Lately there has been a number of studies, led by Hendrik Bessembinder of Arizona State University which says 4% of the publicly traded stocks accounted for all of the net wealth of the stock market since 1926. A mere 30 stocks account for 30% of the net wealth generated by the stock market and 50 stocks account for 40% of the net wealth. The number one company on the list is Apple, Amazon is 14th, other companies are Exxon Mobil, Facebook, Visa, Alphabet (Google), Microsoft and Berkshire Hathaway. It stands to reason if your investments do not include these stocks, your portfolio has not done as well.

In a recent article by Barry Rithhotz writing for Bloomberg News asks what should you do? One solution is to buy the index, however you will own the big winners and you will own the mediocre companies to. Another approach is to be selective and try to buy the winners.

Each approach has its plus and minuses. If you own the stocks and they are doing very well, do you take profits or let it ride? Another issue is each of the successful stocks on their way up had large downward swings of 50% or more, would you have kept them? Owning GM stock was a star until it went 2009. The important takeaway is finding the very best companies is a difficult thing to do.

Linking to dividend paying stocks, eventually the best performers pay dividends because the first rule should be to invest in profitable stocks for the idea is not to lose money. One can always add to your portfolio either through dividend reinvestment into the company or using the dividends to buy the best companies you can. Another choice is to ensure you have a fund similar to the SPDR Technology Select Sector (this is from State Street). The fund invests in 73 of the largest tech companies which have multiple names among the wealth creators list.

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.

9. Where to look for Excellent Businesses

There are essentially 3 types of toll companies that produce excellent results:

1. Businesses that make products that wear out fast or are used up quickly, that have brand name appeal or if a merchant does not carry it, sales suffer
2. businesses that provide a repetitive service manufacturers must use to persuade the public to buy their products
3. businesses that provide repetitive consumer services that people and business are consistently in need of.

As you begin to look at what companies really do and how price sensitive they are, you will see many options for companies making money every year and you task is to break them down to what ones work for you.

10.  Management

In as much as the people are very important, if the business is really good as long as management does not screw up, then you have a stock worth investing in. The trick is to find honest hardworking people whose job is to profitability allocate capital, keep the return on investment as high as possible, and to think of shareholders when they have no investment opportunity at the moment.

Linking to dividend paying stocks, the book is full of details of how to do but the idea is to build the discipline in the decision making process to look at expected return on investments, what are the alternatives and use the power of compounding. Then your decisions are good decisions.

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.

6. Determining What Kind of Business You Want to Earn

What are the characteristics of the businesses that you would want to own? Everyone has a different idea and that is what makes the economy, this is good. If you go into a store for a bargain, is everything on sale or is  a bargain to you? Hopefully you said no, maybe many things but not everything. The next decision is when do you sell? How do you know you bought a company that will not work on for you, even though the price is good for? Warren’s answer is the theory of an expanding intrinsic value. The theory is over the long term, if a company has an expanding value – higher earnings every year, profitable, can reinvest in the company, the price of the stock will go higher and you will get the return you are expecting. Time is the friend of a great business and a curse to the mediocre. A mediocre business rarely will be anything besides a mediocre business. A great business only gets better over time.

7. How to determine what is mediocre and what is a great business.

In Warren’s investing, there are two types of businesses – commodity type or consumer monopoly. A commodity business is a business where price is the single most important motivation factor for the consumer’s buy decision. In a commodity type business, the low cost provider win. The lower the costs to produce, the higher the profit margins, but profit margins will fall when someone can produce for less.

Identifying a Commodity type business

low profit margins – competition will mean prices are set lower.

low returns on equity – in 1997 the average return of equity was 12%, if it is less, then it is a

absence of any brand name loyalty

presence of multiple producers

existence of substantial excess production capacity in the industry  – think base metals

erratic profits

profitability almost entirely dependent upon management’s abilities to efficiently utilize tangible assets

8. How to Identify the Excellent Business

1. Does the business have an identifiable consumer monopoly?
2. Are the earnings of the company strong and showing an upward trend?
3. Is the company conservatively financed?
4. Does the business consistently earn a high rate of return on shareholders’ equity?
5. Does the business get to retain its earnings?
6. How much does the business have to spend on maintaining current operations?
7. Is the company free to reinvest retained earnings in new business opportunities, expansion of operations, or share repurchases?
8. Is the company fee to adjust prices to inflation
9. Will the value added by retained earnings increase the market value of the company?

Linking to dividend paying stocks, one of the keys to excellent businesses is the moat and the ability to raise prices for inflation. The classic example is electric utilities and the regulatory body, 99% of the time they allow for increases. After identifying the industry the challenge is to pick the best alternative in the industry.

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.

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.