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159 Madison Avenue, Suite 10i New York, NY 10016
Phone: 646.526.8403
www.sirelinecapital.com [email protected]
SIRE LINE CAPITAL MANAGEMENT
HOW TO TURN $10,000 INTO $10,000,000:
INVEST LIKE WARREN BUFFETT
Disclaimer
2 CONFIDENTIAL SIRE LINE CAPITAL MANAGEMENT, LLC 2012
Disclaimer: All information in this report is provided for informational purposes
only and should not be deemed as an offer to sell or the solicitation of an offer to
buy. References to specific securities and issuers are for illustrative purposes only
and are not intended to be, and should not be interpreted as, recommendations to
purchase or sell such securities. Past performance is no guarantee of future
results. The opinions expressed herein are those of Sire Line Capital and are
subject to change without notice. Entities including, but not limited to, Sire Line
Capital, directors and employees may have a position in the securities mentioned
above and/or related securities. This presentation is not intended for public use or
distribution. Reproduction without written permission is prohibited.
Sire Line Capital Management
3 CONFIDENTIAL SIRE LINE CAPITAL MANAGEMENT, LLC 2012
Who are we? A registered investment adviser based in New York We provide investment management services to all types of investors The foundation of our investment philosophy was inspired by Warren Buffett
Why are we giving this presentation? To remove the mystery of investing in the stock market To show you why some money managers outperform others over the long term To help you better protect and grow your hard-earned assets
Sire Line Capital Management
4 CONFIDENTIAL SIRE LINE CAPITAL MANAGEMENT, LLC 2012
To protect and grow your hard-earned assets… Your money must keep up with inflation and taxes. Stocks have provided the highest return on investment over the long term.
A $10,000 Investment in Warren Buffett?
5 CONFIDENTIAL SIRE LINE CAPITAL MANAGEMENT, LLC 2012
*Question:
If you had invested $10,000 in the Buffett Partnership in 1956 and rolled it over into Berkshire Hathaway stock in 1969, how much would you have had at the end of 2010?
Warren Buffett: Professional Money Manager? 1956 ― 1969: Buffett Partnerships (an early hedge fund) 1965 ― Today: Chairman & CEO of Berkshire Hathaway
A $10,000 Investment in Warren Buffett?
6 CONFIDENTIAL SIRE LINE CAPITAL MANAGEMENT, LLC 2012
Would you believe…Over $676 million at the end of 2010!
Compounded Annual Returns Buffett: 22.9%; Dow/S&P 500: 9.4%
*Buffett LTD/Berkshire BV represents partnership returns from 1957-1968 plus book value growth in Berkshire Hathaway from 1969-2010. **Dow/S&P 500 represents the total return in the Dow Jones Industrial Average from 1957-1968 and S&P 500 Index from 1969-2010.
$676,082,850
$1,277,601
$0
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Buffett LTD/ Berkshire BV Dow/S&P 500
A $10,000 Investment in Warren Buffett?
7 CONFIDENTIAL SIRE LINE CAPITAL MANAGEMENT, LLC 2012
How did he do it? By…
investing in high-tech, high-growth stocks? No.
investing in newly created public companies? No.
day-trading? No.
trading on inside information? No.
predicting the future better than others? No.
Warren Buffett Tenets
8 CONFIDENTIAL SIRE LINE CAPITAL MANAGEMENT, LLC 2012
Only invest in high-quality businesses that:
1) Are simple to understand
2) Have favorable long-term economic characteristics
3) Are managed by honest and able managers
4) Can be purchased at a significant discount to intrinsic value
An Example:
10 CONFIDENTIAL SIRE LINE CAPITAL MANAGEMENT, LLC 2012
I. Simple to understand?
They provide IT support services for corporations
Over 100 years old
Significant global presence, operating in more than 170 countries
Nearly 60% of its operating income is annuity-like/recurring.
5 operating segments:
Segments: Main Products/Services: % of Income Margins
Software Middleware and operating systems software 44% 35%
Global Technology Services IT outsourcing services 27% 15%
Global Business Services Analytics, Strategy, Consulting 13% 15%
Global Financing Client financing 9% 48%
Systems and Technology Enterprise server and storage systems 7% 8%
11 CONFIDENTIAL SIRE LINE CAPITAL MANAGEMENT, LLC 2012
II. Consistent operating history/favorable long-term prospects? Buffett: “It is a big deal for a large company to change auditors, law firms or IT
support.”
Strengths in R&D: IBM has been awarded more U.S. patents every year than any other company for 18 consecutive years (5,896 in 2010 alone)
5 year CAGR: Sales/share = 8.4%, EPS = 16.6%
Free cash flow margins = 15%
5-yr avg. return on invested capital = 27%; ROE = 70%
An Example:
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Diluted EPS
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ROIC ROIC-tangible ROE
Return on Capital
12 CONFIDENTIAL SIRE LINE CAPITAL MANAGEMENT, LLC 2012
III. Managed by honest and able managers?
Setting long-term goals and achieving them?
An Example:
13 CONFIDENTIAL SIRE LINE CAPITAL MANAGEMENT, LLC 2012
III. Managed by honest and able managers? (cont.)
Returning value to shareholders?
Historical Cash Flows
(in millions) Cumulative Cash Flows: 2007-2011 Total Line
Cash flows from operations $96,621 1
- Capital expenditures 20,291 2 = Free cash flow (FCF) 76,330 3 - Acquisitions and additions to assets 19,039 4 + Disposal of fixed assets 2,837 5 = FCF before financing activities 60,128 6 + Net Issuance of debt 7,251 7
= FCF available for div. & repurchases 67,379 8 Cash dividends paid 14,242 9 + Stock repurchases 52,533 10 = Total Returned to Shareholders 66,775 11
An Example:
*If you had invested in
IBM at the beginning
of 2007, within 5 years
you would have
received over half of
your investment back
through dividends and
stock repurchases.
Meanwhile, the stock
doubled over that time.
14 CONFIDENTIAL SIRE LINE CAPITAL MANAGEMENT, LLC 2012
IV. Trading at a significant discount to intrinsic value? Buffett looks for companies whose business economics…
…have performed better than their stock prices.
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EV / EBITDA
15 CONFIDENTIAL SIRE LINE CAPITAL MANAGEMENT, LLC 2012
IV. Trading at a significant discount to intrinsic value? (cont.)
Traditional measures of value suggest…
Traditional Valuation (in millions, except per share)
As of 3/31/2011*
Stock price $163.00 x Shares outstanding 1,287 = Market value of equity $209,846 + Total debt $28,624
- Cash $11,651 = Enterprise value (EV) $226,819
Income Statement: FY2010 EPS $11.52 FY2010 EBITDA $22,981 FY2010 SALES $99,870
Valuation Multiples: P/E 14.2 x EV/SALES 2.3 x EV/EBITDA 9.9 x
“The stock market is filled with
individuals who know the price of
everything, but the value of nothing.”
-Philip Fisher But…What is the VALUE of IBM?
An Example:
*Buffett started buying in early 2011.
16 CONFIDENTIAL SIRE LINE CAPITAL MANAGEMENT, LLC 2012
IV. Trading at a significant discount to intrinsic value? (cont.)
Value comes from three main sources: Assets, Earnings Power and Growth.
Separate the good information from the bad information.
Reliability Dimension: Asset Value
(Reproduction Value)
Earnings Power Value (EPV)
Growth Value (EPV with Growth)
Tangible Current Earnings Includes Growth
Balance Sheet Extrapolation Extrapolation
No Extrapolation No Forecast Forecast
MOST RELIABLE LESS RELIABLE LEAST RELIABLE
Adapted from Bruce Greenwald’s Value Investing Program at Columbia Business School.
An Example:
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REPLACEMENT VALUE EARNINGS POWER VALUE - NG EARNINGS POWER VALUE - G
17 CONFIDENTIAL SIRE LINE CAPITAL MANAGEMENT, LLC 2012
Equity Valuation of IBM at the end of 2010: Asset Value = $98.9 billion
Earnings power value = $215 billion. Growth does add value!
Total intrinsic value likely between $320 billion ― $360 billion.
Reliability Dimension: Asset Value
(Reproduction Value)
Earnings Power Value (EPV)
Growth Value (EPV with Growth)
Tangible Current Earnings Includes Growth
Balance Sheet Extrapolation Extrapolation
No Extrapolation No Forecast Forecast
MOST RELIABLE LESS RELIABLE LEAST RELIABLE
Adapted from Bruce Greenwald’s Value Investing Program at Columbia Business School.
An Example:
$ in
Mill
ion
s
Buffett paid this amount…
…but paid nothing for future growth.
18 CONFIDENTIAL SIRE LINE CAPITAL MANAGEMENT, LLC 2012
IV. Trading at a significant discount to intrinsic value? (cont.) From 1999 through 2002, the stock was overvalued.
In 2008-2009, the stock was trading close to reproduction value.
Today (January 31, 2012), IBM’s stock remains undervalued (paying nothing for future growth).
An Example:
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EARNINGS POWER VALUE - G EARNINGS POWER VALUE - NG REPLACEMENT VALUE HIGH MARKET VALUE LOW MARKET VALUE CURRENT MARKET VALUE
19 CONFIDENTIAL SIRE LINE CAPITAL MANAGEMENT, LLC 2012
IV. Trading at a significant discount to intrinsic value? (cont.)
Another way to look at it: Free Cash Flow implied rate of return...
An Example:
Expected Forward Rate of Return 2011 Free cash flow $ 16,604
/ Avg. market value of equity $ 162,630 = Free cash yield 10.2% + Volume growth 2.0% + Inflation 2.0% = Free cash flow implied forward rate of return 14.2%
vs. 10-year Treasury bond yield 3.5%
An Example:
20 CONFIDENTIAL SIRE LINE CAPITAL MANAGEMENT, LLC 2012
Does IBM pass all of Warren Buffett’s tenets?
Simple to understand?
Have favorable long-term economic characteristics?
Managed by honest and able managers?
Can it be purchased at a significant discount to intrinsic value?
Conclusion: 1. Buffett bought IBM for roughly 60% of its true underlying value! 2. Free cash flow-based implied forward rate of return = 14%!!
22 CONFIDENTIAL SIRE LINE CAPITAL MANAGEMENT, LLC 2012
Conclusion: 1. Microsoft is likely worth 2x its current market value! 2. Free cash flow-based implied forward rate of return = 16%+
Another Example:
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Historical Valuation REPLACEMENT VALUE EARNINGS POWER VALUE - NG EARNINGS POWER VALUE - G HIGH LOW CURRENT
23 CONFIDENTIAL SIRE LINE CAPITAL MANAGEMENT, LLC 2012
Conclusion: 1. Amazon looks too risky for our clients (valuation is too high).
Another Example:
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HISTORICAL VALUATION REPLACEMENT VALUE EARNINGS POWER VALUE - NG EARNINGS POWER VALUE - G HIGH LOW CURRENT
24 CONFIDENTIAL SIRE LINE CAPITAL MANAGEMENT, LLC 2012
Conclusion:
1. You can buy Apple Inc. today for roughly 60% of its intrinsic value!
2. Free cash flow-based implied forward rate of return = 13%+
Another Example:
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APPLE HISTORICAL VALUATION
REPLACEMENT VALUE EARNINGS POWER VALUE - NG EARNINGS POWER VALUE - G HIGH LOW CURRENT
25 CONFIDENTIAL SIRE LINE CAPITAL MANAGEMENT, LLC 2012
Conclusion:
1. JNJ is trading at half of its underlying value!
2. Free cash flow-based implied forward rate of return = 14%+
Another Example:
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Historical Valuation REPLACEMENT VALUE
EARNINGS POWER VALUE - NG
EARNINGS POWER VALUE - G
HIGH
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CURRENT
26 CONFIDENTIAL SIRE LINE CAPITAL MANAGEMENT, LLC 2012
Conclusion:
1. McDonald’s current stock price looks a little pricey.
Another Example:
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Historical Valuation REPLACEMENT VALUE EARNINGS POWER VALUE - NG EARNINGS POWER VALUE - G HIGH LOW CURRENT
27 CONFIDENTIAL SIRE LINE CAPITAL MANAGEMENT, LLC 2012
Conclusion: 1. You can buy Google today and get all of the growth for FREE! 2. Free cash flow-based implied forward rate of return = 13%+
Another Example:
$0
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Professional Money Managers
28 CONFIDENTIAL SIRE LINE CAPITAL MANAGEMENT, LLC 2012
You should be asking me…
If Buffett’s investment philosophy is so simple, why don’t more professional money managers invest the same way he does?
Answer?
Why do people still smoke cigarettes?
Why do so many people live beyond their means?
Why do millions of people play the lottery?
*When we have an emotional connection to something (i.e. money), we do not always make the best decisions.
29 CONFIDENTIAL SIRE LINE CAPITAL MANAGEMENT, LLC 2012
How do you know if the overall stock market is overvalued or undervalued?
Systematic Risk?
Expected Returns – The Equity Markets
30 CONFIDENTIAL SIRE LINE CAPITAL MANAGEMENT, LLC 2012
Are equity markets overvalued or undervalued?
Slightly overvalued when measured against GDP
Significantly undervalued when measured against bonds.
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potential Upside Potential Downside
Bonds vs. Stocks: Implied Forward Returns for the Equity Markets
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WILSHIRE 5000 AS A % OF GDP LONG-TERM AVG.
Total Market Value as a % of GDP
Expected Returns – The S&P 500 Index
31 CONFIDENTIAL SIRE LINE CAPITAL MANAGEMENT, LLC 2012
Long-term returns for the general market will likely be 7%-10% from here. Assumptions:
5% earnings growth for the S&P 500 Index.
A range (10x-25x) of price/earnings multiples for the S&P 500 ten years out (smaller colored lines). Results:
The thick black line is the actual 10-year rolling average forward return for the S&P 500.
In 1999, the average forward 10-year return for the market was negative.
Looking forward from 2011, average annual returns could be as high as 13% (assuming an end P/E multiple of 25), or as low as 3% (assuming an end P/E multiple of 10).
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32 CONFIDENTIAL SIRE LINE CAPITAL MANAGEMENT, LLC 2012
Is the overall stock market overvalued or undervalued?
Slightly overvalued relative to GDP.
Undervalued vs. bonds.
Expected 10-year forward rate of return = 7% — 10% per year.
Systematic Risk?
33 CONFIDENTIAL SIRE LINE CAPITAL MANAGEMENT, LLC 2012
How to Turn $10,000 into $10,000,000 ?
Starting Value = $10,000 Rates of Return Buffett
Length of Time 5% 10% 13.7% 22.87% 10 years $16,289 $25,937 $35,950 $78,426 20 years $26,533 $67,275 $129,238 $615,060 30 years $43,219 $174,494 $464,604 $4,823,650 40 years $70,400 $452,593 $1,670,235 $37,829,825 54 years $139,387 $1,718,719 $10,017,279 $676,201,838
A 13.7% rate of return is what you need to turn $10,000 into $10,000,000.
Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now.”
— Warren Buffett
159 Madison Avenue, Suite 10i New York, NY 10016
Phone: 646.526.8403
www.sirelinecapital.com [email protected]
SIRE LINE CAPITAL MANAGEMENT
HOW TO TURN $10,000 INTO $10,000,000:
INVEST LIKE WARREN BUFFETT