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Tales of the Long

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By emiller8988
May 6, 2005

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I've got a patient who is in his 80's right now. He recently donated a large sum of money to a local orphanage. We were talking about it, and he told me that in 1948 he bought 10 shares of stock for around $1100. He bought this particular stock because he got two bags of horse feed per year as a dividend. He had to go pick the feed up at a local train depot... if I could find a stock that paid it's dividend in horse feed, I would buy in a heart beat. Anyway, after a few years it got bought out and then bought and bought and it ended up being worth over 250K...he donated the money to the local orphanage, as he and his wife were never able to have children. Now...this is not a globe trotting, wine sipping MBA, this is an old dirt farmer who still gets up on his tractor, feeds the cows, has a big garden, and has more money than he knows what to do with...he's Warren Buffett in old overalls.

One of my partners bought 100 shares of a local generic drug company in1983. The company had six employees and it was a $1000 purchase. He wrote the check, gave it to the CEO (!) who had the accountant issue the market makers there! Company was bought and bought and bought and finally bought by FRX. So my partner now owns 600K of FRX on a $1000 purchase 22 years ago...and he's sick on a daily basis (look at FRX's chart.) He won't sell, because of capital gains, so he lives and dies month to month with FRX. Lots of the brainy people around here would deride and laugh at him for not selling...but NOT SELLING 18 years ago, 15 years ago, 10 years him 600K of a great company he's yet to pay a dime of taxes on. FRX is a great company,  and it'll do's again much like Buffett and KO and not selling a few years ago.

I've repeatedly argued that individual investors should "live in the terminal value." By that I mean if we (amateur investors) pick stocks that have a good shot of outstripping the terminal value calculations, the compounding becomes huge. I really believe that good Mr. Buffett has a total focus on "terminal value." Take BUD...if it grows at an average CAGR of 9 or 10 percent for 25 years, it completely blows the back end out of any three stage DCF using 5 year tiered x3-x2-3% staged numbers, no matter how elegantly you reduce them. And if BUD or WMT or MSFT does grow at 9-10% for another 25 years, they are grossly undervalued right now...but only for the guy that buys and holds for 25 years

I've got an old PDF where Michael Mauboussin seems to argue exactly that, through the concept of the "competitive advantage period CAP." That PDF is still available here.

Who knows; for amateur investors like me, the tortoise approach of shooting for blowouts on terminal value (just like W Buffett) actually seems like a vastly easier task than the rabbit approach of constant research, and moving through stock after stock; [that's] clearly best left to the professionals who haunt this board, and devote hours a day to such pursuits.

Good luck.


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