How do you identify an exceptional company with a durable competitive advantage from the SHAREHOLDERS' EQUITY OF THE BALANCE SHEET?

How do you identify an exceptional company with a durable competitive advantage?

Financial statements are where you can search for companies with a durable competitive advantage that is going to make one super rich.

BALANCE SHEET

The balance sheet is a snapshot of the company's financial condition on the particular date that the balance sheet is generated.

Assets minus Liabilities = Net worth or Shareholders' Equity

Shareholders’ Equity/Book Value

Shareholders’ Equity is accounted for under the headings of

·         Capital Stock (Preferred and Common Stock);

·         Paid in Capital and

·         Retained Earnings

Shareholders’ Equity is an important number as it allows us to calculate the return on shareholders’ equity.

Return on shareholders’ equity is one of the ways we determine whether or not the company in question has a long-term competitive advantage working in it favour.

Preferred and Common Stock, Additional Paid in Capital

From a balance sheet perspective preferred and common stocks are carried on the books at their par value, and any money in excess of par that was paid in when the company sold the stock will be carried on the books as “paid in capital.”

If the company’s preferred stock has a par value of $100/share, and it sold it to the public at $120 a share, a $100 a share will be carried on the books under preferred stock and $20 a share will be carried under paid in capital. 

The same thing applies to common stock, with say, a par value of $1 a share.  If it is sold to the public at $10 a share, it will be booked on the balance sheet as $1 a share under common stock and $9 a share under paid-in capital.

Companies that have durable competitive advantage tend not to have any preferred stock. 

This is in part because they tend not to have any debt. 

They make so much money that they are self financing.

While preferred stock is technically equity, in that the original money received by the company never has to be paid back, it functions like debt in that dividends have to be paid out.

Interest paid on debt is deductible from pretax income.  

However, dividends paid on preferred stock are not tax deductible, which tends to make issuing preferred shares very expensive money.

Because it is expensive money, companies like to stay away from it if they can. 

One of the markers we look for in our search for a company with durable competitive advantage is the absence of preferred stock in its capital structure.

Retained Earnings

A company’s net earnings can either be paid out as dividends or used to buy back the company’s shares, or they can be retained to keep the business growing

When they are retained in the business, they are added to an account on the balance sheet, under shareholders’ equity called retained earnings.

If the earnings are retained and profitably put to us, they can greatly improve the long-term economic picture of the business.

To find the yearly net earnings that are going to be added to the company’s retained earnings pool, take the company’s after tax net earnings and deduct the amount that the company paid out in dividends and the expenditures in buying back stock that it had during the year.

Retained Earnings is an accumulated number, which means that each year’s new retained earnings are added to the total of accumulated retained earnings from all prior years.

If the company loses money, the loss is subtracted from what the company has accumulated in the past. 

If the company loses more money than it has accumulated, the retained earnings number will show up as negative.

Retained Earnings is one of the most important number, on the balance sheet that can help us determine whether the company has a durable competitive advantage. 

If a company is not making additions to its retained earnings, it is not growing its net worth.

If it is not growing its net worth, it is unlikely to make any of us super rich over the long run.

Simply put:  the rate of growth of a company’s retained earnings is a good indicator whether or not it is benefiting from having a durable competitive advantage. 

Not all growth in retained earnings is due to an incremental increase in sales of existing products; some of it is due to the acquisitions of other businesses. 

When two companies merge, their retained earnings pools are joined, which creates an even larger pool.

General Motors and Microsoft both show negative retained earnings.

General Motors:  it shows a negative number because of the poor economics of the auto business, which causes the company to lose billions.

Microsoft:  it shows a negative number because it decided that its economic engine is so powerful that it doesn’t need to retain the massive amount of capital it has collected over the years and has instead chosen to spend its accumulated retained earnings and more on stock buybacks and dividend payments to its shareholders.

Berkshire Hathaway:  Warren Buffett stopped its dividend payments the day he took control of the company.  This allowed 100% of the company’s yearly net earnings to be added into the retained earnings pool.  As opportunities showed up, he invested the company’s retained earnings in businesses that earned even more money and that money was all added back into the retained earnings pool and eventually invested in even more money making operations.   As time went on, Berkshire’s growing pool of retained earnings increased its ability to make more and more money.

From 1965 to 2007, Berkshire’s expanding pool of retained earnings helped grow its pretax earnings from $4 a share in 1965 to $13,023 a share in 2007, which equates to an average annual growth rate of approximately 21%.

The more earnings that a company retains, the faster it grows its retained earnings pool, which in turn will increase the growth rate for future earnings. 

The catch is, it has to keep buying companies that have a durable competitive advantage.

Treasury Stock

When a company buys back its own shares, it can do two things with them. 

It can cancel them (and the shares cease to exist) or it can retain them with the possibility of reissuing them later on (and they are carried on the balance sheet under shareholders’ equity, as treasury stock).

Shares held as treasury stock have no voting rights, nor do they receive dividends and though arguably an asset, they are carried on the balance sheet at a negative value because they represent a reduction in the shareholder’s equity.

Companies with a durable competitive advantage because of their great economics, tend to have lots of free cash that they can spend on buying back their shares. 

One of the hallmarks of a company with a durable competitive advantage is the presence of treasury shares on the balance sheet.

When a company buys its own shares, and holds them as treasury stock, it is effectively decreasing the company’s equity, which increases the company’s return on shareholders’ equity.

Since a high return on shareholders’ equity is one sign of a durable competitive advantage, it is good to know if the high returns on equity are being generated by financial engineering or exceptional business economics or because of a combination of the two.

To see which is which, convert the negative value of the treasury shares into a positive number and add it to the shareholders’ equity instead of subtracting it. 

Then divide the company’s net earnings by the new total shareholders’ equity. 

This will give us the company’s return on equity minus the effects of financial engineering.

Treasury shares are not part of the pool of the outstanding shares, when it comes to determining control of the company.

The presence of treasury shares on the balance sheet and a history of buying back shares, are good  indicators that the company in question has a durable competitive advantage working in its favour.

Return on Shareholders’ Equity

Shareholders’ equity equal to the total sums of preferred and common stock, plus paid in capital, plus retained earnings and less treasury stock.

Shareholders in a company would be interested in how good a job management does at allocating their money so that they can earn even more.

Financial analysts developed the return on shareholders’ equity equation to test management’s efficiency in allocating the shareholders’ money.   

It measures the management’s ability to profitably put shareholders’ equity to good use.

Warren Buffett use the return on shareholders’ equity in his search for the company with a durable competitive advantage.

Return on Shareholders’ Equity = Net Earnings / Shareholders’ Equity

Companies that benefit from a durable or long term competitive advantage show higher than average returns on shareholders’ equity.

Companies with no sustainable competitive advantage tend to have low returns on equity.

High returns on equity mean that the company is making good use of the earnings that it is retaining. 

As time goes by, these high returns on equity will add up and increase the underlying value of the business, which over time, will eventually be recognized by the stock market through an increasing price for the company stock.

Some companies are so profitable that they don’t need to retain any earnings, so they pay them all out to the shareholders.  

In these cases, its shareholders’ equity may be a negative number.

Insolvent companies will also show a negative number for shareholders’ equity.

If the company shows a long history of strong net earnings, but shows a negative shareholders’ equity, it is probably a company with a durable competitive advantage.

If the company shows both negative shareholders’ equity and a history of negative net earnings, we are probably dealing with a mediocre business that is getting beaten up by the competition.

High returns on shareholders equity means “come play.”

Low returns on shareholders equity means “stay away.”

Leverage

Leverage is the use of debt to increase the earnings of the company.

A company using leverage can increase its earnings and its return on equity.

The problem with leverage is that it can make the company appear to have some kind of competitive advantage when it, in fact is just using large amounts of debt.

Wall Street investment banks are notorious for the use of very large amounts of leverage to generate earnings.

It creates the appearance of some kind of durable competitive advantage, even if there isn’t one.

In assessing the quality and durability of a company’s competitive advantage, avoid businesses that use a lot of leverage to help them generate earnings. 

In the short run they appear to be the goose that lays the golden eggs, but at the end of the day, they are not.

What is in the detail of the equity section of the balance sheet?

Share capital and the share premium account together relates to the amount that investors actually have invested into the business.

Retained earnings relate to the total amount of profit that the company has made ever since it started trading and that has not yet been given back to the shareholders.  This is the profit that has been reinvested back into the business on behalf of the shareholders.

Other equity reserves relate to amounts owed to the shareholders, but that cannot be classified as profit or investment - an example of another reserve might be a revaluation reserve.

The balance sheet of a company may be titled "Consolidated statement of financial position".  This means that the balance sheet is the combined balance sheets of all the different companies through which it conducts its business.  It is quite possible that it does not own 100% of all of its subsidiary companies.  If another party owns a very small part of the business, for example, 2% of one of the subsidiaries, then this share will be shown under equity as non-controlling or minority interests.



What is the difference between share capital and share premium?

The share capital is the nominal value of all investments in the business by shareholders.

The sale of additional shares at a premium to the original or nominal value at which the initial shares were issued would be accounted for as shown:

Nominal value $450 per share
Additional shares sold at $500 per share.
For each share sold for $500 each, $50 would be accounted for as share premium and the remaining $450 would be accounted for as share capital.

Share premium is the premium over and above the nominal value of the share.  



What is a revaluation reserve?

Company A bought a building for $1 million and that building was now worth $2 million.  The company might decide to increase the property, plant and equipment on the balance sheet by $1 million.

In order for the balance sheet to continue to balance, the equity section of the balance sheet must, therefore, also increase by $1 million.

Company A cannot increase the called up share capital or share premium accounts, as there has been no additional investment in the company.

It cannot increase the retained earnings figure because it has not made a profit on the building (Company A can recognise a profit on the building only when it actually sells the asset).

It may, therefore, choose to set up a revaluation reserve to account for the increase in the value of the building.  This would appear in the equity section as other reserves.

In effect, an increase in the value of the building is merely an increase in the amount that Company A now owes to the shareholders.

Stock investments versus bonds are a ‘no-brainer’, says Warren Buffett

October 6th, 2010 by John Doherty

 

Stock investments are superior to investment in bonds, despite the general view that bonds investments are relatively low-risk, according to the world’s most successful investor, Warren Buffett.

Speaking at a conference for top US businesswomen organised by Fortune magazine, Buffett said of stocks investments: “It’s quite clear that stocks are cheaper than bonds. I can’t imagine anyone having bonds in their portfolio when they can have equities.”

For the world’s 3rd-richest man, with a personal net worth estimated at $47 billion in March 2010, low-risk investments may no longer be necessary – but even for the ordinary investor prepared to put their money away for a decade or two, the arguments for stocks and shares investments are what Buffett might call a ‘no-brainer’.

By charting the performance of a long-term investment in stocks and shares made in 1945, figures released recently by Scottish Widows shows that returns over a 60-year term were 70 times greater than investing the same sum as cash in a bank or building society account.

A sum of £100 invested in a building society account in 1945 would have been worth just £1,767 by 2006, according to Scottish Widows. Invested in bonds, the sum would have been worth £4,323.

However, the same £100 invested in the UK stock markets, as measured by the Barclays Equity Index and including dividends reinvested, would have grown to £125,243 over the same time period.

While bonds may be attractive for an investment of 5-10 years, as you are told in advance what your minimum return will be, stocks and shares investments are the clear winner in the longer term.

Warren Buffett’s investment activities are carried on through his investment company Berkshire Hathaway, which has been voted the world’s most respected company by the leading US business publication Barron’s Magazine.

http://www.principlefirst.co.uk/investment-news/stock-investments-versus-bonds-are-a-nobrainer-says-warren-buffett/

Should investors switch from bonds to shares?

Savers have preferred bonds to shares for the past seven months. But those saving for long-term goals such as retirement should remember that equities, unlike bonds, can offer a growing income.

http://www.telegraph.co.uk/finance/personalfinance/investing/9290399/Should-investors-switch-from-bonds-to-shares.html

The Basics of Personal Finance Investing: Stocks, Bonds, and Short-term investments.

Overall, investing is a great way to build wealth or a 'nest egg' for your retirement. If you invest regular amounts of money on a consistent basis over a long period of time, you are more likely to be successful in reaching your financial goals. By knowing just a few investing basics, you can get started with a variety of income options.

Three Types Of Investments

There are three basic types of investments you can choose from. There are stocks, bonds, and short-term investments.

Stocks

Stocks can also be referred to as equity investments. These are investments in individual companies that are publicly held. Stocks allow you to hold a small ownership in these companies. When invested in long-term, stocks have a high potential for growth. Stocks are not without risk, however. If the price of the stock drops, so do the investor's earnings. If a company goes out of business, the owners of the stock can lose their entire investment. It is wise to invest in the stock of companies that have been around for a very long time and that have a track record of rising stock prices.

Bonds

Buying a bond is basically lending money to the company you are purchasing it from. An example of this is buying a bond from the U.S. Treasury. After purchase a bond, you would be paid back after you cash it in. Buying bonds has the potential to increase your wealth with a lower risk than purchasing stocks, as well as the benefit of having a bit of protection from economic inflation.

Short-Term Investments

Short term investments can include money market investments, certificates of deposit (CD's), and others. After a short period of time, you can earn interest on these investments. You can usually begin receiving interest in as little as one year or less. These short-term investments are much less risky than stocks and bonds, but there is lower potential for growth. This means you can not expect as large of a return on a short-term investment as you could from stocks or bonds.

Article Source: http://EzineArticles.com/1408204

The Basics of Personal Finance Investing
By Richard MacGrueber

Sell bonds and buy equities? Maybe not

Sell bonds and buy equities? Maybe not
Written by Celine Tan of theedgemalaysia.com
Tuesday, 06 December 2011 09:40



KUALA LUMPUR: Which was the best asset class in the first three quarters of 2011?

Given the volatility on Bursa Malaysia’s Main Board, it may not be surprising that the local bond and money-market funds performed better than equity funds in the one-year period ended October 28 (see table), but still, the institutional investors were caught flat-footed.

“This [underperformance of equities] was not expected early in the year. But seeing how the Greek sovereign debt issue has remained unresolved and the situations that followed the US’ credit rating downgrade, the underperformance is not a surprise [now],” says Koh Huat Soon, chief investment officer of Pacific Mutual Fund Bhd.

Similarly, Azian Abu Bakar, executive director of Apex Investment Services Bhd, did not expect bond portfolios to outperform their equity counterparts until Bank Negara Malaysia (BNM) hiked interest rates and the macroeconomic situations in developed economies kept “turning turtle”. BNM hiked the overnight policy rate by 25 basis points to 3% in May.

Throughout the year, the local bourse’s performance was mainly news-driven. “The poor performance of equity funds was due to major sell-offs in 3Q2011, as investors sought refuge and shifted to safer assets such as bonds and money-market instruments,” says Yeoh Mei Kei, research analyst at Fundsupermart.com.

Koh says the local bond market benefited from foreign investments while Azian attributes demand for sukuk issued during the year. For both, the interest-rate hike in May was also a factor.

The equity funds’ performance was attributed to the bearish sentiment on the local equity market throughout the year, says Azian. “Generally, the performance of the banking sector affected conventional equity portfolios. Islamic equity portfolios were impacted by the doldrums in the plantation sector and, to some extent, the construction sector.”

What to do?
Everyone has heard of the old adage — what goes up must come down. “We advise investors — be they conservative or aggressive — to rebalance their portfolios from winning positions [bond and money-market funds] to losing positions [equity funds],” says Yeoh.

“This prevents investors’ portfolios from [suffering a] ‘style drift’, which means a divergence from the original investment objective or investment style. Also, it forces investors to be disciplined and to manage their emotions when investing.”

Koh suggests switching to European equities. “The eurozone had bought more time to resolve their crisis. This region managed to avoid a messy default in the near term. Since many equity funds are holding cash, the potential for short-term gains is there.”


But this move requires a stomach for risk and constant surveillance of the situation in Europe. Key risks — such as the success of austerity measures in countries such as Greece and inadequate amounts of bail-out funds — remain.


This means that conservative investors should hold on to their performing bonds and money-market funds as equities are likely to remain very volatile, given the uncertainly in the global economy. Institutional investors are also likely to take their time before acquiring equities.

“Most asset managers have implemented trading or benchmarking tactics. This conservative approach is taken in lieu of the global uncertainty,” says Azian.

Beware of Inflation

Beware of inflation.

The longer you leave your money in fixed deposit, the higher the risk of inflation eating away the purchasing power of your money.

Money market investments are safest when the money is needed in the short-term.

The very same safe investments become high risk the longer they stay invested.


Stocks are on the opposite track. They are high risk investments in the short-term, but are lower risk investments in the long term:

Fixed deposit 
1yr = Low risk 
10 yrs = High risk

Stocks 
1 yr = High risk 
10 yrs = Low risk


http://myinvestingnotes.blogspot.com/2008/10/risks-of-investments.html

The ultimate determinant of eventual returns is the price you pay at the outset. History shows that the best way to invest is against the tide but not blindly so.

For most, equities are still a step too far


A feature of investment markets this year has been the so-called risk-on, risk-off trade whereby investors have swung between an appetite for more risky assets like shares and commodities and a desire to play it safe in the perceived calm havens of government bonds and cash.

By Tom Stevenson, on The Markets

8:35PM GMT 13 Nov 2010

This jumpiness is part of a bigger trend away from the certainties of the pre-2000 equity bull market towards a foggier investment landscape in which investors are scrabbling around for three sometimes contradictory outcomes: capital security in a volatile world; a decent income in an environment of near-zero interest rates; and growth against a backdrop of deleverage and austerity.

The chart illustrates how much the investment world has changed over the past decade. In 2000 there was only one game in town. Around £8 of every £10 invested in UK mutual funds by private investors went into equities, with about £1 into bonds and the same into balanced funds.

Fast forward nine years to 2009 and a very different picture emerges. Last year, less than a third of net retail sales of UK funds was in funds investing in the stock market. A larger proportion went into bonds while much of the remainder went into absolute return and cautious managed funds. This is not just a UK picture. Figures compiled by Citigroup show that inflows into equity funds have been nothing to write home about across Europe (in fact they are negative pretty much everywhere outside the UK) while bond funds continue to attract money despite increasing fears in the eurozone periphery. The big winner has been balanced funds.

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What this tells us, I think, is that investors are being forced out of cash and into riskier assets by persistently low interest rate policies but, despite the return to form of stock markets over the past 18 months, the pain of the "lost decade" and recent volatility mean that for most people equities remain a step too far.

The money that is going in to equities is largely chasing the perceived growth offered by emerging markets, which confirms the contradictory thinking driving asset allocation at the moment. Investors' desire for safety, income and growth all at the same time smacks of wanting their cake and eating it. This is leading to some pretty indiscriminate investment with not a lot of attention to which assets currently offer the best value.

There are some good technical reasons why investment flows should have shifted towards less risky assets. The matching of assets to liabilities by pension funds and the ageing of the average member of pension schemes are part of the story – as are greater capital requirements in the insurance sector. But something else less logical and more worrying seems to be going on. Investors yet again appear to be chasing past performance in a rose-tinted piece of extrapolation which assumes that last year's winners will inevitably be next year's too.

In 2000 the best-performing asset classes over the preceding five years in the UK were residential property, European equities and hedge funds. It is perhaps unsurprising that fund flows should have been so skewed. Jump to 2009 and the best-performing assets were gold, corporate bonds, gilts, German bunds and US Treasuries. Guess where the money is now going.

We know what happened to those caught up in the equity mania 10 years ago, so it is not unreasonable to ask what the returns will be 10 years hence on all the money currently pouring into precious metals, government bonds and emerging market equities.

History shows that the best way to invest is against the tide but not blindly so. Fund flows are only a part of the story because the ultimate determinant of eventual returns is the price you pay at the outset. In the case of emerging market equities, the multiple of earnings on which the average share trades is bang in line with global markets generally, according to Morgan Stanley's calculations.

When Japanese stocks peaked in 1989 it was at three times the global average, while technology stocks in 2000 were twice as expensive. Equities, emerging and developed, are much better value than government bonds – which is just what the fund flows are telling us.

tomrstevenson@fil.com

Tom Stevenson is an investment director at Fidelity Investment Managers. The views expressed are his own


http://www.telegraph.co.uk/finance/comment/tom-stevenson/8130470/For-most-equities-are-still-a-step-too-far.html


Main Points:
What this tells us, I think, is that investors are being forced out of cash and into riskier assets by persistently low interest rate policies but, despite the return to form of stock markets over the past 18 months, the pain of the "lost decade" and recent volatility mean that for most people equities remain a step too far.


Investors yet again appear to be chasing past performance in a rose-tinted piece of extrapolation which assumes that last year's winners will inevitably be next year's too.


In 2000 the best-performing asset classes over the preceding five years in the UK were residential property, European equities and hedge funds. It is perhaps unsurprising that fund flows should have been so skewed. Jump to 2009 and the best-performing assets were gold, corporate bonds, gilts, German bunds and US Treasuries. Guess where the money is now going.


History shows that the best way to invest is against the tide but not blindly so. Fund flows are only a part of the story because the ultimate determinant of eventual returns is the price you pay at the outset. 

I told you so: why shares beat bonds and deposits

I told you so: why shares beat bonds and deposits

By Ian Cowie Your Money
Last updated: November 5th, 2010

Perennial pessimism is the easiest way to simulate wisdom about stock markets – but it ain’t necessarily the way to make money. As the FTSE 100 hits a two-and-a-half-year high, this might be a good time to remind the smart Alecs that you have to be in it to win it.

Sulphurous cynicism is the usual response whenever anyone points out that shares yielding more than bonds or deposits might represent reasonable value – as you can see from the responses to my most recent blog on this theme. But, as regular readers will know, despite a dismal decade for the Footsie, I have long held the view that shares and share-based funds should make up the majority of any medium to long term investment strategy.

For example, here’s what I wrote in this space in August, 2009: “After all the worldly-wise men’s warnings of a double-dip recession, it should be no surprise to see the FTSE 100 soar by 40pc above its low-point this year.

“If anything, the continued consensus among most market observers that this remarkable rally has “gone too far, too fast” should boost our hopes the index will breach 5,000 soon.

“One reason all this may come as a surprise to many is that most TV coverage of the market is based on the principle that bad news is good news and good news is no news at all. “Bong! Billions wiped on shares!” Doesn’t sound familiar, does it?

“But the fact remains that investors in blue-chip shares have enjoyed the best summer in a quarter of a century. Some smaller companies shares and emerging markets did even better. That’s another fact you won’t hear from the doom and gloom crew.

“This should remind us that the reason shares provided higher returns than bonds or deposits over three quarters of all the five-year periods during the last century is that economies tend to grow over time and shareholders own the companies that create this wealth.

“So, medium- to long-term savers – like those of us saving toward paying off the mortgage or funding retirement – need not worry too much if share prices fall next month. That might be a problem for fund managers, who must answer to a board of directors every few weeks, and an opportunity for the rest of us.

“Finally, it is worth considering the personal anxiety of many professionals who are now “short of the market” or holding cash rather than shares. They can only afford to sit and watch prices rise for so long before they feel compelled to join the fun and keep their jobs.”

Shares are not as cheap as they were when I wrote those words but returns on bonds and deposits remain dismal. The agony of the worldly-wisemen and perennial pessimists sitting in cash or fixed interest, earning next to nothing, may only be just beginning.


http://blogs.telegraph.co.uk/finance/ianmcowie/100008501/i-told-you-so-why-shares-beat-bonds-and-deposits/

Warren Buffett says in future Wall Street chiefs should go broke - and their wives

Warren Buffett, the billionaire investor, has hit out at pay practices on Wall Street, attacking the lack of reform despite two years passing since the financial crisis struck.

By Richard Blackden, US Business Editor
Published: 8:59PM BST 05 Oct 2010

The 80-year old billionaire said: 'Wall Street does a lot of good things and then it has this casino.'

 

"People have a propensity to gamble, and it gets made easier and easier for them," Mr Buffett told a conference in Washington DC yesterday. "One of the problems we still have is we have unbalanced incentives for managers of huge financial institutions." 
 

In future, chief executives of banks who need government assistance should "go broke", said Mr Buffett. Their wives "should go broke, too", he added.

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The prospect of another round of bank bonuses is likely to inflame public opinion in the US, where the broader economic recovery is flagging.

Banks have been forced to split off some of their riskier trading activities because of the Dodd-Frank law - the financial reform act signed into law in the summer - but critics say it does little to remove the incentives to pursue short-term profits. 

Mr Buffett's company, Berkshire Hathaway, is a major investor in American banks, with a stake in Goldman Sachs and Wells Fargo.

The 80-year old billionaire, who runs the company out of Omaha, Nebraska, with his long-term colleague Charlie Munger, said "Wall Street does a lot of good things and then it has this casino. It's like a church that's running raffles on the weekend." 

As in Britain, banks are keen to counter an impression that they are failing to do enough for the recovery. Goldman Sachs, for example, last week began an advertising campaign designed to show its role in helping create jobs.

Despite the difference in the fortunes of those on Wall Street and many Americans in other industries, analysts have said that banks may decide to cut jobs in coming months as trading revenues decline. Meredith Whitney, for example, has forecast that up to 80,000 finance jobs could go over the next 18 months.

Mr Buffett also told Fortune magazine's Most Powerful Women conference that investors are "making a mistake" if they chase a rally in bonds. The price of US two-year government bonds has raced to a record high this week as investors see little to spark a more robust recovery. 

"It's quite clear that stocks are cheaper than bonds," Mr Buffett said. "I can't imagine anyone having bonds in their portfolio when they can own equities." 

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8044789/Warren-Buffett-says-in-future-Wall-Street-chiefs-should-go-broke-and-their-wives.html

Now, super rich look at alternative asset classes

CHENNAI: Equities, mutual funds and FDs can longer satiate the super rich. Instead, they are channelling their wealth into start-ups, unlisted companies, realty-focused private equity funds, gold ETFs and art. The burgeoning breed of HNIS, or wealthy people, are exploring and investing in a whole new range of asset classes.

According to a recent report by Karvy Private Wealth, the wealth management arm of the Karvy Group, individual wealth in India stands at Rs 73 lakh crore and this is expected to double to Rs 144 lakh crore within the next three years. While the bulk of investment is still in direct equity (31.1%) and fixed deposits and bonds (30.3%), private bankers said there is a growing preference for alternative investments. Most HNIs have ridden on the mutual fund and equity wave as they went into the market early. They are now looking at different asset avenues, said Nitin Rao, executive vice-president (private banking group and third party products), HDFC Bank.

HNIs are classified as people with an investible surplus of at least $1 million . Over the years, the profile of HNIs has also rapidly undergone a change.

• Older HNIs largely comprised members drawn from business families. 
• Today, nearly 45% of private clients are first-generation entrepreneurs or self-employed, 15% comprise professionals, 20% are senior salaried executives, 5% are young celebrities, with property inheritors accounting for remainder.

"We believe that individuals in India are under-invested in alternative assets. We believe this will be a huge area of investments in the next decade. PE, real estate funds, realty investment trusts and global investments are expected to be popular among HNIs," said the Karvy report.

Even with debt and equity, HNIs are exploring options that are offshoots in such classes. "They are looking at investing in unlisted equities, PE funds and in debt," said Rajmohan Krishnan, senior V-P, Kotak Wealth Management.

Read more: Now, super rich look at alternative asset classes - The Times of India http://timesofindia.indiatimes.com/business/india-business/Now-super-rich-look-at-alternative-asset-classes/articleshow/6680959.cms#ixzz11R1yExbE

Buffett (1992): His thoughts on issuing shares.

His thoughts on issuing shares.  He concentrated most of his investments in companies where shareholder returns have greatly exceeded the cost of capital and where the entire need for future growth has been met by internal accruals.


Here are the investment wisdom Warren Buffett doled out through his 1992 letter to Berkshire Hathaway's shareholders.

Up front is a comment on the change in the number of shares outstanding of Berkshire Hathaway since its inception in 1964 and this we believe, is a very important message for investors who want to know how genuine wealth can be created. Investors these days are virtually fed on a diet of split and bonuses and new shares issuance, in stark contrast to the master's view on the topic. Laid out below are his comments on shares outstanding of Berkshire Hathaway and new shares issuance.

"Berkshire now has 1,152,547 shares outstanding. That compares, you will be interested to know, to 1,137,778 shares outstanding on October 1, 1964, the beginning of the fiscal year during which Buffett Partnership, Ltd. acquired control of the company."

"We have a firm policy about issuing shares of Berkshire, doing so only when we receive as much value as we give. Equal value, however, has not been easy to obtain, since we have always valued our shares highly. So be it: We wish to increase Berkshire's size only when doing that also increases the wealth of its owners."

"Those two objectives do not necessarily go hand-in-hand as an amusing but value-destroying experience in our past illustrates. On that occasion, we had a significant investment in a bank whose management was hell-bent on expansion. (Aren't they all?) When our bank wooed a smaller bank, its owner demanded a stock swap on a basis that valued the acquiree's net worth and earning power at over twice that of the acquirer's. Our management - visibly in heat - quickly capitulated. The owner of the acquiree then insisted on one other condition: "You must promise me," he said in effect, "that once our merger is done and I have become a major shareholder, you'll never again make a deal this dumb."

It is widely known and documented that Berkshire Hathaway boasts one of the best long-term track records among American corporations in increasing shareholder wealth. However, what is not widely known is the fact that during this nearly three decade long period (1964-1992), the total number of shares outstanding has increased by just over 1%! Put differently, the entire gains have come to the same set of shareholders assuming shares have not changed hands and that too by putting virtually nothing extra other than the original investment. Further, the company has not encouraged unwanted speculation by going in for a stock split or bonus issues, as these measures do nothing to improve the intrinsic values. They merely are tools in the hands of mostly dishonest managements who want to lure naïve investors by offering more shares but at a proportionately reduced price, thus leaving the overall equation unchanged.

How is it that Berkshire Hathaway has raked up returns that rank among the best but has needed very little by way of additional equity. The answer lies in the fact that the company has concentrated most of its investments in companies where shareholder returns have greatly exceeded the cost of capital and where the entire need for future growth has been met by internal accruals. Plus, the company has also made sure that it has made purchases at attractive enough prices. Clearly, investors could do themselves a world of good if they adhere to these basic principles and not get caught in companies, which consistently require additional equity for growth or which issue bonuses or stock-splits to artificially shore up the intrinsic value. For as the master says that even a dormant savings account can lead to higher returns if supplied with more money. The idea is to generate more than one can invest for future growth.

http://www.equitymaster.com/detail.asp?date=12/7/2007&story=3

Reviewing the Basics of Investing in Equities for the Young and Old Investors

Reviewing the basics of investing in equities

Importance of Financial Education

The risk involved in equities

Equities carry the highest risk. Why, then, invest in equities?

Inflation: your ultimate enemy

Inflation is your ultimate enemy. Your other enemy: IMPATIENCE

Listed and Unlisted companies.

The stock market provides a market for setting prices based on supply and demand

Costs of a standard equity transaction

Two important strategies to help you avoid large losses: STOP LOSSES and REBALANCING

Two techniques for Getting your timing right: 'dollar cost averaging' and 'phasing in' your investments

Good strategies for buying in and for preventing big losses

Five important don'ts when you want to buy shares

Valuing stocks and bonds video

What would Warren Buffett do? You have to be in it (the market) to win it

Five important don'ts when you want to buy shares

Mistakes to avoid when you invest in equities

Do not buy on tips or rumours.  Consult someone who has long experience of equity investment.

Do not buy with borrowed money.

Do not buy shares in boom times when everybody is buying and sell in bust times when everybody is selling.  Or put differently:  do not buy when shares are at a high and sell when they are at a low - you will make a loss!

Do not invest in a share that has been in the spotlight recently - the price might already have been driven up significantly.

Do not buy a share just because the price has dropped substantially and you think it is a bargain.  There might be sound reasons why it has dropped.

Costs of a standard equity transaction

The cost of a standard equity transaction is made up of:

• a stockbrokers's fee,
• taxes,
• a levy for the adminsitrative cost of the electronic settlement system,
• insider trading levy and
• other compulsory administrative charges.

Brokerage

Your broker could charge you a percentage of the value of your trade, depending on the size of the trade and the nature of the service required.

• All brokers charge a minimum per deal, even if your order is very small.
• If your investment is too small, the charges could dilute your returns considerably.  Your investment would need to deliver sizeable returns before expenses are recovered. 

Listed and Unlisted companies.

You can hold shares in companies that are

• listed on the stock market or
• in unlisted companies. 

The bulk of equity investments are in listed shares. 

• Companies list on a stock exchange in order to gain access to more capital, and
• they must comply with stringent criteria set by the stock exchange to protect investors.

Be very careful when you invest in unlisted shares. 

• Unlike the listed companies, the unlisted companies are not scrutinised that closely. 
• Shares in unlisted companies therefore carry a bigger risk and
• are also much more difficult to sell as there is no open market.

The risk involved in equities

You can lose a lot of money investing in equities. 

That is why it is the asset class carrying the highest risk. 

If you had bought shares during the height of the Internet boom in March 2000, you would have lost 72% if you had sold them 18 months later!

Equities are affected by many risks, including:

• commercial risk, for example, interest rate changes and trade cycles
• political risk, for example, negative sentiment about Third World countries
• market risk, for example buying shares at the top (when they are too expensive) and selling them at the bottom (just before prices start to increase again).

Anyone who has invested in equities over the past few years knows how it feels to be on a roller-coaster ride. 

• In the end of the last century, investors witnessed huge stock market crashes (in 1987, and again in 1998), interspersed with a spectacular rise in share prices as investors started to become hyped-up about the new economy and Internet stocks. 
• Then, of course, a major downswing was experienced in September 2001 after terrorist attack in the USA. 
• Due to low interest environment for many years following 911, the US stock market crashed in 2008 due to the subprime credit crunch.