Joel Greenblatt discusses the legendary NVR 2001 writeup (2005 Columbia Business School lecture) - YouTube

For those of you watching it's a  write-up on NVR written by Charlie479 (Norbert Lou)  

They're not building until they pre-sell  right. Anything else they're doing here?

They're buying back stock. So you sort of know what  they're doing with their cash right. Anything else?  

Right so in other words usually home building  requires a lot of capital expenditure... You  

have to buy the land, you have to build the  house and then you go sell it... That could  

be a very capital intensive business and then  you hope to sell it.... And..... The thesis here is that  

that that's not what these guys are doing!  Number one they're taking the land costs  

down by only buying options on  land... So they have inventory to  

to build in the future ,if they need it.  But they're buying an option on the land.  

So that doesn't take up a lot of capital. And it's  an option so they're not obligated for the rest.  

They're pre-selling. So they probably have money  ahead of time, before they have to start building  

and a pre-sold. You know I'm sure they're taking  some risks there. I'd want to look in to see how  

much is actually put down, by the home builder,  before I start building, but I'm assuming they're  

collecting more money than they need to  get going and then have a schedule to pay.

So this is sound  

Right. I think, he answers, that in a  sense, you know there's a size  

issue. In other words not everyone can option  huge tracks of land. Also I would imagine in  

building there's economies of scale. If you're  building a whole development out, you can build the stuff fairly cheaply. 

Right. But I guess they're getting large  returns on capital, so I guess so far  

they haven't been overpaying. I guess there's some

some benefit.... Yeah Jason

Right and um. My only guess here is that  they've changed their business model. In  

other words traditionally, it was. They were  buying the land, they were building the house  

and then trying to sell it and I think it  developed over a period of time. So I would  

say when this was written in 2001, the last  downturn had probably been in the early 90s  

and I would want to see if they were  using the same business model at that  time and we would want too see how much their sales might drop.

By going backwards you can see how much sales  could possibly drop off on the other hand  

they're doing business differently because they're pre-selling,  

So obviously they might collect just the  

this there are only so many people who can buy  huge these are huge tracks of land that they're  

you know buying for developments. Um so you know  these are all good questions.... But on the other  

hand you have a company, that... The thesis here if  I had to say it, in two or three sentences  

is something the fact that this is trading at  eight times earnings, seven times forward earnings  

They don't put much capital into the business.  They have things pre-sold beforehand and if I were  

looking at this business I'd say when I'm looking  at something that's earning a lot of money, I don't  

i just care that that reverses and they've  invested a lot of money and they lose a lot  

of money in the future but with this what looks  attractive here is it's it's selling at seven  

times forward earnings. They don't put a lot of  capital into the business, they're not taking a  

lot of risk. So if there's another downturn, maybe  they take a small lump for a period of time but  

probably won't actually lose money and they  wait for the the upturn to come and they'll  

earn that money so perhaps this isn't normalized  earnings perhaps it is. But it's seven times  earnings.

There's almost nothing you could you could buy at that that level... So you know I  

cheated a little. So we we know from 2001 how this  worked out. And I'm not showing the bad ones. But  

now you can see that right. Let's make it incredibly small.

All right well well it was at 143$ when this  was written up in 2001 and I guess now in 2005 it's over 800$.  

So uh one of the problems there was you  thought the real estate boom might end  

but you were buying it at seven times earnings  uh with a very good business. I doubt I happen  

to know the guy who wrote it up,   didn't know this was gonna travel up to 800 but  

I think he he saw a double when he bought  it. (Correction. He actually held the stock... There is a interview with the author Norbert Lou, in the description) So I guess he had a margin of safety