Pricing

I see share prices in terms of 'value of the entire equity portion of the company'. I started buying when the company was worth 120. I continued buying in the same doses while the price was flat and when it started rising.
Unfortunately, the price is now near 156 (30% up) and I am done with only a quarter of my purchases.
Fortunately, the company is still significantly undervalued.
Unfortunately, I started buying at a much lower price - I ache for those prices again!!
Oddly, I expect another global equity downturn soon - nothing has changed wrt Europe, US's systemic crisis and China's hidden dirtballs.
Therefore, do I wait for that downturn? Or do I keep buying like a moron?
Plan: I buy until 25-30% of my capacity and then reduce the frequency of my purchases until 50%. At 50% I reassess the notion of sitting on my rear.

Butts and Abstinence

One of the most important things in investing is to protect one's downside - the reason is that a single bad year can ruin compounding prospects.

1. If the market values a company at USD 100 Mn and your analysis pegs the value north of USD 150 Mn... is it a good buy?
2. If the market values a company at USD 100 Mn and your analysis pegs the value at USD ~80 Mn... is it a good buy?

Question 1:
What if the company is Kodak in 2003?
What if the company is Apple in 2002?

Question 2:
What if the company is Archer Daniels Midland in 2007?
What if the company is IBM in 2011?

My point here is that there is no absolute rule just based on valuations. It's hard enough coming to a range of values for a company. It's rather difficult peering into the future. Oddly, investing is primarily about the future because that is when your potential value will be realised.

The philosophy used by WB towards the beginning of his career was the classic Graham and Dodd Cigar Butt investing with an both eyes on Margin of Safety. He would invest in a company like Kodak and wait for the market to come up to his confident valuation numbers. Luckily, he was rather smart and therefore hit quite a few homeruns - somewhere along the way he bought into disasters such as Berkshire Hathaway, Dexter Shoes, US Air and of course, Solomon Brothers.

A few key things make investments disasters even though one may have entered with a margin of safety:
1. Management
2. Industry dynamics
3. Business Environment
4. Currency
5. Corporate Governance

By far, the most important are management and corporate governance, and more important that this is corporate governance. One should see what went wrong with BRK's Solomon investment - it is plausible that BRK may never again enter that sector unless if in the form of a superior security, e.g. preferreds in Goldman Sachs.
Once, a margin of safety has been established, it is essential to understand how the company is going to realise its full potential. What if it is as culturally and managerially broken as Kodak or Yahoo! ? Odds are that the company's management will indulge in thumb-sucking while money is being burned away in sustaining an unsustainable business operation.
The problem with the cigar butt investing approach is that the one last puff may take a long time to be realised unless one can influence the board or the management.

How did WB manage to invest in IBM at a supposed 3x book value? It is quite contrary to the margin of safety approach... or is it? WB bought into Coca Cola when it was near its then all time high (in 1988-89) - what led him to do this?
Sustainable competitive advantage or Moat.
How difficult is it for another company(ies) to enter my investee company's business domain?
How easy is it for my investee company to build on its business and pricing power?
Can IBM be seriously challenged in its domain expertise and reliability? Is its consumer loyalty questionable?
Can Parle increase prices of its Bisleri bottled water without driving consumers away? Does it have a brand that is blindly relied on?
The question for smaller companies is: Is the management sincere about keeping progress and innovation uninterrupted? Is the management careful and caring with respect to its investors and employees? Is it in a sector where it really knows what it's doing? How good is the competition that surrounds it?

As an investor, the difficulty with these questions (or may be the ease!) is that answers can be substantiated only over a period of time; often, gut instinct needs to be strong and no numbers can support you in answering these questions.

Going back to Margin of Safety. It is essential because a good company at a bad price is worse than a good company at an OK price. May be it is better to buy into IBM at a 20% overvaluation than it is to buy into Netflix at a 60% overvaluation. The trouble is that there are many non-quantifiable attributes to a company which cannot be incorporated into a numerical value.

Lethargy bordering on sloth is more important than people think it is.

Pricing

What would we do without the stock market? Would the world we fundamentally different? An interesting thing to think about is the crash of 1929 - the quoted prices of equity securities would usually be higher than a price one could transact at. (Yes, I ended with a preposition and now I'm not going to change it!).
How can share prices change so dramatically over extremely short time spans and not as dramatically over very long spans of time, e.g. 15% compounded for 8 years as opposed to 40% - 100% swings within a year?

What if I had a company that needed some equity (permanent) capital to support the business, and I went to an investor to get some money? (The year is 2027) That investor would say, "I need periodic updates and financials and meetings to ensure smooth functioning." OK. As the owner of this company, until the time I go to this investor, I don't care about the 'value' of my company; I care about profitability and cash positions.
When I do go ahead and transact with this investor, it is then that I care about the 'value' of my company because that influences how much of my company he will be owning post-transaction.
Now, assume that this owner has 23.54% of my company's shares and it has been one month since the signing and everything is hunky-dory; do I care about the 'value' of my company? May be. Three years thence, and without any further requirements for myself or for my investor buddy, I still ought to not care about the value of my company. Fifteen years hence, I have a huge-ass fight with my wife and she wants to wrest my entire stake from me! Sadly, she wins the case because she had forged the papers!! It is up to me to derive a good value for my stake because beyond a threshold, the remainder belongs to me. It is now that I care about the value of my Company. Assume that this is the year 2045. However, my investor still doesn't care about the value of his stake (the management of my company is luckily still very able.) because he wants to cash out after a further 15 years.

We should agree here that the value of my Company was largely irrelevant throughout the span that I held a stake in it.

Now for some woodoo!!! The investor looks like a really hot guy and has dozens of hot women around him. So, when I sign the document for the 23.54 %, I move into his body and he moves into mine! Funky eh? Since he owns the majority of the company, he wants to cash out a bit more... he goes to the public market after 3 years and sells a portion. Let's say he now owns 40%, I own the 23.54% and the public owns the rest. His wife (who was originally my wife, curse the bit*h!) does exactly what I had described above in the year 2045. Since the Company is performing well and I am happy with my other cash flows (and the hot girls in my life) I don't wanna sell.
Now, I have been able to see the fluctuating value of my company from the year 2027 onwards. Do you still agree that it made no material difference to my life?

What do you care what other people think?

The Long Term

It's interesting how quarterly projections are 'made' or arrived at, without much knowledge of cash flows.
It's also interesting how moods, sentiments and irrationality affect the price at which one can - theoretically - buy or sell a company, or rather, portions of a company.
It's amusing that professional fund managers are servants to the whims of investors in terms of unforseen or immediate events or limited time horizons; a typical case being that of a private equity fund. They typically have 4-7 years to get in and out of 'investments'.

Do I trust this Company's management based on what I can hear, see or judge?
Do I believe that this Company is interested in making its shareholders and employees richer over a period of time?
Do I largely understand what this Company does and how it is positioned to navigate through/ around obstacles?
Do I believe that this Company is going to do substantially better than most other companies over the long haul?
Do I believe that the price is to my liking?

Note: WB bought into KO in 1988. WB has bought into IBM over the last few months (2011) - USD 10.7 Bn worth of shares for a 5.5 % stake, 64 million shares.