Question: If you had wildly speculate, do you think Buffett understood the nuances of the "oil and gas payment" (i.e. debt) and then went looking for a company understanding those parameters? Or do you think he found a low mkt cap oil and gas company and THEN figured out the nuances of the capital stack?
If he understood the capital stack nuances and THEN found O&G, that would be informative. This is reminiscent of your uncovering/understanding the ECIP, and then finding the best bank that received the funds and investing accordingly.
It just makes me wonder if Buffett sniffed out the GAAP oddity first and then found a company that he knew wouldn't "screen" well in the Moody's Manuals.
I know there probably isn't a way to know for sure, short of hearing from Buffett himself, but curious to know what you think.
Hey thanks for the question. I think he probably found the company first then worked backwards to figure out the debt situation. His main source of ideas at this point was going through the Moody's manuals. He was always interested in asset banks - TPL for instance at age 13, MNPP later, Kalamazoo Stove liquidation, etc. Of course I don't know for sure, but that would be my guess.
One clarification on ECIP. My experience was sort of opposite of what you said, which was probably due to a miscommunication on my end. I found out about ECIP because there was this little bank in Atlanta that perpetually traded at like 5x earnings and 40-50% of book. I read their annual reports every year. Back in 2022, when I read the report, they mentioned this ECIP thing. So I found it in an annual report. Then I worked backward to figure out what the program meant. Pretty quickly realized that it was basically free money from the government that was like 5x this little bank's market cap.
After that, I found all the publicly traded banks that were set to receive this "free money". I analyzed each of them. I reached the conclusion (in May 2022) that the little bank in Atlanta presented the best downside protection. The potential upside on all of these banks seemed so obvious at the time, so I picked the one with the lowest downside. It was a little more nuanced than that - there were signs that little bank in Atlanta would buy back stock (they had in the past), they had a massive advantage in terms of deposits costs - but that's basically what happened.
Thanks for the interesting question. It's a fun thought exercise. If I was smarter I would do more top down thinking to find ideas. But the good thing is, you don't need to be that smart. You just need to look at thousands of stocks and find the one or two that are blatantly obvious to you.
I had misunderstood in the writeup on CZBS about the ECIP discovery (probably my fault not yours). But it’s just as interesting nonetheless that you found it in the annual report and then worked backwards to see what it meant.
A friend of mine recommended looking at 50 OTC stocks per day and I’m hooked. I can’t do it every day, but the days I can are some of my favorite work days.
Out of 150 stocks I looked at recently I found one I’m really excited about. So I agree completely on the “looking at thousands of stocks” part of your comment as well. That is great advice.
Dirt. This is awesome. Great writeup.
Question: If you had wildly speculate, do you think Buffett understood the nuances of the "oil and gas payment" (i.e. debt) and then went looking for a company understanding those parameters? Or do you think he found a low mkt cap oil and gas company and THEN figured out the nuances of the capital stack?
If he understood the capital stack nuances and THEN found O&G, that would be informative. This is reminiscent of your uncovering/understanding the ECIP, and then finding the best bank that received the funds and investing accordingly.
It just makes me wonder if Buffett sniffed out the GAAP oddity first and then found a company that he knew wouldn't "screen" well in the Moody's Manuals.
I know there probably isn't a way to know for sure, short of hearing from Buffett himself, but curious to know what you think.
Hey thanks for the question. I think he probably found the company first then worked backwards to figure out the debt situation. His main source of ideas at this point was going through the Moody's manuals. He was always interested in asset banks - TPL for instance at age 13, MNPP later, Kalamazoo Stove liquidation, etc. Of course I don't know for sure, but that would be my guess.
One clarification on ECIP. My experience was sort of opposite of what you said, which was probably due to a miscommunication on my end. I found out about ECIP because there was this little bank in Atlanta that perpetually traded at like 5x earnings and 40-50% of book. I read their annual reports every year. Back in 2022, when I read the report, they mentioned this ECIP thing. So I found it in an annual report. Then I worked backward to figure out what the program meant. Pretty quickly realized that it was basically free money from the government that was like 5x this little bank's market cap.
After that, I found all the publicly traded banks that were set to receive this "free money". I analyzed each of them. I reached the conclusion (in May 2022) that the little bank in Atlanta presented the best downside protection. The potential upside on all of these banks seemed so obvious at the time, so I picked the one with the lowest downside. It was a little more nuanced than that - there were signs that little bank in Atlanta would buy back stock (they had in the past), they had a massive advantage in terms of deposits costs - but that's basically what happened.
Thanks for the interesting question. It's a fun thought exercise. If I was smarter I would do more top down thinking to find ideas. But the good thing is, you don't need to be that smart. You just need to look at thousands of stocks and find the one or two that are blatantly obvious to you.
Great reply Dirt.
I had misunderstood in the writeup on CZBS about the ECIP discovery (probably my fault not yours). But it’s just as interesting nonetheless that you found it in the annual report and then worked backwards to see what it meant.
A friend of mine recommended looking at 50 OTC stocks per day and I’m hooked. I can’t do it every day, but the days I can are some of my favorite work days.
Out of 150 stocks I looked at recently I found one I’m really excited about. So I agree completely on the “looking at thousands of stocks” part of your comment as well. That is great advice.