Silver Bird - Could Fundamental Analysis prevent you from investing into this stock?

Unaudited FY 2011 account of Silver Bird

Revenue

2011  612.746m

2010  593.507m

Earnings

2011  4.934m (Diluted EPS 1.24 sen)

2010  3.655m

Total Asset 382.970m

Total Equity 213.424m  (Net Asset per Share RM 0.52) (Accumulated Losses 44.139m)

Net Profit Margin 0.8%

Asset Turnover 1.6x

Financial Leverage 1.79x

ROA 1.28%

ROTC 1.51%

ROE 2,29%  

Cash 34.699m

Bank balances 3.704m

Cash & Equivalent 38.403m 

LT Borrowings ( 24.694m)

ST Borrowings (126.772m)

Net Debt  (113.063m)

CA 169.083m

CL 144.088m

Working capital 24.995m

CA/CL = 1.729m

Inventories  15.016m

Trade receivables 87.459m (2010:  51.168m)

Other receivables 28.204m (2010: 18.467m)

Trade payables 10.411m

Other paybales 6.732m

Net CFO (25.582m)

CFI (6.259m)

CFF 21.125m

Net decrease in cash (10.716m)

Dividend 0

Valuations

Price 20.5 sen

No. of ordinary shares issued and issuable 396.387m

Market Cap 81.23m

P/E 16,5x

P/BV  0.394x

DY 0%

Could fundamental analysis guide you from investing into this stock?


The answer is YES.  The business fundamentals of this company are extremely lousy and there are enough red flags in its accounts to warrant caution or avoidance of this stock.


Please click below to read the post by BENGRAM for a more detailed explanation.
http://www.investlah.com/forum/index.php/topic,39283.msg770490.html#msg770490

Warren Buffett: Leverage is also a way to get very poor.

Unquestionably, some people have become very rich through the use of borrowed money. However, that’s also been a way to get very poor. When leverage works, it magnifies your gains. Your spouse thinks you’re clever, and your neighbors get envious. But leverage is addictive. Once having profited from its wonders, very few people retreat to more conservative practices. 

• And as we all learned in third grade – and some relearned in 2008 – any series of positive numbers, however impressive the numbers may be, evaporates when multiplied by a single zero. 
• History tells us that leverage all too often produces zeroes, even when it is employed by very smart people.

Leverage, of course, can be lethal to businesses as well. Companies with large debts often assume that these obligations can be refinanced as they mature. That assumption is usually valid. Occasionally, though, either because of company-specific problems or a worldwide shortage of credit, maturities must actually be met by payment. For that, only cash will do the job.

Borrowers then learn that credit is like oxygen. When either is abundant, its presence goes unnoticed. When either is missing, that’s all that is noticed.

• Even a short absence of credit can bring a company to its knees. 
• In September 2008, in fact, its overnight disappearance in many sectors of the economy came dangerously close to bringing our entire country to its knees.

By being so cautious in respect to leverage, we penalize our returns by a minor amount. Having loads of liquidity, though, lets us sleep well. 

• Moreover, during the episodes of financial chaos that occasionally erupt in our economy, we will be equipped both financially and emotionally to play offense while others scramble for survival. 
• That’s what allowed us to invest $15.6 billion in 25 days of panic following the Lehman bankruptcy in 2008.

http://www.berkshirehathaway.com/letters/2010ltr.pdf

Buffett: What students should be learning is how to value a business.

John Kenneth Galbraith once slyly observed that economists were most economical with ideas: They made the ones learned in graduate school last a lifetime. University finance departments often behave similarly. Witness the tenacity with which almost all clung to the theory of efficient markets throughout the 1970s and 1980s, dismissively calling powerful facts that refuted it “anomalies.” (I always love explanations of that kind: The Flat Earth Society probably views a ship’s circling of the globe as an annoying, but inconsequential, anomaly.)

Academics’ current practice of teaching Black-Scholes as revealed truth needs re-examination. For that matter, so does the academic’s inclination to dwell on the valuation of options. You can be highly successful as an investor without having the slightest ability to value an option. What students should be learning is how to value a business. That’s what investing is all about.

http://www.berkshirehathaway.com/letters/2010ltr.pdf

Buffett: Ownership of commercial "cows" (first class businesses) over any extended period of time will prove to be rewarding and by far the safest.

Our first two categories, namely cash and gold, enjoy maximum popularity at peaks of fear:

• Terror over economic collapse drives individuals to currency-based assets, most particularly U.S. obligations, and fear of currency collapse fosters movement to sterile assets such as gold. 
• We heard “cash is king” in late 2008, just when cash should have been deployed rather than held. 
• Similarly, we heard “cash is trash” in the early 1980s just when fixed-dollar investments were at their most attractive level in memory. 
• On those occasions, investors who required a supportive crowd paid dearly for that comfort.

My own preference – and you knew this was coming – is our third category: investment in productive assets, whether businesses, farms, or real estate. Ideally, these assets should have the ability in inflationary times

-  to deliver output that will retain its purchasing-power value 
- while requiring a minimum of new capital investment. 

• Farms, real estate, and many businesses such as Coca-Cola, IBM and our own See’s Candy meet that double-barreled test.
• Certain other companies – think of our regulated utilities, for example – fail it because inflation places heavy capital requirements on them. To earn more, their owners must invest more.
• Even so, these investments will remain superior to nonproductive or currency-based assets.

Whether the currency a century from now is based on gold, seashells, shark teeth, or a piece of paper (as today), people will be willing to exchange a couple of minutes of their daily labor for a Coca-Cola or some See’s peanut brittle. In the future the U.S. population will move more goods, consume more food, and require more living space than it does now. People will forever exchange what they produce for what others produce.

Our country’s businesses will continue to efficiently deliver goods and services wanted by our citizens. Metaphorically, these commercial “cows” will live for centuries and give ever greater quantities of “milk” to boot. 

• Their value will be determined not by the medium of exchange but rather by their capacity to deliver milk. 
• Proceeds from the sale of the milk will compound for the owners of the cows, just as they did during the 20th century when the Dow increased from 66 to 11,497 (and paid loads of dividends as well). 

Berkshire’s goal will be to increase its ownership of first-class businesses.

• Our first choice will be to own them in their entirety – but we will also be owners by way of holding sizable amounts of marketable stocks.
•  I believe that over any extended period of time this category of investing will prove to be the runaway winner among the three we’ve examined. 
• More important, it will be by far the safest.

http://www.berkshirehathaway.com/letters/2011ltr.pdf

Gold: Bubbles blown large enough inevitably pop. “What the wise man does in the beginning, the fool does in the end.”

The second major category of investments involves assets that will never produce anything, but that are purchased in the buyer’s hope that someone else – who also knows that the assets will be forever unproductive – will pay more for them in the future. Tulips, of all things, briefly became a favorite of such buyers in the 17th century.

This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further. Owners are not inspired by what the asset itself can produce – it will remain lifeless forever – but rather by the belief that others will desire it even more avidly in the future.

The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative.

• True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. 
• Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.

What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct.

• Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. 
• As “bandwagon” investors join any party, they create their own truth – for a while.

Over the past 15 years, both Internet stocks and houses have demonstrated the extraordinary excesses that can be created by combining an initially sensible thesis with well-publicized rising prices. 

• In these bubbles, an army of originally skeptical investors succumbed to the “proof” delivered by the market, and the pool of buyers – for a time – expanded sufficiently to keep the bandwagon rolling. 
• But bubbles blown large enough inevitably pop. 
• And then the old proverb is confirmed once again: “What the wise man does in the beginning, the fool does in the end.”

Today the world’s gold stock is about 170,000 metric tons.

• If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) 
• At $1,750 per ounce – gold’s price as I write this – its value would be $9.6 trillion. Call this cube pile A.

Let’s now create a pile B costing an equal amount.

• For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). 
• After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). 

Can you imagine an investor with $9.6 trillion selecting pile A over pile B?

Beyond the staggering valuation given the existing stock of gold, current prices make today’s annual production of gold command about $160 billion. 

• Buyers – whether jewelry and industrial users, frightened individuals, or speculators – must continually absorb this additional supply to merely maintain an equilibrium at present prices.

A century from now

• the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops – and will continue to produce that valuable bounty, whatever the currency may be. 
• Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). 
• The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.

Admittedly, when people a century from now are fearful, it’s likely many will still rush to gold. I’m confident, however, that the $9.6 trillion current valuation of pile A will compound over the century at a rate far inferior to that achieved by pile B.

http://www.berkshirehathaway.com/letters/2011ltr.pdf

Cash and related currency assets: Their beta may be zero, but their risk is huge.

Investments that are denominated in a given currency include money-market funds, bonds, mortgages, bank deposits, and other instruments. Most of these currency-based investments are thought of as “safe.”  In truth they are among the most dangerous of assets.

• Their beta may be zero, but their risk is huge. 
• Over the past century these instruments have destroyed the purchasing power of investors in many countries, even as the holders continued to receive timely payments of interest and principal. 
• This ugly result, moreover, will forever recur. 
• Governments determine the ultimate value of money, and systemic forces will sometimes cause them to gravitate to policies that produce inflation. From time to time such policies spin out of control.

Even in the U.S., where the wish for a stable currency is strong, the dollar has fallen a staggering 86% in value since 1965, when I took over management of Berkshire.

• It takes no less than $7 today to buy what $1 did at that time.
• Consequently, a tax-free institution would have needed 4.3% interest annually from bond investments over that period to simply maintain its purchasing power. 
• Its managers would have been kidding themselves if they thought of any portion of that interest as “income.”

For tax-paying investors like you and me, the picture has been far worse. During the same 47-year period, continuous rolling of U.S. Treasury bills produced 5.7% annually. That sounds satisfactory.

• But if an individual investor paid personal income taxes at a rate averaging 25%, this 5.7% return would have yielded nothing in the way of real income. 
• This investor’s visible income tax would have stripped him of 1.4 points of the stated yield, and 
• the invisible inflation tax would have devoured the remaining 4.3 points.
• It’s noteworthy that the implicit inflation “tax” was more than triple the explicit income tax that our investor probably thought of as his main burden. 
• “In God We Trust” may be imprinted on our currency, but the hand that activates our government’s printing press has been all too human.

High interest rates, of course, can compensate purchasers for the inflation risk they face with currency-based investments – and indeed, rates in the early 1980s did that job nicely. 

• Current rates, however, do not come close to offsetting the purchasing-power risk that investors assume. 
• Right now bonds should come with a warning label.

Under today’s conditions, therefore, I do not like currency-based investments. Even so, Berkshire holds significant amounts of them, primarily of the short-term variety.

• At Berkshire the need for ample liquidity occupies center stage and will never be slighted, however inadequate rates may be.  
• Accommodating this need, we primarily hold U.S. Treasury bills, the only investment that can be counted on for liquidity under the most chaotic of economic conditions. 
• Our working level for liquidity is $20 billion; $10 billion is our absolute minimum.

Beyond the requirements that liquidity and regulators impose on us, we will purchase currency-related securities only if they offer the possibility of unusual gain – either

• because a particular credit is mispriced, as can occur in periodic junk-bond debacles, or
• because rates rise to a level that offers the possibility of realizing substantial capital gains on high-grade bonds when rates fall. 

Though we’ve exploited both opportunities in the past – and may do so again – we are now 180 degrees removed from such prospects. Today, a wry comment that Wall Streeter Shelby Cullom Davis made long ago seems apt: “Bonds promoted as offering risk-free returns are now priced to deliver return-free risk.”


http://www.berkshirehathaway.com/letters/2011ltr.pdf

Volatility is not risk. Risk is the reasoned probability of that investment causing it's owner a loss of purchasing power over his contemplated holding period.

Investing is often described as the process of laying out money now in the expectation of receiving more money in the future.

At Berkshire we take a more demanding approach, defining investing as

•  the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power – after taxes have been paid on nominal gains – in the future. 
• More succinctly, investing is forgoing consumption now in order to have the ability to consume more at a later date.

From our definition there flows an important corollary: The riskiness of an investment is not measured by beta (a Wall Street term encompassing volatility and often used in measuring risk) but rather by the probability – the reasoned probability – of that investment causing its owner a loss of purchasing-power over his contemplated holding period. 

• Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period. 
• And as we will see, a non-fluctuating asset can be laden with risk.

Investment possibilities are both many and varied.



http://www.berkshirehathaway.com/letters/2011ltr.pdf

Interesting to Note that this is a development that hurts Berkshire Hathaway during 2011

-  Three large and very attractive fixed-income investments were called away from us by their issuers in 2011. Swiss Re, Goldman Sachs and General Electric paid us an aggregate of $12.8 billion to redeem securities that were producing about $1.2 billion of pre-tax earnings for Berkshire. That’s a lot of income to replace, though our Lubrizol purchase did offset most of it.

http://www.berkshirehathaway.com/letters/2011ltr.pdf


Comment:  Buffett emphasizes increasing the aggregate pre-tax earnings and incomes.  He reinvests into or replaces companies, to achieve growth in aggregate pre-tax earnings and incomes.   This is very sound strategy to follow.

Buffett: In my early days I, too, rejoiced when the market rose. Now, low prices became my friend.

Buffett highlights the irrational reaction of many investors to changes in stock prices.


Today, IBM has 1.16 billion shares outstanding, of which we own about 63.9 million or 5.5%.  Naturally, what happens to the company’s earnings over the next five years is of enormous importance to us.  Beyond that, the company will likely spend $50 billion or so in those years to repurchase shares. Our quiz for the day: What should a long-term shareholder, such as Berkshire, cheer for during that period?

I won’t keep you in suspense. We should wish for IBM’s stock price to languish throughout the five years.

----



The logic is simple: If you are going to be a net buyer of stocks in the future, either directly with your own money or indirectly (through your ownership of a company that is repurchasing shares), you are hurt when stocks rise. You benefit when stocks swoon. Emotions, however, too often complicate the matter:

• Most people, including those who will be net buyers in the future, take comfort in seeing stock prices advance. 
• These shareholders resemble a commuter who rejoices after the price of gas increases, simply because his tank contains a day’s supply.

Charlie and I don’t expect to win many of you over to our way of thinking – we’ve observed enough human behavior to know the futility of that – but we do want you to be aware of our personal calculus. And here
a confession is in order: In my early days I, too, rejoiced when the market rose. Then I read Chapter Eight of Ben Graham’s The Intelligent Investor, the chapter dealing with how investors should view fluctuations in stock prices. Immediately the scales fell from my eyes, and low prices became my friend. Picking up that book was one of the luckiest moments in my life.

In the end, the success of our IBM investment will be determined primarily by its future earnings. But an important secondary factor will be how many shares the company purchases with the substantial sums it is likely to devote to this activity. And if repurchases ever reduce the IBM shares outstanding to 63.9 million,  I will abandon my famed frugality and give Berkshire employees a paid holiday. 

-----


When Berkshire buys stock in a company that is repurchasing shares, we hope for two events:

• First, we have the normal hope that earnings of the business will increase at a good clip for a long time to come; and 
• second, we also hope that the stock underperforms in the market for a long time as well. A corollary to this second point: “Talking our book” about a stock we own – were that to be effective – would actually be harmful to Berkshire, not helpful as commentators customarily assume.

http://www.berkshirehathaway.com/letters/2011ltr.pdf

Share Buybacks: Mixed Emotions evoked when Berkshire shares sell well below Intrinsic Value

Share Repurchases


Last September, we announced that Berkshire would repurchase its shares at a price of up to 110% of book value. We were in the market for only a few days – buying $67 million of stock – before the price advanced beyond our limit. Nonetheless, the general importance of share repurchases suggests I should focus for a bit on the subject.

Charlie and I favor repurchases when two conditions are met: 

• first, a company has ample funds to take care of the operational and liquidity needs of its business; 
• second, its stock is selling at a material discount to the company’s intrinsic business value, conservatively calculated. 

We have witnessed many bouts of repurchasing that failed our second test. Sometimes, of course, infractions – even serious ones – are innocent; many CEOs never stop believing their stock is cheap. In other instances, a less benign conclusion seems warranted.

• It doesn’t suffice to say that repurchases are being made to offset the dilution from stock issuances or simply because a company has excess cash. 
• Continuing shareholders are hurt unless shares are purchased below intrinsic value. 

The first law of capital allocation – whether the money is slated for acquisitions or share repurchases – is that what is smart at one price is dumb at another. (One CEO who always stresses the price/value factor in repurchase decisions is Jamie Dimon at J.P. Morgan; I recommend that you read his annual letter.)

Charlie and I have mixed emotions when Berkshire shares sell well below intrinsic value. We like making money for continuing shareholders, and there is no surer way to do that than by buying an asset – our
own stock – that we know to be worth at least x for less than that – for .9x, .8x or even lower. (As one of our directors says, it’s like shooting fish in a barrel, after the barrel has been drained and the fish have quit flopping.)

Nevertheless, we don’t enjoy cashing out partners at a discount, even though our doing so may give the selling shareholders a slightly higher price than they would receive if our bid was absent. 

• When we are buying, therefore, we want those exiting partners to be fully informed about the value of the assets they are selling. 
• At our limit price of 110% of book value, repurchases clearly increase Berkshire’s per-share intrinsic value. 
• And the more and the cheaper we buy, the greater the gain for continuing shareholders. 

Therefore, if given the opportunity, we will likely repurchase stock aggressively at our price limit or lower.

You should know, however, that

• we have no interest in supporting the stock and that our bids will fade in particularly weak markets.
• Nor will we buy shares if our cash-equivalent holdings are below $20 billion. At Berkshire, financial strength that is unquestionable takes precedence over all else.

http://www.berkshirehathaway.com/letters/2011ltr.pdf

Boosting Berkshire Hathaway Profits: Through organic growth and through purchasing some large operations.

-  I also included two tables last year that set forth the key quantitative ingredients that will help you estimate our per-share intrinsic value. I won’t repeat the full discussion here; you can find it reproduced on pages 99-100. To update the tables shown there, our per-share investments in 2011 increased 4% to $98,366, and
our pre-tax earnings from businesses other than insurance and investments increased 18% to $6,990 per share.

Charlie and I like to see gains in both areas, but our primary focus is on building operating earnings. Over time, the businesses we currently own should increase their aggregate earnings, and we hope also to purchase some large operations that will give us a further boost. We now have eight subsidiaries that would each be included in the Fortune 500 were they stand-alone companies. That leaves only 492 to go. My task is clear, and I’m on the prowl.


Comment:  In managing Berkshire Hathaway, Buffett's primary focus in on building operating earnings.  He expects his existing companies can increase their aggregate earnings.  He hopes to boost these earnings further through purchasing some large operations.

Intrinsic Business Value - Look for the long term growth in the intrinsic values of your invested businesses.

Intrinsic Business Value


Charlie and I measure our performance by the rate of gain in Berkshire’s per-share intrinsic business value. If our gain over time outstrips the performance of the S&P 500, we have earned our paychecks. If it doesn’t, we are overpaid at any price.

We have no way to pinpoint intrinsic value. But we do have a useful, though considerably understated, proxy for it: per-share book value. This yardstick is meaningless at most companies. At Berkshire, however, book value very roughly tracks business values. That’s because the amount by which Berkshire’s intrinsic value exceeds book value does not swing wildly from year to year, though it increases in most years. Over time, the divergence will likely become ever more substantial in absolute terms, remaining reasonably steady, however, on a percentage basis as both the numerator and denominator of the business-value/book-value equation increase.

Comment:  It is not easy to determine intrinsic value.  The best PROXY for intrinsic value of Berkshire Hathaway is its book value.  Though this closely tracks the intrinsic value of Berkshire Hathaway,  it actually understates the intrinsic value of the company.  Nevertheless, Buffett opines that using book value to denote intrinsic value is meaningless for most other companies.


We’ve regularly emphasized that our book-value performance is almost certain to outpace the S&P 500 in a bad year for the stock market and just as certainly will fall short in a strong up-year. The test is how we do over time. Last year’s annual report included a table laying out results for the 42 five-year periods since we took over at Berkshire in 1965 (i.e., 1965-69, 1966-70, etc.). All showed our book value beating the S&P, and our string held for 2007-11. It will almost certainly snap, though, if the S&P 500 should put together a five-year winning streak (which it may well be on its way to doing as I write this)

Comment:  Psychological forces trump the fundamental forces in the short term.  In the long term, the fundamental forces always trump the psychological forces that affect the stock price of a company.  Buffett looks at long term performances.  He highlighted that in any given 5 year period, the percentage gains in book value of Berkshire Hathaway have beaten those offered by the S&P 500.

http://www.berkshirehathaway.com/letters/2011ltr.pdf

Buffett's Big 4 Investments in Marketable Securities - American Express, Coca Cola, IBM and Wells Fargo

-  Finally, we made two major investments in marketable securities:

• (1) a $5 billion 6% preferred stock of Bank of America that came with warrants allowing us to buy 700 million common shares at $7.14 per share any time before September 2, 2021; and 
• (2) 63.9 million shares of IBM that cost us $10.9 billion. 

Counting IBM, we now have large ownership interests in four exceptional companies:

• 13.0% of American Express, 
• 8.8% of Coca-Cola, 
• 5.5% of IBM and 
• 7.6% of Wells Fargo. 
• (We also, of course, have many smaller, but important, positions.)

Comment:  "Buying wonderful company at fair price" and "holding period is forever".   This is classically Buffett's style.


We view these holdings as partnership interests in wonderful businesses, not as marketable securities to be bought or sold based on their near-term prospects. Our share of their earnings, however, are far from fully reflected in our earnings; only the dividends we receive from these businesses show up in our financial reports. Over time, though, the undistributed earnings of these companies that are attributable to our ownership are of huge importance to us. That’s because they will be used in a variety of ways to increase future earnings and dividends of the investee. They may also be devoted to stock repurchases, which will increase our share of the company’s future earnings.

Comment:  Buffett buys and holds for the long term.  He keeps these companies for their long-term prospects, knowing that he will obtain good returns from these companies, either through the dividends they distribute or through the undistributed growing earnings attributable to the owners from its reinvested retained earnings.


-  Had we owned our present positions throughout last year, our dividends from the “Big Four” would have been $862 million. That’s all that would have been reported in Berkshire’s income statement. Our share of this quartet’s earnings, however, would have been far greater: $3.3 billion. Charlie and I believe that the $2.4 billion that goes unreported on our books creates at least that amount of value for Berkshire as it fuels earnings gains in future years. We expect the combined earnings of the four – and their dividends as well – to increase in 2012 and, for that matter, almost every year for a long time to come. A decade from now, our current holdings of the four companies might well account for earnings of $7 billion, of which $2 billion in dividends would come to us.


Comment:  Only the dividends received are reported in Berkshire Hathaways account.  This is only a fraction (36%) of the actual earnings of $3.3 billion.  Buffett opines that these dividends will continue to grow as the retained earnings fuel earnings gains in future years.  I like the way Buffett projects the future earnings of these companies.

• For present earnings of $3 billion to grow to $7 billion in 10 years, he is projecting a CAG of 8.84%.  
• Projecting the dividends of $862 million growing to $2 billion in a decade is the equivalent of the dividends growing at a CAG of  8.77% for the same period.  
• The growth rates used in his projections are very conservative (8.84% and 8.77%).  Maybe Buffett just uses his simple rule of thumb of doubling the earnings or dividends every 10 years.
• Once again, he reiterates that $1 retained earnings by the company should deliver at least $1 value to the shareholder.

http://www.berkshirehathaway.com/letters/2011ltr.pdf

Buffett Loves The Insurance Operations that deliver "float" or costless capital of $70 BILLION .

• Our insurance operations continued their delivery of costless capital that funds a myriad of other opportunities.

• This business produces “float” – money that doesn’t belong to us, but that we get to invest for Berkshire’s benefit. 
• And if we pay out less in losses and expenses than we receive in premiums, we additionally earn an underwriting profit, meaning the float costs us less than nothing. 
• Though we are sure to have underwriting losses from time to time, we’ve now had nine consecutive years of underwriting profits, totaling about $17 billion. 
• Over the same nine years our float increased from $41 billion to its current record of $70 billion. Insurance has been good to us

http://www.berkshirehathaway.com/letters/2011ltr.pdf

Growth Investing Examples from Berkshire Hathaway

-  On September 16th we acquired Lubrizol, a worldwide producer of additives and other specialty chemicals. The company has had an outstanding record since James Hambrick became CEO in 2004, with pre-tax profits increasing from $147 million to $1,085 million. Lubrizol will have many opportunities for “bolt-on” acquisitions in the specialty chemical field. Indeed, we’ve already agreed to three, costing $493 million. James is a disciplined buyer and a superb operator. Charlie and I are eager to expand his managerial domain.

Comment:  Lubrizol grew its pre-tax profits from $147 million from 2004 to $1,085 million.   Thus its pre-tax profit has grown at the compound annual growth rate of 33.05% over 7 years.

• Buffett likes this company for its good earnings growth.  
• The good earnings growth rate also is reflective of the good business fundamentals of this company.
• Buffett loves buying / owning wonderful company (that are growing).

-  Our major businesses did well last year. In fact, each of our five largest non-insurance companies – BNSF, Iscar, Lubrizol, Marmon Group and MidAmerican Energy – delivered record operating earnings. In aggregate these businesses earned more than $9 billion pre-tax in 2011. Contrast that to seven years ago, when we owned only one of the five, MidAmerican, whose pre-tax earnings were $393 million. Unless the economy weakens in 2012, each of our fabulous five should again set a record, with aggregate earnings comfortably topping $10 billion.

Comment:  

1994:  Mid American contributed pre-tax earnings of $393 million.

2011:  BSNF, Iscar, Lubrizol, Marmon Group and MidAmerican Energy earned $9 billion pre-tax.

• BSNF and Lubrizol are recent acquisitions of Buffett.  
• Buffett likes these companies for their earnings and growth.  
• Buffett even projected that their aggregate earnings will top $10 billion next year, 2012 (a growth rate of 11%).

-   In total, our entire string of operating companies spent $8.2 billion for property, plant and equipment in 2011, smashing our previous record by more than $2 billion. About 95% of these outlays were made in the U.S., a fact that may surprise those who believe our country lacks investment opportunities. We welcome projects abroad, but expect the overwhelming majority of Berkshire’s future capital commitments to be in America. In 2012, these expenditures will again set a record.

Comment:  

Yes, to grow one has to re-invest.  Looks like Buffett reinvest all the free cash flows ($8.2 billion capital expenditure) for future growth.

http://www.berkshirehathaway.com/letters/2011ltr.pdf

How To Teach Your Child About Investing

February 29 2012

Have you taught your children about investing?

As your child becomes more aware of money and other financial concepts, it is vital that you arm them with some important investment knowledge.   Read on to find out how to impart some investing smarts to your children. If you don't have the basic knowledge required for investing, and need to learn more yourself, read Investing 101: A Tutorial For Beginner Investorsbefore we start.

Investing Should Be a Family Activity


Some parents are guilty of not discussing personal finance with their children, and almost all parents are guilty of not discussing investing with their children. Investing should be a family activity.Children mature at different rates, so it may take some time before your child is ready to tackle concepts like portfolio creation and asset allocation; however, the basics of investing can be taught quite young.

Risk and Reward


Before you have your kids spending Saturdays at the library using the internet to check company profiles, you will have to explain risk and reward.  Risk is the possibility that an investment will lose some or all of its value. Reward is the percentage of gain that your investment experiences over time - the return on investment (ROI).

Below we will sketch a brief picture of the two more common investments: debt securities and stocks.

Easy Ideas to Tell Your Kids About: Stocks


Stocks are variable risk, variable return investments. On the whole, they are categorized as high risk and high return. You have to make it clear that all the risks involved in the stock markets can't be predicted.

Enron and other companies have proved that accounting sheets can be tampered with and CEOs can lie. But even with the unknown risks, the stock market is a strong investment because, over time, it has seen a general rise.   

SEE: Stocks Basics

Easy Ideas to Tell Your Kids About: Debt Securities


A bond is a low-risk, low-return investment. Typically, bonds pay only a small amount over the prime interest rate because they are backed by stable institutions (usually banks or governments). You can buy bonds from unstable regions of the world that offer better returns, but these countries often have unstable governments, so you can't necessarily count on getting that return down the road.

Therefore, it may be best start your child with stocks and explain that bonds become more important as you age and need guaranteed investments. Your child will probably not have enough money to make bonds worthwhile, and may actually lose money to inflation.

Getting Your Child's Attention


When you are checking your stocks, show your child the companies of which you own a small part.  If you own any exciting companies that might be of interest to your children - plane manufacturers like Boeing, sports equipment specialists like Bauer, technology and video game companies like Sony - make sure that you request the company's current investor relations package, or print it off the internet, so that you can show your child more about those companies, including how much they earned, what they make and how many people work for them.

Then you can ask your child what company he or she would like to buy. Children have favorites even if they are not aware of them. For example, Nike, Nintendo, Sony and Disney are popular with most children. Once again, you can go on the internet or write a letter to these companies to get a copy of the investor's package. This will give your child something interesting to flip through, even though he or she may not understand all the papers inside. Disney, for example, has an investor relations newsletter that features a rotating cast of characters parading through their announcements.

Buying and Tracking


Once you have introduced your child to some basic concepts, you can sit down together allow him or her to select a company. If you have the money, you can buy the stock and track it with your child. You should give the statements to him or her to keep in a financial binder  (you can add his or her banking information here also and separate the two different sections with a divider). If you don't have the money, make an artificial portfolio and track the stock for fun. You can even do it on this site: try out Investopedia's Stock Simulator.


You and your child can follow your stocks with daily, weekly and monthly summaries on Yahoo! Finance.


When your child is older, you can provide a more in-depth explanation of stocks and other investments.  Eventually, you want to let your children buy their own stocks. Your child may have enough cash diligently saved up in a savings account by the time he or she is interested in investing. Don't put it all into a bond or the stock market, but invest a third in each and keep a third in savings.    This will allow your child to compare the performance of a savings bond, stocks of his or her choosing and the interest from a bank account.

If your child doesn't have any money, you have two options. You can use $100 of your own money to open a discount brokerage account for your child to make investments through, or you can continue to use an artificial portfolio of stocks that your child wants to buy some day. In the latter case, you will need to find ways to maintain your child's motivation.  

Conclusion


If you are able to pick stocks together and track them when your children are young, they will get a sense of the up-and-down cycles that stocks go through.  This understanding will prepare them for riding out market fluctuations and making informed decisions when others panic. 

During all this, you want to allow your child to make real decisions and take real risks. Yes, your child may lose money, but the purpose of this exercise is to familiarize your child with investing.  Part of this exercise is learning that any investment has advantages and disadvantages. Your child may not make a fortune, but the experience of gaining and losing money is almost as valuable.

To read more youth-related articles, see Savings Plans For Minors, Encouraging Good Habits With An Incentive Trust and Retirement Savings Tips For 18- To 24-Year-Olds.

Read more: http://www.investopedia.com/articles/pf/07/childinvestor.asp?partner=ntu12&utm_source=18&utm_medium=Email&utm_campaign=NTU-2/29/2012#ixzz1noYeDfyc

The latest edition of Buffett's annual letter,

http://www.berkshirehathaway.com/letters/2011ltr.pdf



The per-share book value of both our Class A and Class B stock increased by 4.6% in 2011. Over the last 47 years (that is, since present management took over), book value has grown from $19 to $99,860, a rate of 19.8% compounded annually.



Change in Per-Share Book Value of Berkshire
Compounded Annual Gain – 1965-2011 . . . . . . . . . . . . . . . . . . . . . . . . . 19.8%
Overall Gain – 1964-2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . 513,055%

Percentage Change in S&P 500 with Dividends Included
Compounded Annual Gain – 1965-2011 . . . . . . . . . . . . . . . . . . . . . . . . . 9.2%
Overall Gain – 1964-2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,397%

Berkshire Hathaway showed losses in only 2 years for this long period, namely 2001 (-6.2%) and 2008 (-9.6%).

By ensuring that losses are few and small, the gains in all the years compounded into a very huge value.

Why Don't You Invest?

By Morgan Housel | More Articles 
February 28, 2012 | Comments (24)

Last month, The Motley Fool posted a beautiful video titled "Why Do You Invest?"

"Is it for the fancy cars? The dream home?" the ad asks. "Maybe we invest for our families," it ponders, a reason I think most investors would agree with.

But there's a related question for millions across the country: Why don't you invest?

About 54% of U.S. households own stock investments, according to a 2011 Gallup poll. That leaves 46% that do not.

Part of this is due to a lack of wealth -- many American households simply don't have any money to invest. But there's more to it. A 2008 paper by a trio of economists showed that (link opens PDF file) sizable numbers of even the wealthiest Americans don't own stocks. 

• Of households ranked in the third quartile of wealth, 34% did not own stocks either directly or through mutual funds. 
• Of those in the top quartile, 14% had no stock exposure. 
• Within the richest 5% of American households, 6% owned no stocks.

Some of the wealthiest households may avoid stocks because ownership in private businesses offers better opportunities. But for others, the excuses are more interesting.

Two centuries of data makes one point clear: Over the long haul, stocks trounce the returns of bonds, cash, commodities, and real estate -- and they do it with less risk. 

• Adjusted for inflation, $1 invested in stocks in 1802 was worth $755,000 in 2006. 
• In bonds, $1 turned into $1,083. 
• Gold grew to $1.95. 
• Cash depreciated to $0.06. 

During that 200-year stretch, the worst 20-year period 

• for stocks produced a real return of 1% a year. 
• For bonds, the worst period eroded half of investors' purchasing power. 

Stocks win over the long haul, and yet a large number of Americans avoid them.

Why is hard to know, but not particularly surprising. Americans' love for self-destructive financial behavior is never-ending. One incredible 2005 report (link opens PDF file) led by Yale economist James Choi showed that 

• half of workers over 59.5 years old -- and hence eligible to withdraw money from a 401(k) plan right away -- do not contribute enough to retirement plans to take full advantage of employer matching, turning down money that would have been theirs to spend immediately. 
• Two-thirds of those over 59.5 years old not participating in a retirement plan with employer matching said they would never sign up. It's astounding, as they could have pulled the money out the next day penalty-free.

Choi's paper doesn't detail attitudes toward stocks, but his results speak volumes about people's attitudes toward money in general. When something requires a modicum of effort, many Americans decline -- even if it offers substantial rewards. Our aversion to paperwork can be stronger than our desire for money.

Past performance also guides people's willingness to own stocks. 

• While 54% of households currently own stocks, 
• that figure was as high as 65% in 2007 when the market hit an all-time high. 

As USA Today wrote in 2005:

In 1996 and 1997, when the bull market was in full swing, Washington [state] gave its teachers an option of staying in the traditional pension plan or switching to a hybrid pension plan -- 50% of assets in a traditional pension and 50% in a private account. Seventy-four percent opted for the hybrid plan. But when public employees were offered the same choice in 2002 and 2003, after the slump, only 11% chose the hybrid offering.

Those who do invest in stocks tend to do miserably at it, reinforcing their perception that it's a losing game. 

• One study by Dalbar showed that (link opens PDF file) the S&P 500 returned 9.14% a year over a 20-year period ending 2010, but the average investor earned 3.83% a year by buying high and selling low. 
• Stocks crush bonds over the long run, but many would be better off in bonds so long as they stay put. They're that bad at investing.

Then there's the fear of being cheated. The same three economists mentioned above wrote a great paper (link opens PDF file) in 2008 asking a group in the Netherlands a simple question: "Generally speaking, would you say that most people can be trusted or that you have to be very careful in dealing with people?"

The question has nothing to do with stocks, but it was highly significant in predicting stock ownership. 

• "Trusting others increases the probability of buying stock by 50% of the average sample probability and raises the share invested in stock by 3.4% points," the authors wrote. 
• The results "explain the significant fraction of wealthy people who do not invest in stocks." The study is likely applicable to the United States.

Another possibility -- though one I don't have evidence for -- is that people willingly forego higher long-term returns to avoid the nausea of stock volatility. 

• Academic economists tend to view people as unemotional "utility maximizers" for whom rational behavior equals whatever is most efficient, but the real world is different. 
• Trading a percentage point of returns for a better night's sleep may be worth it for those who value a peaceful life over a large net worth. 
• What looks irrational on the chalkboard often makes sense in the real world.

With pensions a dying relic, more Americans are now responsible for financing their own retirements. For most, the only way to get there is heavy exposure to stocks over many years. Will those now shunning stocks eventually change their minds? Will they ever get to retire? It's hard to know. Never underestimate people's willingness to undermine their future.

http://www.fool.com/investing/general/2012/02/28/why-dont-you-invest.aspx