Now an Asset Play, page-38

Vesupria

NWH tends to have blue-chip customers like RIO, and with large contracts, progress payments are the norm.

On asset utilisation, NWH at times has low utilisation, but that does not mean that potential new owners would have no use for the equipment. There is a hierarchy of capital goods valuations – specialised cranes may have the lowest likelihood of finding alternative employment, drilling rigs are also a problem, and yellowgoods (graders, dozers and the like) are probably one of the easiest asset classes to dispose of at fair value.

Buying shares, or companies, is like buying cars – a $2K second-hand car that is likely to run for years is a bargain for some folk, because its price is so low relative to the net utility that the car would deliver. Obviously, if one cannot abide being seen driving a bomb, then a $2K car should be avoided. On punts, paying odds of 10:1 on a horse that has a 5:1 chance of winning may makes sense, even though one has an 80% chance of losing, but if for economic or psychological reasons an investor has a zero tolerance of risk, then the bet should not be taken.

Petepan mentioned Uncle Warren. Warren Buffet is famous for buying regional newspapers that he knows are in decline, provided he can acquire them at a low price-earnings multiple. If you read the article at http://www.*.com.au/warren-buffett-buying-newspapers-2013-3 you will read the words below. I underlined the bits that support the view that one can logically invest in a less-than-stellar company if the price is low relative to the quality perceived.

Berkshire’s cash earnings from its papers will almost certainly trend downward over time. Even a sensible Internet strategy will not be able to prevent modest erosion. At our cost, however, I believe these papers will meet or exceed our economic test for acquisitions. Results to date support that belief.

Charlie and I, however, still operate under economic principle 11 (detailed on page 99) and will not continue the operation of any business doomed to unending losses. One daily paper that we acquired in a bulk purchase from Media General was significantly unprofitable under that company’s ownership. After analysing the paper’s results, we saw no remedy for the losses and reluctantly shut it down. All of our remaining dailies, however, should be profitable for a long time to come. (They are listed on page 108.) At appropriate prices – and that means at a very low multiple of current earnings – we will purchase more papers of the type we like.

Note Buffett's careful language that allows for failure (words like “believe”, “belief”, “should be profitable”, and note the admission of failure in respect to the paper that was shut down. Uncle Warren does not avoid investments that might fail – he simply trusts that his judgement generally stacks the odds in his favour, and his track record supports his faith in his judgement.