

As for how much to stay invested is a tough question, but it will vary according to your situation. If you have an income and you are young, then there should be no problem being 100% invested. Why not? Even if there is a bear market, it doesn't matter as you can keep buying with new cash you are earning. 

But on the other hand, if you are the nervous type and you freak out from big numbers, then maybe you want to temper your exposure (and then let it grow). For example, if you inherit $1 million suddenly and then put that in the market, you might see $100,000 or $200,000 losses (temporarily). That would freak out most people who are not used to those kinds of numbers. In that case, it's probably a better idea to gradually move into stocks and get used to the volatility. Or else your first monthy statement that shows you down $60,000 in a single month might prove too upsetting. 

I can imagine billionaires not wanting to see even a $1 million mark against them. 

Also if you have so much money that money is not an issue, then you can probably afford to have a lot in the markets too. Buffett is 99% in BRK and doesn't worry about volatility because he has so much that even after a 90% loss, he would still have more than enough to live comfortable. So why worry? Plus his 1% is probably enough to live off of too. 

So there are all these different factors involved. And yes, there may be a tactical reason to keep cash too; have some cash available in case of another bear market. For some people, if it makes them feel better, its probably not a bad idea. But then again, if you have income, there is always cash coming in so maybe people don't need as much cash lying around as they think. 

On the other hand, if you need cash in the near future, that cash probably shuoldn't be in the market. Again, unless you have so much that it's not going to affect your lifestyle... 

Oh, and for generals, in BPL, I do think it's just regular undervalued situations; low p/e and things like that. 

Thanks for reading. 



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