[hawk59]

I'll give an example of one of my investments, I'm going to try to keep it as short as I can so just assume the things I say are true, you can look them up if you want.

Cavalier Homes(CAV) makes manufactured homes(MH, or also known as trailer houses). Since the 60's the MH industry has followed a predictable pattern relative to total housing starts in the US; whatever housing starts are in a given year the number of manufactured homes bought is between 15%-30% of that number. Tends to be closer to 30% when the economy is bad and closer to 15% when the economy is doing better, counter-cyclical for obvious reasons. In absolute numbers the MH industry has shipped in the range 250k-500k manufactured homes per year. You can figure 20% as a normalized number.

The past several years have seen an unprecedented depression in the MH industry. There was bad lending in the late 90's and early 00's that bankrupted a bunch of lenders that made loans to buy trailer homes. That removed financing and was the first leg down. But then you had the whole subprime fiasco; a huge proportion of people who normally would be the ones buying trailer houses were now able to buy a regular house with no money down. That was the thing that really killed MH demand and kept it there for several years. MH shipments have been running at about 8% of total housing starts(half the bottom end of the historical range) and 130k units in absolute terms.

Last year there was a lengthy period of time where CAV was trading in the range of $3-$3.50/sh. This was a decent estimate of their liquidation value, plus they were running at about breakeven. So right there, without worrying about anything else(and not worrying about the stock price movement) you know you won't lose money. The stock might go down more but it's not real, a company that is not losing money is not worth less than its' liquidation value.

So you're not going to lose money, and you know the MH industry is severely depressed and shipments would have to go up 2x just to return to the bottom end of the historical range(and it seems pretty likely we will get back near the top of the range given what is currently going on). Furthermore, CAV mothballed a lot of factories when the downturn hit, they can at least double their output without incurring any meaningful capex.

If their output doubled CAV would earn somewhere around $15mm-$20mm. At $3 the market cap was about $55mm. So you are buying a company where your downside is basically nil, and the upside is that you are buying it at 2x-3x it's normalized earnings.

If you read analyst reports from the time you will see lots of detailed predictions about gross margins, industry shipments, market share, operating expenses, Katrina rebuilding, interest rates, predictions on the housing market, etc etc etc. A ton of data and lots of analysis went into making those predictions and coming up with their quarterly earnings estimates.

But you don't even need to know any of those things, you don't need to come up with any sort of estimates and you don't need to have much insight.

Calculating the liquidation value is just a math problem involving addition and subtraction. Then you can look at long range data going back four decades and see that the industry follows a very predictable trend and that we are currently in a period of time that is completely unprecedented. The only insight you need is that the dynamics of the MH industry have not been permanently altered, the unprecedented decline in the industry is a direct result of the unprecedented availability of no money down mortgages to just about anybody. You don't need to calculate when the industry will return to historical levels, you just need to know that it is going to. It's essentially impossible to say what MH shipments are going to be over the next few years but it's very likely they will be significantly higher.

When it's hard or impossible to predict exactly how something will happen then analysts tend to not focus on it, and instead focus on all the data points. Q2 shipments below estimates?? DOWNGRADE! When in reality that kind of data is irrelevant in the grand scheme. But coming up with complex models incorporating lots of variables seems smart and gives you precise numbers, while saying you have no idea what exactly is going to happen but are pretty sure the stock is very undervalued doesn't sound so smart and doesn't give you any precise numbers to hang your hat on. I guess you could say focusing on data makes you miss the forest for the trees and also makes you tend to feel too confident in your analysis because you have hard numbers to look at.(Incidentally, Berkshire is now the largest owner of MH capacity in the US, with all the assets being bought since 2003.)