Share Buy-Back

BUYING BACK SHARES

Sometimes a company has surplus funds that it does not need for its operations. It can use those funds to expand its operations (eg buy new businesses) or it can distribute them to stockholders. One way of distributing funds to shareholders is to have a share buy back, wherein the company buys back some of its shares from existing stockholders.

EXAMPLE OF A SHARE BUY-BACK

Company A has 100 shares issued and makes a profit of $50. This means a shareholder is getting a return of 50 cents a share ($50/100). This is the Earnings per Share or EPS. If the share sells on the stock exchange for 15 times its EPS, a share has a value of $7.50.

Suppose that the company buy back 25 shares. A shareholder who retains their shares now earns 67 cents ($50/75) on each share held. If the share sells on the stock exchange for 15 times its EPS, a share has a value of $10.

STICKING TO WHAT YOU KNOW

CORE BUSINESSES

Warren Buffett likes to invest in companies where management focuses on activities that are within the expertise of the company and not wander off and spend shareholders’ money in going into areas that they know little about.

Keeping a company on track is obviously an attribute of sound company management and is a sound investment principle.

UNDERSTANDING THE BUSINESS

This is really just an extension of Warren Buffett’s investment principle that one should not invest in a company whose business one does not understand. If it applies to direct investment, it also applies to indirect investment and an investor is better off investing in a company that uses its capital in areas of its own expertise.

Investors should Stay with What They Know

KNOWING A COMPANY

Knowing a company involves research as well as personal experience and successful investors approach share investment the way that they would the purchase of a business.

They buy a business in an industry area that they know or that they have learned about, they investigate the financials, they look at how the business operated in the past, they weigh up future potential, and they then make a reasoned decision to buy at the price offered or not buy.

Just as the cobbler should stick to his last, investors should stay with what they know. They should not stray into areas beyond their expertise. As Warren Buffett said in 1992:

‘What counts for most people in investing is not how much they know, but rather how realistically they define what they don’t know.’

Robert Hagstrom has looked extensively at Warren Buffett’s investments over the years and agrees that Buffett has made it his business to understand the business of the companies where he puts the money of Berkshire Hathaway. According to Hagstrom, Buffett:

‘understands the revenues, expenses, cash flow, labor relations flexibility and capital-allocation needs of each of Berkshire’s holdings.’

Hagstrom argues that the prudent individual investor should do no less.

Why Warren Buffet does not Invest in Companies he does NOT Understand

COMPLEX COMPANIES

Take however, a company like Unilever NV. This is a corporation that has been around a long time, has a worldwide reputation and market, and is successful. But how easy is it to understand the way it operates?

According to Value Line, it has two parent holding companies, one in Great Britain, and one in The Netherlands. It operates as one company but each of the two holding companies owns shares in operating subsidiaries. The director component of both holding companies is the same and there are agreements that equalise dividends and set trading ratios for their respective shares. The business may be good but this complex structure is just too difficult for the average person to understand.

WHY WARREN BUFFETT DOES NOT INVEST IN MICROSOFT

As Warren Buffett has said, he knows and admires Bill Gates and the Microsoft Corporation but has never invested in it because he does not understand the way that the company works.

Warren Buffett and Keynes

WARREN BUFFETT AND KEYNES

In Warren Buffett’s own words, he did not invest in these companies, and many other successful investments, without acquiring as full a knowledge as possible about the company, its business, its management, and its financial position. He has advised individual investors to do the same, as did the great economist and successful investor John Maynard Keynes.

‘As time goes on, I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about …’ - Jim Keynes

What Warren Buffett says about Buying a Business

BUYING THE BUSINESS

Warren Buffett believes, as did Benjamin Graham, that investors should look upon share investment as buying a part of a business. Investors should take the same approach to buying shares as they would if they were buying a business. The only difference is that instead of buying the whole of the business, or a partnership in the business, they are only buying a tiny share.

A prudent investor never buys a business that they do not understand. Similarly, a prudent share investor should never buy shares in a company, whose business they do not understand.

WHAT WARREN BUFFET SAYS ABOUT BUYING A BUSINESS

In 1977, Warren Buffett told shareholders in Berkshire Hathaway that their company would only invest in a business that the directors could understand.. He has repeated this message many times since. In 1992, he expanded on this theme:

‘[W]e try to stick with businesses we believe we understand. That means they must be relatively simple and stable in character. If a business is complex or subject to constant change we’re not smart enough to predict future cash flows. Incidentally that shortcoming doesn’t bother us.’

What Warren Buffett says about Non-Commodity (Franchise) Companies

NON-COMMODITY COMPANIES

Warren Buffett prefers to invest in non-commodity companies - companies whose products or services are unique or special in some way.

Here customers either need the product, or there is no real competitor, or the reputation of the product is such that people will keep buying it. Suppliers and distributors have no choice but to stock the product or people will go elsewhere.

Generally, but not always, either the product will be a brand name (eg Coke, Gillette), the company will be a brand name (H & R Block) or the company will be in a monopoly situation or monopolistic cartel.

WHAT WARREN BUFFETT SAYS ABOUT NON-COMMODITY COMPANIES

Warren Buffett illustrated this difference in 1982:

‘[There is the] constant struggle of every vendor to establish special qualities of product or services. This works with candy bars (customers buy by brand name, not by asking for a "two-ounce candy bar") but doesn't work with sugar (how often do you hear, "I’ll have a cup of coffee with cream and C & H sugar, please").’

What Warren Buffett says about Commodity Companies

COMMODITY COMPANIES

Warren Buffett does not like to invest in what he calls commodity companies - companies whose product does not differ from that of competitors in any significant way.

A company like this can be vulnerable to the actions of competitors and have limited power to raise prices to retain their profit position in the light of inflation.

WHAT WARREN BUFFETT SAYS ABOUT COMMODITY COMPANIES

Warren Buffett said this in 1982:

‘[Where] costs and prices are determined by full-bore competition, there is more than ample capacity, and the buyer cares little about whose product or distribution services he uses, industry economics are almost certain to be unexciting. They may well be disastrous.’

WHAT WARREN BUFFETT SAYS ABOUT GOOD BUSINESSES

Good businesses with that ‘protective moat’ that Warren Buffett likes have the ability to cope with inflation by raising prices. As he said in 1993:

‘The might of their brand names, the attributes of their products and the strength of their distribution systems gives them an enormous competitive advantage, setting up a protective moat around their economic activities. The average company, in contrast, does battle daily without any means of protection.’

BERKSHIRE HATHAWAY HOLDINGS

Stocks held by Berkshire Hathaway in 2002, as stated by Buffett in his letter to stockholders include:

• The Coca Cola Company
• American Express
• The Gillette Company
• H and R Block Inc
• Moody’s Corporation
• The Washington Post Company
• Wells Fargo and Company

These are all companies with a unique or special product, or with a company brand name, or in a market domination position. They or their products have a loyalty (voluntary or otherwise) that means customers want or must come back.

Another desirable quality in non-commodity companies is repeat business. Customers drink their Coke, wear out their razor blades, or finish reading their Washington Post, and then, eventually have to replace it.

WHAT WARREN BUFFETT SAYS ABOUT DEBT

Warren Buffet acknowledges that debt can effectively increase the return on equity in a company but warns against it. In 1987, he said this:

‘Good business or investment decisions will eventually produce quite satisfactory economic results, with no aid from leverage.'

'It seems to us both foolish and improper to risk what is important (including, necessarily, the welfare of innocent bystanders such as policyholders and employees) for some extra returns that are relatively unimportant.’

WARREN BUFFETT DOES NOT LIKE DEBT

Warren Buffett does not like debt and does not like to invest in companies that have too much debt, particularly long-term debt. With long-term debt, increases in interest rates can drastically affect company profits and make future cash flows less predictable.

• In 1982, Warren Buffett noted that Berkshire Hathaway preferred to buy companies with little or no debt and has repeated this mantra on many occasions. 
• He adopts the same philosophy for his company, preferring to avoid debt but where necessary going into it on a long-term basis only with fixed rates of interest and to obtain the finance before they need it.

Warren Buffett and Long-Term Debt

WARREN BUFFETT AND LONG-TERM DEBT

Warren Buffett speaks only generally of his approach to debt. Mary Buffett and David Clark have concluded that he focuses on long-term debt, a conclusion that is supported by his public comments. They believe that his concern lies with the company’s ability to repay its debts, should the need arise, from its profits; the longer the time period, the more vulnerable is the company to external changes and the less predictable are its future earnings.

The formula for such a calculation is:

Number of years to pay out debt = Long term debt
                                                 Current annual profit

COMPANY EXAMPLES

If we apply this formula to Johnson and Johnson, for example, we find, using Value Line, that for 2002, the long-term debt of the company was $2022 million and the profit for that year was $6610 million. Dividing the first figure by the second, we can calculate that at that rate the company could pay off its long-term debt in 0.3 of a year.

If we apply the same formula to McDonald’s Corporation, we find, using Value Line, that for 2002, the long-term debt of that company was $9703 million and the profit for that year was $ 1692 million. Dividing the first figure by the second, we can calculate that at that rate the company could pay off its long-term debt in 5.73 years.

Charlie Munger - A Short Biography

CHARLIE MUNGER AND WARREN BUFFETT

Charlie T Munger works alongside Warren Buffett, as Vice-Chairman ofBerkshire Hathaway and Warren invariably refers to him as his partner and right hand man, generously giving Charlie credit for much of his success and that of the company.

Charlie Munger was a practising lawyer, having got into Harvard Law School without then having an existing Bachelor degree, not an easy thing to do.Roger Lowenstein recounts that Charlie was somewhat assertive as a student; when challenged by a professor in the Harvard Socratic fashion to analyze a case, Charlie, who had not prepared for the lesson, is reputed to have told the professor to give him the facts of the case and he, Charlie, would give him the law.

Charlie was practising law in Omaha Nebraska when he met Warren Buffett and Buffett eventually persuaded him to give up the law and get into financial investment. Charlie did so, a decision that one suspects neither man has regretted. Certainly, long time shareholders of Berkshire Hathaway would not.

Munger is chief executive officer of Wesco, an associate of Berkshire Hathaway, and like Buffet, his annual letters to shareholders can give good clues as to the investment secrets of this brilliant duo.

Charlie Munger is not only a brilliant investor; he is also a deep thinker with strong views on society, education and the philosophy of life. Go here to read an example of Charlie Munger’s frank discission of investment philosophy.

In 1995, Charlie Munger addressed students at the Harvard Law School on the issue of psychology of human misjudgement.

Charlie Munger is an interesting man and the recent subject of a book on investment philosophy, Investing: The Last Liberal Art

FURTHER RESOURCES

Our review of Investing: The Last Liberal Art, by Robert Hagstrom

EXTERNAL RESOURCES

The philosophy of Charlie Munger

http://www.buffettsecrets.com/charlie-munger.htm

Warren Buffett - A Short Biography

EARLY LIFE

Buffet was born in 1930 in Omaha, Nebraska, the son of a stockbroker and Congressman, and has become probably the world’s most successful investor.

As a boy, irrespective of his family background, he delivered newspapers to make extra money and this probably sparked his interest in the media where he has made several successful investments including the Washington Post Company, a stock that has made him a lot of money and which he vows never to sell.

Imbued with a determination to make good and an entrepreneurial nature, Warren dabbled in several part time businesses but his destiny was chartered early in the piece when, after graduating from the University of Nebraska, he studied business at the Columbia Graduate Business Schoolunder the legendary Benjamin Graham.

WORKING WITH BENJAMIN GRAHAM

He tried to get a position with Graham’s firm and was at first unsuccessful. He finally got the job and, as he generously acknowledges, learned a lot about stock investment from The Master.

Graham eventually retired and Buffett started a limited partnership in Omaha, using capital contributed by family and friends. The partnership was a great success and Buffett is said to have averaged an annual rate of return for the partnership in excess of 23 per cent, far in excess of the market.

BUYING BERKSHIRE HATHAWAY

Buffett, after several years, decided to wind up the partnership, returning the lucky investors their capital and their share of the profits, and bought an interest in Berkshire Hathaway, a textile company, giving his original investors the the chance to invest. The smart ones did so.

Buffett’s early days at Berkshire Hathaway were not great. The company was in an industry facing real challenges from exports and high manufacturing costs. Warren Buffett had not, however, forgotten what he had learned under Graham, and arranged for the company to buy out two Nebraska insurance companies.

This was the start of Buffett’s interest in insurance and the rise to financial fame of both himself and Berkshire Hathaway. The insurance game is a hard one but under Buffett, the company has become, not only a successful share investor, but a leading provider of insurance.

BUFFETT AND CHARLIE MUNGER

Buffett struck up a friendship with Charles T Munger, a lawyer and investor and Charlie Munger eventually joined Warren at Berkshire Hathaway as his Vice-Chairman, alter ego, and friend. Warren Buffett is always the first to acknowledge the contribution that Charlie Munger has made to Berkshire Hathaway. (Listen to an interview with Charlie Munger, or read our biography)

Under Buffett and Munger, Berkshire Hathaway has become an investment giant that wholly owns a number of successful companies that include:

• Geico Corporation
• Nebraska Furniture Mart
• See’s Candy Shops

WARREN BUFFET, THE MAN

Warren Buffett, the man, is just as hard to define as Warren Buffett, the investor. He projects a homespun frugality but one suspects that he plays his personality as close to the chest as he does his investment secrets. He always claims that it is his partner, Charlie Munger, who keeps his feet planted firmly in the ground.

Warren Buffet has become a legend and is generally ranked, along with his mentor, Benjamin Graham, first in a stellar cast of investors that includes Peter Lynch, John Neff, and Philip Fisher.

BERKSHIRE HATHAWAY AND RETAINED EARNINGS

BERKSHIRE HATHAWAY AND RETAINED EARNINGS

Berkshire Hathaway does not, following Buffett’s mantra, pay dividends to its shareholders and this is one reason why its compound return over the years of Buffett-Munger management has been so high.

• The downside of course is that shareholders have not received dividends, meaning, that if they were dependent on money coming in at a given time, their only recourse, in relation to their shareholding, would be to sell the shares or borrow against them.
• Having regard to the huge price of a single share over the past few years, this meant that investors may have had to either keep all their shareholding or dispose of it, not always the choice they wanted. Berkshire Hathaway partly catered for this dilemma by introducing B shares, which are in essence a fractional unit of the normal shares.

A POWERFUL FORCE

When asked to nominate the most powerful force on earth, Albert Einstein is reputed to have answered ‘compound interest’. Buffett might well agree.

Buffett likes companies with high and increasing returns on equity (ROE)

HIGH RETURNS ON EQUITY

Buffett is interested in companies that have rights rates of earnings on equity and likes them even more where the return rates are increasing. He reasons that, with a company like this, he is better off if the company pays no or little dividends and retains the money to earn even more for its owners.

• In addition, where no dividend is received, there is no income tax payable by the shareholder. 
• Instead, the investor gets the value of the increase in value in the shares which will, eventually, rise to reflect the enhanced earnings. 
• The shareholder can then retain the shares, sell them at a time that best suits them, if they wish, and take advantage of the capital gains taxation regime.

It is why potential investors should calculate the company’s history of returns on equity and management of retained earnings.

Compounding and Retained Earnings

Warren Buffet is said to look at the compounding factor when deciding on investments, requiring a stock investment to show a high probability of compound growth in earnings of at least 10 per cent before making an investment decision.

Warren Buffett has on several occasions referred to the use by a company of its retained earnings as a test of company management.

• He tells us that, if a company can earn more money on retained earnings than the shareholder can, the shareholder is better off (taxation aside) if the company retains profits and does not pay them out in dividends. 
• If the shareholder can achieve a higher rate of return than the company, the shareholder would be better off if the company paid out all its profits in dividends (taxation situation again excluded) so that they could use the money themselves.

Put simply, 

• if a company can retain earnings to grow shareholder wealth at better than the market rates available to shareholders, it should do so. 
• If it can’t, it should pay the earnings to shareholders and let them do with them what they wish.

The Wealthiest Life - Start In The Right Direction

Have you ever thought that your life could be better? It can be!

Start In The Right Direction

Most people step towards wealthy living with great anticipation, looking to everything that will change for the better. This is positive thinking but let us look at two principles that will ensure that your wealth dreams actually become a reality.

Two Keys To Living Wealthy

There are two keys to having the best life you could possibly hope for! 

• We must dream big dreams and 
• then commit to small steps that will lead us towards opportunities.

Dream Big

You were not meant to wake up in a year, or five years, and be in the same place that you are today. Dreams are the essence of life progress. Your dreams have the capacity to energize your present and future progress.

Take a pen and paper and write down all the improvements that you would like to see happen in your life. Take time to imagine your best life; see the end (the big picture). Then visualize the necessary changes taking place to propel you in the right direction.

Opportunities for advancement are awaiting each of us. Sadly, few experience the reality of these opportunities manifesting in their lives because they don't see them coming. Dreams open the hidden doorways to future life change.

If you have big dreams, you will eventually live a big life!

Commit To The Small

A very wise man once said, "Hope deferred makes the heart sick, but a longing fulfilled is a tree of life." - King Solomon (The Book of Proverbs Chapter 13, verse 12)

I have watched people grow extremely bitter as they have allowed their lives to stagnate for decades, simply because they would not take some simple life changing steps.

Experiencing another year will not necessarily change your life unless you commit to personal change in specific areas. Without making selective changes to our life patterns we will most likely remain in the same state for decades. This is a sad truth for many!

Each small step you take to change your life will activate opportunities in corresponding areas. For example, if you lose weight, your self-esteem will rise, your attitudes will brighten, your emotional and physical appeal will advance and you will attract greater relationship opportunities.

Think about how you will move forward emotionally, relationally, physically and financially by making simple adjustments to your lifestyle.

5 Steps Towards Wealthy Living

1. Don't spend what you don't have. If you can't afford something, it's not your time to buy right now.

2. Brainstorm monthly for one creative idea to generate more wealth in your business, or personal finances!

3. Position yourself around people who have a higher net worth than you and ask sensible questions to help you increase financially. Do this at least once a month!

4. Keep track of your daily income and expenses. By making this a daily habit, your finances will never get out of control.

5. Start giving to others and form this as a habit in your life. What you do for others will happen for you in increased measure. This is a principle practiced by rich philanthropists.

If you will dream big wealth dreams and take small steps towards those dreams, doors of opportunity will open in your life for riches to come in!

You can have a wealthy life. Why not start on the path today.

Article Source: http://EzineArticles.com/6890105

The Wealthiest Life
By Dr Carmen Lynne

Money is actually a debt instrument: Over time debt grows per compounding interest and purchasing power diminishes with increased cost of living

Traditional financial recommendations typically ignore the risk factor represented by how money works in context of its monetary system. Same as with health issues; without knowledge of the cause of symptoms, treatments generally lack full effectiveness.

When it come to personal-finance success, responsibility for how we earn, spend, save and invest is obviously essential. However, financial objectives can easily elude us if we lack the whole story about money. The missing piece is systemic in nature. Overlooked and under reported, impersonal monetary-system mechanics grind away to leave families vulnerable; undermining goals of stability and wealth-building.

Also known as a hidden tax. Who benefits?

Central banks worldwide (Federal Reserve for the U.S.) issue currency at the precise moment it is borrowed via an automated procedure called fractional-reserve banking. Therefore, money is actually a debt instrument (Federal Reserve Note). This private profit, interest-delivering system was designed centuries ago.

Over time debt grows per compounding interest and purchasing power diminishes with increased cost of living. The cost of living rises as businesses add their interest cost from bank loans to the cost of the goods and services we purchase.

And so grows the gap between the haves and have-nots.

That brings me to the pivotal issue of how much purchasing power $1.00 has in the marketplace today. One dollar is only worth 4.5 cents and an online inflation calculator proves my point. An item purchased for $1.00 in 1913 (when the Federal Reserve System was created) would cost $22.10 in 2010; a 2000% increase in inflation!

It's a fact: Skilled advisers are definitely helping families lower their debt-loads and modify their budgets. That said, the "good-debt, bad-debt" conversation remains as conventional truth; leading individuals and families to believe they can tweak their budget and lifestyle here and there to make it through to better days.

Unfortunately, such household gains may not last. Without a working knowledge of money as debt, even the most sincere efforts may falter as a rising cost of living erodes hard-won forward movement. When following conventional financial wisdom, the solution to keeping up and making ends meet could well end up, once again, as participation in the vicious cycle of credit and debt. Who benefits?

More choices with the big picture.

When we add the missing-piece about money to our knowledge-base and decision-making process we also gain additional financial strategies. Those who set out to explore alternatives outside-the-traditional-personal-finance-box tend to develop a new part of their brain.They uncover a world of possibilities (perhaps previously under-valued) along with the thousands of others on the very same mission!

Article Source: http://EzineArticles.com/5646119

Personal finance action-steps to build a solid financial foundation

Here are personal finance action-steps formulated to help individuals and families build a solid financial foundation. Savings and investments are very important but in the 2011 economy they will be most SUSTAINABLE when a solid present-day foundation has been attended to first. You'll know you have completed the "foundation" step once you have more money coming in to your household than going out for at least four consecutive months!

1. Write down your short-term, mid-term, and long-term financial goals and put them somewhere to easily refer back to them.
2. Review your goals (at least) on a weekly basis.
3. Figure out your exact financial status today. How much money a) comes in and b) goes out each month. Create a line-item and categorized itemization of money in and out. Don't forget things like eating out and entertainment.
4. Track your expenses and out-of-pocket spending precisely for at least one month. Save all receipts and record out-of-pocket information daily. Also determine the exact amount of money (or average) that comes in each month.
5. Do you have more money going out than coming in? If so, exactly how much?
6. Use your list of current itemized expenses to create an action-plan regarding how and by when you will lower or eliminate line-items that exceed the amount of money currently coming in to your household. This may mean creative downsizing.
7. Create an action-plan about how and by when you will increase money coming in to your household. As debt becomes reduced or eliminated, this action step becomes the most important one in order to stay ahead of the cost-of-living debt curve for the long-term.
8. As you focus on ways to increase cash flow, perhaps consider an independent trade or service that people will always need and that best suits you. For example, car mechanics, computer techs, hair stylists, barbers, clean-water suppliers, pet care-givers, delivery-service providers etc.
9. Make debt-elimination a high-priority; the final goal being to consistently live within your means and pay as you go.
10. Once credit-card debt is paid off, get rid of all but one credit card because credit access is actually an instant-gratification state-of-mind.
11. Do NOT keep your one remaining credit card in your wallet. Leave it frozen in a bowel of water in your freezer. This tactic builds time into the otherwise instant-gratification decision-making mindset of a credit card in your wallet.
12. You might even want to reallocate existing assets towards building your "more money in than going out" household-budget foundation more quickly. Since money (as debt) is worth the most today than it will be tomorrow, it's best to put it to work today! A stable present situation will increase your well-being. Increased well-being empowers a healthy decision-making process
13. Use cash first and foremost. Most people will pay more attention to what they spend when it comes straight out of their wallet.
14. Stop shopping for entertainment. Shop purposefully using coupons, during sales and buy bulk whenever possible. Generally shop recycled including for cars.
15. Include your children in the how and why of your decision-making process (should you accept this mission)and invite their imitation of your thinking and efforts.
16. If you have savings and/or investments to preserve, keep some of YOUR money entirely out of the reach of the banking-services industry. They consider their own interests before they consider yours! More and more people are moving their bank capital into hard (tangible) assets.
17. Specifically per 16 above, consider anything you have in savings, retirement funds or the stock market. (Remember the stock-market 2008 and FYI: The U.S. government is currently floating the idea of nationalizing 401(k)'s and IRA's given their nearly 14-trillion-dollar deficit. In other words, individuals would lose control over their account and the government instead would ration annuity-type payments.)

Article Source: http://EzineArticles.com/5646119