Friday, 16 August 2013
Not doing anything differently: Buffet (2009)
16 Nov 2009
Warren Buffet, chairman and CEO, Berkshire Hathaway, has faith in his long standing value investing philosophy
Warren Buffett: An Amazing Interview on Economic Recovery, Finance, Stocks (2012)
@39.00 "I read almost every book in the library on investment in Omaha by the age of 11."
Systemic Value Investing
The speaker summarizes the principles of Peter Lynch, Warren Buffett and Benjamin Graham.
@25 min: Long term investing - holding on to your strategies for the long term.
Mr. Buffett the Teacher: Warren Buffett (2009)
@6.40 The 2 most important topics to learn:
1. How to value an asset and
2. Understanding the Market Fluctuations
Thursday, 15 August 2013
How to Stay Out of Debt: Warren Buffett - Financial Future of American Youth (1999)
@2.30 Focus on your own earning potential. How to realise your full potential? Education to unlock this potential. Next is developing the right habits (integrity, smart and energetic).
@7.38: A piece of financial advice. Avoid credit cards. Save. Save. Save. Be ahead of the game.
@23.50 Advice for youth on how to ensure their financial future. Develop your full potential. Most people go through life in a "sleep walk". Always be ahead of the game. Save. Save. Save. Don't be behind the game. Have net resources and not having debt. Don't get behind by buying a lot of things that you have to pay interest on.
@27.00 Buffett's advice on students' education debts. High price education versus lesser price education. You need to be prodded in the right direction, but most education is SELF TAUGHT.
@38.30: How does Warren Buffett decide how to invest his time and money in?
@47.50 Warren Buffett's advise those who are interested in stocks and how they can get involved in this..
(His previous 8 years involvement with stock led him to reading Intelligent Investor when this book was written.)
Warren Buffett's Investment Checklist
How would your firm look to the premier investor? What does great investment potential look like to Mr. Buffett?(ed.)
A checklist for the stock selector; the Warren Buffett criteria:
Is the business simple and understandable?
"An investor needs to do very few things right as long as he or she avoids big mistakes." Above-average returns are often produced by doing ordinary things exceptionally well.Does the business have a consistent operating history?
Buffett's experience has been that the best returns are achieved by companies that have been producing the same product or service for several years.Does the business have favourable long-term prospects?
Buffett sees the economic world as being divided into franchises and commodity businesses. He defines a franchise as a company providing a product or service that is (1) needed or desired, (2) has no close substitute, and (3) is not regulated. Look for the franchise business.
Is the management rational with its capital?
A company that provides average or below-average investment returns but generates cash in excess of its needs has three options: (1) It can ignore the problem and continue to reinvest at below average rates, (2) it can buy growth, or (3) it can return the money to shareholders. It is here that management will behave rationally or irrationally. In Buffett's mind, the only reasonable and responsible course is to return that money to shareholders by raising the dividend, or buying back shares.
Is management candid with the shareholders?
Buffett says, "What needs to be reported is data - whether GAAP, non-GAAP, or extra-GAAP - that helps the financially literate readers answer three key questions: (1) Approximately how much is this company worth? (2) What is the likelihood that it can meet its future obligations? and (3) How good a job are its managers doing, given the hand they have been dealt?" "The CEO who misleads others in public may eventually mislead himself in private."Does management resist the institutional imperative?
According to Buffett, the institutional imperative exists when "(1) an institution resists any change in its current direction; (2) just as work expands to fill available time, corporate projects or acquisitions will materialize to soak up available funds; (3) any business craving of the leader, however foolish, will quickly be supported by detailed rate-of-return and strategic studies prepared by his troops; and (4) the behaviour of peer companies, whether they are expanding, acquiring, setting executive compensation or whatever, will be mindlessly imitated."Is the focus on Return On Equity?
"The primary test of managerial economic performance is the achievement of a high earnings rate on equity capital employed (without undue leverage, accounting gimmickry, etc.) and not the consistent gains in earnings per share."What is the rate of "owner earnings"?
Buffett prefers to modify the cash flow ratio to what he calls "owner earnings" - a company's net income plus depreciation, depletion and amortization, less the amount of capital expenditures and any additional working capital that might be needed. Owner earnings are not precise and calculating future capital expenditures requires rough estimates.Is there a high profit margin?
In Buffett's experience, managers of high-cost operations continually add to overhead, whereas managers of low-cost operations are always finding ways to cut expenses. Berkshire Hathaway is a low-cost operation with after-tax overhead corporate expense of less than 1 percent of operating earnings, compared to other companies with similar earnings but 10 percent corporate expenses.Has the company created at least one dollar of market value, for every dollar retained?
Buffett explains, "Within this gigantic (stock market) auction arena, it is our job to select a business with economic characteristics allowing each dollar of retained earnings to be translated into at least a dollar of market value."What is the value of the business?
Price is established by the stock market. Buffett tells us the value of a business is determined by the net cash flows expected to occur over the life of the business, discounted at an appropriate interest rate, and he uses the rate of the long-term U.S. government bond.Can it be purchased at a significant discount to its value?
Having put a value on the business, Buffett then builds in a margin of safety and buys at prices far below their indicated value.
Reference to Robert Hagstrom's book The Warren Buffett Way, John Wiley & Sons Inc., New York, 1994.
http://www.refresher.com/!buffett2.html
Warren Buffett: "For every dollar retained by the corporation, at least one dollar of market value must be created for owners."
Each dollar of retained earnings is translated into at least one dollar of market
Not quite, retained earnings is profits from the business less any dividends paid out to shareholders, and its a component of "shareholder equity" in the balance sheet. So if a company makes $100 in total profit and pays out $20 in dividends, retained earnings would be $80.
Market value is the market cap of the company. So if the company has increased retained earnings by $80 a year you want the market cap (share price times total number of issued shares) to increase by at least $80 if not more. It is a measurement of whether or not the company's share price is keeping up with the growth of the company's earnings, and the amount by which it increases over the amount of retained earnings will reflect that company's return on equity over and above the cost of capital.
In other words, do not buy companies whose share price is declining over the long term, as this indicates a poor return on retained earnings.
http://www.sharetrader.co.nz/showthread.php?9262-Each-dollar-of-retained-earnings-is-translated-into-at-least-one-dollar-of-market
Allocation of capital is crucial to business and investment management.
Managers and owners should think hard about the circumstances under which earnings should be retained and under which they should be distributed.
1. All earnings are not created equal.
In many businesses, particularly those that have high asset/profit ratios, inflation causes some or all of the reported earnings to become ersatz (inferior substitutes). The ersatz portion - let's call these earnings "restricted" - cannot, if the business is to retain its economic position, be distributed as dividends. Were these earnings to be paid out, the business would lose ground in one or more of the following areas: its ability to maintain its unit volume of sales, its long-term competitive position, its financial strength. No matter how conservative its payout ratio, a company that consistently distributes restricted earnings is destined for oblivion unless equity capital is otherwise infused.
2. Restricted earnings are seldom valueless to owners, but they often must be discounted heavily. In effect, they are conscripted by the business, no matter how poor its economic potential.
(This retention-no-matter how unattractive-the-return situation was communicated unwittingly in a marvelously ironic way by Consolidated Edison a decade ago. At the time, a punitive regulatory policy was a major factor causing the company's stock to sell as low as one-fourth of book value; i.e., every time a dollar of earnings was retained for reinvestment in the business, that dollar was transformed into only 25 cents of market value. But, despite this gold-into-lead process, most earnings were reinvested in the business rather than paid to owners. Meanwhile, at construction and maintenance sites throughout New York, signs proudly proclaimed the corporate slogan, "Dig We Must.")
3. The much-more-valued unrestricted variety of earnings may, with equal feasibility, be retained or distributed. Management should choose whichever course makes greater sense for the owners of the business.
This principle is not universally accepted. For a number of reasons, managers like to withhold unrestricted, readily distributable earnings from shareholders - to expand the corporate empire over which the managers rule, to operate from a position of exceptional financial comfort, etc. But there is only one valid reason for retention. Unrestricted earnings should be retained only when there is a reasonable prospect - backed preferably by historical evidence or, when appropriate, by a thoughtful analysis of the future - that for every dollar retained by the corporation, at least one dollar of market value will be created for owners. This will happen only if the capital retained produces incremental earnings equal to, or above, those generally available to investors
4. In judging whether managers should retain earnings, shareholders should not simply compare total incremental earnings in recent years to total incremental capital because that relationship may be distorted by what is going on in a core business.
During an inflationary period, companies with a core business characterized by extraordinary economic can use small amounts of incremental capital in that business at very high rates of return. But unless they are experiencing tremendous unit growth, outstanding businesses by definition generate large amounts of excess cash. If a company sinks most of this money in other businesses that earn low returns, the company's overall return on retained capital may nevertheless appear excellent because of the extraordinary returns being earned by the portion of earnings incrementally invested in the core business. The situation is analogous to a Pro-Am golf event: Even if all the amateurs are hopeless duffers, the team's best-ball score will be respectable because of the dominating skills of the professional.
Ref: Warren Buffett
1. All earnings are not created equal.
In many businesses, particularly those that have high asset/profit ratios, inflation causes some or all of the reported earnings to become ersatz (inferior substitutes). The ersatz portion - let's call these earnings "restricted" - cannot, if the business is to retain its economic position, be distributed as dividends. Were these earnings to be paid out, the business would lose ground in one or more of the following areas: its ability to maintain its unit volume of sales, its long-term competitive position, its financial strength. No matter how conservative its payout ratio, a company that consistently distributes restricted earnings is destined for oblivion unless equity capital is otherwise infused.
2. Restricted earnings are seldom valueless to owners, but they often must be discounted heavily. In effect, they are conscripted by the business, no matter how poor its economic potential.
(This retention-no-matter how unattractive-the-return situation was communicated unwittingly in a marvelously ironic way by Consolidated Edison a decade ago. At the time, a punitive regulatory policy was a major factor causing the company's stock to sell as low as one-fourth of book value; i.e., every time a dollar of earnings was retained for reinvestment in the business, that dollar was transformed into only 25 cents of market value. But, despite this gold-into-lead process, most earnings were reinvested in the business rather than paid to owners. Meanwhile, at construction and maintenance sites throughout New York, signs proudly proclaimed the corporate slogan, "Dig We Must.")
3. The much-more-valued unrestricted variety of earnings may, with equal feasibility, be retained or distributed. Management should choose whichever course makes greater sense for the owners of the business.
This principle is not universally accepted. For a number of reasons, managers like to withhold unrestricted, readily distributable earnings from shareholders - to expand the corporate empire over which the managers rule, to operate from a position of exceptional financial comfort, etc. But there is only one valid reason for retention. Unrestricted earnings should be retained only when there is a reasonable prospect - backed preferably by historical evidence or, when appropriate, by a thoughtful analysis of the future - that for every dollar retained by the corporation, at least one dollar of market value will be created for owners. This will happen only if the capital retained produces incremental earnings equal to, or above, those generally available to investors
4. In judging whether managers should retain earnings, shareholders should not simply compare total incremental earnings in recent years to total incremental capital because that relationship may be distorted by what is going on in a core business.
During an inflationary period, companies with a core business characterized by extraordinary economic can use small amounts of incremental capital in that business at very high rates of return. But unless they are experiencing tremendous unit growth, outstanding businesses by definition generate large amounts of excess cash. If a company sinks most of this money in other businesses that earn low returns, the company's overall return on retained capital may nevertheless appear excellent because of the extraordinary returns being earned by the portion of earnings incrementally invested in the core business. The situation is analogous to a Pro-Am golf event: Even if all the amateurs are hopeless duffers, the team's best-ball score will be respectable because of the dominating skills of the professional.
Ref: Warren Buffett
Wednesday, 14 August 2013
The divergent styles of value investing
1. Some of the value investors invest only in superior businesses that they intend to own for decades, if not forever.
2. Others, are looking for damaged goods that have been thrown on a rubbish heap, even though the assets or businesses are still worth something.
3. Some investors run portfolios with six or eight stocks, others will own more than a hundred companies at any one time.
4. Some of them buy bonds of companies headed for or already in bankruptcy, thinking that either the bonds will be redeemed for more than their cost or that they will end up owning equity in a reorganized company as it emerges from bankruptcy.
5. Some seek to avoid the crowd by concentrating on small and tiny companies; others prefer the stability and predictability of established firms with good businesses.
6. Some try to buy shares in companies that they feel will command a premium from an industrial purchaser who wants to own the whole firm.
7. Others play that role themselves and purchase the entire company.
There are many dimensions along which value investors differ from one another in how they select their companies: size, quality, growth prospects, asset backing, location (domestic only or more international), and so on. They also differ on how they assemble their portfolios: broadly diversified, industry-weighted to take advantage of a circle of competence, moderately concentrated, or tightly focused.
All put the most emphasis on the "quality of company" dimension. The quality dimension entails preferences concerning valuation approaches (assets, earnings, growth), the breadth of the portfolio (better companies generally mean more concentration), and the expected time for holding the shares (for the deeply discounted stock, until they recover; for the great companies, forever).
Direct and active investing is a dangerous game, not a trick one can do casually at home. The easy availability of real-time security prices and inexpensive trading has convinced many otherwise sensible people that investing on their own will provide both enjoyment and profit.
When Mr. Market creates opportunities for value investors by overreacting to information or otherwise plunging to an extreme, most participants are part of that herd, not the few standing to the side. To recall a piece of wisdom Warren Buffett frequently cites, if you have been in the poker game for thirty minutes and still don't know who the patsy is, you can be pretty certain the patsy is you.
Ref: Bruce Greenwald
2. Others, are looking for damaged goods that have been thrown on a rubbish heap, even though the assets or businesses are still worth something.
3. Some investors run portfolios with six or eight stocks, others will own more than a hundred companies at any one time.
4. Some of them buy bonds of companies headed for or already in bankruptcy, thinking that either the bonds will be redeemed for more than their cost or that they will end up owning equity in a reorganized company as it emerges from bankruptcy.
5. Some seek to avoid the crowd by concentrating on small and tiny companies; others prefer the stability and predictability of established firms with good businesses.
6. Some try to buy shares in companies that they feel will command a premium from an industrial purchaser who wants to own the whole firm.
7. Others play that role themselves and purchase the entire company.
There are many dimensions along which value investors differ from one another in how they select their companies: size, quality, growth prospects, asset backing, location (domestic only or more international), and so on. They also differ on how they assemble their portfolios: broadly diversified, industry-weighted to take advantage of a circle of competence, moderately concentrated, or tightly focused.
All put the most emphasis on the "quality of company" dimension. The quality dimension entails preferences concerning valuation approaches (assets, earnings, growth), the breadth of the portfolio (better companies generally mean more concentration), and the expected time for holding the shares (for the deeply discounted stock, until they recover; for the great companies, forever).
Direct and active investing is a dangerous game, not a trick one can do casually at home. The easy availability of real-time security prices and inexpensive trading has convinced many otherwise sensible people that investing on their own will provide both enjoyment and profit.
When Mr. Market creates opportunities for value investors by overreacting to information or otherwise plunging to an extreme, most participants are part of that herd, not the few standing to the side. To recall a piece of wisdom Warren Buffett frequently cites, if you have been in the poker game for thirty minutes and still don't know who the patsy is, you can be pretty certain the patsy is you.
Ref: Bruce Greenwald
The market prices reflect the sentiment of the investors. To protect oneself from the volatilities of the market prices, the smart investor needs to understand the value of the business he is investing into.
It is the nature of the market that prices of a stock can be pushed to very low level when the crowd is pessimistic. On the other hand, the prices of these same stock can be pushed to very high level when the crowd is optimistic. The reasons maybe fundamental or sentimental.
The market prices reflect thus the sentiment of the investors. However, the value of a stock is unlikely to change very much during these short periods when the market prices may change drastically.
To protect oneself from the volatilities of the market prices, the smart investor needs to understand the value of the business he is investing into.
More investors lose money when they overpay for the stocks when the crowd is overoptimistic. Many hold onto losses in unbelievable denial. This is evident whenever the price of a stock falls. Why does the price of a stock fall? Often these investors blame many external factors for the fall, when in fact, the single most important reason is themselves, they overpaid for the stock during period of over-optimism.
The market prices reflect thus the sentiment of the investors. However, the value of a stock is unlikely to change very much during these short periods when the market prices may change drastically.
To protect oneself from the volatilities of the market prices, the smart investor needs to understand the value of the business he is investing into.
More investors lose money when they overpay for the stocks when the crowd is overoptimistic. Many hold onto losses in unbelievable denial. This is evident whenever the price of a stock falls. Why does the price of a stock fall? Often these investors blame many external factors for the fall, when in fact, the single most important reason is themselves, they overpaid for the stock during period of over-optimism.
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