Common Stocks and Uncommon Profits by Philip Fisher (Summary)

Common Stocks and Uncommon Profits 
by Philip Fisher 
 
INTRODUCTION
By Kenneth L. Fisher (Philip Fisher’s Son)
Ken Fisher credits his father for teaching him the "craft" of investing. He writes that, "It’s the difference between learning to play the piano (craft) and then composing (art)." Indeed Ken’s own investment practice—his art— deviates from his father’s preference for growth stocks; Ken prefers value-oriented investments. But the process Ken uses to arrive upon investment decisions is largely based on his father’s tenets of "scuttlebutt" and "the fifteen points." As the son now runs a large investment management company he uses these principles en mass. He also believes his father’s ideas about undue diversification, in particular, influenced Buffett. 
Phil Fisher went to Stanford and started work as a security analyst in San Francisco in 1928. He formed his own firm, Fisher & Co., in 1931. After some years in the game he decided to write this book, "In studying the investment record of both myself and others, two matters were significant influences in causing this book to be written. One, which I mention several times elsewhere, is the need for patience if big profits are to be made from investment. Put another way, it is often easier to tell what will happen to the price of a stock than how much time will elapse before it happens. The other is the inherently deceptive nature of the stock market. Doing what everybody else is doing at the moment, and therefore what you have an almost irresistible urge to do, is often the wrong thing to do at all."   


1:  CLUES FROM THE PAST
Fisher summarizes his conclusions from the past in the following paragraph, "Such a study indicates that the greatest investment reward comes to those who by good luck or good sense find the occasional company that over the years can grow in sales and profits far more than industry as a whole. It further shows that when we believe we have found such a company we had better stick with it for a long period of time. It gives us a strong hint that such companies need not necessarily be young and small. Instead, regardless of size, what really counts is a management having both a determination to attain further important growth and an ability to bring its plans to completion…It makes clear to us that a general characteristic of such companies is a management that does not let its preoccupation with long-range planning prevent it from exerting constant vigilance in performing the day-to-day tasks of ordinary business outstandingly well."


2:  WHAT SCUTTLEBUTT CAN DO
Merriam-Webster defines "scuttlebutt" as:
1, a : a cask on shipboard to contain freshwater for a day's use, b : a drinking fountain on a ship or at a naval or marine installation 
2 : RUMOR, GOSSIP
Fisher makes use of definition 2 here in the second chapter. "It is amazing what an accurate picture of the relative points of strength and weakness of each company in an industry can be obtained from a representative cross-section of the opinions of those who in one way or another are concerned with any particular company." Though he writes only three pages about scuttlebutt here, Fisher assures us the concept will be discussed in great detail all throughout the book.   


3:  WHAT TO BUY, THE FIFTEEN POINTS…
Below you will find "The Fifteen points to look for in a common stock," Fisher’s famous checklist for the inquiring investor.
1. Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?
2. Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?
3. How effective are the company’s research and development efforts in relation to its size?
4. Does the company have an above average sales organization?
5. Does the company have a worthwhile profit margin?
6. What is the company doing to maintain or improve profit margins?
7. Does the company have outstanding labor and personnel relations?
8. Does the company have outstanding executive relations?
9. Does the company have depth to its management?
10. How good are the company’s cost analysis and accounting methods?
11. Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition?
12. Does the company have a short-range or long-range outlook in regards to profits?
13. In the foreseeable future will the growth of the company require sufficient equity financing so that the large number of shares then outstanding will largely cancel the existing benefit from this anticipated growth?
14. Does the management talk freely to investors about its affairs when things are going well but "clam up" when troubles and disappointments occur?
15. Does the company have a management of unquestionable integrity?   


4:  APPLYING THIS TO YOUR OWN NEEDS
"The typical investor has usually gathered a good deal of the half-truths, misconceptions, and just plain bunk that the general public has gradually accumulated about successful investing." Fisher posits that the average investor believes only a bookish genius is capable of superior returns. He doesn’t agree with this mean mentality. "The most skilled statistical bargain hunter ends up with a profit which is but a small part of the profit attained by those using reasonable intelligence in appraising the business characteristics of superbly managed growth companies," he further expounds upon his view of apparent expertise, "Even among some of the so-called authorities on investment, there is still enough lack of agreement on the basic principles involved that it is as yet impossible to have schools for training investment experts…"


5:  WHEN TO BUY
Contrary to Buffett, Fisher is looking for companies that "will have spectacular growth in their per-share earnings." (Buffett is primarily concerned with consistent and handsome returns on equity.) Buffett and Fisher do agree on the worthlessness of macroeconomic forecasting. Fisher writes, "The conventional method of timing when to buy stocks is, I believe, just as silly as it appears on the surface to be sensible. This method is to marshal a vast mass of economic data…I believe that the economics which deal with the forecasting business trends may be considered to be about as far along as was the science of chemistry during the days of alchemy in the Middle Ages." Fisher prefers to buy into outstanding companies when their earnings are temporarily depressed, and so consequently is the share price, because of a new product or process launch. "In contrast to guessing which way general business or the stock market may go, he should be able to judge with only a small probability of error what the company into which he wants to buy is going to do in relation to business in general."


6:  WHEN TO SELL
Fisher is very precise about when to sell. "I believe there are three reasons, and three reasons only, for the sale of any common stock which has been originally selected according to the investment principles already discussed." They are: 
1.) Upon realizing a mistake, 
2.) When a stock no longer meets the 15 points, and
3.) If a substantially attractive investment arises and stock needs to be sold to finance that investment.
Interestingly, Buffett’s commonly told parable about investing in your classmates seems to have originated out of this chapter. Both describe a hypothetical scenario of buying a percentage of the future earnings of a classmate. The point being that we should rationally select people on the basis of their character rather than purely on their intellect. Fisher notes how foolish it would be to sell your lucrative future contract on classmate’s earnings for the sake of buying another, less proven, classmate’s earnings, simply because somebody offered to buy your original classmate investment at a high price.   


7:  THE HULLABALOO ABOUT DIVIDENDS
Fisher warns us to be wary of two scenarios when earnings are retained and no dividends are paid. 
The first is when executives pile up liquid assets for a sense of security. 
The second occurs when "substandard managements can get only a subnormal return on the capital already in the business, yet use the retained earnings merely to enlarge the inefficient operation rather than to make it better."
Fisher posits that "regularity or dependability" is the most important characteristic of dividends. He illustrates his claim using the restaurant parable that Buffett so often cites. "There is perhaps a close parallel between setting policy in regard to dividends and setting policy on opening a restaurant. A good restaurant man might build up a splendid business with a high priced venture. He might also build up a splendid business with an attractive place selling the best possible meals at the lowest possible prices. Or he could make a success of Hungarian, Chinese, or Italian cuisine. Each would attract a following. People would come there expecting a certain kind of meal. However, with all his skill, he could not possibly build up a clientele if one day he served the costliest meals, the next day low-priced ones, and then without warning served nothing but exotic dishes. The corporation that keeps shifting its dividend policies becomes as unsuccessful in attracting a permanent shareholder following. Its shares do not make the best long-range investments."   


8:  FIVE DON’TS FOR INVESTORS
"1. Don’t buy into promotional companies." 
"When a company is in a promotional stage…all an investor or anyone else can do is look at a blueprint and guess what the problems and strong points may be." 
"There are enough spectacular opportunities among established companies that ordinary individual investors should make it a rule never to buy into a promotional enterprise." 
Fisher wants to see a firm with at least one year of operational profit and two to the three years of business before investing.
"2. Don’t ignore a good stock just because it is traded ‘over the counter.’" 
"3. Don’t buy a stock just because you like the ‘tone’ of its annual report." 
"The annual report may…reflect little more than the skill of the company’s public relations department in creating an impression about the company in the public mind." 
"4. Don’t assume that the high price at which a stock may be selling in relation to earnings is necessarily an indication that further growth in those earnings has largely been discounted already in the price." 
"…why shouldn’t this stock sell five years from now for twice the price-earnings ratio of these more ordinary stocks just as it is doing now and has done for many years past?" 
"5. Don’t quibble over eights and quarters." 
"If the stock seems the right one and the price seems reasonably attractive at current levels, buy ‘at the market.’"   


9:  FIVE MORE DON’TS FOR INVESTORS
Given the recent terror and talk of war, we will focus on point two in this chapter.
"2. Don’t be afraid of buying on a war scare." 
"At the conclusion of all actual fighting—regardless of whether it was World War I, World War II, or Korea—most stocks were selling at levels vastly higher than prevailed before there was any thought of war at all. Furthermore, at least ten times in the last twenty-two years, news has come of other international crises which gave threat of major war. In every instance, stocks dipped sharply on the fear of war and rebounded sharply as the war scare subsided." 
"War is always bearish on money. To sell a stock at the threatened or actual outbreak of hostilities so as to get into cash is extreme financial lunacy. Actually just the opposite should be done. If an investor has about decided to buy a particular common stock and the arrival of a full-blown war scare starts knocking down the price, he should ignore the scare psychology of the moment and definitely begin buying." 
The other four points… 
1. Don’t overstress diversification. 
3. Don’t forget your Gilbert and Sullivan. 
4. Don’t fail to consider time as well as price in buying a true growth stock. 
5. Don’t follow the crowd.   


10:  HOW I GO ABOUT FINDING A GROWTH STOCK
"Possibly one-fifth of my first investigations start from ideas gleaned from friends in industry and four-fifths from culling what I believe are the more attractive selections of a small number of able investment men. These decisions are frankly a fast snap judgment on which companies I should spend my time investigating and which I should ignore. Then after a brief scrutiny of a few key points in an SEC prospectus, I will seek ‘scuttlebutt’ aggressively, constantly working toward how close to our fifteen-point standard the company comes. I will discard one respective investment after another along the way. Some because the evidence piles up that they are just run of the mill. Others because I cannot get enough evidence to be reasonably sure one way or the other. Only in the occasional case when I have a great amount of favorable data do I then go to the final step of contacting the management. Then if after meeting with management I find my prior hopes pretty well confirmed and some of my previous fears eased by answers that to me make sense, at last I am ready to feel I may be rewarded for all my efforts."
Fisher also notes that he’ll invest in one stock out of two hundred fifty that he initially considers. For every two to two and a half visits he’ll buy into the company—this points to the fact that most of his work is done beforehand.   


11:  SUMMARY AND CONCLUSION
Chapter eleven concludes the first part of Fisher’s book; it and the chapters leading to it comprise a book within a book. "This book has attempted to show what these basic principles are, what type of stock to buy, when to buy it, and most particularly, never to sell it—as long as the company behind the common stock maintains the characteristics of an unusually successful enterprise."



Here are the points, abbreviated, Fisher gives as his conclusion:
1. Buy into companies that have disciplined plans for achieving dramatic long-range growth in profits and that have inherent qualities making it difficult for newcomers to share in that growth.
2. Focus on buying these companies when they are out of favor.
3. Hold the stock until either (a) there has been a fundamental change in its nature (such as a weakening of management through changed personal), or (b) it has grown to a point where it no longer will be growing faster than the economy as a whole.
4. For those primarily seeking major appreciation of their capital, de-emphasize the importance of dividends.
5. Taking small profits in good investments and letting losses grow in bad ones is a sign of abominable investment judgment. A profit should never be taken just for the satisfaction of taking it.
6. There are a relatively small number of truly outstanding companies. Their shares frequently can’t be bought at attractive prices. Therefore, when favorable prices exist, full advantage should be taken of the situation.
7. A basic ingredient of outstanding common stock management is the ability to neither accept blindly whatever may be the dominant opinion in the financial community at the moment nor to reject the prevailing view just to be contrary for the sake of being contrary.
8. In handling common stocks, as in most other fields of human activity, success depends greatly on a combination of hard work, intelligence, and honesty.

The 15 points of Philip Fisher in picking Common Stocks

The Fifteen Points to Look for in a Common Stock

1. Does the company have products or services with sufficient market potential to make possible a sizeable increase in sales for at least several years?
2. Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?
3. How effective are the company's research and development efforts in relation to its size?
4. Does the company have an above-average sales organization?
5. Does the company have worthwhile profit margin?
6. What is the company doing to maintain or improve profit margins?
7. Does the company have outstanding labor and personnel relations?
8. Does the company have outstanding executive relations?
9. Does the company have depth to its management?
10. How good are the company's cost analysis and accounting controls?
11. Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition?
12. Does the company have a short-range or long-range outlook in regard to profits?
13. In the foreseeable future will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholders' benefit from this anticipated growth?
14. Does the management talk freely to investors about its affairs when things are going well but "clam up" when troubles and disappointments occur?
15. Does the company have a management of unquestionable integrity?
    
    
    
    
    
    
    Ref:  Common Stocks and Uncommon Profits by Philip Fisher
    
    
    
    
    http://www.valueinvestingstock.com/#!A-Legendary-Investor-To-Learn-From/cour/569909000cf2e94e3fb94388

Year 2008 - Buffett Calls The Market Again...And He's Never Been Wrong

Henry Blodget

Dec. 4, 2008

Follow Business Insider:

Warren Buffett recently wrote an editorial in the New York Times explaining why he was starting to buy stocks. The bottom line?

If you wait for the robins, spring will be over.

But who is Buffett, anyway? How do we know he isn't one of these jokers who is never in doubt and usually wrong?

Fund manager Whitney Tilson of the Tilson Fundsrecently addressed this issue. We've done some cutting and pasting, but mostly we'll let Whitney and Warren take it away:

Whitney Tilson: Starting in 1974, Buffett has written four articles in which he's expressed a strong opinion about the market -- he was bullish in 1974, 1979 and 2008, and was bearish in 1999.  I've posted all four articles here [pdf]. Note that he'snever once been wrong -- important to consider when reading his recent NY Times article [in which Buffett announced that he was starting to buy stocks]. 

We've added some of these article excerpts at the bottom of this post. We've also added a scrollable slide presentation below.  To make it easier to read, click the "full screen" button in the bottom right-hand corner of the player (then click "ESC" to return to your screen).  If you're only going to read one of the articles, read the third one--the one Buffett wrote for Fortune in 1999. It's the best short synopsis of markets and investing we've ever read.  Enjoy!

Warren Buffett Makes 4 Market Calls

View SlideShare document or Upload your own.

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Excerpt of Forbes article on Buffett, 1974:

What good, though, is a bargain if the market never recognizes it as a bargain? What if the stock market never comes back? Buffett replies: “When I worked for Graham-Newman, I asked Ben Graham, who then was my boss, about that. He just shrugged and replied that the market always eventually does. He was right--in the short run, it’s a voting machine; in the long run, it’s a weighing machine. Today on Wall Street they say, ‘Yes, it’s cheap, but it’s not going to go up.’ That’s silly. People have been successful investors because they’ve stuck with successful companies. Sooner or later the market mirrors the business.” Such classic advice is likely to remain sound in the future when they write musical comedies about the go-go boys.

    We reminded Buffett of the old play on the Kipling lines: “If you can keep your head when all about you are losing theirs … maybe they know something you don’t.”

    Buffett responded that, yes, he was well aware that the world is in a mess. “What the DeBeers did with diamonds, the Arabs are doing with oil; the trouble is we need oil more than diamonds.” And there is the population explosion, resource scarcity, nuclear proliferation. But, he went on, you can’t invest in the anticipation of calamity; gold coins and art collections can’t protect you against Doomsday. If the world really is burning up, “you might as well be like Nero and say, ‘It’s only burning on the south side.’”

    “Look, I can’t construct a disaster-proof portfolio. But if you’re only worried about corporate profits, panic or depression, these things don’t bother me at these prices.

Buffett’s final word: “Now is the time to invest and get rich.

---

Excerpt of Forbes article BY Buffett in 1979:

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Excerpt of Fortune article by Buffett in 1999. This is one of the single best short synopses of the stock market and investing we have ever read.

Mr. Buffett on the Stock Market
Fortune, 11/22/99

Investors in stocks these days are expecting far too much, and I’m going to explain why. That will inevitably set me to talking about the general stock market, a subject I’m usually unwilling to discuss. But I want to make one thing clear going in: Though I will be talking about the level of the market, I will not be predicting its next moves. At Berkshire we focus almost exclusively on the valuations of individual companies, looking only to a very limited extent at the valuation of the overall market. Even then, valuing the market has nothing to do with where it’s going to go next week or next month or next year, a line of thought we never get into. The fact is that markets behave in ways, sometimes for a very long stretch, that are not linked to value. Sooner or later, though, value counts. So what I am going to be saying--assuming it’s correct--will have implications for the long-term results to be realized by American stockholders.

Let’s start by defining “investing.” The definition is simple but often forgotten: Investing is laying out money now to get more money back in the future--more money in real terms, after taking inflation into account.

Now, to get some historical perspective, let’s look back at the 34 years before this one--and here we are going to see an almost Biblical kind of symmetry, in the sense of lean years and fat years--to observe what happened in the stock market. Take, to begin with, the first 17 years of the period, from the end of 1964 through 1981. Here’s what took place in that interval:

Dow Jones Industrial Average
Dec. 31, 1964: 874.12
Dec. 31, 1981: 875.00

Now I’m known as a long-term investor and a patient guy, but that is not my idea of a big move.

And here’s a major and very opposite fact: During that same 17 years, the GDP of the U.S.--that is, the business being done in this country--almost quintupled, rising by 370%. Or, if we look at another measure, the sales of the FORTUNE 500 (a changing mix of companies, of course) more than sextupled. And yet the Dow went exactly nowhere.

To understand why that happened, we need first to look at one of the two important variables that affect investment results: interest rates. These act on financial valuations the way gravity acts on matter: The higher the rate, the greater the downward pull. That’s because the rates of return that investors need from any kind of investment are directly tied to the risk-free rate that they can earn from government securities. So if the government rate rises, the prices of all other investments must adjust downward, to a level that brings their expected rates of return into line. Conversely, if government interest rates fall, the move pushes the prices of all other investments upward. The basic proposition is this: What an investor should pay today for a dollar to be received tomorrow can only be determined by first looking at the risk-free interest rate.

Consequently, every time the risk-free rate moves by one basis point--by 0.01%--the value of every investment in the country changes. People can see this easily in the case of bonds, whose value is normally affected only by interest rates. In the case of equities or real estate or farms or whatever, other very important variables are almost always at work, and that means the effect of interest rate changes is usually obscured. Nonetheless, the effect--like the invisible pull of gravity--is constantly there. 

In the 1964-81 period, there was a tremendous increase in the rates on long-term government bonds, which moved from just over 4% at year-end 1964 to more than 15% by late 1981. That rise in rates had a huge depressing effect on the value of all investments, but the one we noticed, of course, was the price of equities. So there--in that tripling of the gravitational pull of interest rates--lies the major explanation of why tremendous growth in the economy was accompanied by a stock market going nowhere.

Then, in the early 1980s, the situation reversed itself. You will remember Paul Volcker coming in as chairman of the Fed and remember also how unpopular he was. But the heroic things he did--his taking a two-by-four to the economy and breaking the back of inflation--caused the interest rate trend to reverse, with some rather spectacular results. Let’s say you put $1 million into the 14% 30-year U.S. bond issued Nov. 16, 1981, and reinvested the coupons. That is, every time you got an interest payment, you used it to buy more of that same bond. At the end of 1998, with long-term governments by then selling at 5%, you would have had $8,181,219 and would have earned an annual return of more than 13%.

That 13% annual return is better than stocks have done in a great many 17-year periods in history--in most 17-year periods, in fact. It was a helluva result, and from none other than a stodgy bond.

The power of interest rates had the effect of pushing up equities as well, though other things that we will get to pushed additionally. And so here’s what equities did in that same 17 years: If you’d invested $1 million in the Dow on Nov. 16, 1981, and reinvested all dividends, you’d have had $19,720,112 on Dec. 31, 1998. And your annual return would have been 19%.

The increase in equity values since 1981 beats anything you can find in history. This increase even surpasses what you would have realized if you’d bought stocks in 1932, at their Depression bottom--on its lowest day, July 8, 1932, the Dow closed at 41.22--and held them for 17 years.

The second thing bearing on stock prices during this 17 years was after-tax corporate profits, which the chart, After-Tax Corporate Profits as a Percentage of GDP, displays as a percentage of GDP. In effect, what this chart tells you is what portion of the GDP ended up every year with the shareholders of American business.

The chart, as you will see, starts in 1929. I’m quite fond of 1929, since that’s when it all began for me. My dad was a stock salesman at the time, and after the Crash came, in the fall, he was afraid to call anyone--all those people who’d been burned. So he just stayed home in the afternoons. And there wasn’t television then. Soooo ... I was conceived on or about Nov. 30, 1929 (and born nine months later, on Aug. 30, 1930), and I’ve forever had a kind of warm feeling about the Crash...

---

Excerpt of Warren's recent New York Times article from October:

Buy American. I Am. 
By WARREN E. BUFFETT
Published: October 16, 2008


THE financial world is a mess, both in the United States and abroad. Its problems,
moreover, have been leaking into the general economy, and the leaks are now turning
into a gusher. In the near term, unemployment will rise, business activity will falter and
headlines will continue to be scary.

So ... I’ve been buying American stocks. This is my personal account I’m talking about,
in which I previously owned nothing but United States government bonds. (This
description leaves aside my Berkshire Hathaway holdings, which are all committed to
philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be
100 percent in United States equities.

Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when
others are fearful. And most certainly, fear is now widespread, gripping even seasoned
investors. To be sure, investors are right to be wary of highly leveraged entities or
businesses in weak competitive positions. But fears regarding the long-term prosperity of
the nation’s many sound companies make no sense. These businesses will indeed suffer
earnings hiccups, as they always have. But most major companies will be setting new
profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock
market. I haven’t the faintest idea as to whether stocks will be higher or lower a month —
or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you
wait for the robins, spring will be over.

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.

What are provisions in accounting?

A provision is accounting for a future expected loss.

Some examples of provisions are:

• Car companies will establish a warranty provision - on the basis that cars sold with a warranty may need to be fixed.
• If a company is being sued, and there is a reasonable expectation that they will lose the case, they may need to raise a provision.

The provisions merely book the loss in the current period (or the existence of the provision shows that the loss has been accounted for).  

It does not reflect whether or not any money has been set aside to pay out costs.

A provision for non-payment of an amount owed (called a provision for bad and doubtful debts) merely reduces the asset (debtor) and appears as a loss in the P&L account - this is booked in the period in which the debtor is expected not to pay.

When it becomes clear that they will definitely not pay, the amount is written off as a bad debt - note, it has already hit the P&L account when it was provided for, so writing off a bad debt that has already been provided for has no further impact on the P&L account.

Depreciation, Amortisation and Impairment Charge

Depreciation is actually focussed on matching the cost of an asset over its useful economic life.

Tangible assets are depreciated.

Intangible assets are amortised.

An impairment charge is a one-off reduction in the value of an asset.

Accruals, prepayments, accrued income and deferred income.

The accruals or matching concept states that we recognize an income or expense in the income statement in the period in which it is earned or incurred, not in the period in which payment is received or made.

In order to ensure that costs (and revenues) are allocated to the correct period, we use prepayments, accruals, accrued income and deferred income.

An accrual is where you have received a service, but not yet paid.

A prepayment is where you have paid for a service, but not yet received that service.

Deferred income is where you have been paid, but have not yet provided the service.

Accrued income is where you have provided a service, but not yet been paid.



Accrual =  liability
Accrued Income = Asset

Prepayment = Asset
Deferred Income = Liability


Balance Sheet

Assets
     Cash
     Prepayments
     Accrued income


Liabilities
     Accruals
     Deferred income

Buy-to-let investors under attack in the UK

By David Milliken / Reuters | January 13, 2016 2:20 PM MYT

They have pocketed some of the most lucrative returns available to investors in recent decades and been a staple of newspapers' personal finance pages, but tougher times now lie ahead for Britain's army of small-time landlords. So-called buy-to-let investors -- who usually own at most a handful of properties -- have enjoyed 20 years of surging house price growth and rents, and annual returns of nearly 10 percent.

They accounted for almost one in four house purchases funded by a mortgage last year, a chunk of the market unseen in other big economies. Overall, there are nearly 2 million private landlords in Britain, owning almost 20 percent of homes.

Their power is politically sensitive in a country where house prices border on a national obsession, reflecting the fact most people have the vast bulk of their assets tied up in their home. Critics argue buy-to-let distorts the market and makes it even harder for ordinary people to get on the housing ladder.

Now the landlords face a double threat. Finance minister George Osborne is squeezing more tax from buy-to-let (BTL) investments, partly to help fund incentives for new homeowners, while the Bank of England is seeking powers to limit the size of BTL mortgages in order to reduce risky lending.

A few economists say the changes could even push the overall housing market down later this year. One landlord who fears he will have to sell is Chris Cooper. The 54 year-old airline steward must retire at 60, and started acquiring buy-to-let properties over 14 years ago in order to boost his pension. "I'm fuming, to be perfectly honest," he said in his own one-bedroom flat in Windsor, a historic town near London which is dominated by Queen Elizabeth's 1,000-room castle. "I will either have to raise rents by a ridiculous amount which tenants won't be able to afford, or sell my properties."
Cooper owns 15 properties in northern England and around London worth 2.4 million pounds ($3.5 million), financed by loans totalling 1.6 million pounds. Tenants pay him over 100,000 pounds in rent a year and, after running costs, interest and tax, Cooper makes 12,400 pounds. But Osborne's cut to the amount of mortgage interest that can be offset against tax, which Cooper plans to challenge in court, will reduce that to 1,000 pounds. When interest rates rise, which could happen this year, profits will be even thinner.

HEIRS OF THATCHER

Helping new buyers to enter the housing market is a stated priority of Prime Minister David Cameron, whose Conservative Party enjoyed electoral success in the 1980s under Margaret Thatcher by making it easier for renters to buy their own homes. Home ownership rates in Britain are now the lowest in 30 years at 65 percent, below the EU average of 70 percent. Many Britons blame property investors for making it harder for young people to buy, even if experts say a chronic lack of new home-building is really the main factor.

In a new headache for landlords like Cooper, the Bank of England said last month that buy-to-let borrowers could be more vulnerable to higher interest rates than normal borrowers. It wants powers to cap the size of BTL mortgages relative to a property's price and rental income, similar to those it already has over residential mortgages. On the other hand, the squeeze on small landlords could help ventures like Property Partner, which launched in 2014 to offer alternatives to traditional buy-to-let.

"Buy-to-let as a cottage industry is dead," said chief executive Dan Gandesha. The start-up enables would-be landlords to buy, sell and trade fractions of BTL properties and take advantage of tax benefits available to big investors, as well as spreading their bets across a wider range of properties.

"I don't think the returns on that are quite as good, but those are the sort of options that would make my life easier," said Ramzi Hajaj, 26, a technology worker whose family gave him two London investment flats in 2013 which are now each worth about 500,000 pounds.

He may invest 700,000 pounds more, but is put off by a 3 percentage point increase in property sales tax on for buy-to-let purchases from April, in addition to other changes that will make it more onerous for landlords to get tax relief on the cost of maintenance and repairs.

LOWER RETURNS

Upfront returns on buy-to-let property have already fallen. Property Partner estimates net rental yields in London are 2.5 percent now, compared with nearly 8 percent when buy-to-let got going in the late 1990s. But returns on other assets are lower too. Ten-year British government bonds yield around 1.8 percent now, down from 7 percent in 1997. Small investors are betting instead on more of the house price rises which allowed buy-to-let in England to show average annual returns of over 9 percent for the past 20 years.

However, low rental yields are putting off major investors such as Grainger, Britain's largest specialist residential landlord. Speaking at an industry conference last month, one of its managing directors, Derek Gorman, said new investment in London was hard. "It is very difficult to get into the London market at prices that are reasonable. So we are looking at the regions," he said. Shortages of construction workers and rising costs, the slow speed of planning approval and the difficulty of building higher-density housing in London also delayed construction. Lack of supply means most economists predict house prices will keep rising -- by 5 percent this year and 4 percent in 2017, according to a Reuters poll -- even if some such as Morgan Stanley see buy-to-let triggering a brief dip.

"My hunch is that demand will rise first before supply catches up," said Simon Rubinsohn, chief UK economist at the Royal Institution of Chartered Surveyors. "Living costs are going to get dearer."

http://www.theedgeproperty.com.my/content/buy-let-investors-under-attack-uk

A budget is crucial to managing the business.

"If you fail to plan, plan to fail."  Benjamin Franklin

A company that fails to prepare budgets and then to use those budgets to control the business runs a high risk of failing.

A company that is well run operationally, may not be so well run financially.

As a company grows, the importance of good financial management, alongside operational management, cannot be over-estimated.

Companies use budgets and other similar tools to financially manage their business.

A budget is a financial picture of the future (perhaps on a short, medium or long-term basis).

Others may see a budget as more of a forecast or plan to which you add (or take away) money.

It could just be just a future P&L account; a benchmark or baseline.

A budget is crucial to managing the business.

What is strategy?

Strategy is the direction and scope of an organisation over the long term that achieves an advantage for the organisation through the configuration of its resources within a changing environment to meet the needs of the customers and to fulfil stakeholder expectations.

Is the Graham and Dodd "look for values with significant margin of safety relative to prices" approach to security analysis out of date?

The Super-investors of Graham-and-Doddsville by Warren Buffett
https://drive.google.com/file/d/0BxxZpH0rWpYHQkZDc2RKQlM3cFE/view


Are short-term performance and value investing mutually exclusive?

The Hare and Tortoise Revisited.

Calculating your stock portfolio returns using the XIRR function in Excel

Date                 Amount
12/31/14      -100,000.00         Your initial value of the shares in your portfolio
1/15/15            -3,000.00         You bought new shares
4/10/15                200.00         You received dividends
7/2/15              -1,500.00         You bought more shares
10/15/15              250.00          You received dividends
11/10/15           1,300.00          You sold some shares
12/31/15       110,000.00          Your final value of the shares in your portfolio

Using the XIRR function in Excel
= XIRR(values, dates)

XIRR = 7.02%


Note:
Your initial portfolio value and new shares bought - negative signs
Your final portfolio value, shares sold and dividends received - positive signs

Decline in Market Price of holdings is not true risk or loss.

It is our conviction that the bona fide investor does not lose money merely because the market price of his holdings declines.  

Hence, the fact the decline may occur does not mean that he is running a true risk or loss.

If a group of well-selected common stock investment shows a satisfactory overall return as measured through a fair number of years then this group of investment has proved to be safe.

During that period, its market value was bound to fluctuate and likely than not, would sell for a while under the buyer's cost.

If that fall makes the investment risky, it would then have to be called both risky and safe at the same time.

This confusion may be avoided if we apply the concept of risk solely to a loss in value which:

• either is realized through an actual sale 
• or is caused by significant deterioration in the company's position 
• or more frequently, perhaps is the result of paying an excessive price in relation to the intrinsic worth of the security.

Many common stocks involve risks of such deterioration but it is our thesis that a properly executed group of investment in common stocks does not carry any substantial risk of this sort.


Ref:   Intelligent Investor by Benjamin Graham



Additional notes:

It is conventional to speak of good bonds as less risky than good preferred and that the latter as less risky than good common stocks.

From this was derived the popular prejudice against common stocks because they are not safe but we believe that what is here involved is not a true risk in the useful sense of the term.

If an investor's list has been competently selected in the first instance, there should be no need for frequent or numerous changes to the portfolio.

Charlie Munger

Exclusive ValueWalk series on Charlie Munger’s life

• Charlie Munger — Part One: The Beginning
• Charlie Munger — Part Two: Quality Over Value
• Charlie Munger – Part Three: Sit On Your A$$
• Charlie Munger — Part Four: Investment Advice
• Charlie Munger — Part Five: Checklist Investing
• Charlie Munger — Part Six: The Daily Journal
• Charlie Munger — Part Seven: Poor Charlie’s Almanack
• Charlie Munger — Part Eight: Berkshire At 50
• Charlie Munger -- Part Nine: Colorful Charlie And The Cinderella Principle
• Charlie Munger — Part Ten: Conclusion

Charlie Munger's full resource page can be found here.

Cost leadership

Companies with large fixed costs and able to deliver their products most efficiently have a strong advantage and can achieve superior financial performance.

Firms don't usually advertise their cost structures per se.

To get an idea about how efficiently a company operates, look at its fixed asset turnover, operating margins, and ROIC - and compare its numbers to industry peers.

Unique assets

When limited assets are required to fullfill the delivery of a particular service, ownership of those assets is key.

Companies with well-located landfill assets represent a significant competitive advantage and barrier to entry in the waste management market because it is unlikely that enough new landfill locations will get government approval to diminish its share of this business.

Prudent financing

Having a load of debt is not itself a bad thing.

Having a loa of debt that cannot be easily financed by the cash flow of the business is a recipe for disaster.

When analysing companies with high debt, always be sure that the debt can be serviced from free cash flow, even under a downside scenario.

Examine growth expectations

Understand what kind of growth rates are incorporated into the share price.

If the rates of growth are unrealistic, avoid the stock.

Size the market opportunity

Industries with big, untapped market opportunities provide an attractive environment for high growth.

In addition, companies chasing markets perceived to be big enough to accommodate growth for all industry participants are less likely to compete on price alone.

Focus on cash flow

Investors timely earn returns based on a company's cash-generating ability.

Avoid investments that are not expected to generate adequate cash flow.

Look for recurring revenue

Long term customer contracts can guarantee certain levels of revenue for years into the future.  This can provide a degree of stability in financial results.

Look for scale and operating leverage.

Economies of scale and operating leverage are characteristics that can provide significant barriers to entry and lead to impressive financial performance.

Know the business. Understand the business model.

Understand the business model is important as this will provide insight as to the kind of financial results the company may produce.

Tell tale signs of good cash generation: Dividends, Share Buybacks and Accumulation of Cash on the Balance Sheet

Economies of scale refers to a company's ability to leverage its fixed cost infrastructure across more and more clients.

The result of scale economies should be operating leverage, whereby profits are able to grow faster than sales.

The combination of operating leverage and low ongoing capital requirements suggest that the firms should have plenty of free cash to throw around.

Tell tale signs of good cash generation are dividends, share buybacks, and an accumulation of cash on the balance sheet.

Another characteristic to look for when evaluating investments is predictable sales and profits. That makes financial results more stable and predictable.

Should there be high barriers to entry into this business, the firms in this business tend to have wide, defensible moats.

When they are trading at cheap prices, they are usually worth a good look.

Whole life insurance versus Renewable term insurance. The problems with whole life insurance.

Term insurance:

With term insurance all you pay for and get is protection.  If you die, they pay.

Term insurance rates start very low but go up every year.

Whole life insurance:  

With whole life you are buying a tax-sheltered savings plan as well.  Your policy accumulates "cash values."

Whole life rates start high but remain constant.



Insurance salesmen are eager to sell whole-life policies because their commissions are so much higher.

But you would be wiser to buy renewable term insurance and do your saving separately.  (With renewable policy you are assured of continuing coverage even if your health deteriorates.)


The problems with whole life:

• Many policies pay low interest.
• It is impossible for a non-expert to tell a good policy from a bad one.
• There is tremendous penalty for dropping the policy, as many people do, after just a few years.
• Most young families cannot afford the protection they need if they buy whole life.  The same dollars will buy five or six times term insurance.
• In later years, and particularly beyond the age of 50 or 55, term insurance premiums rise rapidly.  But by then you may have a less urgent need for life insurance.  The kids may be grown, the mortgage paid off, the pension benefits vested.  You will still need to build substantial assets for retirement, and to protect your spouse; but there are better ways to save for old age than whole life.   

Ref:  The Only Investment Guide you'll Ever Need  by Andrew Tobias

Read also:

Term Life Insurance is Value for Money

It is easier to make money in some industries than in others.

It is easier to make money in some industries than in others.

Some industries lend themselves to the creation of economic moats more so than others.

These are the industries where you will want ot spend most of your time.

The economics of some industries are superior to others.

You should spend more time learning about attractive industries than unattractive ones.

Every industry has its own unique dynamics and set of jargon.

Some industries (such as financial services ) even have financial statements that look very different from others.

Wade through the different economics of each industry and understand how companies in each industry can create economic moats - which strategies work and how you can identify companies pursuing those strategies.

Here are some areas of the market that are definitely worth more of your time exploring.

• Banks and Financial Services
• Business Services
• Health Care
• Media

These are not the four areas of the market with worthwhile investments.

They are highlighted because they contain so many wide-moat companies.

There are great firms in even the least likely areas of the stock market.

The goal is to help answer a few essential questions:

• How do companies in this industry make money?
• How can they create economic moats:
• What quirks does this industry have that an investor should know about?
• How can you separate successful from unsuccessful firms in each industry?
• What pitfalls should you watch out for?

Over the long haul, a big part of successful investing is building a mental database of companies and industries on which you can draw as the need arises.

That will make you a better investor.

Super-profitable companies with too much cash pile up on the balance sheet. Be proactive.

Company ABC

It has no long-term debt.

Its current ratio is around 4; rather high for a company with no debt to worry about.

It has consistently kept around 15% of total assets in cash.

You must be able to value the business better than Mr. Market to be in this game

In describing the irrationality of the market, Graham uses the metaphor of Mr. Market.

An investor is free to take advantage of Mr. Market, but on no account should the investor fall under his influence.

If someone is not certain that he can value his business far better than Mr. Market can, then he doesn't belong in the game.

As they say in poker, "If you have been in the game 30 minutes and you don't know who the patsy is, you are the patsy."  (Buffett)


Related:

Benjamin Graham's Mr. Market, a stubborn business partner who sometimes offer great deals or very expensive prices.

Businesses with challenging fundamentals - commodity type businesses

Producers of relatively undifferentiated goods in capital intensive businesses must earn inadequate returns except under conditions of tight supply or real shortage.

As long as excess productive capacity exits, prices tend to reflect direct operating costs rather than capital employed. (Buffett)

This means that the prices of finished goods are lower than the full production cost, which should include amortization.

The capital employed not only does not earn a return, but also does not reinstate itself.

After Berkshire Hathaway's textile business closed in 1985, Buffett commented that over the years, there had always been the possibility of making a large capital investment in the textile business that would have resulted in a reduction of variable costs.

Those investment opportunities, if viewed throught the prism of standard return on investment tests, would have brought greater economic gains than if similar investments had been made in other Berkshire businesses (candy and newspapers).

However, the potential benefits from investing in the textile industry were imaginary.

Berkshire's competitors were implementing the same types of capital expenditures, and once a certain proportion of the industry participants had made these investments, the reduced cost base in the industry would have resulted in a reduction in prices.

Considered individually, each company's investments appears to be justified, but viewed collectively, these decisions affected every company and did not benefit the individual players ("just as happens when each person watching a parade decides he can see a little better if he stands on tiptoes").

After each cycle of capital investment, all the companies had more money tied up in the bsiness, but their returns did not improve.

As Buffett's parade revelers rising on tiptoes demonstrate, the managerial decisions of individual participants in uniform industries are intertwined.

Poor judgment by a single manager may lead to future losses for all involved.

"In a business selling a commodity-type product, it is impossible to be a lot smarter than your dumbest competitor."  (Buffett)

If your competitors set prices at a level that is lower than your production costs, then you also must set prices at that level and suffer the losses if you are to remain in business.

"The trick is to have no competitors.  That means having something that distinguishes itself." (Buffett)

While the degree to which it is possible to introduce product differentiation within an industry may change because of technology developments or the evolution of consumer preferences, in many industries differentiation among products may be simply impossible to implement.

A few producers in such industries may consistently do well if they have a wide sustainable cost advantage, but such exceptions are rare or, in many industries, nonexistent.

For the great majority of companies selling "commodity-type" products, persistent overcapacaity without regulated prices (or costs) results in poor profitability.

Overcapacity may eventually self-correct as capacity shrinks or demand expands, but such corrections are often long delyaed, and "when they finally occur, the rebound to prosperity frequently produces a pervasive enthusiasm for expansion that, within a few years, again creates ovecapacity and a new profitless environment."  (Buffett)

The best type of business to own

Businesses with Good Fundamentals - the best type of business to own


The best type of business to own is "one that over an extended period can employ large amounts of incremental capital at very high rates of return."  (Buffett)

In practice, most high-return businesses need relatively little capital.  (Buffett)

While the highest return attainable as a criterion is understandable, how capital intensive is a business is a very important consideration.

Buffett opines that between two "wonderful" busineesss one should choose the least capital intensive.  He admits that it took Charlie Munger and him 25 years to figure this out.  (Buffett).

Warnings for calling your investment long term when they were meant to be short-term

Buffett warns against calling long-term those investments that were meant to be short-term but became long-term because the investors could not achieve the desired results quickly.

Buffett recommends being suspicious of those managers who fail to deliver in the short term and blame it on their long-term focus.

Arguing against market timing

1.  While waiting for the market to fall, it is possible to miss out on growth in companies with good prospects (some ten-baggers made their biggest moves during bad markets).

2.  Following the fashionable trend may lead to serious mistakes in the choice of investment targets.


The market is overvalued when there are no suitable investments at suitable prices.

There is no reason to worry about an overvalued market.

The way you will know when the market is overvalued is when you cannot find a single company that is reasonably priced or that meets your other criteria for investment.  (Lynch and Rothchild, 2000)

Peter Lynch holds the same view as Buffett on market timing.

Lynch doesn't believe in predicting markets, but believes in buying great companies - "especially companies that are undervalued, and/or under-appreciated."

"Things inside humans make them terrible stock market timers.  The unwary investor continually passes in and out of three emotional states:  concern, complacency, and capitulation."

Both investors prefer falling markets.

A good 300 point drop creates some bargains that are the "holy grail of the true stock picker."

The loss of 10 to 30% of  net worth in a market sell-off is of little importance.

Peter Lynch views a correction not as a disaster, but as an opportunity to add to a portfolio at low prices:  

"This is how great fortunes are made over time."

Walter Schloss remarked on Warren Buffett

Walter Schloss observed that Buffett's advantage is in that he is not afraid of the downside.  (Schloss, 1998)

The Lessons a CEO wish he knew when he was 21.

WHAT I WISH I KNEW AT 21

It was more years ago than I’d care to admit, but I vividly remember being 21 years of age.

Beneath a headstrong facade hid a perplexed kid, riddled with nerves about succeeding on the professional road that lay ahead. I concealed these feelings of uncertainty because I thought that’s what would impress an employer: an uber-confident young talent with an unmistakable hunger to get ahead. Surely they would respond well to someone who was outspoken, bold and unmistakably ambitious.

Upon entering the full-time workforce I applied this attitude in droves. While I thought I was doing the right thing, unbeknown to me I was damaging my reputation. It started to become apparent that my colleagues perceived me as somewhat arrogant, closed minded, and difficult to work with.

My career advancement was limping rather than sprinting. I’d watch peers receive promotions while I hovered in the same position, brimming with resentment.

Rationalising it was just a simple case of not finding the right job, an environment that would finally let me shine, I propelled myself down a path of short-term stints in various organisations, becoming increasingly disillusioned every time I job-hopped; where was this professional utopia? It took me a few years to realise that utopia doesn’t exist. It wasn’t the particular organisation, culture or people that were clamping my progress; it was my misguided attitude. My professional disappointments were no one else’s fault but my own. Coming to terms with that wasn’t easy, but ultimately, and thankfully, I did.

Today, I am a CEO. My many missteps as a young professional are a chief reason why I spend a significant amount of my time mentoring young people throughout Australia and abroad. I want to help them avoid making the same mistakes that I did.

During these mentoring sessions I am always reminded of my fledgling missteps, and what I wish I’d known as a young professional. If I were to have a mentoring session with my 21 year old self, here’s what I would I tell that bull-headed young person:

KNOW YOUR IMPACT

Self-awareness in business is paramount. Not identifying or understanding the impact your behaviour has on others is a professional pitfall and will limit your progress. Observe how people respond to you. What is their body language like when you speak or enter a room? If it’s noticeably negative, is there anything you should be doing differently?

This is not about changing who you are as a person: it’s about finding better ways to relate and work with your colleagues. Taking the time to listen, observe, see things from someone else’s point of view is essential to knowing your impact and building solid relationships.

FOCUS ON THE MOMENT

Ambition is great. Blind ambition is not. Constantly focusing on reaching the next level of your career will detract from your responsibilities and relationships at hand. One of the biggest annoyances for any manager is an employee who expects more responsibility before they’ve mastered in their current role. Master your current role and you will be invited to the next level much quicker.

BE GRACIOUS IN DEFEAT

When people are promoted ahead of you don’t let it unsettle you. Jealousy is never, ever, a good look. Believe me, managers are always observing how their employees respond to unfavourable situations. Remaining positive in these situations, using them as motivation to work harder, will be recognised and respected by your superiors.

YOU’RE NOT KIDDING ANYONE

Employers know you’re inexperienced. They know you’re likely anxious about your first foray into professional life. And they know that you want to impress. Their expectations of you won’t be that high for those very reasons, so avoid trying to look like you know all the answers, because they know you don’t.

The first job is about listening, observing and fulfilling requests to the best of your ability. You’re laying the foundation for bigger things — don’t be impatient.

Don’t forget:

- Understand the impact your behaviour has on others and respond accordingly.

- Focus on doing your current role well and your manager will take notice.

- Don’t be jealous when a colleague is promoted ahead of you, rather use it as motivation to work harder and improve.

- Employees don’t expect you to know everything – so don’t pretend you do.


This article first ran on news.com.au:

http://www.news.com.au/finance/work/what-i-wish-i-knew-at-21/story-fnkgbb6w-1227267011567

Patience - the key to successful stock market investment.

The hardest thing to learn is not the complicated technical analysis formulas that one can be found in textbooks. It is the empirical formula called patience. It is the key to successful stock market investment. Without it even one has the sharpest mind of great stock pick will not yield desirable and consistent results.

I have read countless great textbooks, technical and non-technical, throughout my investing life and in the end, I came to realise that the very one thing that many people lack of in stock investment is patience. It took me years to understand and appreciate this. That is why i always stressed one must have patience, persevere, trust and conviction in stock investment. Yes. Each of this word is about human behaviour. Master it and only then talk about fundamental analysis, technical analysis, stock pick and timing. Case in point, how many would have patiently hold on to Presbhd long enough to achieve extreme profit from it ? It doesn't matter if you have held onto a stock for very long time despite making less paper profit, but the patience that you have developed subconsciously within you to keep that stock is already a good start. 

By the way, the worst enemy of patience is distraction. Think about it.

Good luck.



http://unclezmalaysia.blogspot.my/2015/03/are-you-doing-investment-in-stock-market.html

I have learned mainly by reading myself.

Buffett: "I have learned mainly by reading myself. So I don’t think I have any original ideas. Certainly, I talk about reading Graham. I’ve read Phil Fisher. So I’ve gotten a lot of my ideas from reading. You can learn a lot from other people. In fact, I think if you learn basically from other people, you don’t have to get too many new ideas on your own. You can just apply the best of what you see.”

"ORIGINALITY is overrated. I believe in the discipline of mastering the best that other people have figured out. I don’t believe in just sitting down and trying to dream it all up yourself. Nobody’s that smart." Charlie Munger

"What’s really astounding, is how resistant some people are to learning anything … even when it’s in their self-interest to learn. There is just an incredible resistance to thinking or changing. Bertrand Russell once said: ‘Most men would rather die than think. Many have.’ And in a financial sense, that’s very true." Warren Buffett.

Charlie Munger Fan Club

International Business Machines

International Business Machines

IBM (NYSE)

Website: www.ibm.com

Sector:  Information Technology
Beta Coefficient: 0.63
10 Yr Compound EPS Growth:  13.0%
10 Yr Compound DPS Growth: 19.5%

Dividend raises, past 10 years: 10 times.


Financial Result Year 2014

Revenues (b)     92.8
Net Income (b)   15.7
EPS  15.59
DPS   4.25
Cash flow per share 20.44

Current yield 2.7%

High Price  199.2  P/E 12.8    DY 2.1%
Low Price   150.5  P/E  9.7     DY 2.8%

IBM historically has made a broad range of computers, mainframes, and network servers.  

But the company has morphed over the years into a software and services company.

As a consequence, fewer folks than ever talk about an "IBM computer" anymore; they talk about an "IBM business solution" or some such.

IBM is divided into four principal business units and a financing unit:

• The Global Technology Services unit:  This is the largest, at 38% of revenues.
• The Global Business Services unit (18%)
• The Software unit (32%).
• The Systems and Technology group (10%)
• The Financing Unit (2%) helps the company market it all.

Overseas sales make up about 55% of revenues.

The company has kept "strategic" large systems but little else; it is now offering cloud-based and integrated hardware/software/service solutions for diverse needs such as business analytics and data security.

It recently invested $4 billion in "new" core strategic areas in cloud and mobile computing, analytics and information security.

It is buying up its own stock, almost 6% of its float last year.

Its business mix is shifting from less profitable hardware to more profitable services, first came consulting, then outsourcing and now, leading-edge analytics, security and cloud services.