What Buffet would do if he was managing less than 10 million ?

In a recent meeting with shareholders, a question was posed to Warren asking him what would he invest in if he had started a partnership today?

Warren's answer was firm and quick. He said that if he was managing smaller sums of money, he would be investing in companies with a net cash balance. From a balance sheet perspective, the net cash balance is found when you take the cash balance and equivalents and deduct all liabilities from it. To be honest such companies are extremely hard to find especially in the US.

But if you look to other countries, such as singapore, there is a whole list of companies trading below the net asset value.

In fact, when you buy companies trading below net cash, you virtually get the company for free which also includes some freebies such as the excess cash available. A vulture upon seeing such an opportunity, would probably liquidate the company and try to realise the proceeds.

I once spoke about a company on the STI. Its name is Matex International and it was trading at less than the net current asset value. The company had a positive cashflow and also an income stream though the industry was a very competitive one. Porter's 5 forces applied to it would show that it was in an industry that had too many internal and external factors that slowed its growth. It is no longer growing but rather at a stage where industry players are cannibalising each other.

So what? it was trading at 10 - 12 cents then and that was when i scooped it up. There was also a warrants offering to existing shareholders with a major insider scooping most of it. The warrants are excercisable at 16 cents. That being said, Joel Greenblatt did mention that it is very important to look at the actions of insiders. Hence since this insider scooped up the most warrants in a rights offering, it must be that he would have had some incentive to try to boost the company's stock price.

Today, it is trading at 16 cents. More than a decent return 6 months on.

Warren did go on to mention if he did buy companies as such, he might be realising an annual return of 50% a year. And he sounds confident.

Where can you find such stocks? One place that Warren has suggested is Korea. To me, one such place is Sunny Singapore. In fact, i did do some research a while ago. If you all had actually heard of humming bird value where Paul Sonkins is the portfolio manager, he claims that he has good returns in Sunny Singapore.

I am going to conduct more research before i make any more claims. But what i do know is this...Buffet does not speak without any references...He knows what he is talking about...

Cheers!

Owner earnings

Owner earnings has been discussed quite frequently in Warren Buffets letters to his shareholders. What is owner earnings? It is essentially the rfee cash flow to equity and it can be written in a simple formula.


Owner Earnings = Reported earings + depreciation,depletion,amortization + other non cash charges - average capital expenditure - change in working capital to maintain competitive position and unit volume

Through Warren's letters, we know that he would rather pay for $2 of unreported earnings than for a $1 of reported earnings and it is on this basis that he values his company. By conservatively predicting owner earnings 10 years into the future and using a suitable discount rate, he is able to find a range of intrinsic values for the company.

Keeping it simple and stupid!

If you have ever wondered why Warren Buffet loves to invest in simple to understand businesses, what he is actually trying to do is to keep things simple and stupid. And we can see how this strategy has withstood the test of time through his fantastic returns. Today, he is worth more than 40 billion dollars. As i thought deeper, i began to understand that he was actually trying to reduce the number of variables so that he can estimate the company's cashflow with more certainty. A clear analogy is this if i may: Imagine a mathematical equation that has 10 variables or more compared with a mathematical equation that has 2 variables. Which one would be easier to solve? It is pretty obvious to me at least that the answer would be the latter. So, just to sum up, an oversimplified model of investing in Buffet's head should somewhat be screening companies for simple business models with strong moats. Companies with such qualities would have above average profit margins and sales and will be a cut above competition, an extremely important factor. This leads to an easier estimation of how future cashflows will look like and how capital expenditures might lead to increases owner earnings. In fact, Buffet while he is doing this does not even care about the price of the company as it might distort his valuation. Do refer to Manpreet's previous post on this.

Now, what i may be talking about may be an extremely simple concept. But it is something that is not embraced by many inclusive of the speculators who look a companies with a certain theme or using technical analysis which to me is utter nonsense. Sorry if i have offended anyone but if there is anyone out there that disagrees with me, i would be glad to agree to disagree with you.

Just think about it this way. I am sure all of you knows microsoft. It is a wonderful business , possibly with a moat. The office program is indeed a value to users and there is quite high switching cost. However, what people fail to notice is that Microsoft has not been able to revolutionize their operating system. Before, when the first operating system came out, it wowed the world. Today, their operating systems are not very mush different from the first. There is no revolution whatso ever. And competitors are coming into the field providing possibly better alternatives such as Apple products. How long can microsoft generate free cash flow that is not only growing but also sustainable with competitors coming in. The technology landscape is so complex that you never know when something might hit the market that might take away Micirsofts competitive advantage. For one, lets learn a lesson from history. IBM used to be a giant in the 80s. Now it has been taken over by better companies and has suffered stagnating stock prices.

What about Coca cola. Everyone knows Cocal Cola. People around the world drink the brand and even as i am typing here, there are still many people and countries around the world not exposed to Coca Cola. the growth potential is still tremendous. In fact, Buffet is still holding onto it. Strong moat with an easy to understand business. Competitors like Pepsis come no where close in terms of global popularity. I am so hooked onto Coca Cola that even when i go to Japan or Europe, i asked to be served Coca Cola. But do take beer for instance, in singapore, you might want a tiger but if you do go to Japan, you might want some Sake and if you do go to the US you might wanna try Budweiser. Case in point, coke is so entrenched within the customers mind that there is so much customer loyalty. And customer loyalty leads to recurring income. Simple and Stupid! Hence, in my opinion, it is always easier to value businesses with the buffet approach.

Eddie Lampert looking for potential acquistions

In recent years, the takeover of the K-Mart by Eddie Lampert and its merging with Sears later has produced impressive for Lampert's ESL partnership.Now,after several years of laying low,Lampert has made it clear that Sears is looking for potential acquisitions in the coming months.It will interesting to see what lies ahead for this billionaire value investor in the coming months.Here is a short excerpt from the recent shareholder AGM(2007)

"Responding to a shareholder question about his plans for the company's more than $2 billion in cash, Lampert said there are "a variety of options to deploy that."

"What will shake out, especially this year, really is going to depend on what the opportunity set is," he said."

(Excerpted from Yahoo Finance)

Link to the entire article

http://biz.yahoo.com/ap/070504/sears_shareholders.html?.v=1

More Jewels:Buffett on Valuation

As the build up to the BRK shareholder meeting continues,i would like to share more excepts from a previous Buffett interview( this time taken from Harvard Investment Magazine).Here, Buffett outlines his criteria for valuing companies and gives us a peak into his thought processes.Indeed, its a fascinating look into one of the greatest investment minds ever and gives us invaluable advice into how to value companies which is crucial for successful investing.


Q: What do you stay away from when valuing a company?

Buffett: What I donʼt understand. Get a  x on your own limita-tions of knowledge. Ted Williams [the only Major League Base-ball player to hit .400, or a 40% success rate, over an entire sea-son] divided the strike zone into 77 areas. You only swing at the pitches you can hit with an average of .400. Also, I donʼt want to know the price of a stock as I value it. Knowing the price anchors your thoughts.

Q: What is the more valuable area of academic study, accounting or nance?

Buffett:Accounting is the more valuable. It is the language of business… A number of CEOs donʼt understand accounting. Some people have an intuitive grasp, [but] some people will try to cheat you and lie to you.

Q: Explain your business evaluation criteria.

Buffett: Where is this business going to be in 5 to 10 years? What is the moat? What protects it? With Coca-Cola, the moat is the brand name in the mind. Seeʼs Candies [a Berkshire Hathaway company] owns the boxed chocolates business in California and has been there since 1921. A boy buys a box of chocolates, and she kisses him: We own him. Other examples of moats: Microsoft operating systems; and Meg Whitman [CEO of pioneering online auction company eBay Inc., who] has all of the buyers and sellers. Businesses with moats are easy to value. How do you knock off Wrigley? — the Internet doesnʼt change the way people chew gum

(Excerpted from Harvard Investment Magazine)