Bubbles have one thing in common; they are going to burst

On March 6, 2000, Larry Summers and Alan Greenspan and many of the senior executives actually waxed poetic about the productivity gains, the technologies, the confluence of our capital markets and great new technological advances, and the fact that it meant great things for our future.

Four days after that March 6, 2000 gathering, on March 10, the bubble burst and the game was over. All had changed.

It all seemed very real at the time, and the senior people in government were getting their information from the sources that had proved the most valuable and trustworthy in the past for all of us: real economic data generated by consumers and corporations, as well as the very best information that the executives running those corporations could give them. We all had seen the same things, and we all had believed.

"Trying to understand is like straining through muddy water. Be still and allow the mud to settle." Lao-Tzu

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The lessons from this bubble are important for 3 reasons.

1. First, there is the unlikely possibility that we may encounter another stock market bubble in our investing lifetime. One per lifetime seems the 'rule', but we cannot rule out anything completely.
2. Second, we do have small bubbles in the market (smaller than in 1929 and 2000) periodically. These include the one caused by a mania in blue chips (called the "Nifty Fifty") from the late 1960s into early 1973, a moderate technology stock bubble in 1983, and the overvaluation in the market before the 1987 stock market "crash."
3. Third and most important, bubbles occur in INDIVIDUAL STOCKS fairly frequently.

We have all heard the term bubble and also the term mania used over the past few years very, very frequently - when people have talked about possible bubbles:

• in real estate or housing,
• in financial instruments in foreign countries, and
• at times even in the Chinese economy,

which has had some startling growth numbers that are far above anything seen before.

Bubbles, like those from bubble gum or soap, come in all different sizes, but they all have one thing in common with each other, including the gum and the soap bubbles; they are going to burst. They are unsustainable because they are not built on enough real substance to support themselves. Thus, many bubbles develop from a mania. A mania is simply something that is more emotional than tangible or rational, so it can be thought of as irrationality.

The irrationality that leads to the inflating in price beyond what complete knowledge and good analysis would suggest can be the result of one thing or of two or more things in combination.

• The irrationality itself is not very easy to see at the beginning, since there would be no bubble if it were apparent.
• The causes start with beliefs that are exciting, but the crowd does not know what it does not know.
• Knowledge is incomplete or just wrong.

When something appears that is new, and seems to have unlimited potential and some mystery about it, that, to me, is "the big one". This has happened many times in history, as when electricity first came to the household; or with the advent of canals, railroads, and radio in the 1920s and so forth. Perceptions, not analysis, drove some of the stocks to ridiculous levels and then that bubble popped.

Bubble Trouble

Bubbles and bear markets are two separate and distinct things. Investors truly need to understand the differences. You need to understand which strategy to apply when, and not use a hammer when you need a screwdriver. Once you see the straightforward differences, you will know what to do.

One buys in a bear market and sells in a bubble. Those buying in bad markets made a lot of money. This approach avoids the pitfalls of market timing and uses knowledge of what you own or want to own to a maximum advantage.

A bubble results from a mania, meaning that either valuations or fundamentals are highly suspect or totally wrong, since emotions and perceptions have overwhelmed what is "real". It is better to run - meaning sell - if you recognize a bubble.

Some people wonder why the NASDAQ remained 3,000 points below its old year 2000 high for more than 5 years. They wonder why they had trouble making back their money that was lost in the year 2000 bubble. That is because they think of bubbles like bear markets and do not realize the incredible excesses of bubbles that have to be worked off. But the most important difference is the cause.

Bear markets are caused mainly by fundamental problems. The 5 main cause of a bear market are listed (see reference). It runs its course, and so does the poor market. Then things normalize. You buy into a bear market, since you get great prices on stocks; then stocks come back and you make more money.

Bubbles are not caused by fundamental events. It is investors themselves who create them. Investors come to believe some things that are not true or not rational and thus create a mania in a stock, in an industry, or in the overall market. If the mania goes on for a time, a bubble is created, and that builds until its inherent instability leads it to break.

One of the interesting differences between bubbles and bear markets is that in a bear market, there are plenty of bulls and bears. In a bubble, the few bears are drowned out by the loud and almost universal bullishness. This happened with the Internet, because a mania is normally caused by a belief in something that is supposed to be new and amazing, even though this cannot be proved.

It is natural to like momentum and money, but if investors have no disciplines and no sense of bubbles, then they are headed not for the big money, but for quite the opposite.

With bear markets, one wants to use buy and sell disciplines and buy when prices and fundamentals would dictate that.

There are market bubbles once in a great while, perhaps once in a life-time, but individual stock bubbles are more common. All bubbles have some similarities that concern how perceptions, emotions, and a lack of accurate information combine to set an investor trap.

The five possible factors that cause bear markets

While various people can legitimately pick factors that trigger bear markets, or those stock-market environments that result in declines that are long, very significant, or both, there are five factors which great investors center on. These elements of a bear market can be present individually to create falling prices, or they can appear in combination.

The five possible factors that cause bear markets are:

1. Persistent overvaluation.
2. High or rising interest rates or rising inflation that leads to them.
3. Weakness in company earnings. (By the time people know they are in a recession, normally weak earnings have been evident and if high interest rates cause economic weakness, then those rates have been present for a time.)
4. Oil shocks.
5. Wars (but not always).

The first three are, "the big three"; and those who ignored them suffered much greater losses than those who did not.

In each of the following instances: the terrible 1973-1974 market, the 1983 tech boom and bust, the 1987 stock-market crash and the 2000 Internet and technology bubble burst, there was a general disregard for valuations of individual stocks leading up to the collapses. Each collapse was related to this factor. They did not descend upon the markets out of nowhere.

Markets have a habit of discounting good and bad events in advance. This explains why a company's stock may make a big move before its earnings are made public, or why the market may hit the doldrums for three weeks prior to a rise in interest rates. The reason is anticipation. Savvy investors must take into account that reaction to future events may already be reflected in current prices.

Markets can detach from fundamentals for long periods

Warren Buffett, say that the markets can detach from fundamentals for periods as long as a year or even longer. Therefore market timing is a form of gambling. It is easier to understand a stock you know well, and value that stock with reasonable accuracy, particularly if it is for a time horizon of a couple of years.

These days, minor market-moving news and events are more and more frequent and could have you trading (at a dizzying and counterproductive pace) into and out of some of the companies that you would want for long-term investing and wealth.

There are countless small but violent moves in the markets, let alone the many corrections and periodic bear markets that occur. Using knowledge and disciplines instead of being driven by raw emotion and using a 'timing approach' were the keys to investment success.

Over the years, volatility in market averages and individual stock prices has increased, not decreased, so that there have been many more sharp moves and many more reversals. Many factors are responsible. Some of the reasons are:

• computerised stock trading,
• huge increases in the size of the largest institutional portfolios,
• the proliferation of aggressive hedge funds, and
• the complexity of the task of properly interpreting information that develops at a dizzying pace in our globalised markets.

Interestingly enough, there are typically more 3 percent and 5 percent daily upward moves in stock market averages during bear markets than in bull markets. The basic nature of market moves, and the psychology that affects those moves, coupled with the complex financial variables, makes the process of trying to determine the short-term direction of markets a very tricky game of chance, and one that can be immensely costly.

Predicting short-term market movements (Market Timing) will cost you money or opportunities

Any attempts to try to predict the direction of the stock market are called market timing. Academicians and professionals as a group agree that it cannot be done; in fact, it will cost you money or opportunities.

Fear, greed, and a basic human desire to think we can know or control our future all drive us to try to predict short-term market movements.

If you flip a coin ten times and it comes up heads ten times, that is random luck, not a 'system'. We know that over time it will be 50-50, heads and tails. Many who guess which way the market will move and guess correctly think they have a system and really can do it. Yet if you guess correctly and try to time the market a number of times in succession, it most likely that you will guess wrong at some point and more than wipe out your prior gains and be well behind (see the Long-Term Capital Management story). This is also evident from reading academic studies on the subject and from observing what has happened in the markets over the decades.

Therefore, avoid timing the market. How then to resist the temptations posed by events or rapid market moves?

First, and most important, is to have buy and sell disciplines, and right after that, a proper time horizon. Emotions are an important step, for as soon as you feel the pull of fear in a down market or a down stock, you know that you do not have enough knowledge to know what to do. Knowledge, disciplines, and your buy and sell disciplines can be called upon to resist emotion-driven timing.

Computers and sophisticated software programs for determining weather changes or changes in the direction of the stock market have been developed and refined over the last two decades. But computer software cannot properly account for all of the linked factors that influences weather changes or market changes.

Buffett sticks to his investment principles.

Warren Buffett is one of the greatest investor of all time. What lifts him above his peers is a determination to stick to his investment principles. Buffett has steadfastly refused to jump on any bandwagon. Unlike so many other investors who are nursing burnt fingers, Buffett let the dot-com train roll on by. Famously, he refuses to invest in businesses that he doesn't understand - which includes most high-tech companies. Instead Buffett made a fortune for himself and his shareholders by investing in undervalued companies for the long-term. It's Buffett's willingness to buck the trend that makes him worthy of his 'Sage of Omaha" tag.

Coastal

Company Basics
Exchange Bursa Malaysia
Company Name Coastal Contracts
Stock Code 5071
Sectors
Paid Up Capital * MYR 70.56
Par Value - (as at 2008-12-31)
Market Cap * MYR 682.30 (based on value of 1.9300 per share)

Recent 52 wk low: Price 0.79 a share (Market cap MYR 279.3m)

Performance (as at 2008-12-31) *
Total Assets: MYR 862.32
Intangible Assets: MYR 5.88
Revenue: MYR 348.06
Earnings Before Interest and Taxes: MYR 98.10
EPS (Basic) Inc. Extraordinary Items: MYR 0.28
PE Inc. Extraordinary Items: 7.02
EPS (Basic) Exc. Extraordinary Items: MYR 0.28
PE Exc. Extraordinary Items: 7.02
Net Income: MYR 96.77
Dividends - Common/Ordinary: MYR 8.47
Dividends - Total: MYR 8.47
Goodwill: MYR 5.88
Minority Interest: -
Reserves: -
Return On Assets: 11.22%
Return On Equity: 31.42%
Shareholder's Equity: MYR 307.97


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2008...2007...2006

Assets
862.32...546.42...292.72
Liabilities
554.35...331.76...143.22
ROA
11.22%...12.69%...11.69%
ROE
31.42%...32.29%...22.89%
EPS
0.28...0.20...0.10
PE
7.02...9.65...18.85
Net Income Margin (%)
27.80...23.76...21.48
Operating Margin (%)
-
EBITD Margin (%)
30.29...25.51...25.83


Income Statement
Revenue - Total
348.06...291.76...159.29
Gross Profit (Loss)
-
Operating Income After Depreciation
98.10...69.44...35.75
Net Income (Loss) - Consolidated
96.77...69.32...34.22

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Recent 52 wk low: Price 0.79 a share (Market cap MYR 279.3m)

You could have bought the whole company for 279.3 million and earned 98.10 million for the year 2008! (PE of 2.82, P/B of 0.9). Yes, there remains the concern over its book orders in 2010 or the short run. However, over the long run, Coastal should do alright when the O&G sector improves. Its business and fundamentals have been good and at that very low price 0f MYR 0.79 a share, was probably a good investment: there is safety of capital with a potential for a positive reasonable return.

What led to the steep drop from MYR 2.38 to MYR 0.79? The severe economic depression, the Lehman crash and the worries over the future earnings of Coastal had led to investors to sell down causing the steep fall in the price of this stock. On the other hand, what led to the recent steep rise in the price of this stock? The answer lies in understanding the fundamentals of the business of this company and the Mr. Market phenomenon espounded by Benjamin Graham.

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Coastal share price continues to rise. It was sold down hugely during the last few months.

2008 was another record year for Coastal. It has achieved a 5 years compounded annual growth rate above 43%.

What of its prospects for the coming year? Here are some notes from its chairman in its annual report:

"We are determined to remain firm on fostering a strong balance sheet and sound credit rating."

"We will continue to, of which we did, augment our fleet by building and owning more sophisticated marine transportation vessels, including higher end OSV."

"We expect 10-15% reduction in global fuel exploration and production expenditure and hence the concomitant offshore services. In the short run, our performance will be backed by existing book order."

"....global oil moguls continue to move exploration into deeper sea ensured by higher demands for young and sophisticated OSV. Pressure are on ship owners to replace their fleet."

"Longer term, we believe the fundamentals for oil & gas services remain strong and the demand for OSV will gradually return."

"We expect 2009 to be another year of progress for the Group."

... sounds encouraging in this financial turmoil.

Padini

Business Summary
Padini Holdings Berhad, an investment holding company, engages in the distribution and retail of fashion wears and accessories in Malaysia and Hong Kong. It offers ladies shoes and accessories, ancillary products, children's garments, maternity wear, and accessories. The company distributes its products through approximately 170 freestanding stores and in-house outlets. It offers its products under the Padini, Padini Authentics, PDI, P&Co, Seed, and Miki brand names. The company was founded in 1971 as Hwayo Garments Manufacturers Company and changed its name to Home Stores Sdn Bhd in 1991. Further, it changed its name to Padini Holdings Sdn Bhd in 1992; and to Padini Holdings Berhad in 1995. The company is based in Shah Alam, Malaysia.


Company Basics
Exchange Bursa Malaysia
Company Name Padini Holdings Bhd
Stock Code 7052
Sectors Consumer Discretionary
Paid Up Capital * MYR 65.59
Par Value - (as at 2008-06-30)
Market Cap * MYR 327.64 (based on value of 2.4900 per share)

Performance (as at 2008-06-30) *
Total Assets: MYR 264.31
Intangible Assets: MYR 0.12
Revenue: MYR 383.31
Earnings Before Interest and Taxes: MYR 58.43
EPS (Basic) Inc. Extraordinary Items: MYR 0.32
PE Inc. Extraordinary Items: 7.85
EPS (Basic) Exc. Extraordinary Items: MYR 0.32
PE Exc. Extraordinary Items: 7.85
Net Income: MYR 41.72
Dividends - Common/Ordinary: -
Dividends - Total: -
Goodwill: -
Minority Interest: -
Reserves: -
Return On Assets: 15.78%
Return On Equity: 24.61%
Shareholder's Equity: MYR 169.48

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Historical 5 Yr PE 6.2 to 10.5

Historical 10 Yr PE 8.0 to 14.8

Present PE based on 2.49 = 7.85

Earnings Yield = 12.7%

DY = (0.134/2.49)= 5.4%

ROTC
= 41.72/ (OE 206.737 + STL 37.607 + LTL 2.525)
= 16.9%

Between the end of 1999 and the end of 2008:

total earnings were $1.28 a share,
total dividends were $0.463 a share and
retained earnings were $ 0.817 per share to add to its equity base.
the company's per share earnings increased from $0.025 a share to $0.317, the difference was $0.292 a share.
return on retained capital/earnings RORC was 0.292/0.817 = 35.7%

How can you turn innovation into profitable growth?

How can you turn innovation into profitable growth?

There are 5 components to innovation:

• ideation
• selection
• nurturing,
• launch, and,
• killing failures early.

Before discussing each, there are four factors to note.

1. All the factors are interrelated, although most people don't stop to realize that. You need to know all pieces tie together, because a breakdown in one can affect what happens thereafter. If you can improve the nurturing and launching of ideas, for example, you can improve their flow.

2. This is an observable process. You can observe and diagnose how well your organization deals with each component. You can rank your firm's ability to handle each function on a scale of one to ten. And you will also be able to observe how well your company, or business unit, handles the overall flow within each of these 5 components. The selection process should be transparent. Everyone should know the criteria that will decide whether the concept will be funded.

3. You can't pursue every idea, and not all ideas are created equal. After you have surfaced as many ideas as possible, pick the best ones to fund. Kill off the rest. There are criterias you use to make that decision.

4. Finally, these are 5 distinct steps to getting an idea into the marketplace. Each requires a unique set of skills.

All revenue growth starts with an idea.

All revenue growth starts with an idea. The idea could be for a new product or a new service. Or it can be an addition to a product or a service that already exists. Or it can be an idea that begins as almost idle speculation - "I wonder what would happen if...."

Employees, from the rawest recruits to crusty veterans of the business, have ideas, and many of them have the potential to help the enterprise. The leadership challenge is to have a social process that helps draw them out. After all, those ideas don't do your company any good if people won't voice them.

The social engine can help, of course. The interactions among the various departments - marketing and R&D, for example, or customer services and sales - will spark more ideas worth pursuing.

Your organization doesn't need to wait for the proverbial light-bulb to go on in order to come up with new ideas. Innovation can be operationalized. You can develop a process that you can follow to surface ideas and then, develop as many growth ideas as possible.

Unlike cost-cutting, growing revenues requires innovation. Many people think only geniuses can innovate. And, indeed, genius is always welcom. However, innovation is a social process and everyone can participate. Once the process is firmly integrated into the way the company does business every day, you will find more and more geniuses coming out of the woodwork.

Silicon Valley is filled with geniuses. But if you look at the successful entrepreneurs who work there, you will discover a curious thing. The vast majority of them worked - often for a long time - at established firms before going off on their own. Part of the attraction, of course, in starting their own companies was the freedom and equity ownership that come along as part of the deal. But another reason for leaving had to do with the fact that their old companies just could not accommodate them and what they wanted to do. Had their former employers handled the social innovation process better, a certain percentage of those entrepreneurs would have stayed and probably contributed in a big way to the growth of their former company.

How can you turn innovation into profitable growth?

Growth fuels the organization to even greater growth

The situations of Bill Carter and Susan illustrate both the business and personal consequences of being part of a business that is growing - or one that is not.

With growth, the organization expands and people can build a career and a future. Growth enables a business to get the best people and retain them. People who see personal growth opportunities have more energy, better morale, and enhanced self-confidence. Growing companies expand into new markets and market segments, new regions, and even new countries. Not only does all that create wonderful opportunities for talented people, but also the growth taps into all the latent psychological energy that is buried inside the employees, and the release of all that previously contained power fuels the organization to even greater growth.

The contrast to a company that isn't growing is stark. First, there is limited room for advancement. Susan could take a step down to join a growing company, convinced - rightly so, as it turned out - that she still would end up climbing further and faster up the corporate ladder at a firm tha was increasing the top line and not shrinking. Bill Carter has no such options. Susan is excited to go to work. By contrast, as Bill is learning, it's frustrating to be employed by a company that seems to be going downhill. There is no excitement as you walk through the halls. No emotional energy. Your entire workday is spent feeling as if you are moving underwater.

When there is no growth, a negative psychology permeates the organization. The best people spend a significant part of their time looking for a job, and they leave once they find one. Those that remain make macabre jokes about what form the next round of corporate cost-cutting will take and devote a large part of their days to infighting to make sure that theirs will not be the next head to roll when the cost cutting ax falls again, as it inevitably will.

If you are not in a growth situation, you are in a limiting situation.

Are you part of a growth business?

Here are some questions that can help you diagnose whether or not you are part of a growth business. Are you ready to start Monday morning?

1. What percentage of time and emotional energy does the management team routinely devote to revenue growth?

2. Are there just exhortations and talk about growth, or are there actually a lot of meetings and brainstorming sessions about how growth is going to happen? How good is the follow-through?

3. Do managers talk about growth only in terms of home runs? Do there understand the importance of singles and doubles for long-term sustained organic growth?

4. How much of each management team member's time is devoted to making effective visits with customers? Do they do more than listen and, probe for information and then try to "connect the dots"?

5. Does the management team come in contact with the final user of your product?

6. Are people in the business clear about what the specific future sources of revenue growth will be? Do they know who is accountable?

7. Would you characterise your company or business unit's culture as cost-cutting or growth oriented? If the answer is one or the other, you need to start doing both. Do people in leadership positions have the skill, orientation, and determination to grow revenues?

8. Does the company practice revenue productivity, that is, does it think through whether there are ways to more effectively use current resources to generate higher revenues?

9. How well and how regularly does your sales force - and others in the organization - extract intelligence from customers and other players in the marketplace? How well is this information communicated and acted on by other parts of your organization, such as product development?

10. How good are the upstream marketing skills - that is, the ability to segment markets and identify consumer attributes - in your business?

11. Is the head of marketing in your business an upstream marketing expert?

12. How good is the relationship and information flow between upstream marketing and product development? Between upstream marketing and R&D?

13. Do you have an explicit growth budget in your organization's traditional budget document? How well is the growth budget connected with revenue growth beyond the current fiscal year? Are there funds allocated in the growth budget for medium- and long-term revenue growth?

14. How skilled are the people in your business in creating value propositions for each major customer segment of your business? How effective is your organization in using cross-selling to accelerate revenue growth?

15. How often and how effectively is information shared simultaneously among people who make decisions about resource trade-offs?

16. How good is the flow of ideas in your business?

17. How good is the process of selecting ideas that will be funded as growth projects?

18. How well defined are the steps of the nurturing process in getting revenue growth projects ready for launch? How effective is the process?


By answering these questions, you can confirm if your company is growing, not growing or is in decline.

Start by compiling a list of simple things you could do Monday morning that would lead to "singles and doubles" - steady increases in sales.

Instead of bemoaning the fate of your company, draw upon your inner psychological reserves.

Be determined to lead and adopt a whole attitude and presence that would be 180 degrees from what it had been in recent weeks.

Profitable growth can be everyone's business.

Profitable Growth

"In our unstable world of today, achieving sustainable and profitable revenue growth is not easy. How can you improve bottom line and energy, personal growth for the people involved, and creating value for your company?"

"Growth is a constantly achievable result for an organization that is properly focused and empowered. The CEO's job is to provide the organization with the vision and confidence to deliver it."

"CEOs require a fresh reconceptualization of what sustainable growth looks like in today's hyper-competitive world and a practical 'how to' program for achieving it."

"Every day is Monday morning for profitable growth. Monday morning starts today."

"In maximising long-term shareholder return, consistent earnings and dividend growth, as well as revenue growth, are mandated by investors. If earning growth is simply based on improving expense productivity, investors question and discount the sustainability of future earnings growth. Investors demand and reward profitable revenue growth. There are many competitive advantages that can be achieved with good growth."

"Reorient your thinking about growth to small day-to-day changes. Focusing on collaboration with customers is critical to growth. Also, important to have a practical implementation guide."

"Growth is achievable. It is in the consistency of day-to-day execution that you build the backbone of a great company. How much control you have over the growth of your business? "

"Profitable growth is now attainable for everyone who follows certain practical advice. Leaders of organization should make profitable, organic, and sustainable growth, become everyone's business. ..... a prerequisite to building shareholder value."

"The importance of execution is at the forefront of growth. Insight and knowledge of how to execute, based on management principles for profitable growth, is invaluable for the business community. "

"In an industry where 3 to 5 % growth is top quartile, we are always looking for creative ways to get the most from our existing assets, while also looking for the next big growth area. By identifying a number of internal and external obstacles to growth and then showing managers at all levels how to overcome these obstacles and create profitable growth in their businesses. The importance of hitting "singles and doubles", creating a continuous improvement mind-set throughout your organization, and maintaining a disciplined and accountable approach to growth. "

"A growth agenda is on the top of every CEO's mind. Using simple but on-the-mark tools for building a company-wide 'growth culture' are invaluable."


Ref: Profitable Growth is Everyone's Business by Ram Charan

Operating Profit before Working Capital changes vs. Operating Cash Flow

Proton's Cash Flow Details

National car maker Proton Holdings Bhd should provide more details in its quarterly cash flow statement instead of just a summary.

Although the condensed statement did show the amount of cash flow generated from operations (operating cash flow), it didn't present the "operating profit before working capital changes", or spell out in detail how the operating cash flow was derived.

There is a huge difference between operating profit before working capital changes and operating cash flow.

Operating profit before working capital changes: This indicates the very basic operating cash flow scenario of a company, with the assumption that payments to suppliers are made on time while collection from client for the sale of goods is also received punctually.

A negative operating profit before working capital chagnes spells trouble for the viability of a company's operations. It means the company has to pour in cash to sustain its operations instead of generating cash from the operations.

The non-disclosure of operating profit before working capital changes denies investors an important piece of information. This is because companies could bump up their operating cash flow by adjusting their working capital, by delaying payment to suppliers or expediting the receipt of cash from customers.

These may blur investors' judgment about the basic health of the business or when they seek to compare the actual operating situation with the previous corresponding period.

Cash flow is the lifeblood of a busines, which is especially important in tough times. In order to give the public a better picture of its operating condition, Proton should present its quarterly cash flow statement in detail.





The Edge Malaysia June 8, 2009

Growth or value investing in these times?

Growth or value investing in these times?
Written by Celine Tan
Tuesday, 02 June 2009 18:00

In the investment world, there are two broad investment styles -- value and growth investing. With stock prices around the globe experiencing major corrections in the past 18 months, should you be applying the value investing strategy?

Value investors seek stocks that they believe has been undervalued by the market. Some undervalued investments, which suffered acute fall in prices, are the result of overreaction to negative developments and this does not correspond with the investments’ long-term fundamentals, says Sharifatul Hanizah Said Ali, managing director of RHB Investment Management Sdn Bhd. “In such a scenario, value investors are likely to profit when the value of the assets, in which they invested at deflated prices, recovers.”

However, in the event that the investment suffers a drastic change in fundamentals -- from bad to worse, it will remain cheap for a long time. “Therefore, it’s crucial for one to be aware of the nature of your investment. This is even more so when it comes to value investing as some of these investments are under-researched and information may not be easily accessible,” says Sharifatul. Another common risk in value securities is liquidity risk, she adds.

Meanwhile, growth investors invest in companies that have a high-growth story, even if the price appears expensive. “While most growth investments yield decent returns [usually in line with the broad market], value investments can potentially yield exponential returns in the right market cycle [like small-cap stocks rally],” says Sharifatul.

You need to make a judgment call in determining the approach to your investment. “If you are of the opinion that the market recovery will be protracted and eventually spill over to the entire market, then it may be worth investing in value investments. Otherwise, it’s more advisable to invest in growth investments as they should move ahead of value investment,” says Sharifatul. “In essence, we prefer equity growth investments that are undervalued. We are also of the view that values are emerging among blue chips and fundamentally strong companies with good track records, prudent management and strong brand names. These established corporates would be the driver of growth and lead the economic recovery.”

Regardless of your approach, in deciding the intrinsic value of an investment, you are making certain assumptions, for instance, the expected revenue and earnings, says Chen Fan Fai, chief investment officer of Kenanga Asset Management Sdn Bhd. “If your assumptions are wrong, your valuation will be totally out – and this is where the risk lies.”

However, unit trust fund investors should not make the mistake of assuming that unit trust funds that have fallen in price appear to provide value. “In essence, a unit trust is a portfolio of assets. You cannot simplistically say that this unit trust fund, which has fallen from RM1 to 50 sen, is a good buy, compared with the one that has dropped from RM1 to 90 sen [both funds having the same investment mandates],” says Teoh Kok Lin, managing director of Singular Asset Management Sdn Bhd.

Alternatively, one can scrutinise the individual holdings of the stocks or bonds in the unit trust portfolio to gauge its value, says Sharifatul. “Assuming if the stocks are largely undervalued stocks and trade at steep discounts to their fair values, it is likely that the fund trades at a discount too or adopts a value investing strategy.”


http://www.theedgemalaysia.com/personal-finance/15495-growth-or-value-investing-in-these-times.html

Ensuring that successful growth continues or is rekindled

All growth efforts eventually slow. But neither your business nor your career has to decline in tandem with them as long as you stay alert to the dynamics that are in play and cultivate the ability to adapt.

These steps can help ensure that successful growth continues, or is rekindled:

1. Review current business activities: this may involve analysing strengths, weaknesses, opportunities, and threats (SWOT), as well as assessing the business's relative market share.

Answer the following questions:

• Where are the most profitable parts of the business?
• What are the prospects in the short-, medium-, and long-term for those products and markets?
• How precarious is the business - for example, does it rely on too few products, customers, or distribution channels?
• How clearly focused is the business - is it over-burdened with too many products, markets, and initiatives, or is it running on empty with too few opportunities?
• What is likely to be the best method of expansion - is it affordable (not just in terms of money)?
• What are the advantages and disadvantages of expanding?

2 Decide the best method of achieving growth: discuss the options with senior managers and shareholders, refining potential opportunities and deciding how to approach problems.

3. Plan for growth: decide what action is needed to achieve growth. This will involve leadership qualities to communicate and mobilise resources.

4. Act decisively and consistently: once the course has been set it needs to be rigorously followed. One of the greatest obstacles to growth is inertia, often in the form of attachment to heritage and past activities. However, Sir John Harvey Jones, one of the UK's most successful businessmen, emphasised the point that any business is only as good as its next three months' order book.

• Pay attention to the details of any strategy for growth. Understand how the changes affect people.
• Decisive action is vital, but this needs to include an understanding of how to maintain people's commitment and motivation. If people feel threatened, or insecure, then however sensible the strategy for growth and the plan for implementation it simply will not be achieved.
• It is vital to treat people with respect. It is also worth communicating what is happening to people so that they understand their role and how they can contribute.
• Also, monitor the situation; time lags need to be understood and planned for, and the strategy needs to be supported in the long term.

Taking Growth for Granted

Growth can never be taken for granted. There is no such thing as a growth industry - growth is a matter of being perceptive enough to spot where future growth may lie.

History is filled with companies that fall undetected into decay because:

• they assume that the growth in their particular market will continue for as long as the population grows in size and wealth
  
• they believe that a product cannot be surpassed
  
• they tend to put faith in the ability of improved production techniques to deliver lower costs and, therefore, higher profits.

See's Candies for sale

One day, Buffett got a call from Bill Ramsey, Blue Chip's president, saying that a local Los Angeles company, See's Candies, was for sale.

"See's has a name that nobody can get near in California," Munger told Buffett. "We can get it at a reasonable price. It's impossible to compete with that brand without spending all kinds of money." Ed Anderson thought it was expensive, but Munger was overflowing with enthusiasm. He and Buffett went through the plant, and Munger said, "What a fantastic business. And the manager, Chuck Huggins - boy, is he smart, and we can keep him on!"

See's had a tentative deal on the table already and wanted $30 million for assets worth $5 million. The difference was See's brand, reputation, and trademarks - and most of all, its customer goodwill.

Buffett and Charlie Munger decided that See's was like a bond - worth paying $25 million for. If the company had paid out its earnings as "interest," the interest would average about 9%. That was not enough - owning a business was riskier than owning a bond, and the "interest rate" was not guaranteed. But the earnings were growing, on average 12% a year. So See's was like a bond whose interest payments grew. Furthermore:

"We thought it had uncapped pricing power. See's was selling candy for about the price of Russell Stover at the time, and the big question in my mind was, if you got another 15c a pound, that was 2.5 million dollars on top of 4 million dollars of earnings. So you really were buying something that perhaps would earn 6.5 or 7 million dollars at the time, if just priced a little more aggressively."

At the price offered, $25 million, the $4 million it was earnings pretax would give Buffett and Munger payback of 9% after-tax on their investment from the first day they bought it - not factoring in future growth. Adding in the $2 to $3 million of price increases they thought See's could institute, the return on their capital would rise to 14%: a decent level of profitability on an investment, although it wasn't a sure thing. The key was whether the earnings would continue to grow. Buffett and Munger came close to walking. The pickings had been so easy until now, and they had such an ingrained habit of underbidding, that it was like swallowing live guppies for them to pay the asking price.

"You guys are crazy." Munger's employee Ira Marshall said, "There are some things you should pay up for - human quality, business quality, and so forth. You're underestimating quality."

"Warren and I listened to the criticism," says Munger. "We changed our mind. In the end, they came to the exact dollar limit of what we were willing to pay."



Price paid: $25 million
Earnings: $4 million pre-tax
Initial return: 9% after tax
Earnings growth rate: 12% per year

If earnings increased to: $6 - $7 million
Return on their capital: 14%


Ref: Page 345 The Snowball, Warren Buffett and the Business of Life, by Alice Schroeder

Warren Buffett's Historical Investments (Part 9)

Warren Buffett's Historical Investments (Part 9)

Warner-Lambert Company: This is a pharmaceutical, consumer health care, and gum and mint company. It has such brand-name products as Listerine, Bromo-Seltzer, Halls cough tablets, Rolaids antacids, Schick and Wilkinson Sword razors and blades. its gums and mints division owns Dentyne, Trident, Freshen-up, Bubblicious, Mondo, Cinn-a-Burst, Clorets, and Certs. Its over-the-counter drugs are protected by patents. The ROE is consitently above 30% and per share earnings have been growing at 11% annually for the last 10 years. During the 1990 bubble it traded at a PE of between 30 and 45. If you can get it for a PE of below 17, the economics really work. In the early nineties, when it looked as if the federal government was going to start regulating drug prices, rumour had it that Buffett was buying into this company at a PE of 13. He then sold out because he couldn't establish the large positions that would give him greater weight in dealing with management. In 2000 the company merged into Pfizer.

ROE: > 30% (for last 10 years)
Per share earning annual growth rate: 11% (for the last 10 years)
PE in 1990 bubble: 30 - 45
Price bought: PE of 13 (in early 90s, when fed was going to start regulating prices)



Washington Post: The Washington Post was Buffett's first taste of owning a monopoly newspaper and the incredible profits that it can earn. This one had a majority owner who kept a close eye on things, namely Katharine Graham. She and Buffett hit it off big after he bought into the paper in 1973. He coached her on the virtues of share repurchases and how not to venture into areas of business outside the company's circle of competence. A quick learner, she caused the stock to rise from the $5.60 a share Buffett paid for it in 1973 to more than $500 a share today. The ROE for this company fluctuates between 13% and 19%. Its per share earnings have been growing at approximately 9% annually. In addition to the newspaper, the Washington Post Company owns Newsweek magazine, six TV stations and numerous cable TV systems in eighteen states. It is doubtful that the company will do anything stupid that would create a buying opportunity, so you are going to have to wait for a recession in advertising rates or a general stock market decline to buy. Since the long-term picture of the company looks sound, any price under $400 a share should be a good buy, and any price under $300 a share is a screaming bargain. Buffett bought the Washington Post during the 1973-74 crash for $5.69 a share against earnings of $0.76 a share, which equates to a PE of 7.5. During the 1972 and 1999 bubbles it traded at a PE of 24. Katharine has passed on, but her life's work, the Post, remains a fantastic business.


Price bought: $5.69 a share (at PE of 7.5, during the 1973 - 74 crash)
Earnings: $0.76 a share
ROE: 13% - 19% (for last 10 years)
Per share earnings annual growth rate: 9%
Price in 2001: $500 a share



Wells Fargo: This is the bank of banks and it is growing by leaps and bounds. Buffett bought into it during a banking recession in which just about every major bank in the nation took a bath over bad real estate loans. The stock market, being shortsighted, exited stage right and drove the bank's stock down to $15.75 a share. Buffett, exploiter of short-term folly that he is, jumped on this one with $497.8 million to buy 28.8 million shares at an average price of approximately $17. It has recently traded at $49 a share. In 1999, at the top of the real estate boom, Buffett exited stage left and started selling his shares. Here we have Buffett buying in during a recession and selling out during a boom. Banks go through this boom-and-bust real estate cycle every 10 to 15 years. The shortsighted stock market panics when things go bust and sends bank socks into the ground. When things boom again, the short-sighted stock market sends bank stocks skyward. Anyway you look at it, it's a nice ride. You can do what Buffett does and buy the strongest of the litter.


Price bought: average price $17 (during a banking recession that drove the bank's stock down to $15.75)
Price sold: during the top of the real estate boom in 1999


Wyeth: This drug company is a leading manufacturer of patented prescription drugs, but it also owns some wonderful over-the-counter brand names such as Advil, Anacin, Robitussin, and Chap Stick. The ROE for the last 10 years has always been over 30%. Per share earnings growth has been at 7.9%. At the right price, it's a great buy, and worth holding on to for the long term. People have a habit of getting sick, and that's not going to change anytime soon. Your big buying opportunities will be bear markets and panic sell-offs during bull markets.


ROE: 30% (over the last 10 years)
Per share earnings annual growth rate: 7.9%
Price bought: At the right price; best buy during bear markets and panic sell-off during bull markets.
Price sold: Worth holding on to for the long term.


Related topics:
Warren Buffett's Historical Investments (Part 1)
Warren Buffett's Historical Investments (Part 2)
Warren Buffett's Historical Investments (Part 3)
Warren Buffett's Historical Investments (Part 4)
Warren Buffett's Historical Investments (Part 5)
Warren Buffett's Historical Investments (Part 6)
Warren Buffett's Historical Investments (Part 7)
Warren Buffett's Historical Investments (Part 8)
Warren Buffett's Historical Investments (Part 9)

Warren Buffett's Historical Investments (Part 8)

Warren Buffett's Historical Investments (Part 8)

Pepsico inc.: Before Warren started drinking three or four Cherry Cokes a day, he was a Pepsi man. PepsiCo is a fantastic company with an annual ROE for the last 10 years of over 20% and per share earnings growing annually at 8%. This is a Buffett Foundation holdings. Look to buy it in a recession, or during a panic sell-off.

ROE: 20% (the last 10 years)
Per share earnings annual growth rate: 8%


Times Mirror: In 1980, the Fed pushed interest rates up to the 14% level, which killed stock prices. Buffett put on his selective contrarian hat and went shopping. One of his purchases was Times Mirrow, owner of the Los Angeles Times, for an amazing $14 a share against per share earnings of $2.04, which equates to a P/E of 6.8 and an initial return of 15%. By 1985 it was trading at $53 a share, giving Buffett a 30% compounding annual rate of return. During the 1999 bubble it traded at 21 x earnings. You can't trade this one anymore - in March 2000 Tribune Company saw the great opportunity here and bought the company.

Price bought: $14 a share (in 1980, PE 6.8x)
Earnings: $2.04 a share
Initial return: 15%
Price in 1985: $53 a share giving a CAGR of 30%
PE in 1999 (bubble): 21x


Torchmark Corp: This is an insurance and financial services company. It consistently earns a ROE in excess of 19%. Its per share earnings have been growing at an annual rate of 10.9% for the last 10 years. Buffett has been buying this one for years, most recently in February 2000 right after the 1999 bubble. You could have bought it then at $20 a share with earnings of $2.82 a share, which equates to an initial return of 14%. As of May 2001, it traded at $37.50 per share.

ROE: 19% (the last 10 years)
Per share earnings annual growth rate: 10.9% (the last 10 years)
Price bought: $20 a share (in February 2000, after the 1999 bubble)
Earnings: $2.82 a share
Initial returns: 14%
Price in May 2001: $37.50



Wal-Mart Stores: With over 2,400 stores, Wal-Mart has the power to outbuy the competition. This means it can give its customers a better buy on just about anything. Thus every price-conscious consumer shops there. More shoppers mean more volume, which means more money. How much? Wal-Mart's annual ROE for the last 10 years has always been over 20%. Its per share earnings have been growing at an annual rate of 24%. It is, after all, the world's largest retailer. It got that way by going into small towns and driving the competition out of business, thus establishing a monopoly. Its distribution network is so sophisticated that it has created a barrier to entry that protects the company from competition. Berkshire reported that it owned 4.39 million shares of Wal-Mart as of 1997.

ROE: > 20% over the last 10 years.
Per share earnings annual growth rate: 24%


Related topics:
Warren Buffett's Historical Investments (Part 1)
Warren Buffett's Historical Investments (Part 2)
Warren Buffett's Historical Investments (Part 3)
Warren Buffett's Historical Investments (Part 4)
Warren Buffett's Historical Investments (Part 5)
Warren Buffett's Historical Investments (Part 6)
Warren Buffett's Historical Investments (Part 7)
Warren Buffett's Historical Investments (Part 8)
Warren Buffett's Historical Investments (Part 9)

Warren Buffett's Historical Investments (Part 7)

Warren Buffett's Historical Investments (Part 7)

Media General Inc.: Media General is a major newspaper publisher and owner of TV and cable systems. Warren was buying it in 1978 and 1979 for $16 a share, with per share earnings of $3.42 a share, which equates to an initial return of 21%. Again, the Fed's raising interest rates helped make this low price possible. No hard information on when he sold it, but we believe it was 1985, for around $70 a share.

Price bought: $16 a share (in 1978 and 1979)
Earnings: $3.42 a share
Initial return: 21%
Price sold: $70 a share (in 1985)


Mercury General Corp: Mercury is the largest agency writer of passenger auto insurance in California, and California has a lot of cars. It gets great ROE. Buy this one when it is trading close to or below book value, which you could have done in 1988, 1990, 1991, 1992, and 2000. This is a Buffett Foundation holding.


New York Times: The company owns the New York Times, Boston Globe, fifteen smaller dailies, and half the International Herald Tribune. It also owns eight TV and two radio stations. This is a Buffett Foundation holding. In the early nineties the numbers were lousy, but they are starting to look better.


Ogilvy & Mather Int'l. Inc.: This stock is no longer publicly traded. Buffett bought 31% of Ogilvy, the fifth-largest ad agency in America, after the 1973 - 74 stock market crash for approximately $4 a share against earnings of $0.76 a share. No record of when he sold it. By 1978 it was trading at $14 a share, which would have given him an annual compounding rate of return of 30%. By 1985 it was trading at $46 a share, which equates to an annual compounding rate of return of 24%.

Price bought: $4 a share (after 1973-74 stock market crash)
Earnings: $0.76 a share
Price at 1978: $14 a share, giving a CAGR of 30%
Price at 1985: $46 a share, giving a CAGR of 24%


Related topics:
Warren Buffett's Historical Investments (Part 1)
Warren Buffett's Historical Investments (Part 2)
Warren Buffett's Historical Investments (Part 3)
Warren Buffett's Historical Investments (Part 4)
Warren Buffett's Historical Investments (Part 5)
Warren Buffett's Historical Investments (Part 6)
Warren Buffett's Historical Investments (Part 7)
Warren Buffett's Historical Investments (Part 8)
Warren Buffett's Historical Investments (Part 9)

Warren Buffett's Historical Investments (Part 6)

Warren Buffett's Historical Investments (Part 6)

Hershey Foods: Buffett is rumored to have purchased Hershey Foods on several occasions, but we have no confirmed purchase to sink our teeth into. He has used it as an example in discussing the concept of a durable competitive advantage. Its been making chocolate forever and is the largest producer in America. The majority of the voting stock fo the company is held in trust for the benefit of the Milton Hershey School for Orphans. The company's founder, Milton Hershey, left the majority of his wealth to benefit the children who had made him rich. What this means to you the investor is that there is one large shareholder - the trust for the orphanage - which can wield an incredible amount of weight. The company gets high ROE and ROTC. Its per share earnings have been growing at an annual rate of 9.9% for the last 10 years. It traded at a PE of 33 during the bubble, which is too steep for this business. Try to get it at a PE below 15, which you could ahve done up until 1996. Even if you have a sweet tooth, wait for a recession or panic sell-off to take a bite.

ROE: high
ROTC: high
Per share earnings annual growth rate: 9.9% (the last 10 years)
Price bought: Wait for a recession or panic sell-off to buy



Interpublic Group of Companies: In 1974, Interpublic was the largest company in the international advertising business. Now it is number three. Advertising agencies, according to Buffett, earn a royalty on the growth of other businesses. When manufacturers want to take their products to market, they have to advertise, so they use an agency.
Agencies produce and place ads in the media and are paid a percentage of what the advertiser spends for these services. Agencies are almost inflation-proof. Inflation causes advertisers to spend more for the same amount of work, and the more advertisers spend, the more the agencies make. Agencies are service businesses so they spend only modesly on capital equipment, which means that profits don't go toward replacing worn-out plant and equipment. Plus, only 4% of U.S. advertisers change agencies every year! In other words, those big accounts stay in place. Many of the large agencies that dominated the marketplace years ago still dominate it today. Seven of the top ten are in their fifth or sixth generration of management. The key here is that there is no limit on how big they can grow. As long as businesses grow and the media continue to be where manufacturers take their products to market, advertising agencies will continue to grow as well.
The numbers on Interpublic are great. For the last 10 years it has earned an annual ROE of 16% or better, with the last 3 years at over 20%. Per share earnings for the last 10 years have been growing at an annual rate of 13.8%. Buffett used the 1973-74 recession to buy 17% of Interpublic, which traded as low as $3 a share, against earnings of $0.81. He paid a total $4,531,000 for 592,650 shares, for an averge price of $7.65 per share. We don't know when he sold his interest in this company. We do know that if he had held his position, he would have 74.6 million shares, adjusted for stock splits, worth approximately $2.8 billion. This equates to a compounding annual rate of return of approximately 27% for the 27-year period. If you're patient, you can get a great price on this one. During the 1999 bubble, it traded at a PE of 33 - too high for even this wonderful business. In the midnineties, you could have bought it for 14 x earnings.

Price bought: average price $7.65 (bought in 1973-74 recession, was traded as low as $3 a share)
Earnings: $0.81 a share
ROE: > 16% (over the last 10 years, with last 3 years, ROE greater than 20%)
Per share earnings annual growth rate: 13.8% (over last 10 years)


Kaiser Aluminium & Chemical Corp: This is one of the few investment mistakes that Buffett made in his early days. He bought based on earnings in good "businesslike" fashion, but the earnings soon vanished as they often do in a price-competitive business. He lost money on this one.



McDonald's Corp: McDonald's made the hamburger into a brand-name product with some 28 thousand restaurants - no easy feat. Over the last 10 years the company has had a yearly ROE between 16% and 20%, which is delicious. And its per share earnings have been growing at an annual rate of 12%. It's a great company, and at the right price it is a great investment. Buffett acquired 60 million shares in 1994 and 1995 for $1.2 billion, which equates to $20 a share. He was then rumoured to be selling them in 1997 to 1999 for between $30 and $45 a share as he sold into the bubble. This turned out to be a wise decision. At the right price, Buffett will once agains be buying McDonald's shares, and so would you.

Price bought: average $20 a share (in 1994 and 1995)
ROE: 16%-20% (over the last 10 years)
Per share earnings annual growth rate: 12% (the last 10 years)
Price sold: $30 - $45 a share ( in 1997 to 1999, sold into the bubble)


Related topics:
Warren Buffett's Historical Investments (Part 1)
Warren Buffett's Historical Investments (Part 2)
Warren Buffett's Historical Investments (Part 3)
Warren Buffett's Historical Investments (Part 4)
Warren Buffett's Historical Investments (Part 5)
Warren Buffett's Historical Investments (Part 6)
Warren Buffett's Historical Investments (Part 7)
Warren Buffett's Historical Investments (Part 8)
Warren Buffett's Historical Investments (Part 9)

Warren Buffett's Historical Investments (Part 5)

Warren Buffett's Historical Investments (Part 5)


Geico: This was acquired by Berkshire. Buffett's initial big investment was made as the company was on the verge of insolvency. Buffett decided to ride to the rescue, believing that the company's durable competitive advantage was still intact. He was right and watched his $45 million investment grow over the next 15 years to more than $2.3 billion. That equates to a compounding annual rate of return of 29.9% - the stuff investment legends are made of.

Price bought: $45 million
Price 15 years later: $2.3 billion
CAGR: 29.9%



General Electric: Originally GE had a lockdownon the electrification of the planet. For most people electricity is a fact of life, but a mere one hundred years ago it wasn't. One company provided the knowledge and equipment to wire the planet, and that company was GE. And it made a fortune. Today GE is one of the largest and most diversified industrial giants on earth. With this position, it has the financial power to play in any game it wants.

Buffett has long admired this company - it is a Buffett Foundation holding - but has never been able to buy a big piece at a price he thinks is attractive. The ROE for the last 10 years has fluctuated between 18% and 23% (which is great) and ROTC between 16% and 25%. The per share earnings have been growing at an annual compounding rate of 11.8%, which is also electrifying. GE carries only $400 million in long-term debt against $10 billion in earnings. You need a real good recession to buy this one at a fair price. During the 1999 bubble it traded at a PE of 36, which is no bargain. Take a strong look anytime the PE drops below 15, where it traded in the 80s and early 90s.

ROE: 18% - 23%
ROTC: 16% - 25%
Per share earnings annual growth rate: 11.8%
Long-term Debt: $400 million
Earnings: $10 billion
PE: 36 (during the bubble in 1999) Buy at PE below 15


General Foods Corp: In 1979, Buffett began buying up the stock of a food company called General Foods, paying an average price of $37 a share for approximately 4 million shares. Buffett saw strong earnings, $5.12 a share, which had been growing at an average annual rate of 8.7%.
This gave him an initial return of 13.8%, which he could argue was going to grow at 8.7% a year. Then, in 1985, the Philip Morris Company saw the value of General Foods' many brand-name products, which created a strong and expanding earnings base, and bought all of Buffet's General Foods stock for $120 a share in a tender offer for the entire company. This gave Buffett a pretax annual compounding return on his investment of approximately 21%. That's right, a pretax annual compounding return of 21%. A nice number in anybody's book.

Price bought: $37 a share (1979)
Earnings: $5.12 a share
Per share earnings annual growth rate: 8.7%
Initial return: 13.8%
Price sold: $120 (1985, tender offer by Philip Morris Company)
CAGR: 21% (pretax return)


Gillette: Razor blades and batteries wear out quickly, and people have to buy more of them if they want to be clean shaven or to keep their portable electrical devices humming. Gillette knows how to make money. This is a Berkshire holding. For the last 10 years the ROE has been above 30% and the ROTC above 20%. Per share earnings over the last 10 years have grown at an annual rate of 14%. During the 1999 bubble it traded at a PE of 40, which is way too high for this company. If you can get it at a PE below 15, you can make some money.

ROE: > 30 % (the last 10 years)
ROTC: > 20% (the last 10 years)
Per share earnings annual growth rate: 14% (the last 10 years)
PE: 40 (during the 1999 bubble). Fair price PE < 15



Related topics:
Warren Buffett's Historical Investments (Part 1)
Warren Buffett's Historical Investments (Part 2)
Warren Buffett's Historical Investments (Part 3)
Warren Buffett's Historical Investments (Part 4)
Warren Buffett's Historical Investments (Part 5)
Warren Buffett's Historical Investments (Part 6)
Warren Buffett's Historical Investments (Part 7)
Warren Buffett's Historical Investments (Part 8)
Warren Buffett's Historical Investments (Part 9)

Warren Buffett's Historical Investments (Part 4)

Warren Buffett's Historical Investments (Part 4)


Freddie Mac: This is a wonderful company that buys residential mortgages from banks and mortgage brokers and securitizes them before selling them to investors. At one time, Buffett owned a ton of this stock, but he had sold it because the nature of the company changed. It got more risky and Buffett hates risk.

F.W. Woolworth Company: This was once one of the largest retail chains in America. Buffett bought it in 1979 for $20 a share against earnings of $6.02 a share, which equates to an initial return of 30%. It had a book value of $41 a share. By 1985 it was at $50 a share, which equates to an annual rate of return of 20%. (Woolworth is no longer a business concern at present.)

Price bought: $20 a share (in 1979)
Earnings: $6.02 a share
Initial return: 30%
Book value: $41 a share
Price in 1985: $50 a share


Gallaher Group Plc: This company owns Gallaher Tobacco Limited, the market leader in the United Kingdom. It makes Benson & Hedges cigarettes. Gallaher Tobacco sold its American tobacco operations in 1994 and said good-bye to all that bad press and possible expense associated with cancer lawsuits. Cigarette products have great profit margins, which mean big bucks. Gallaher owns other things as well, but it is tobacco that reaps the bountiful harvest. The tobacco operations are a classic durable-competitive-advantage business. English tobacco companies don't face the kind of lawsuits American ones do, so the downside risk is smaller. This stock shows up as a Buffett Foundation holding, though when it was purchased and for how much we can't say.

Gannett Company: Warren Buffett's 1994 purchase of shares in Gannett, the largest newspaper publisher in the United States with 99 other newspapers, was made during an advertising recession for $24 a share, or 15x earnings. During the 1999 bubble it traded at 24 x earnings. He could have sold it in 2002 for $76 a share, which would have given him an annual rate of return of 15.2%. Not too shabby.

Price bought: $24 a share (15 x earnings, in 1994 during an advertising recession)
Price in 2002: $76 a share


Related topics:
Warren Buffett's Historical Investments (Part 1)
Warren Buffett's Historical Investments (Part 2)
Warren Buffett's Historical Investments (Part 3)
Warren Buffett's Historical Investments (Part 4)
Warren Buffett's Historical Investments (Part 5)
Warren Buffett's Historical Investments (Part 6)
Warren Buffett's Historical Investments (Part 7)
Warren Buffett's Historical Investments (Part 8)
Warren Buffett's Historical Investments (Part 9)

Warren Buffett's Historical Investments (Part 3)

Warren Buffett's Historical Investments (Part 3)

Coca-Cola Co.: Coca-Cola has the mother lode of durable competitive advantages. Coke is the world's top soft-drink company. It sells more than 230 brands of beverages, including coffees, juices, and teas. It commands 50% of the global soft-drink market and 2% of the world's daily fluid consumption. This is one of the biggest bets that Buffett ever made, and it's also one of his most profitable. Buy this one during a recession and panic sell-off. Under no circumstances should you ever pay more than 30 times earnings for it. Expect Buffett to be buying more anytime it drops to a PE below 25.

Price bought: During a recession and panic sell-off



Cox Communications: Provides cable TV service to 6 million customers and digital TV to 350,000 subscribers. Media conglomerate Cox Enterprises contorls 68% of Cox Communications' stock. It also offers Internet access and local and long-distance phone service. It is the monopoly cable TV provider in most of the markets it services. Think of it as 6.3 million people who are addicted to channel surfing sending it checks each month. Cox's net profit margin was 23% in 2000. Compare that to Ford Motors's net profit margin of 1% and you can see why Buffett loves the cable TV business and abhors the automobile business. This is a Buffett Foundation holding.



The Walt Disney Company: Buffett first bought into Walt Disney Company in 1966, when it was selling for $53 a share, which meant that the market was valuing the entire business for $80 million, less than Snow White and the other cartoons were worth. Included in the deal you also got Disneyland. Buffett bought $5 million worth and sold it a year later for $6 million.


Price bought: Bought $5 million at $53 a share (1966, when Disney was undervalued)
Price sold: Sold for $6 million (1967)
(If this 5% stake were kept, it is now worth $1 billion)



He says that if he had kept that 5% stake it would now be worth more than $1 billion (which equates to a 19% compounding annual rate of return for the 30-year period). Lessons like this taught Buffett that holding companies with a durable competitive advantage for the long term was the easiest way to become superrich. He later acquired 21.5 million shares of Disney when it acquired Capital Cities in 1995. At the top of the bullmarket between 1998 and 2000, he was rumored to be selling Disney directly in the market, and also, he sold it indirectly in the General Reinsurance deal.


Price bought: Acquired in 1995 when Disney acquired Capital Cities.
Price sold: Rumored to be selling at the top of bullmarket (1998 - 2000)



Disney is the second-largest media conglomerate in the world. It owns the ABC television network, TV stations, radio stations, theme park, movie studios, and of course, the monarch of the Magic Kingdom - Mickey Mouse. Wait for a recession to buy this one and then hold on for the ride of your life.



Exxon Corporation: In the early eighties the Fed jacked up interest rates to kill inflation. It also killed the economy and the stock market. Lots of stocks were selling cheap ut Buffett placed his bet on Exxon, the largest and best run of the oil companies, on the theory that no matter what happened to the economy, individuals and businesses would keep guzzling oil. The high interest rates kept Exxon's stock down to $44 a share, against earnings of $6.77, which equates to an initial return of 15.2%. It has been growing its per share earnings at an annual rate of 6.7% and had been buying back its own shares. Buffett paid approximately 6.5 times earnings. By 1987 it was trading at $87 a share, which would have given him an annual compounding rate of return of approximately 25%.


Price bought: $44 a share (at 6.5x earnings, in early 80s)
Earnings: $6.77 a share
Initial return: 15.2%
Per share earnings annual growth rate: 6.7%
Price at 1987: $87 a share



Related topics:
Warren Buffett's Historical Investments (Part 1)
Warren Buffett's Historical Investments (Part 2)
Warren Buffett's Historical Investments (Part 3)
Warren Buffett's Historical Investments (Part 4)
Warren Buffett's Historical Investments (Part 5)
Warren Buffett's Historical Investments (Part 6)
Warren Buffett's Historical Investments (Part 7)
Warren Buffett's Historical Investments (Part 8)
Warren Buffett's Historical Investments (Part 9)

Warren Buffett's Historical Investments (Part 2)

Warren Buffett's Historical Investments (Part 2)

Bristol-Myers Squibb: This company sold about $22 billion in proprietary medical products, ethical pharmaceuticals and health and beauty products in 2000. It has been in business since 1887, and unless people are going to stop getting sick, it is going to be in business for a long time to come. We believe Buffett was buying it in 1993, on the threat of government regulation, for around $13 a share, with earnings of $1.10 a share and historical returns on equity and capital of over 30%. So far Buffett has earned a 23% average annual return on this investment.


Price bought: $13 a share (in 1993, on threat of government regulation)
Earnings: $1.10 a share
Historical ROE and ROTC: >30%



Campbell Soup: Campbell's has 70% of the condensed-soup market. It also owns Franco-American, V8, Swanson, Pepperidge Farm, Vlasic, Mrs. Paul's, Prego, and dozens of other brand names that you might find in your grocery basket. The durability of this company's competitive advantage is amazing. Winter comes along and people start buying soups. Look for recessions, panic sell-offs, a warm winter, which can hurt soup sales, or just a business screwup to make the stock attractively priced. This company shows up in the Buffett Foundation holdings. Soup is good food and so is the stock at the right price.


Price bought: Stock became attractively priced during recessions, panic sell-offs, a warm winter (all these hurt soup sales) or business screwup.



Capital Cities Communications: This acquired ABC, when was then acquired by Disney: Buffett loves owning television stations because they make a lot of money and are cheap to run - you buy a transmitter, put up an antenna, plug it into the wall, and you're in business. Network affiliated TV stations make money because they are key advertising bridges that businesses have to use to reach potential consumers. Capital Cities owned a bunch of television stations and cable TV networks and was incredibly well run. Buffett owned the company in the late seventies and then sold it in the early eighties, which he admitted was a mistake.


Price bought: in late 70s
Price sold: in early 80s (Buffett admitted selling this was a mistake)


When it acquired ABC, back in 1986, it needed an equity infusion, so the CEO asked Buffett whether he wanted in. Buffett made an offer and the company said yes. He bought $515 million worth, paying $17.25 a share and then sold out (in a cash-and-stock deal) when Disney acquired Capital Cities in 1995 for $127 a share. That equates to a 24% compounded annual return on his 1986 investment. Another lesson in the long-term-hold department.


Price bought: $17.25 a share (1986, Capital Cities required equity infusion)
Price sold: $127 a share (1995, acquired by Disney)




Cleveland-Cliffs Iron Company: This is the largest supplier of iron ore products to North American steel companies. It owns and operates 5 iron ore mines with several large steelmakers. The company has been around since 1840. What makes it interesting is that during a recession in the steel business it simply closes down the mines until demand returns. Buffett first bought shares in this company during the 1984 steel industry recession and sold it after the industry recovered.

Price bought: Acquired in 1984 during the steel industry recession
Price sold: When steel industry recovered after the 1984 steel industry recession.

The most recent buying opportunity with this company occurred in 2001 when an overabundance of iron ore met a recession in the steel industry, which killed iron ore prices and sent the stock tumbling from a high of $50 to a low of $14. The company's durable competitive advantage is that it is tied in with the steel companies and can stop production and cut expenses without damaging its competitive advantage. You buy this one in a recession and sell when it's over.


Price bought: $14 Buy during a recession. ( Down from $50 due to recession in the steel industry)
Price sold: Sell when when steel recession is over.


Related topics:
Warren Buffett's Historical Investments (Part 1)
Warren Buffett's Historical Investments (Part 2)
Warren Buffett's Historical Investments (Part 3)
Warren Buffett's Historical Investments (Part 4)
Warren Buffett's Historical Investments (Part 5)
Warren Buffett's Historical Investments (Part 6)
Warren Buffett's Historical Investments (Part 7)
Warren Buffett's Historical Investments (Part 8)
Warren Buffett's Historical Investments (Part 9)