Saturday, 31 December 2011
There is no power on earth like unconditional love.
WARREN BUFFETT INTERVIEW: THE BEST LIFE ADVICE I’VE EVER RECEIVED
Billionaire Warren Buffett, widely considered the smartest investor on the planet and known for his modest lifestyle despite astronomical wealth, was recently asked the best advice he ever received. Surprisingly, it wasn’t about money, finances or wealth creation. It was about parenting. Here’s what Buffett said about the best advice he’s ever received:
The power of unconditional love. I mean, there is no power on earth like unconditional love. And I think that if you offered that to your child, I mean you’re 90 percent of the way home. There may be days when you don’t feel like it, it’s not uncritical love, that’s a different animal, but to know you can always come back, that is huge in life. That takes you a long, long way. And I would say that every parent out there that can extend that to their child at an early age, it’s going to make for a better human being. – Warren Buffett
http://pursuitist.com/wellness/warren-buffett-interview-the-best-life-advice-ive-ever-received/
Friday, 30 December 2011
Speculative-Growth Stocks - Are Net Margins on the Rise?
Although Yahoo is profitable, many speculative growth companies - including most Internet companies - lose money.
Of course, that is to be expected from a new venture. It's investing heavily to exploit profit opportunities, and if those investments pay off, earnings will materialize.
But to curb risk, we want to find companies that are making progress toward profitability.
Even if a company is losing money, net margins should be improving, even if that means becoming less negative.
Yahoo shows an encouraging trend in 1999.
Of course, that is to be expected from a new venture. It's investing heavily to exploit profit opportunities, and if those investments pay off, earnings will materialize.
But to curb risk, we want to find companies that are making progress toward profitability.
Even if a company is losing money, net margins should be improving, even if that means becoming less negative.
Yahoo shows an encouraging trend in 1999.
- After losing money in its first three years, Yahoo made a profit in 1998, with a net margin close to 5%.
- Furthermore, it had net margins above 20% in the third and fourth quarters of 1998 and the first quarter of 1999.
- Net margins declined over the next few quarters because of non-cash charges resulting from mergers, but operating margins (which exclude such charges) remained solid.
- Yahoo appears to have left its money-losing phase behind.
(My comment: A great company can still be a bad investment if you pay too high a price to own it.)
Speculative-Growth Stocks - What's the Growth Trend?
Rapid sales growth won't do us any good if it can't be sustained.
We want staying power, not sales growth of 50% one year and shrinkage the next.
Even though it has only been around for a few years, Yahoo has been one of the most consistent Internet stocks around, growing steadily without a lot of wild swings from quarter to quarter.
We want staying power, not sales growth of 50% one year and shrinkage the next.
Even though it has only been around for a few years, Yahoo has been one of the most consistent Internet stocks around, growing steadily without a lot of wild swings from quarter to quarter.
- The pace of that growth has been steadily declining (from 230% in 1997 to 120% in the first quarter of 2000), but that's to be expected as a company gets bigger and grows from a larger base.
- Yahoo has demonstrated a lot of staying power, at least by the standards of Internet stocks.
Speculative-Growth Stocks - Is Sales Growth Outpacing Asset Growth?
The speculative-growth market is full of companies that are doubling their sales by doubling their assets.
This is a legitimate way to expand. Investors pour additional capital into the business, which drums up new sales.
Eventually (we hope), the company reaches a critical mass at which it becomes a big moneymaker.
But to limit risk, we can focus on companies that are making more efficient use of their assets as they expand, generating rising sales on each $1 of capital.
Yahoo has done pretty well on this front.
This is a legitimate way to expand. Investors pour additional capital into the business, which drums up new sales.
Eventually (we hope), the company reaches a critical mass at which it becomes a big moneymaker.
But to limit risk, we can focus on companies that are making more efficient use of their assets as they expand, generating rising sales on each $1 of capital.
Yahoo has done pretty well on this front.
- Between 1997 and 1998, its sales grew 18%, but its assets grew even faster, at 333%.
- In 1999, though, Yahoo's sales started to grow faster than its assets, indicating that it's starting to squeeze more growth out of its assets.
- That tells us that Yahoo is growing quickly, but prudently.
Speculative-Growth Stocks - Introduction
Speculative-growth stocks can inspire dreams of wealth - and nightmares of poverty.
These companies are often new ventures selling something people want, generating rapid revenue growth, but incurring high expenses as they strive to become a permanent fixture of the corporate landscape.
One might be the next Microsoft MSFT. Or the next Atari.
Their defining characteristics are rapid revenue growth but slower or spotty earnings growth - strong sales, in other words, but a lagging bottom line.
In fact, many speculative growth companies lose money - lots of it. That's not much inducement to invest.
Still, corporate America's future heavyweights and best investments may lurk in this high-risk, high-reward corner of the market.
It's possible to curb some of the risk, too.
For example, Yahoo YHOO, the World Wide Web portal was one of the hottest Internet stocks of the 1990s.
These companies are often new ventures selling something people want, generating rapid revenue growth, but incurring high expenses as they strive to become a permanent fixture of the corporate landscape.
One might be the next Microsoft MSFT. Or the next Atari.
Their defining characteristics are rapid revenue growth but slower or spotty earnings growth - strong sales, in other words, but a lagging bottom line.
In fact, many speculative growth companies lose money - lots of it. That's not much inducement to invest.
Still, corporate America's future heavyweights and best investments may lurk in this high-risk, high-reward corner of the market.
It's possible to curb some of the risk, too.
For example, Yahoo YHOO, the World Wide Web portal was one of the hottest Internet stocks of the 1990s.
Buffett: My job is to take advantage of the craziness of Mr. Market; whacking him when he gets way out of line
March 31, 2008
Question: What are your thoughts about the Chinese Stock market?
Buffett:
The Chinese stock market? I don’t know what markets are going to do. When I was over in China they were bombarding me with questions about the market and of course you have these A shares, including Petro China, which was going public in China. Petro China and others were trading at twice the price within China (at that time Chinese people were not permitted to buy shares in Hong Kong or in the United States) than outside China. This was really extraordinary. If you knew these restrictions were going to break down it would have been great to short the stocks in China and buy them elsewhere around the world.
But the Chinese stock market has 1.2 billion people waking up to the stock markets and having an investing or gambling urge. The stock market was becoming wildly popular as we know in China. Petro China at one time, based on the Chinese prices, was the most valuable company in the world, and was selling for over 1 trillion dollars, whereas Exxon was only worth 500 billion. This made Petro China twice as valuable as the largest company in the world.
I have no idea why and where that many people were relatively new to the market and were very excited about stocks. You do know in the end you have to buy things on a basis of when you get a value for what you pay. This seemed to lose relevance in a market like China. They had a situation like that in Kuwait 20 years ago. When a whole society, and a rich society, (certainly far richer than 15 years ago), a huge market opened up for them. I have no idea whether the people get friendlier or crazier. That is not my game.
My game is simply to buy something worth a dollar for 50 cents. Then if they go crazy in the right direction it helps me and if they go crazy in the other direction I just buy more.
My job is to take advantage of craziness. And that goes back to Ben Graham’s Intelligent Investor chapter 8. If you are going to invest based on value with a partner (lets say Mr. Market) - let’s say you each own half of a McDonalds stand. Every day he quotes a price at which he either wants to buy me out or sell me his interest. If he hears a bad rumour he low-balls it, so I buy. Other days he is all excited about some Burger King burning down and seeing some line ups and decides to give a high offer, so I sell.
If I’m going to have a partner like that what kind of partner do I want? I want a psycho. The stupider he gets the better I am going to do. I don’t want some cool, calm rational partner. I want somebody with huge ups and downs - a manic depressive. Basically that’s what you get in the stock market some times. As long as you realize he is there to serve you, and not to instruct you, you can make a lot of money. You can’t listen to Mr. Market and think he must be right. Only listen to what he says in the context of: when this guy gets way out of line I am going to whack him. And basically that’s what you get in the stock market.
In China you can’t tell how far the markets will go to extremes. You can’t tell that, I have no idea where the markets are going to go tomorrow or the next day or the next month or the next year. I do know that in the end stocks tend to sell for what they are worth. At least in the range of what they are worth. They go all over the place in between - but tend to true value in the end.
A Discussion of Mr. Warren Buffett with Dr. George Athanassakos and
Ivey MBA and HBA students
Omaha, NB, March 31, 2008, 10:00 am - 12:00 pm
http://www.bengrahaminvesting.ca/Resources/Interviews_Notes/Buffett_March_31_2008.pdf
Only One Warren Buffett: Buffett's investing style is to buy great companies at reasonable prices.
Buffett is often thought of as a pure value investor, buying companies and shares only when they are dirt cheap. He does some of that, and his investments in Goldman and GE last year were an example.
But far and away Buffett's investing style is to buy great companies at reasonable prices. His simple definition of a great company is one which has a sustainable competitive advantage, like a railway, for example.
Price wise, he is not getting Burlington on the cheap. The Financial Times calls Burlinton's valuation "generous", but also says "Buffett is not a man to quibble (on price) when he sees something he likes".
Buffett imitators often try to buy shares in a company because they are cheap. Buffett himself concentrates on buying great businesses. The difference is chalk and cheese, and it's the reason why there's only one Warren Buffett.
Buffett's Ratio Says Stocks Are Getting Interesting
17 August 2011
The art of cheap.
The art of cheap.
One of the hardest things to grasp in investing is that when the present turns the darkest, the future becomes the brightest. Warren Buffett once captured this with a famous and oft-repeated quote: "I will tell you how to become rich: Be fearful when others are greedy, and greedy when others are fearful."
There's another, more specific Buffett rule that gets less attention. In 2001, Buffett wrote an article for Fortune magazine laying out a few investing truisms. In short, you want to buy stocks when the total market capitalization of all public companies looks cheap in relation to that country's gross national product (similar to gross domestic product, or GDP). He called this technique "probably the best single measure of where valuations stand at any given moment."
He even threw around some numbers. "If the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you."
Tallying up the total market value of all listed stocks isn't easy. Different analysts come up with different numbers. The most widely used method is the full capitalization version of the Wilshire 5000 index, which tracks the market cap of all U.S. companies "with readily available price data." Divide that index by gross national product, and you get Buffett's ratio.
Where are we today? After the market bloodbath of the past few weeks, the ratio of U.S. stocks to GNP recently hit 79% -- just below what I'd call Buffett's comfort zone.
Source: Dow Jones, St. Louis Fed, author's calculations.
Understand what this does not mean:
- It does not mean stocks are bound to go up in the short run. No metric can predict that.
- It does not mean stocks won't fall further from here. A ratio becoming mildly attractive doesn't rule out the possibility of it becoming much more attractive. In fact, that's usually how it works. The history of bear markets is that of stocks becoming not just a little cheap, but obnoxiously cheap.
And importantly, other valuation metrics, such as the cyclically adjusted P/E ratio created by Yale professor Robert Shiller, still peg stocks as slightly overvalued.
But Buffett's metric means things start getting interesting. Forty years of data show there's a fairly strong correlation between Buffett's ratio and stock returns two years hence. At 79%, today's ratio is in a range that has historically set investors up for decent future returns:
| U.S. Stocks as % of GNP | Average Subsequent 2-Year Return |
|---|---|
| < 60% | 21% |
| 60%-80% | 24% |
| 80%-100% | 13% |
| > 100% | (4%) |
Source: Dow Jones, St. Louis Fed, author's calculations. Data since 1971.
There are no certainties. There are no promises. But investing gets interesting when the odds of success are in your favour. Buffett's ratio suggests those odds are now pretty good. If you were excited about stocks a month ago, you should be thrilled about them today. Indeed, many of us are.
"The lower things go, the more I buy," Buffett said last week. How about you?
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