the value of a stock idea

The value of a stock idea can come from a combination of four sources:

1. How much money you put in the idea.
2. How cheap the stock is.
3. How fast the stock is compounding its value.
4. How long you own the stock.

The ideal stock would be a business quickly compounding its intrinsic value per share, which you are able to buy at a deep discount to intrinsic value, which you feel confident allocating a big chunk of your portfolio to and which you are going to hold for a very long time.

Take Buffett’s investment in Coca-Cola for example. This was considered a big bet by Berkshire. By my calculations, however (admittedly, very approximate based on the data I have), Buffett allocated perhaps just under 20% of his entire stock portfolio to Coca-Cola at the time he built the position. Despite putting just 20% of his portfolio into the stock in the late 1980s, however, Berkshire ended up not only with a position that today is worth about 13 times what he originally bought – the one position alone is also worth several times what Berkshire’s entire portfolio was when he made the Coke investment.

How did he do that?

Let’s look at the four ways to get the most out of a stock idea:

1. You can put a lot into the stock (Buffett put 20% of his portfolio into Coke).
2. You can hold the stock a long time (Buffett has now owned Coke for just under 30 years).
3. The stock can compound is intrinsic value at a high annual rate (Coca-Cola compounded EPS at about 11% a year for the first 25 years Buffett owned the stock).
4. You can buy the stock when it is cheap (the P/E on Coke went from 15 when Buffett bought it to 30 recently).

Coke is pretty close to a perfect example of some value coming from all four possible sources of getting the most out of an idea.

Whitney Tilson shutting down hedge fund

(Reuters) - Whitney Tilson is closing his hedge fund Kase Capital, and will return capital to investors, he said in a letter to clients.

Tilson cited “high prices and complacency that currently prevail in the market” as main reasons for shutting down his fund.

“Historically, I have invested in high-quality, safe stocks at good prices as well as lower-quality ones at distressed prices,” Tilson wrote to clients on Sunday.

“... However, my favorite safe stocks (like Berkshire Hathaway and Mondelez) don’t feel cheap, and my favorite cheap stocks (like Hertz and Spirit Airlines) don’t feel safe. Hence, my decision to shut down.”

Kase Capital follows a spate of other notable funds that have gone out of business this year, including Eric Mindich's Eton Park Capital Management, and John Burbank's Passport Capital, which recently announced plans to shut its long-short equity fund. reut.rs/2fuEDoI

buying at the peak

If you bought the S&P 500 at this time 10 years ago, you watched more than half your investment erased. You heard buy-and-hold pronounced dead and watched fellow investors pull $200 billion from equities.

You also doubled your money.

Or just about, anyway. Using a version of the S&P 500 that reinvests dividends, the index has now pushed its gain since its Oct. 9, 2007 top to 98 percent. Down 55 percent at the market low in March 2009, the benchmark gauge has made all that back plus a lot more, posting annualized gains of more than 7 percent for a decade.

“It was in the early 2000s and again 2008, where a lot of market pundits came out and said, ‘that’s the end of 10 percent a year for stocks,”’ said Rich Weiss, the Los Angeles-based senior portfolio manager at American Century Investments. “Stocks have done what they almost always have done and proved yet again that even with the 2008 disaster, they return 7, 8 percent a year annualized."

[On October 11, 2007, I sold some AMZN at 95 for about a triple of shares bought in 2005.  It closed at 939 today.]

Reitmeister 2017

[9/1/17] It is hard to believe that this is my last Profit from the Pros message. Yet after 16 years of being the head of Zacks.com it is time for a new adventure. Gladly that adventure continues with Zacks...just in a new and exciting capacity.

Zacks.com had just 20 employees back when I started. Now that is nearly 200.

The website traffic has grown 12 times over.

And our valuable ratings are now in the hands of many, many more investors who use it to improve their financial well-being. That is the most gratifying part of all.

I leave you in the very capable hands of Kevin Matras who will take over the helm of Zacks.com and the writing of Profit from the Pros on a daily basis. No doubt you already know Kevin from all of his expert investment commentaries over the years. Most popular of which are his keen market outlooks and Screen of the Week articles.

Please do yourself a favor and keep making Zacks a part of your daily investment diet. I have no doubt that it will help you achieve investment success for many years to come.

Best,

Steve Reitmeister

[8/9/17] The S&P made new highs Tuesday getting ever closer to 2500. Then right around noon investors got a case of high anxiety with stocks recoiling a bit, but still in profitable territory.

Just before the closing bell the real fireworks began. That came in the form of some tough talk from the White House that any North Korean aggression will be met with "Fire and Fury".

Since this is an investment publication, we will stay focused on what this means for the market. First, we are used to a lot of bluster from North Korea with no serious action taking place. So, this likely leads to nothing and investors ignore the situation.

Now let's imagine that military action does take place. North Korea is a paper tiger that is easily toppled. (Heck, if you gave me a month with nothing to do, I likely would have a more impressive military arsenal than they do and feed the people and keep the electricity running....but that is beside the point ;-) The reality is that the stock market likes war and typically rises after fighting commences. Some call it a patriotic response by investors.

To be clear, I don't like rooting for war as a catalyst for the stock market. There are plenty of other reasons to be bullish. I just want you to have the correct view of this situation. And that is to realize these issues with North Korea should not cause any continued downside to the market.
 
[5/10/17] Stocks flirted with their first real breakout above 2400 on Tuesday. Early in the session the S&P got as high as 2404 when investors got altitude sickness leading to a close just a notch below.

I truly believe we will soon break above 2400 touching 2450 or even 2500 before the next consolidation period. And as noted yesterday, it should be a Risk On rally with smaller and growthier companies leading the charge.

Sometimes you need a positive catalyst to create a breakout of this nature. However, other times the fundamental backdrop is solid and it is the lack of negative news that gives a green light for stock advances. I sense that will be the case this time around.