if you do, please post it here first - i'm sure the forum will have some valuable feedback/suggestions.

There are a lot of things wrong with your post.

1. He wasn't a horse handicapper. He was a mathmetician. And he went on to beat the stock market with similar methods that he wrote about. Please read my posts more carefully.

2. I also laugh at all the stuff that Buffett laughs at. I'm concerned that some of the readers here are using my posts as an excuse to believe in nonsense.

3. As long as Buffett stuck to big companies where he had major disagreements with the market price, he didn't need to think about my stuff-as long as he is great at valuing companies and the public sometimes isn't. But what no one is getting here is that in spite of his words, I'm sure he agrees with me. In other words he agrees that the eventual worth, after present value adjustments, of companies he invests in are away from the market pice and toward his price but not ALL THE WAY. This is ridiculously obvious. Otherwise he owns the world. He doesn't mention it because it isn't relevant to him.

4. Almost no one is as good as Buffett at valuing a company and finding large discrepancies. So they have to pay more attention to the market's mindset. In fact Buffett himself might not be able to succeed with his methods as well he used to. The public is probably better now. So even if you are an expert, it is less likely that your valuation will differ as much from the market price. So if Buffett was starting now he would be forced to pick from smaller discrepancies and pay more attention to David Sklansky's Fundamental Theorem of Investing.

Even if the returns are greater that doesn't mean that it's a better alternative because the risk may be greater as well (out of proportion to the extra returns). I keep coming back to the concept that investors want to achieve desired returns at the minimum risk possible. An analysis without quantifying the risk is an incomplete analysis.

Then we could get into investor utility. Not all investors desire the same rate of return.

He knows of me so I doubt he will dismiss my ideas out of hand. Here are a few specific contentions of mine that you should mention where I think he agrees with me and you are skeptical.

When he says he ignores the actual stock price, he means that as long as he considers it seriously out of whack, he has a good play. And he need not concern himself with the contention that in the long run, his profits will certainly be less substantial then they would be if his predictions, on average, were perfect. All he needs them to be is substantially different form the markets predictions and in the direction his predictions would indicate. He doesn't even have to be closer than the market's predictions in order to become a multi billionare. And in fact that is what actually has been the case.

(If he agrees with that, then he agrees that once he sees the price he must shade his prediction. Even if he doesn't realize it.)

2. The idea that pure analysis will get you a good estimate of the price of a stock regardless of the market price is only a reasonable idea for some major companies. The idea that it is important to try to figure out WHY the market is disagreeing with you is not just a good idea for "fulcrum" stocks. It is important for a whole slew of stocks. Any stock where there is any kind of a chance your analysis might have missed something. But IF you can figure out why the market is disagreeing with you, and you can EXPLAIN why it is misevaluating, you should be willing to invest even if the disrepancy between prices is smaller than usual.

There is much that is wrong with the David Sklansky Fundamental Theorem of investing. The first is that a company's earnings, cash flow and potential are not static. The movement in these variables can far outweigh any current descrepency in price and private market value.

Buffet says that in the short term the market is a voting machine, in the long term it is a weighing machine. This means he does not look at current market prices as representing anything other than a popularity contest. Stocks swing from in favor to out of favor around intrinsic value. The real key to his success though is a competitive advantage. His companies grow earnings at an above average rate which multiplies value over time.

While it may be nice to buy a company at a significant discount to estimated private value if you look at his big investment winners the main key was to identify company’s and management teams with a unique position in an industry that could generate abnormal returns. His gains are NOT a simple movement from undervalued to fairly valued, that is a small part of his gains. The real money has come in identifying companies that can generate abnormal returns because competition is generally limited due in many cases to a company’s brand name that can’t be duplicated at any price.

Market price to Buffett is but a barometer of investor sentiment. He knows what value should be. He stays away from complicated companies or industries he does not understand to eliminate the risk of the market knowing more about nasty suprises than he does. Coke, See's etc are American staples with many decades of earnings growth. He correctly identified many of these brand names as giving a company a unique advantage and could care less how the American public valued these companies.

I won't be responding to your post. I'm telling you that so that you won't think my non response was because I didn't read it. But I also can't tell you what my reason is. Except to say it has nothing to do with being irritated or anything like that.

David, I have what I believe to be a solid disproof of your theory, I will attempt to post it tomorrow. In the mean time I'm not sure why you think Buffett's skill either applies to large companies or is best applied to large companies. His greatest outperformance occurred when he was able to invest in small companies and he has regularly contended he could guarantee 50% annual returns if he could invest in small companies.

No he didn't. He built a company, and only part of that involved buying stocks.

That doesn't change anything. You can get to 50% a year with stocks that you thought were half price and that turned out to be 80% or higher of true value. And there are many smaller companies that are in solid stable businesses where a great analyst doesn't have to worry too much about why he can't explain the discrepancy between his opinion and the market. And lastly I still say that Buffett DOES usually make sure he can explain it before he invests. And if he can't explain it and he invests anyway, he doesn't win anywhere near what his estimates indicated he would.

Meanwhile we have to get through this simple stuff so we can get to the more sexy exciting stuff. Where you find stocks where there is a SMALL discrepancy between your value (that you have a FIRM opinion about) and the market's value, you have NO IDEA why there is this discrepancy (In other words you would have thought the market would value the stock the same as you) and you thus invest in exactly OPPOSITE OF YOUR OWN OPINION. Ironically, in order to pull off this coup that would make fuddy duddy FAs stomach churn you have to be an expert FA. Otherwise you can't be sure that the stock price is slightly weird.

Eventually you and Stephen will come around kicking and screaming. And make 100 million between you. And when you do a mere apology will not be sufficient. We are talking about a suite in Dubai liberally stocked with hostesses.

No. Suppose you know that the Giants have a tight end that has a particular pass move that is tough for the Packer cornerback to defend against. But you also know that the public doesn't know about that or take it into account properly. So your line will be different from your anticipated line. And therefore when it is you can explain it.

I know you still believe you are right and you may be. I enjoy sharing ideas.

He bought stocks, companies and made various arbitrage and foreign currency investments through his holding company Berkshire Hathaway. The source of his $50 billion net worth is investing.

I don't agree. I think this is an apples to oranges comparison. There are thousands of computers and smart people with lots of money who move the markets. The average player in the stock market is not a layman. The average sports bettor is. I still contend that this "third" parameter doesn't exist. Either that or I still don't fully understand what you are talking about. I don't see any difference between valuing a stock with FA, and this "third" parameter you're talking about.

FA guys value the stock. That is their handicap of what price they think it should be. The market price is the other variable. They bet accordingly. Give me a stock example of this "third" parameter.

"pay more attention to David Sklansky's Fundamental Theorem of Investing."

Howz that theorem been working out for you over the last 10 years?

You got it David...

Have a Happy Thanksgiving,
Stephen

BTW ...Seriously whats "David Sklansky's Fundamental Theorem of Investing" as referred to above?

This sounds like taking much higher risk for less reward.

I think it's: "Whenever a group of investors makes the wrong conclusion about a stock's worth, and reacts accordingly, and you, having interpreted the worth of that stock correctly, profit from those who misinterpreted its true value and sold, thus depressing the price of the stock and creating a bargain for you."

Of course, you could do it the ol' boring way and DRIP.

2k invested in Pepsi in 1980 is now worth 150k if you reinvested the dividends.

2k invested in Phillip Morris in 1980 is now worth 300k.

2k invested in Johnson and Johnson is worth 140k.

It's a very boring approach to investing for retirement and certainly not recommended for the action junkie.

HOWEVER! Your 6k investment is worth 600k today and your yearly dividends: 17k.

Exciting results for some. Some believe the road they took to get there is the thrill, not the end result.

What if someone asked that of Buffett when he was forming his first partnership? I don't see David's point or agree with what I think I understand of what he is trying to say. But, like his theory suggests since he has a better than average history of being right on such things I should double check my thinking. I ordred the Fabricand book and hopefully he does a better job of explaining things then the ever cryptic David Sklansky.

He'd point to a personal history of 30%+ annualized returns, and his similar work record at one of the top investment partnerships on Wall Street. And he'd point to people who were also using Graham's philosophy to make outsize returns on Wall Street and off. And this would be in 1956.

So while a lack of audited financial history doesn't disqualify David's theory, it would be stronger if it was supported by some empirical evidence rather than a lofty sky castle built from pure logic.

This is the kind of mythology that some traders have promoted to explain away Buffett's results, because they reject the idea you can build so much wealth through buy and hold investing in the stock market. I thought you were more open-minded than to buy into this.

Buffett ran an investment partnership from 1956-1969 with annualized returns of around 30% per year. He took control of a few minor companies during that span but virtually all of the partnership's assets were invested in liquid public stocks (or bonds). One he took control of was Berkshire Hathaway which was a business that turned out to be a dog and a drag on results. When he closed the partnership and he put the bulk of his life savings in BRK, so he could invest it's net capital (and that of an insurance subsidiary) in the stock market. Once again, it was his stock market acumen that drove the entire increase in Berkshire's value during most of it's life.

Eventually over time he added more wholly owned businesses as Berkshire grew larger. In 1975 BRK had $159 per share in investments, and earned $4 per share from subs. In 1985 BRK had $2,400 in investments per share, and earned $52 per share from subs. In 1995 it had $21,800 in investments per share, and earned $175 per share from subs. Now it has $80,000 per share in investments, and earns $3,600 per share from subs.

And if you understand his philosophy, you'll understand there is little difference between buying some shares of a company's stock in the market, or purchasing all of a company's stock in a negotiation. Both involve buying investments at large discounts to value, typically with the intention to hold them for very long periods. He is forced to buy more companies now because Berkshire is too large, and he no longer has the same opportunities in the stock market that you and I have.

OT:
Why would someone who has a company to sell, sell it to Buffet. Couldn't they just tell other potential buyers that he is interested in purchasing it, and then get a little more from someone else who knows Buffet only make good deals?

None of Buffet's results do anything to disprove my ideas. If he hasn't been using them, I can still easily contend that he would have done even better if he had. And more importantly, that those who are not as good as him would do much better. Meanwhile if he actually HAS been using my ideas, which I still say is better than 50-50, the argument is over. So write that letter please. Meanwhile, where is your logical disproof you were promising?

Buffett will allow you continue to run your company. He won't make any changes to the company, or demand you to lay anyone off. He won't even bother you, you just need to send him a monthly financial summary, and any excess cash flow. And when he gives you a handshake on the deal, it's as good as done. Oh, and he'll pay cash.

Obviously, many people would just prefer more money, and aren't interested in selling to Buffett. But for a class of very successful entrepreneurs who've built family businesses over decades, working for Buffett under those terms is very attractive. It also makes it easier to have your family stay involved without exposing them to big financial risks.

If you think of what he offers, it's a psychological test that is form of self selection that's very important to Buffett. He must find owners who will stay motivated to build their businesses when they aren't owners, otherwise the business will suffer, and Buffett will have to get involved. He's got 73 subsidiaries now, he can't afford to put out fires on a regular basis.

Only a guy who really values being to continue running his business after it's sold would take less money for it. Obviously Buffett must have some other character tests he uses, but this certainly helps filter out a lot of bad apples.

I wasn't saying his results disprove you, just that your ideas would carry more weight if you had some real world results to go with them. And my counter proof is built entirely from a lattice-work of pure logic, so we don't need a letter to Buffett yet. But I'll be happy to write one if still necessary after you respond to my response that I have not responded with yet

I've been working on some research for an article on the AP scandal I'd like to write and now it's time to take my kids to grandpas for thanksgiving. So give me one more day.

I'll first admit my own biases as an experienced hedge fund analyst but I still need to question the novelty of what is presented by David as it applies to the stock market...obviously a large discrepancy between projected value and actual value is superior to a small discrepenacy...as important as it is for lawyers to be able to argue the other side, it is just as important for stock analysts especially for more liquid names (ie the financials)...I contend that trades stemming from a fundamental disagreement with the other side are far more profitable than those where the other side's argument cannot be disproved....for example, many investors have been burned buying financials on this recent dip...i think the majority of those getting long did not fundamentally disagree with the bear case, namely that assets would continue to be wrote down constraining future lending opportunities and thus a direct hit to the bottom line...i think as prices declined investors saw the opportunity to get long Citi at an 8 P/E even if it might later turn out to be a 10 P/E...i suppose that only leads to the question "doesn't that preclude one from getting long at any price"...ie the bear thesis will be around for at least the time being...obv that doesnt preclude but I would only buy where a bank reached a fair valuation assuming troubled assets written to 0, the price reached a point where the acq of the bank would be a worthwile accretive endeavor to multiple willing bidders, or and this is strengthened by the 10 yr treasury being <4%, the minimum sustanaible dividend created a yield that made is considerably attractive....in summary, when one cannot disprove the other side, one should not simply buy a stock because its "cheap" but rather wait until it becomes so cheap that the opposing argument becomes nullified.

Would love feedback....i know there are far better ways to express my point...David?