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.

Tuesday, 5 May 2009

Warren Buffett: Why Buying Constellation Energy Group Is A Sweet Deal

Warren Buffett: Why Buying Constellation Energy Group Is A Sweet Deal

by Floyd G. Brown, Advisory Panelist, Investment U
October 01, 2008: Issue # 863

Last week, I suggested you ignore Washington and “the bailout plan,” and do what great investors such as Warren Buffett do in times of crisis - buy stocks.

Based on reader response, you would have thought I recommended investing in the Titanic, and doubling down on the Hindenburg. My email inbox was full of remarks from people who thought I had lost my mind, such as, “There are idiots out there saying [the credit crisis is] ‘no problem’…you know who they are!!!”

I think he means me…

But this kind of reaction isn’t out of the ordinary. In times of intense fear - such as this week - contrarian investors often have opposing views from the crowd. And while many investors are running scared, legendary investor Warren Buffett is betting big. Let’s see what Buffett just bought on the cheap and how we can profitably do the same…

Warren Buffett’s $10 Billion Spending Spree
Berkshire Hathaway, Warren Buffett’s holding company, spent nearly $10 billion in the last week. Not only did he spend $5 billion to acquire preferred stock in Goldman Sachs (NYSE: GS), but he also is backing MidAmerican Energy’s $4.7 billion buyout of Constellation Energy Group (NYSE: CEG) based in Baltimore.

Frankly, I find Warren Buffett’s investment strategy with this bid much more interesting than the Goldman Sachs deal, even though it is slightly smaller. In early January, shares of Constellation were trading at over $100, and yet its management accepted Buffett’s $26.50 a share offer earlier this month.

Constellation is a diversified energy company that owns an energy-trading unit. Its portfolio of energy generation plants covers the spectrum and includes the old-fashioned utility Baltimore Gas and Electric Company. Like many of the financial traders on Wall Street, the firm is a big user of borrowed capital. And because of this Constellation was slammed by the credit crisis.

Constellation’s CEO, Mayo Shattuck III, told The Wall Street Journal last week that he was forced to sell to Buffett after a “classic run on the bank.” Investors dumped shares, fearing CEG wouldn’t be able to get a $2 billion bank loan necessary to fund its energy-trading operation.

The additional cash was needed so the investment ratings agency wouldn’t downgrade the firm from investment grade. If that had happened, it would have increased Constellation’s collateral requirements by $3 billion - thereby putting it into bankruptcy.

“We engaged in discussions,” Mr. Shattuck said, “as we perceived we might not be in commercial operations for long.” According to Shattuck, Warren Buffett moved quickly and injected $1 billion in capital the day after the deal was inked.

Let me explain why this deal is so amazing…
Warren Buffett & The Constellation Energy Deal
The Constellation Energy deal will give MidAmerican control of five nuclear reactors, two in Maryland and three in New York. Plus they get:

A large portfolio of coal and gas plants stretching from coast to coast.
Baltimore Gas & Electric.
And a profitable energy trading operation

all for less than it would cost to build one nuclear plant.

Currently Constellation controls 9,000 MW of power generating capacity. To build or replace these assets would cost billions more than Buffett is paying.

Warren Buffett Starts A Bidding War
In fact, Warren Buffett is getting such a great deal on Constellation Energy that a bidding war is erupting.

Électricité de France International, the French power giant and Constellation Energy Group’s largest shareholder, is making its own offer to buy the firm for much more than the $4.7 billion accepted by management from MidAmerican. EDFI said it is offering $35 per share to buy Constellation. The only problem is Constellation’s board has already agreed to go ahead with MidAmerican, and they’ve already cashed Buffett’s billion-dollar check.

In addition, there are tough regulations prohibiting foreign companies from owning nuclear assets in the United States… Good luck to the French and Constellation’s other shareholders intent on breaking up this deal. (This morning, Constellation traded at $23.75, a 11.58% discount to Buffett’s buyout price. Which could open the door to some short-term arbitrage gains - as the market still hasn’t made up its mind about the buyout.)

Bottom line, there are lots of extraordinary deals right now, but it can take an iron constitution to be a buyer in this environment. If investment greats like Warren Buffett are investing without fear, then we should be doing the same. So I encourage you to look for companies trading for far less than they are worth.

They are out there for the bargain minded investor.

Good investing,
Floyd

PS. Why is CEG trading at a discount? Stay tuned. Next week, I’ll look at arbitrage situations… And how to profit from them.

Today’s Investment U Crib Sheet
Warren Buffett once said, “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.” And that is exactly how he has approached his recent railroad purchases.

In Investment U Issue #846 Floyd showed us that there are still vast fortunes to be made in the transportation sector, and why Buffett has been loading up on them.

Buffett is infamous for buying companies trading at a discount to their value. And for the average investor, it can be hard to tell whether a company is under- or over-valued by looking at the stock price. But, by understanding a few sections on a company’s annual report, you can understand the financial picture of any company, just like he does.

The current market downturn has created an environment where thousands of stocks are trading at multiyear lows. But finding the good ones can be difficult. To find these diamonds in the rough, learn how to screen stocks like a professional.

Earlier this month, Alex Green showed us why Buffett has been the single greatest investor of our lifetimes. Alex also walked us through Warren Buffett’s investment strategy, what kind of questions he asks, and the three reasons he’s buying right now.

More on this topic (What's this?)
How Buffett Has Failed the True Test of Leadership (The Enlightened American, 1/27/09)
Constellation Energy (CEG) Merger Arbitrage Opportunity (Dividend Growth Investor, 10/28/08)
Buffett Bargain Hunting Despite 2008 Losses (Money Morning, 2/12/09)
Read more on Warren Buffett, Constellation Energy Group at Wikinvest

http://www.investmentu.com/IUEL/2008/October/warren-buffett-why-buying-constellation-energy-group-is-a-sweet-deal.html

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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)

Tuesday, 5 May 2009

Warren Buffett: Why Buying Constellation Energy Group Is A Sweet Deal

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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

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