Excerpt from transcript of CNBC Buffett interview Feb 2018

BECKY QUICK: I mean, you lay this out in the annual report, but a lot of investors are told – retail investors are told, that they should have a certain percent of their portfolio in bonds. Maybe they're told 60/40, maybe they're told 70/30 stocks to bonds. That's something that you should do and that's the safe way of doing. What are they missing?

WARREN BUFFETT: Well, some people should not own stocks at all because they just get too upset with price fluctuations. If you're going to do dumb things because a stock goes down, you shouldn't own a stock at all. No, I mean—

BECKY QUICK: What are dumb things? Selling a stock because it goes down?

WARREN BUFFETT: Yeah, selling a stock because it goes down. I mean, you know, if you buy your house at $20,000 and somebody comes along the next day and says, "I'll pay you $15,000," you don't sell it because the quote's $15,000. You look at the house or whatever it may be. But some people are not actually emotionally or psychologically fit to own stocks. But I think more of them would be if you get educated on what you're really buying, which is part of a business. And the longer you hold stocks, the less risky they become, whereas the longer the maturity of a bond, the more risky it becomes.

BECKY QUICK: Do you feel like that's a message that is getting through to people? It's one that you repeat again and again. And I always feel like, I was watching a lot of the Olympics. And I felt like what they do in the Olympics is so easy. These guys sailing through the air and doing massive spins on the ice and turns. And then I read your annual letter and I think, "Oh, it's really easy to invest." And then I walk away and realize it's not that easy.

WARREN BUFFETT: It's not easy psychologically for many people. But I've been teaching since I was 21. I taught my first class on investments, and I had a class last week with 11 schools, 220 students. And some of them get it and some of them don't. Now, people would rather gamble. I mean, the idea that you can double your money in six months, that's just going to – it's why people go to the races, why they go to Vegas. You know, whatever it may be. They even know the odds are against them. And they still do it. I mean, it's a strong instinct to want to get rich fast. And I don't know how to do it.

UOS- yet another year (yawn)

UOS full year results are out. The juggernaut's balance sheet  looks like this. Are you getting bored yet?

	2H17	2H16	2H15	2H14	2H13
Cash	$277m	$398m	$487m	$400m	$435m
Receivables	$258m	$218m	$196m	$169m	$158m
Inventories	$577m	$385m	$395m	$358m	$310m
Land held for property development	$157m	$143m	$123m	$84m	$22m
Property plant and equipment	$99.4m	$94m	$57m	$62m	$28.2
Investment properties	$929m	$823m	$668m	$679m	$649m
Total of Asset Items above	$2297m	$2061m	$1926m	$1752m	$1602m
Total liabilities	$449m	$460m	$486m	$367m	$344m

Picking the Dogs- Round 2

I am quickly writing this post to illustrate the concept of inverting to solve problems.

I think we can neatly use the concept of inverting when we are trying to pick the Dogs, or any investments, come to think of it.

The core philosophy is that we are more likely to encounter inefficiencies and mispricings if we are willing to approach things differently from what the consensus is doing.

Let's start with the Darlings- ALU, APX, PME and WTC. What is it about these stocks that got punters so excited? Quickly off the top of my head, here is a list:

1. They are showing, and promising, lots of growth (more than 20% per annum).
2. They are all technology and software related.
3. They all appear to have a growing worldwide market with a long runway.
4. They have fabulous gross margins.
5. The above 4 allows them to weave a very simple but compelling narrative.

If we are to pick Dogs, it would be logical to look for the complete opposite:

1. They are shrinking, and not promising any growth whatsoever.
2. They are in old school industries- manufacturing, fabrication, trading, printing, etc
3. They have very limited markets.
4. They have terrible margins.
5. The story sounds horrible.

So with those clues, I have picked a portfolio of 4 Dogs. They are the hairiest bunch you will ever see. But they do have some adorable characteristics:

(a) No debt or no net debt, and excess cash plus other assets 
(b) Positive cashflow/profits
(c) Priced at less than 3x to 5x multiples of cashflow/profits

Yours One Legged

Dogs versus Darlings conclusion 4 years later

It is time to draw a close to this amusing exercise, started here with interim follow up here.

The result after nearly 4 years- the Dogs portfolio is up 40% (without accounting for dividends which would have added at least another 10-15%).  The Darlings portfolio broke even (without accounting for dividends, probably adding 10%).

The Dogs are COF, NWH, MND and LYL. In March 2014 and for a subsequent 2 years until the depth of the mining services crush in early 2016, these names were persona non grata in nearly every portfolio manager's book. Within my circle of friend's and colleagues, only one other investor shared my enthusiasm for these Dogs, and actually invested some money in them.

To recap, the Darlings are OFX, XRO, IPP and REA. They collectively underperformed not just the Dogs, but also the All Ordinaries Accumulation Index. It was also quite fortunate for the Darlings portfolio that IPP was taken over by REA (and subsequently written off to zero), and that REA got included instead of the original candidate FLN. Furthermore, I would also argue that the Dogs performance was crimped because of COF's takeover. Subsequent to the takeover, COF's financial performance improved many fold, and I am quite confident that the share price would have appreciated significantly more than the 62% premium gained on the takeover.

It is also worthy to note that the Dogs achieved this outperformance against the Darlings in a raging bull market, especially for technology stocks.

Some may say that 4 years is too early to tell, and that the Darlings will prove their worth over the long haul, say 5 to 10 years. So let's just check periodically.

The lesson here is that valuation matters and variant perception matters. Just speak to any investors who bought Microsoft and Cisco during the heights of the dotcom era in 2000.

To hammer the lesson home, we have a roster of another 4 darlings- PME, ALU, APX, and WTC. I am preparing a roster of Dogs. Stay tuned.

Yours One Legged

A Happy Belated New Year

Just a quick note to my readers.

Missus and myself have both been struggling with a cold caught overseas which pretty much put a damper on what should be a restful and peaceful break.

We have both recovered, but I am now right smack at the start of reporting season and also in the middle of an intake for Castlereagh Equity. The increasingly wobbly financial markets make for interesting times.

To my readers, thank you for your patronage over the years. I will try my best to continue with useful and insightful posts.

To my investor partners, thank you for your continued trust and confidence in me.

To my fellow journeymen (or journeypersons) and friends, many thanks for your companionship and wise counsel through the good times and also the bad.

And to my dear missus, thank you for so many years of patience, care and love. I look forward to many many more.

Yours One Legged