Business Lessons From Billionaire Warren Buffett

Warren Buffett: You should never sell a good business just to get money, this does not sense.

Warren Buffett on How to Buy a Business: Private Companies vs. Stock Market, Investing




A fair price to us is one where we get our money's worth in terms of future earnings.

Its easier for us to buy private businesses than public businesses.

If we have to pay 20% premium to market, we will generally do not wish to buy them.

If someone with a wonderful company wishes to sell and asked for my advice, I will asked them to just keep it.

If you own a wonderful business in life, the best thing is just keep it.

All you are going to do is to trade your wonderful business for a whole bunch of cash, which isn't as good as the business.

Then you have the problem of investing in other businesses and you probably have to pay the tax in between.

If you can figure out a way to keep your wonderful business, keep it.

Why do people sell? Family dynamics. Sometime, the person loses interest in the business.

YOU SHOULD NEVER SELL A GOOD BUSINESS JUST TO GET MONEY, THIS DOES NOT MAKE SENSE.


PAYING PREMIUMS FOR ELEPHANTS DOES NOT MAKE SENSE.

I DON'T CARE ABOUT LOCATION OF ANY POTENTIAL ACQUISITION.

Charlie Munger: I have seen so many idiots getting rich on easy businesses. Don't buy cheap bargains, but look for very good companies.

Don't buy cheap bargains, but look for very good companies.
I have observed what would work and what would not.
I have seen so many idiots getting rich on easy businesses.
Surely, I am interested in the easy businesses.

Quality Persists

Once you have determined that a company does meet your quality standards, its status is not likely to change - at least for a while.

In fact, the only factor that could change your assessment is the data that is reported every three months, so you can be reasonably confident that your assessment will survive at east that long.

And there's an 80% chance it will last a good deal longer.

So it pays you to collect and maintain a "watch-list" of good companies and wait for them to hit an attractive price - just have them available should your portfolio management strategy call for selling or replacing one you already own.

Hopefully, you won't have to find out the hard way - QUALITY first, then PRICE. When in doubt, throw it out!

The most important task is in investing into a company is in assessing its quality.

Hopefully you won't have to find out the hard way that buying a good company for too high a price is still better than buying a poor company - even at what you may think is a bargain price.

No matter how low it may be, a company that doesn't meet the quality requirements will always be too expensive - at any price!

If you are not critical enough about quality, you can easily be seduced into believing that a stock is a bargain when you actually shouldn't touch it with a 10-foot pole.

Here is a statement you may have to think about a little:  The worse a company performs, the better a value it will appear to be.   Why do you suppose that is?

If you ignore the poor operational performance and just look at the price, you'll be in the market for someone else's mistake!

Sure, you will be able to pick up the stock at bargain-basement prices - but for a good reason.

You will think you made out like a bandit when, in fact, whomever you bought the stock from will turn out to be the lucky one.

The most important point here is that you simply cannot afford to ignore the quality issues or treat them lightly.  

Unless the company completely satisfies your quality requirements - and I don't mean it's marginal or might have some problem - your evaluation of the price of the stock can be invalid and, in fact, hazardous to your financial health.

When in doubt, throw it out!

The Most Successful Dividend Investors of all time

Dividend investing is as sexy as watching paint dry on the wall. Defining an entry criteria that selects quality dividend stocks with rising dividends over time and then patiently reinvesting these dividends while sitting on your hands is not exciting. While active traders have a plethora of hedge fund managers on the covers of Forbes magazine there are not many well-publicized successful dividend investors. Even value investing has its own superstars – Ben Graham and Warren Buffett.

I did some research and uncovered several successful dividend investors, whose stories provide reassurance that the traits of successful dividend investing I outlined in a previous post are indeed accurate.

The first investor is Anne Scheiber, who turned a $5,000 investment in 1944 into $22 million by the time of her death at the age of 101 in 1995. Anne Scheiber worked as an IRS auditor for 23 years, never earning more than $3150/year. The one important lesson she learned auditing tax returns was that the surest way to become rich in America is by accumulating stocks. She accumulated stocks in brand name companies she understood and then reinvested dividends for decades. She never sold, in order to avoid paying taxes and commissions. She also never sold even during the 1972-1974 bear market as well as the 1987 market crash because she had high conviction in her stocks picks. She also held a diversified portfolio of almost 100 individual securities in brand names such as Coca-Cola (KO), PepsiCo (PEP), Bristol-Myers (BMY), Schering Plough (acquired by Pfizer in 2009). She read annual reports with the same inquisitive mind she audited tax returns during her tenure at the IRS and also attended annual shareholders meetings. Anne Scheiber did her own research on stocks, and was focusing her attention on strong franchises which have the opportunity to increase earnings and pay higher dividends over time.

In her later years she reinvested her dividends into tax free municipal bonds, which is why her portfolio had a 30% allocation to fixed income at the time of her death. At the time of her death, her portfolio was throwing off $750,000 in dividend and interest income annually. She donated her whole fortune to Yeshiva University, even though she never attended it herself.

The second investor is Grace Groner, who turned a small $180 investment in 1935 into $7 million by the time of her death in 2010. Ms Groner, who worked as a secretary at Abbott Laboratories for 43 years invested $180 in 3 shares of Abbott Laboratories (ABT) in 1935. She then simply reinvested the dividends for the next 75 years. She never sold, but just held on to her shares.

She was frugal, having grown up in the depression era, and was the classical millionaire next door type of person who was not interested in keeping up with the Joneses. Grace Groner left her entire fortune to her Alma Mater. Her $7 million donation is generating approximately $250,000 in annual dividend income.

The reason why dividend investors are not highly publicized is because dividend investing is not sexy enough to be featured in the financial mainstream media. In addition to that, it is not profitable for Wall Street to sell you into the idea that ordinary investors can invest on their own. Compare this to mutual funds, annuities and other products which generate billions in commissions for Wall Street, despite the fact that they might not be in the best interest of small investors.

The third dividend investor is Warren Buffett, the Oracle of Omaha himself. In a previous article I have outlined the reasoning behind my belief that Buffett is a closet dividend investor. He explicitly noted in his 2009 letter that "the best businesses by far for owners continue to be those that have high returns on capital and that require little incremental investment to grow". His investment in See's Candy is the best example of that.

Some of Buffett's best companies/stock that he has owned such as Geico, Coca Cola , See's Candy are exactly the types of investments mentioned above. He has mentioned that at Berkshire he tries to stick with businesses whose profit picture for decades to come seems reasonably predictable. Per Buffett the best businesses by far for owners continue to be those that have high returns on capital and that require little incremental investment to grow. In addition, his 2011 letter discussed his dividend income from all of Berkshire Hathaway investments, including his prediction that Coca Cola dividends will keep on increasing, based on the pattern of historical dividend increases.

In this article I outlined three dividend investors, who managed to turn small investments into cash machines that generated large amounts of dividends. They were able to accomplish this through identifying quality dividend growth companies at attractive valuations, patiently reinvesting distributions and in two out of three cases maintaining a diversified portfolio of stocks. These are the lessons that all investors could profit from.

http://www.dividendgrowthinvestor.com/2012/06/most-successful-dividend-investors-of.html

Buffett investment thought process

Answering the following questions will guide you through the Buffett investment thought process.

QUALITY AND MANAGEMENT ANALYSIS

1.  Does the company have an identifiable durable competitive advantage?

2.  Do you understand how the product works?

3.  If the company in question does have a durable competitive advantage and you understand how it works, then what is the chance that it will become obsolete in the next twenty years?

4.  Does the company allocate capital exclusively in the realm of its expertise?

5.  What is the company's per share earnings history and growth rate?

6.  Is the company consistently earning a high return on equity?

7.  Does the company earn a high return on total capital?

8.  Is the company conservatively financed?

9.  Is the company actively buying back its shares?

10.  Is the company free to raise prices with inflation?

11.  Are large capital expenditures required to update plant and equipment?

PRICE ANALYSIS

12.  Is the company's stock price suffering from a market panic, a business recession, or an individual calamity that is curable?

13.  What is the initial rate of return on the investment and how does it compare to the return on risk free Treasury Bonds?

14.  What is the company's projected annual compounding return as an equity/bond?

15.  What is the projected annual compounding return using the historical annual per share earnings growth?

Making investing enjoyable, understandable and profitable… A Simple and Obvious Approach

Making investing enjoyable, understandable and profitable…

Is it not true, that the really big fortunes from common stocks have been garnered by those 

• who made a substantial commitment in the early years of a company in whose future they had great confidence and who held their original shares unwaveringly while they increased 10-fold or 100-fold or more in value?

The answer is "Yes."

Buffett's Investing Wisdom - Buy Wonderful Companies

It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price. – Warren Buffett

Interestingly enough, Buffett’s mentor, Benjamin Graham, was quite fond of jumping at fair companies trading at wonderful prices. Graham termed this “cigar butt” investing -- as in, he was looking for discarded cigars that still had a few good puffs left in them. In Buffett’s pre-Berkshire days, he ran with this page from Graham’s book. To be sure, Berkshire Hathaway itself looked a lot like a cigar butt when Buffett bought it -- at the time it was a bedraggled textile business that was markedly unprofitable.

Through his career, though, Buffett realized that the real money wasn’t in puffing on dirty cigar butts. Instead, the big profits in investing come from finding well-run companies that dominate their industries and hanging onto those companies for a long time. Of course, Buffett isn’t one to pay any crazy price for a stock, though, so part of the investment process is determining what a fair price is for the stock and looking for an opportunity to buy the stock at that price.

Costco (Nasdaq: COST) is a great example of a company that dominates its industry. Sure, there are other warehouse-shopping clubs out there, but in terms of quality of operations and management, none stack up. And Buffett -- and even more so his right-hand man, Charlie Munger -- are not shy about professing their admiration for the low-price giant. The problem for investors is that it’s highly unlikely we’ll see shares of Costco trade at true bargain levels unless something dramatically changes the quality and outlook for the company.

In a similar vein, Visa (NYSE: V) and MasterCard (NYSE: MA) are among a very small, very dominant group in the growing and highly profitable credit card industry. As the nature of the global payment system continues to move rapidly away from cash and toward cards and electronic payments, both of these payment-network operators stand to rake it in. Just like Costco, though, investors looking for a “blue light” special on Visa or MasterCard shares will likely find themselves with their hands in their pockets as long as the major growth and success continue.

It’s not just academic to say that investors who balk at a premium price for these companies missed out. Over the past five years, the S&P 500 is up 35%. Costco is up 93%. As for Visa and MasterCard, they’ve tacked on an amazing 162% and 127%, respectively. And investors that bought those companies five years ago weren’t buying on the cheap. In 2008, Costco fetched an average price-to-earnings multiple of 23.5, while Visa and MasterCard sported respective multiples of 53 and 45.

Today, the stocks of all three of these companies still sport higher-than-average earnings multiples. But all three are also still top-notch businesses with stellar growth and profit potential.


Ref:  Warren Buffett's Greatest Wisdom

Buffett's Investing Wisdom - Who's Swimming Naked?

You only find out who is swimming naked when the tide goes out. – Warren Buffett

Unwise business plans can often lead to huge profits… over the short term. When the economy is roaring and everything is moving up and to the right, it’s far easier for companies to hide dumb, corner-cutting, or even illegal practices as they rake in profits. Eventually though, the environment changes, those ill-advised practices are exposed, and the companies employing them -- and their shareholders -- get punished.

Thinking back to the dot-com boom, online grocer Webvan is a perfect example. After pricing its 1999 IPO at $15, the stock traded up to nearly $25 -- up 66%! -- on its first day of trading. So what if the company was losing money, it had a questionable business plan, the economy was booming, and internet stocks couldn’t lose!

As we know now, it couldn’t last. As the stock market boom turned to bust and the economy cooled, Webvan’s approach to online retailing -- which only led to mounting losses -- left investors cold. Unable to fund its massive cash bleed, Webvan declared bankruptcy in 2001.

Of course, we have a plethora of even more recent examples of businesses caught swimming naked thanks to the housing bust and financial-market meltdown in 2008. Chief among those examples is Lehman Brothers, which was an investment bank that was raking it in prior to the crash by employing large amounts of ultra-short-term loans to finance risky, complex real-estate investments. When the market turned, Lehman’s lack of swimming trunks was painfully obvious, and in 2008, Lehman filed the U.S.’s largest corporate bankruptcy.

Buffett’s “swimming naked” quote provides us with plenty of cautionary tales and gives us an idea of companies we might want to avoid investing in. If we flip it on its head, though, it also reveals companies that are great investing opportunities.

For example, let’s look at the credit crisis again. Lehman Brothers declared bankruptcy, Fannie Mae (OTC: FNMA) and Freddie Mac (OTC: FMCC) were put into government conservatorship, and Bear Stearns narrowly avoided bankruptcy by agreeing to be bought out by JPMorgan Chase (NYSE: JPM). But Wells Fargo (NYSE: WFC) and U.S. Bancorp (NYSE: USB) both made it through the crisis without reporting a single unprofitable quarter. Though they both accepted government bailout money, it’s unlikely that either truly needed it. In fact, Wells Fargo’s chief executive at the time argued vociferously against taking bailout money, but regulators overruled the request.

When the tide went out, we saw that both Wells Fargo and U.S. Bancorp not only had their swimming suits on, but were wearing suits of titanium. The washing out that came with the financial crisis revealed both banks as great companies to invest in for the long term. It also just so happens that both are among Buffett’s largest holdings at Berkshire Hathaway -- in fact, Wells Fargo is Berkshire’s single largest stock holding. While neither stock is as cheap as it was circa 2009, both are still reasonably priced for a long-term owner today.


Ref:  Warren Buffett's Greatest Wisdom

How to Look for Values in Companies

All you need is to have certain tools to look after your own investing.

@ 3.00  The moment my son turned 18, I invested with him and he is now competent in looking after his own investing.  I believe when he reaches my age, he will be wealthier than I am.

@8.30  US, Japan, Europe, and UK.  Quantitative Easing - To Lower Interest Rates, Lift Asset Prices and Lower Exchange Rates

@ 11.00 My Currency - Your Problem
National Debt solutions - Service it, Default on it, or Inflate it away.

@ 12.40:  Buy inflation beating assets for the long term:  Properties and Shares.

@ 14.18:  How do you value?  PYAD - P/E, Yields, Assets and Debts

@ 16.00:  Cheap rubbish is still rubbish.   What do you do?  Hold or Sell?

@ 17.00:  Benjamin Graham vs Warren Buffett

@ 20.30:  Growth and value are joined at the hip.

@  21.20:  Coca Cola company

@  23.15  Concept of Yield on Cost.

@ 26.20:  "The harder I work, the luckier I am." (Biosensors International)

@ 28.00:  A Healthy Culture


www.fool.sg

Prospecting for Good Quality Stocks at the Right Price at any given time.

There are about 16,000 publicly owned companies in the U.S. for you to select from.  There are also about 3 times this number (48,000) of publicly owned companies in the other countries for you to select from too.

With so many companies, of course, some are much better candidates for your consideration than others.

Of these companies, fewer than 2% are likely to make the cut so far as your quality standards are concerned.

And perhaps, only 5% of THOSE might be available at the right price at any given time- and even this could be an overestimate.


Illustration:

1000 stocks

Only 20 are quality stocks (20/1000 = 2%)

Of these 20 quality stocks, only 1 is available at the right price at any given time, if at all. (1/20 = 5%)

Intrinsic value of Great Businesses: What's the business actually worth? Think long-term.

Company OPX

52 week high:  $52.99  (April 2010)  Market cap $960 million
52 week low:  $33.33 (July 2010)  Market cap $ 625 million
Variance:  35.2%


1.  Is the market really suggesting that this business was worth $960 million in April 2010, but only $625 million the following July?

2.  Yes, this is exactly what the market is suggesting.

3.  What's the business actually worth?

4.  Because it ought to be obvious that a fast-growing company cannot be worth $625 million and $960 million at roughly the same time.  

5.  Our goal as investor is to buy $960 million businesses when the market's charging $625 million.
6.  If you think these things don't happen, be assured:  They happen all the time.

7.  It is even better when we can buy a $500 million business for $300 million and watch the company grow into a $3 billion business.  

8.  It is this effect - the fact that great businesses make themselves more valuable over time - that keeps us from selling a $500 million business when its market cap increases to $600 million.

9.  After all, the $500 million valuation is based on our own analysis, and mathematically speaking, it's our single point of highest confidence in a range of values we believe the company could be worth.

10.  It might be substantially more.  

11.  If you're disciplined enough to only buy companies when they are priced at the low end of your range of potential values, your returns over time are almost guaranteed to satisfy.

12.  Holding a company when it's in the higher end of your range of values leaves you somewhat susceptible to a stock drop, given the lower margin of safety.  

13.  But if you have properly identified the company as a superior generator of wealth, the biggest mistake you might ever make is selling it because its shares are a few dollars too high.

14.  If you bough company OPX back in December 1987, for example, your shares rose 75%, from $23 to $40 in about two months.

15.  That's great return - but over the next 20 years, the stock has risen another seven times in value - tax free.

16.  Ultimately, it is nearly impossible to manage superior long-term results by focusing on short-term aims.

17.  Company OPX has evolved from a regional small cap into one of the most important retailers in the world, generating spectacular returns for shareholders in the process.

Characteristics you will like in a company

What I like to see in a business:

1.  Consistent earnings growth
2.  Good return on equity
3.  Manageable or no debt
4.  Quality management that's committed to the company.
5.  A simple business model.

Always judge the success of your company by the proper metrics - sustained growth and good returns on equity - rather than by a company's stock price.

Stock price, is not always a reflection of a company's quality or value.

Dividends can help to mitigate risk. When buying a dividend stock, the quality of the company is the number one consideration.

Let's assume that the stock stays the same or, even worse, actually goes down a little in the short term.

• If you have invested in a business that does not pay any dividends, you have no compensation for what has happened, just less money than you had when you invested.
• However, if the business pays dividends and continues to honour that commitment (in the same way that companies like Coca Cola have historically done) then it mitigates some of your risk.  

Or to put it another way, you still get some income from the investment which could be seen to offset your loss in the share price, should that have happened.

As a general principle, I tend to invest only in businesses that have a sustained track record of paying dividends.

"When buying a dividend stock, the quality of the company is the number one consideration.  Given enough time, a quality company will always rise above lesser competition.  When your holding period is forever, it is inevitable that a superior stock will eventually out-perform second-tier players."  -  Warren Buffett

In an ideal situation, you will buy a share in a business which is undervalued, and over time the share will increase in value to the point at which you are very pleased with the capital gain you have seen in the share price.  Then guess what, you also receive a cash bonus in the form of a dividend payment!  Sounds like a great concept to me.  :-)

A good quality company trading with a large margin of safety

Company OD

Quarter	High Pr	Low Pr	ttm-eps	High PE	Low PE
1	10.18	10.02	72.91	13.96	13.74
4	9.15	9.09	72.67	12.59	12.51
3	9.08	9.02	72.60	12.51	12.42
2	9.22	9.16	70.69	13.04	12.96
1	8.76	8.65	69.27	12.65	12.49
5	8.76	8.65	68.84	12.73	12.57
5	8.71	8.63	67.16	12.97	12.85
5	8.77	8.74	65.56	13.38	13.33
5	8.50	8.35	64.06	13.27	13.03
4	8.74	8.62	61.39	14.24	14.04
3	8.98	8.75	58.74	15.29	14.90
2	8.67	8.62	57.70	15.03	14.94
1	9.27	9.10	56.02	16.55	16.24
4	8.42	7.65	53.95	15.61	14.18
3	7.77	6.94	23.44	33.15	29.61
2	7.00	6.62	15.99	43.78	41.40
1	7.08	6.60	12.33	57.42	53.53
4	6.86	6.31	7.95	86.26	79.35
3	3.72	2.97	35.51	10.49	8.35
2	3.86	3.52	39.10	9.88	8.99
1	4.28	3.39	38.52	11.10	8.81
4	5.48	4.97	40.87	13.42	12.15
3	5.59	4.72	46.21	12.09	10.22
2	4.72	4.41	46.26	10.20	9.54
1	7.28	6.07	47.82	15.23	12.69
4	6.51	6.07	45.75	14.23	13.27
3	6.90	6.57	42.91	16.07	15.30
2	7.17	6.57	41.49	17.29	15.82
1	7.01	6.23	39.46	17.76	15.80
4	6.40	6.12	41.06	15.59	14.91
3	5.96	5.74	37.07	16.07	15.48
2	6.12	5.85	38.01	16.11	15.39
1	6.34	5.90	39.24	16.17	15.04
4	6.46	6.18	37.78	17.09	16.36
3	6.29	6.01	39.27	16.02	15.31
2	6.90	6.12	39.48	17.47	15.51
1	6.62	6.46	38.00	17.42	16.99

Quarter	Q1 eps	Q2 eps	Q3 eps	Q4  eps	FYE eps	Div
0-Jan-00	17.87	0.00	0.00	0.00	17.87	0.00
31/12/2012	17.63	18.64	19.11	17.29	72.67	65.00
31/12/2011	17.20	17.22	17.20	17.22	68.84	36.00
30/06/2011	14.53	15.72	15.60	15.54	61.39	60.00
30/06/2010	12.46	14.04	14.56	12.89	53.95	55.00
30/06/2009	8.08	10.38	7.11	-17.62	7.95	0.08
30/06/2008	10.43	9.80	10.70	9.94	40.87	31.72
30-Jun-07	8.36	11.35	10.76	15.28	45.75	44.14
30-Jun-06	9.96	9.32	9.34	12.44	41.06	46.90
30-Jun-05	8.51	10.55	10.28	8.44	37.78	56.55
				Sum	448.14	395.39
				DPO	88.2%

Latest share price $10.18

ttm-EPS 72.91 sen

Last FY DPS 65 sen

DPO ratio 89.5%

P/E 13.96

DY 6.39%

Historical P/E range 12 - 16

Historical DY range 4.86% - 6.27%

Estimated EPSGR 8% per year

Present risk free interest rate 4%.

Assuming no growth in its earnings or dividends, and using 4% risk free interest rate
as the discount factor, the present value of:
1.  The earnings stream is equivalent to an asset of  72.91 sen / 4% = $18.23
2.  The dividends stream is equivalent to an asset of  65 sen / 4% = $16.25

At present per share price of $10.18, its upside potential is $18.23 - $10.18 = $ 8.05.

Its downside risk is protected by its dividend yield which is equivalent to an asset of $16.25.  This value exceeds its present share price of $10.18 by a substantial margin of $16.25 - $10.18 = $6.07 per share.

That is, its present share price is at 37.45% below its intrinsic value (the value supported by its dividend yields).

Given its good quality of its business and the large margin of safety at the present market price, this stock is a BUY.

AEON: What is its fair value?

AEON
		31/12/12	31/12/11	31/12/10	31/12/09	31/12/08
EPS (sen)		60.6	55.7	47.0	38.0	34.4
Gross DPS (sen)		24.0	19.0	16.0	12.0	12.0
NAV per shr ($)		4.19	3.67	3.21	2.80	2.51
ROE %		14.49	15.17	14.67	13.57	13.67
P/E ratio		23.30	13.00	12.96	13.04	12.22
Shr Pr ($) (31/12)		14.12	7.24	6.09	4.96	4.20

On 29.5.2013, Aeon closes at $17.96 per share.

Its latest ttm-EPS was 64.46 sen.

This gives a P/E ratio of 27.86 .

EPS Growth Rate last 5 years was 15.5%

Assuming, future EPS GR is also 15.5%, PEG = 27.86 / 15.5 = 1.8

Its gross DPS in 2012 was 24 sen and at present share price, its DY is 1.34%.

[Historical DY ranges from a high of 2.63% to a low of 1.65%.

Historical PE was < 15. ]

At present price of $17.96 per share, EPS GR of 15%, and P/E ratio of 27.86,

1.  What is the Upside Returns / Downside Risk of this investment at the present price?

2.  What is the Potential Returns of this investment at the present price?

.

Best Stocks to Buy & Picking your stock - Two rules of value Investing

Follow these 2 rules and you will find investing in stocks is very profitable and very enjoyable too.

Rule 1: Find a wonderful business to invest in.
Rule 2: Buy its stock at a discount.

Theory of Investment: Why it is so important to buy good quality growth company and not paying too much for it.

The rest take care of themselves.


Investing vs. Speculation, according to Benjamin Graham

Uncovering the best value stocks****