myinvestingnotes.blogspot.my (Bullbear Buffett Stock Investing Notes)

Keep INVESTING Simple and Safe (KISS) ****Investment Philosophy, Strategy and various Valuation Methods**** The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It’s true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner!****Warren Buffett: Rule No. 1 - Never lose money. Rule No. 2 - Never forget Rule No. 1.

Sunday 7 June 2009

Warren Buffett's Historical Investments (Part 6)

Warren Buffett's Historical Investments (Part 6)

Hershey Foods: Buffett is rumored to have purchased Hershey Foods on several occasions, but we have no confirmed purchase to sink our teeth into. He has used it as an example in discussing the concept of a durable competitive advantage. Its been making chocolate forever and is the largest producer in America. The majority of the voting stock fo the company is held in trust for the benefit of the Milton Hershey School for Orphans. The company's founder, Milton Hershey, left the majority of his wealth to benefit the children who had made him rich. What this means to you the investor is that there is one large shareholder - the trust for the orphanage - which can wield an incredible amount of weight. The company gets high ROE and ROTC. Its per share earnings have been growing at an annual rate of 9.9% for the last 10 years. It traded at a PE of 33 during the bubble, which is too steep for this business. Try to get it at a PE below 15, which you could ahve done up until 1996. Even if you have a sweet tooth, wait for a recession or panic sell-off to take a bite.

ROE: high
ROTC: high
Per share earnings annual growth rate: 9.9% (the last 10 years)
Price bought: Wait for a recession or panic sell-off to buy

Interpublic Group of Companies: In 1974, Interpublic was the largest company in the international advertising business. Now it is number three. Advertising agencies, according to Buffett, earn a royalty on the growth of other businesses. When manufacturers want to take their products to market, they have to advertise, so they use an agency.
Agencies produce and place ads in the media and are paid a percentage of what the advertiser spends for these services. Agencies are almost inflation-proof. Inflation causes advertisers to spend more for the same amount of work, and the more advertisers spend, the more the agencies make. Agencies are service businesses so they spend only modesly on capital equipment, which means that profits don't go toward replacing worn-out plant and equipment. Plus, only 4% of U.S. advertisers change agencies every year! In other words, those big accounts stay in place. Many of the large agencies that dominated the marketplace years ago still dominate it today. Seven of the top ten are in their fifth or sixth generration of management. The key here is that there is no limit on how big they can grow. As long as businesses grow and the media continue to be where manufacturers take their products to market, advertising agencies will continue to grow as well.
The numbers on Interpublic are great. For the last 10 years it has earned an annual ROE of 16% or better, with the last 3 years at over 20%. Per share earnings for the last 10 years have been growing at an annual rate of 13.8%. Buffett used the 1973-74 recession to buy 17% of Interpublic, which traded as low as $3 a share, against earnings of $0.81. He paid a total $4,531,000 for 592,650 shares, for an averge price of $7.65 per share. We don't know when he sold his interest in this company. We do know that if he had held his position, he would have 74.6 million shares, adjusted for stock splits, worth approximately $2.8 billion. This equates to a compounding annual rate of return of approximately 27% for the 27-year period. If you're patient, you can get a great price on this one. During the 1999 bubble, it traded at a PE of 33 - too high for even this wonderful business. In the midnineties, you could have bought it for 14 x earnings.

Price bought: average price $7.65 (bought in 1973-74 recession, was traded as low as $3 a share)
Earnings: $0.81 a share
ROE: > 16% (over the last 10 years, with last 3 years, ROE greater than 20%)
Per share earnings annual growth rate: 13.8% (over last 10 years)

Kaiser Aluminium & Chemical Corp: This is one of the few investment mistakes that Buffett made in his early days. He bought based on earnings in good "businesslike" fashion, but the earnings soon vanished as they often do in a price-competitive business. He lost money on this one.

McDonald's Corp: McDonald's made the hamburger into a brand-name product with some 28 thousand restaurants - no easy feat. Over the last 10 years the company has had a yearly ROE between 16% and 20%, which is delicious. And its per share earnings have been growing at an annual rate of 12%. It's a great company, and at the right price it is a great investment. Buffett acquired 60 million shares in 1994 and 1995 for $1.2 billion, which equates to $20 a share. He was then rumoured to be selling them in 1997 to 1999 for between $30 and $45 a share as he sold into the bubble. This turned out to be a wise decision. At the right price, Buffett will once agains be buying McDonald's shares, and so would you.

Price bought: average $20 a share (in 1994 and 1995)
ROE: 16%-20% (over the last 10 years)
Per share earnings annual growth rate: 12% (the last 10 years)
Price sold: $30 - $45 a share ( in 1997 to 1999, sold into the bubble)

Related topics:
Warren Buffett's Historical Investments (Part 1)
Warren Buffett's Historical Investments (Part 2)
Warren Buffett's Historical Investments (Part 3)
Warren Buffett's Historical Investments (Part 4)
Warren Buffett's Historical Investments (Part 5)
Warren Buffett's Historical Investments (Part 6)
Warren Buffett's Historical Investments (Part 7)
Warren Buffett's Historical Investments (Part 8)
Warren Buffett's Historical Investments (Part 9)

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My 18 points guide to Successfully compounding your money in Stocks

Be a good stock picker.
Think as a business owner.
Always look at value rather than the price. Do the homework.
Buy and hold is alright for selected stocks.
Compounding is your friend, get this to work its magic.
Mr. Market is there to be taken advantage of. Do not be the sucker instead. BFS;STS.
Always buy a lot when the price is low.
Never buy when the stock is overpriced.
It is alright to buy when the selected stock is at a fair price.
Phasing in or dollar cost averaging is safe for such stocks during a downtrend, unless the price is still obviously too high.
Do not time the market for such or any stocks.
By keeping to the above strategy, the returns will be delivered through the growth of the company's business.
So, when do you sell the stock? Almost never, as long as the fundamentals remain sound and the future prospects intact.
The downside risk is protected through only buying when the price is low or fairly priced.
Tactical dynamic asset allocation or rebalancing based on valuation can be employed but this sounds easier than is practical, except in extreme market situations.
Sell urgently when the company business fundamental has deteriorated irreversibly.
You may also wish to sell should the growth of the company has obviously slowed and you can reinvest into another company with greater growth potential of similar quality. However, unlike point 16, you can do so leisurely.
In conclusion, a critical key to successful investing is in your stock picking ability.

http://myinvestingnotes.blogspot.com/2012/07/my-18-points-guide-to-successfully.html

11 Lessons From Peter Lynch

Peter Lynch taught me:

1. Behind every stock is a company. Find out what it’s doing.
2. Never invest in any idea you can’t illustrate with a crayon.
3. Over the short term, there may be no correlation between the success of a company’s operations and the success of its stock. Over the long term, there’s a 100% correlation.
4. Buying stocks without studying the companies is the same as playing poker – and never looking at your cards.
5. Time is on your side when you own shares of superior companies.
6. Owning stock is like having children. Don’t get involved with more than you can handle.
7. When the insiders are buying, it’s a good sign.
8. Unless you’re a short seller, it never pays to be pessimistic.
9. A stock market decline is as predictable as a January blizzard in Colorado. If you’re prepared, it can’t hurt you.
10. Everyone has the brainpower to make money in stocks. Not everyone has the stomach.
11. Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what’s actually happening to the companies in which you’ve invested.

Lynch’s advice had a profound effect on my stock market approach. He taught me that investment success isn’t the result of developing the right macro-economic view or deciding when to jump in or out of the market. Success is about researching companies to identify those that are likely to report positive surprises.

Capital Expenditure

A great company with a Durable Competitive Advantage will have a ratio of Capital Expenditures to Net Income of less than 25%. Less is better.

Capital Expenditures are expenses on:
- fixed assets such as equipment, property, or industrial buildings
- fixing problems with an asset
- preparing an asset to be used in business
- restoring property
- starting new businesses

A good company will have a ratio of Capital Expenditures to Net Income of less than 50%.

A great company with a Durable Competitive Advantage will have a ratio of less than 25%.

Less is better.

Benjamin Graham's 113 Wise Words

The true investor scarcely ever is forced to sell his shares, and at all times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons' mistakes of judgement."

Philip Fisher's Wise Words

"The refusal to sell at a loss, while completely natural and normal, is probably one of the most dangerous in which we can indulge ourselves in the entire investment process.

More money has probably been lost by investors holding a stock they really did not want until they could 'at least come out even' than from any other single reason. If to these actual losses are added the profits that might have been made through the proper reinvestment of these funds if such reinvestment had been made when the mistake was first realized, the cost of self-indulgence becomes truly tremendous."

(Common Stocks and Uncommon Profits)

The Ultimate Hold-versus-Sell Test

Here is the overriding primary test, followed by observations on why it is so critically important:

Knowing all that you now know and expect about the company and its stock (not what you originally believed or hoped at time of purchase), and assuming that you had available capital, and assuming that it would not cause a portfolio imbalance to do so, would you buy this stock today, at today's price?

No equivocation. Yes or no?

Answers such as maybe or probably are not acceptable since they are ways of dodging the issue. No investor probably buys a stock; they either place an order or do not.

Here is the implication of your answer to that critical test: if you did not answer with a clear affirmative, you should sell; only if you said a strong yes, are you justified to hold.

Some thoughts on Analysing Stocks (KISS)

Ideally a stock you plan to purchase should have all of the following charateristics:

• A rising trend of earnings dividends and book value per share.
• A balance sheet with less debt than other companies in its particular industry.
• A P/E ratio no higher than average.
• A dividend yield that suits your particular needs.
• A below-average dividend pay-out ratio.
• A history of earnings and dividends not pockmarked by erratic ups and downs.
• Companies whose ROE is 15 or better.
• A ratio of price to cash flow (P/CF) that is not too high when compared to other stocks in the same industry.

Margin of Safety Concept: Stocks should be bought like groceries, not like perfume

The high CAGR in the early years of the investing period, due to buying at a discount, tended to decline and approach that of the intrinsic EPS GR of the companies over a longer investment time-frame.

Chapter 20 - “Margin of Safety” as the Central Concept of Investment

A single quote by Graham on page 516 struck me:

Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions.

Basically, Graham is saying that most stock investors lose money because they invest in companies that seem good at a particular point in time, but are lacking the fundamentals of a long-lasting stable company.

This seems obvious on the surface, but it’s actually a great argument for thinking more carefully about your individual stock investments. If most of your losses come from buying companies that seem healthy but really aren’t, isn’t that a profound argument for carefully studying any company you might invest in?

myinvestingnotes.blogspot.my (Bullbear Buffett Stock Investing Notes)

Sunday 7 June 2009

Warren Buffett's Historical Investments (Part 6)

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All equity security investments present a risk of loss of capital

The Ultimate Hold-versus-Sell Test

Some thoughts on Analysing Stocks (KISS)

Benjamin Graham

Sell the losers, let the winners run.

Investment Style

Warren Buffett

Political and Economic News

Interesting Blogs