Warren Buffett through the Berkshire Hathaway Group has been consistently one of the best investors in the stock market for many years. With success comes opportunity to learn from him and duplicate the success for you. In the stock market there are multiple methods to come to decision to buy and sell stock and when you find the correct formula for you then it likely will be a combination of more than one investor. A number of years ago, Mary Buffett wrote a book called Buffettology published by Rawson Associates, NY, 1997 in which she outlines the process or techniques which Mr. Buffett uses.

3. Valuing a Business

The key to valuing a business is before you buy, you determine what rate of return would you be happy or satisfied with. If the investment falls into your expectation then you can look at alternatives to pick the best one. If the rate of return is lower, then you can pass, to look at the investment when prices change. On the stock market, similar to every other type of market there are different types of buyers. Some buyers only want to be in and out or speculative buyers (hoping or expecting a takeover) others want to be in for the long term. This means prices will fluctuate and one example of it is lawsuits. In 1951, Ben Graham wrote the market undervalues a litigated claim as an asset and overvalues it as a liability. This means when companies get sued for millions the stock price typically falls, for the investor the analysis begins about the underlying business and if it still worth buying or is the price good? The classic situation is tobacco stocks which were undervalued and bounced back and return more as lawsuits were settled.

4. What to Buy and at What Price

Investing is always about alternatives and what to buy and at what price. The complication is on Wall Street there is always another stock to sell and the job of the stockbroker is to offer you ideas to place your money, ideally for the stockbroker on a relatively consistent basis. You challenge is to say no most of the time until you are offered something that means your expectations of return.

There are numerous methods to do this: Ben Graham method is try to find bargains, the classic buy summer clothes in the fall, when stores have marked them down for the fall clothes. Warren’s approach is to determine what he wants to buy in advance than the wait for it go on sale. This means do your homework and follow the companies you would love to own and wait till they fall in price – perhaps to market cycles, news, and when they hit your targets buy them. The targets are the right price and the right return on investment you are looking for.

5. The Magic of Compounding Interest

Use the power of compounding in your investments – doing so will make you more money than almost anything else you do. The secret to getting and stay rich is using compounding interest for you. The best example is Warren owns credit card companies because people pay a high rate and they have a great margin; one of your best investments is to keep your balance near or at zero. The objective is to buy a company that compounds for 30 years at 15% and pay a single tax of 35% at the end to achieve an after tax income of 13.4% annual rate of return.

Linking to dividend paying stocks, there are nothing exceptional to the above methods to investing and most of us can do it. The problem for most of us is we get captured by the possible gains we could get and say yes to alternatives when we should say no. It is hard, but discipline has to be your focus. If you can do it while you shop for your daily life, then you should be able to translate the same type of focus to your investments. One method to do that is to start with dividend paying companies which narrows the field and pick the best ones for you.

There are more questions than answers, till the next time – to raising questions.

 

Warren Buffett through the Berkshire Hathaway Group has been consistently one of the best investors in the stock market for many years. With success comes opportunity to learn from him and duplicate the success for you. In the stock market there are multiple methods to come to decision to buy and sell stock and when you find the correct formula for you then it likely will be a combination of more than one investor. A number of years ago, Mary Buffett wrote a book called Buffettology published by Rawson Associates, NY, 1997 in which she outlines the process or techniques which Mr. Buffett uses.

1. Investing from a Business Perspective

Fortunately for all of us, there are many opportunities for you to invest your money, and as long as there are choices there is the opportunity to say no. Investing for a business perspective means to build a discipline not so much what to buy, but what not to buy.

Warren’s chief idea is to buy excellent businesses at a price that makes business sense. So what makes business sense? In Warren’s decision making process business sense means the venture invested will offer you the highest predictable annual compounding rate of return with the least amount of risk. To do this first thing 5 to 10 years horizon and when evaluating companies you determine what you can make then look at alternatives to see what they are offering. (it would be similar to looking at certificate of deposit rates from various institutions before picking one. Only expecting more from the markets).

In the 1900’s most people bought bonds as investments and received bond interest. The stock markets were to be nice rigged and much of Benjamin Graham’s book Security Analysis printed in 1934 dealt with discovering accounting fraud. Now days we all tend to rely on Securities Commission to keep companies reasonably honest, but it still happens, just not as blatant. Warren believes common stocks bear a resemblance to bonds that have variable rates of return. When the common stock does this because one can project earnings, he calculates his rate of return by dividing the share price by the company’s annual net per share earnings. The assumption of the calculation is based on the wholly dependent on the predictability of the company’s earnings.

2. The Price You Pay determines Your Rate of Return

The price you pay determines your rate of return  and that is why you want to buy reasonably low, receive a dividend and in the future sell high.

In order to determine the rate of return, you must be able to reasonably predict the company’s future earnings. If you bought a bond, you would know what the interest rate going forward and using Present Value tables determine if it is a good price to gain what you want. For stocks, not all of them, but those that expect to earn at least what they earned this year, you can determine if the risk is worth the stock price.

Linking to dividend paying stocks, on the stock markets what you say no will determine your rate of return. There are many methods to invest or alternatives given your risk reward ratio and in investing the first rule of thumb is try not to lose money. One method is to invest in profitable stocks which pay a dividend. Use Warren’s methodology to help you pick from the best basket, not just the basket you are offered.

There are more questions than answers, till the next time – to raising questions.

Warren Buffett through the Berkshire Hathaway Group has been consistently one of the best investors in the stock market for many years. With success comes opportunity to learn from him and duplicate the success for you. In the stock market there are multiple methods to come to decision to buy and sell stock and when you find the correct formula for you then it likely will be a combination of more than one investor. A number of years ago, Mary Buffett wrote a book called Buffettology published by Rawson Associates, NY, 1997 in which she outlines the process or techniques which Mr. Buffett uses.

Every year the techniques Mr. Buffett uses becomes easier for the average investor because companies make available the numbers to evaluate companies. Mrs. Buffett’s book offers you how to make more discipline decisions by going through the process Mr. Buffett uses. If you like shopping and getting a bargain, then you will like Mr. Buffett. The 7 steps to becoming more discipline are:

1. Warren will invest long term only in companies whose future earnings he can reasonably predict.
2. He buys these types of companies because they generally have excellent business economics working for them. The free flow of cash and low debt allows the companies to continue to buy new businesses or reinvest in theirs.
3. The excellent business economics made evident by consistently high returns on shareholders’ equity, strong earnings and what Warren calls a consumer monopoly and management functions with the shareholders’ economic interests in mind.
4. The price you pay for a security will determine the return you can expect on your investment. The lower the price, the greater the return. This is one of the keys to helping Warren decide between alternatives.
5. Warren chooses the kind of businesses he would like to be in and then lets the price of the security, and thus the expected rate of return to determine the buy decision.
6. Warren has determined investing at the right price in the right businesses with exceptional economics working in their favor will produce over the long term an annual return of 15% or better.
7. Warren found a way to acquire other people’s money to manage so that he and they could profit from his investing expertise. He did this by starting an investment partnership and later acquiring insurance companies.

The trick is therefore to consistently earn 15% or better compounding rate of return on your investment. What do you say yes to invest in and what do you say no?

Linking to dividend stocks, most investors have asked what do you want from your investments, the answer is more. More at what risk is the next question? If the answer is low risk and higher compounding of your money, then you need to look at dividend stocks because many of them fit into Warren’s pattern. The homework is what price should you buy it at? how long to hold? and what price would you accumulate if the price fell owning to regular market cycles?

There are more questions than answers till the next time – to raising questions.

If you were trying to gain people’s personal information nothing would be better than looking at the files of Equifax. The credit companies of Equifax, Experian and TransUnion are the big three credit bureaus. They monitor everytime you pay a bill and for that, the banks and other credit granting institutions pay them for their service. If you apply for credit, one of or more of these companies will be notified and from the amount of times you apply for credit and the method you pay your bills helps give you a credit score. All of the companies allow you assess to your credit rating and will sell you a service when a company asks to look at your credit rating.

For a company to have a breach in their security automatically sends their stock on a downward path, Equifax responsibilty dropped from $143 to $96, which meant perhaps the stock is a buy. There are two things to weigh, could another company do the same thing as Equifax? The answer is yes and no for yes they can do the same thing but the big three dominate the industry and to gather all the information to be able to sell to all the credit granting institutions creates high barriers to entry. Equifax has offered free services to all the 143 million people who information was or could have been compromised and likely many of them will accept.

The other issue is fines from the government or anyone willing to sue Equifax for breach of their personal security. In the world of companies being sued for many things it would be expected a number of lawsuites would come forward, but would they be enough to cause the disappearance of the company? If the company does not have a huge magnitude of lawsuits, one could easily see the company returning to where it was.

Linking to dividend paying stocks, all companies have information from their customers and if a cyber breach happens the stock will fall. That is the responsible thing from investors because the company has to double down on security and more importantly reassure and keep its customers. How well it does that or how poorly senior management response is how you judge the outcome. If you believe a stock you own is doing it well, there is fewer reasons not to buy. If you think they do poorly, find alternatives.

There are more questions than answers, till the next time – to raising questions.

 

As an individual buying an index and ideally at a low cost to you is a good thing because all the companies which provide indexes remove the “dogs” and add the “stars” to the index. On the face of it removing companies which no longer mean the criteria and replacing them with better ones over the long term means the index will increase. If you wish to look at the index of the S&P 500 since the index has been kept over the long term it increases.

One method to play this changing of the indexes is to buy companies which are scheduled to be included in the index. David Berman wrote about a column called the The Index inclusion roller coaster. The reason this is a strategy is when the index changes funds which track the index now have to buy the new companies and sell the old ones. Unfortnately, while there will be an impact the impact tends to 1 to 5% increase in price but it falls back to normal. In 2004 McKinsey & Co offer a very clear conclusion Yes the shares typically rise but it is short lived (20 days or less). McKinsey believed there was no permanent price premium for being included in the index. What happens is the stocks volume tends to increase.

Linking to dividend paying companies, most of these companies are in the index for a very good reason they consistently make profits. The consistency will attract more investors looking for good investments. Being in an index is good and understand if the market lost 10% of its value, indexes would sell so there would be selling of the shares, but the profitable ones will go back to what is normal because they are good companies to own. Remember to stay at the basics.

There are more questions than answers, till the next time – to raising questions.

 

When corporate Treasurers have money, lots of money in the bank one of the many options is to buyback stock. Companies issue stock to raise money to do something – buy another company, expand into a market, issue shares in the share purchase program or something productive. One of the options for the Treasurers is to buy back stock – the result will be fewer shares outstanding which translates a higher earnings per share (EPS) given the higher profits. Companies in general have been doing this for the past couple of years, however according to Stephen Gandel  of Bloomberg News June was the fifth month of total reduced stock purchases. The total buyback was $500 billion and companies in the S&P 500 were responsible for $120 billion of it.

The average bottom line of companies in the S&P 500 in the third quarter is expected to advance 4.5%, however profit is expected to advance 11% in the fourth quarter. One of the expectations was the government’s change in tax policy particularly in the cost of bringing funds back from outside the US. If the tax was lower, it was expected stock repurchases would increase $150 billion. It may happen but it may not happen.

Linking to dividend paying stocks, one of the options Treasurer’s have is the ability to repurchase shares because of making profits. While buybacks is the not the only reason why stocks go up, it has been a factor. If you buy for the dividend, there will be numerous reasons why the stock goes up and as long as the stock is profitable, those are good things to happen while holding the stock.

There are more questions than answers, till the next time – to raising questions.

Where ever you live the big competition among cities greater than one million population is the desire to have Amazon locate to the city. The prize is 50,000 jobs and good high tech service jobs and who would not want that?

Amazon has set criteria of one million population, great airport, reasonably inexpensive land, an educated work force ( nearby university or universities which train engineers) and tolerant culture (Amazon wants their brains, but people have to live and want to live in the community).  Noah Smith writing for Bloomberg News expects not only the 50,000 would be needed, but others tech companies would settle to be near Amazon. Think of auto manufacturing companies and other companies locating nearby to make things for the manufacturing company. If you are interested in the culture of Amazon – on their website is the Leadership Principles which they take seriously.

Given the reality, not many companies are expecting to hire 50,000 people the selection process is expected to be fierce. Remember while you live in your community, what the politicians are willing to give away should not put you at a disadvantage. Make sure to focus on the benefits besides the new jobs.

Mr. Smith notes there are communities which easily the bill – the Boston area, Raleigh North Carolina, Nashville, Minneapolis and Austin, Texas to name a few. Austin is a great example because it lured a government agency called Sematech  which was home to Dell, Texas Instruments, and Motorola. Austin also had a group of visionaries leaders ready to transform Austin into a tech center. The people ensure sufficient land and water resources was available, encourage the university to be co-operative (not be in an ivory tower), the infrastructure of the city was up to date and the culture was livable. These aspects will keep you in the city.

Linking to dividend paying stocks, while these companies are profitable it makes their head offices and main areas of producing goods and services even more valuable because they can stay and pay taxes. The trick is always, not to pay too much tax and contribute to the city. It is good for all cities to go through the process because what is good for Amazon is good for any company. The more the home city co-operates and nurture the existing businesses is good for the bottom line.

There are more questions than answers, till the next time – to raising questions.

If you have been following the tech stocks the term FAANG should be familiar to you – the best stocks in technology have enjoyed a healthy rise in stock prices and if you own them your portfolio is up. The FAANG stocks are Facebook, Amazon, Apple, Netflix and Google. It is hard to own a fund without owning at least one of these stocks.

Cormac Mullen writing for Bloomberg News looks at a different aspect of the stocks how they are classified. All stocks are classified by a group called MSCI Global Industry Classification Standard. Facebook. Google and Apple are classified as technology stocks; while Amazon and Netflix are classified as consumer-discretionary stocks.

Other examples are American Express is classified as a financial stock while MasterCard and Visa are listed as technology stocks.

What all this means is stocks have different weighing on indexes which translates to index funds owning the index and portfolio managers trying to be in one sector or another. On the credit card stocks your way of thinking is they should all be the same since they do the same thing, however the accepted PE Ratio for technology is generally higher than financial stocks. Is one undervalued or overvalued?

Linking to dividend paying stocks, if you own a stock for a longer period of time, the classifications matters less, for you own it for different reasons. If you own the stock and short the indexes to protect your investments (hedging) you have to examine your indexes to ensure it is a real hedge. If you own a stock for the dividend, then you know the price will fluctuate for a variety of reasons, but as long as it is profitable it can be held.

There are more questions than answers, till the next time – to raising questions.

The most important aspect to any company is the pricing model – if they get it right people buy, if it is not correct people find alternatives. In a recent article Shane Dingman wrote about the price of the new Apple phone. The first thing to think about is as products have become more powerful and smaller they have also become cheaper. The new technological features plus the supply chain efficiencies has allowed manufacturers to cut prices consistently.

With smartphones it does not seem to be the case. According to data collected by Android Authority, smartphones prices have crept upwards, from $600 in 2012 to $750 and now Apple is testing the $1,000 mark. The new Apple phone is $300 more than the existing one and the old one breaks down to the device parts costs between $250 and $270 with the screen adding another $50. The new phone the screen is likely closer to $100.

Apple has traditionally kept a 33% margin in its iPhone selection and on the NAND memory it can generate as much as 80%. NAND memory stores the data on the phone, if you order more memory, the chip costs $20 but you pay about $100.

The next advantage Apple has is the psychology of pricing – the good, better and best. A variety of pricing are offered and people tend to gravitate towards the middle and spend a little more than they expected. In addition, with the large wireless firms offering a more manageable monthly payment which 75% of smartphone users are using. The psychology of pricing works best if customers see a great benefit with the highest pricing.

Linking to dividend paying stocks, for these stocks, the best customer is the repeat customer and if the company appeals to a mass market as long as there is enough then margins will be good and profits roll in. Once customers see alternatives they deliver them the value they want and need, they will begin to make changes. For now, on the companies you invest in see if the margins are holding.

There are more questions than answers, till the next time – to raising questions.