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.

Friday 29 March 2013

Buffett And Goldman Sachs Do Sweetheart Deal

Buffett And Goldman Sachs Do Sweetheart Deal

Tickers in this Article » BRKB, GS, WFC, IBM, KO, AXP, SPY

Goldman Sachs (NYSE:GS) announced March 26 that in October it will issue to Berkshire Hathaway (NYSE:BRK.B) exactly the number of shares equal to Warren Buffett's profit from the 2008 warrants he got as part of his $5 billion investment in the investment bank. The deal is a win/win for both companies. What does it mean for stockholders?

Deal History
Think back to September 23, 2008, when the two parties made their original deal. Goldman Sach's stock was trading at $125.05, 24% less than just three weeks earlier. Its reputation in question after the collapse of Bear Stearns and Lehman Brothers, investors were skeptical about most investment banks. Warren Buffett rode in on his big white horse providing Goldman Sachs with the reputational shot in the arm it needed. Berkshire Hathaway bought $5 billion in perpetual preferred shares that paid a 10% dividend.

As part of the deal it received warrants giving it the right to purchase 43.5 million shares of Goldman stock at $115 each anytime up to October 1, 2013.

Goldman was paying $500 million in dividends annually on the preferred shares--an untenable amount--so it bought back the shares for $5.5 billion plus a special, one-time dividend of $1.64 billion. What happens next depends on what Goldman's stock does between now and October 1. For example, should the 10 trading days prior to October 1 average $150 per share, Berkshire Hathaway's profit would be $1.52 billion, meaning it would receive 10.15 million shares of Goldman Sachs. Buffett ends up with approximately 2% of the investment bank and a $2.14 billion profit while Goldman reduces its potential dilution by 77%.

Shareholders
Regardless of what happens to Goldman's stock price over the next six months you have to consider Berkshire Hathaway shareholders are the big winners. Its annualized total return from the deal over the last five years is 11.6%. That's 180 basis points higher than the SPDR S&P 500 (ARCA:SPY). But of course that's not the final tally. Should Buffett hang on to its stock perhaps even building a larger position, then it could become the gift that keeps on giving. Time will tell how enthusiastic he is about owning Goldman but clearly it's not red hot because if it were he'd force the issue and buy the 43.5 million shares outright at $115 each. If I had to guess I'd say it will become one of the billion-dollar holdings we read about in every Berkshire Hathaway annual report but not one of his big four - Wells Fargo (NYSE:WFC), IBM (NYSE:IBM), Coca-Cola (NYSE:KO) and American Express (NYSE:AXP).

As for Goldman Sachs, it gains a partner and loses a quasi-lender. It was an expensive deal for the company but one that probably needed to be done. By coming up with a creative solution, Goldman Sachs reduces its dilution by 33 million shares and Berkshire Hathaway reduces its cash outlay by $5 billion, which it can now put toward one of those "elephant" deals Buffett always speaks of. If Berkshire had to buy all 43.5 million shares in order to crystalize its profit, it's very possible the company could have sold its entire investment. This way Buffett stays in the game which is good news for Goldman Sachs shareholders.

Bottom Line
Warren Buffett didn't get to where he is by being stupid. In Goldman, he's acquired a piece of one of banking's biggest and well known firms. Even better, Berkshire Hathaway was paid $2.15 billion over five years to do so. Anytime someone offers to pay you to acquire something they own, especially when it has real value, the answer should always be yes.

If you're a Berkshire Hathaway shareholder this is just another example why you already own its stock. If you're a Goldman Sachs shareholder, and have been for some time, this is the end of a very difficult time in the company's history. Would I own either stock? I'd have no problem owning Berkshire Hathaway. As for Goldman Sachs, I'd consider its stock but only if Buffett remains a shareholder.

http://www.investopedia.com/stock-analysis/032713/buffett-and-goldman-sachs-do-sweetheart-deal-brkb-gs-wfc-ibm-ko-axp-spy.aspx?utm_source=coattail-buffett&utm_medium=Email&utm_campaign=WBW-03/28/2013

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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)

Friday 29 March 2013

Buffett And Goldman Sachs Do Sweetheart 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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