Lunch With Warren Buffett

Tom couldn’t attend to his usual Monday column this week so he asked me to step in. My own investing has been partially on hold over the past couple of months as I have been watching developments in the markets, so I figured I would open the week with something a little lighter albeit not entirely unrelated to alt energy and cleantech investing. Deflating Valuations = Happy Value Investors One of the good things about the current state of equity markets for alt energy investors is that several great company’s stocks that had been trading at rich multiples for most of 2007 are now priced more reasonably. In fact, for value investors, markets such as these present wonderful opportunities to get in at acceptable levels on good stocks. At its core, the value investing approach purports that, when buying a company’s equity, you should only ever pay for one of two things: (a) the replacement value of the firm’s assets (including intangibles like technology and client relationships) or (b) what is affectionately referred to as “the moat“, meaning some form of strategic edge that competitors cannot replicate. With regards to replacement value of the firm’s assets, this effectively means that if a stock is trading much above its book value per share plus certain adjustments (say higher than 1.4x), value investors won’t find it too interesting. This metric represents what it would cost a competitor to exactly replicate the business, and so adjustments to the balance sheet include intangible items like patents and customer relations. On the second point, the moat can be thought of as a market position that is nearly untouchable for one reason or another. For example, First Solar’s (NASDAQ:FSLR) trailing PE of 132x can be partially explained by the company’s unchallenged manufacturing and cost leadership in the thin film PV space – investors perceive a moat and implicit in this high multiple is a belief that earnings won’t come under attack from competition any time soon. Needless to say, certain alt energy sectors such as solar PV have seen PE ratios deflate appreciably since the fall of 2007. PE ratios of 15x and under are the ideal range for value investors and, while many alt e stocks still have PEs far above that, certain good opportunities have certainly emerged in the past few months. Now I don’t want to delve too far into this just yet as I intend on doing a full value analysis of a stock I’m considering buying in a few week’s time. But for those who don’t know a lot about the value investing philosophy, I would recommend familiarizing yourself with it. It can be a powerful, and, if you truly follow it, disciplined approach to investing that has had a very respectable track record over the past four decades, thanks in large part to… Warren Buffett Mr. Buffett, the world’s richest man and the most famous disciple of value investing’s inventor Benjamin Graham, generally needs no introduction. A few of my classmates and I had the extreme pleasure and honor of traveling to Omaha, Nebraska, to spend the morning and lunchtime with Mr. Buffett a couple of weeks ago. It was a truly once-in-a-lifetime experience. While I admire the work and talent of many people, I don’t often come across individuals that I find inspirational on a personal level. Warren Buffett’s thinking on many issues related to investing and business has definitely influenced my own, and it turns out that his approach to life in general makes a lot of sense to me. His most memorable advice to us: “The number one thing you should look for in a spouse is not humor or smarts, but low expectations.” I’ve tried to convince my wife of this since to no avail. So, as a prelude to a post dedicated to the value investing approach to security analysis in a few weeks’ time, I figured I would share a few thoughts and pictures with our readers on the man who has had the most impact on the field of value investing, and, truthfully, on investing in general. Some Pics This sign in medium-sized letters next to an innocuous-looking door is about the only thing in the building telling you where you actually are Lunchtime at Piccolo’s Steakhouse. Mr. Buffett loves a good steak for lunch and a rootbeer float for desert Mr. Buffett and myself after lunch