Investing
&ROA
E/P
Exerpts from
Let's start with intrinsic value, an all-important concept that offers the only logical approach to evaluating the relative attractiveness of investments & businesses. Tweedy Brown
Intrinsic v can be defined simply: It's the discounted v of the cash that can be taken out of a bus. during its remaining life.-Buffet
Look at the 5 year average return on equity for the company. To Buffet, this is the best measure for managerial economic performance. Also take note of debt levels. A good company should be able to produce a good return on equity without high levels of debt. Beware of companies producing a high level of returns using high gearing.
Owners Earnings
Net Income + (Depreciation, depletion, amortization) less Estimated Capital Expenditure
Use a rough estimate of estimated future capital expenditures. Note that in a study approximately 95% of America's businesses require capital expenditures that are roughly equal to their depreciation rates. Whether this applies to Malaysian companies remains to be seen and researched.
"He is a long term investor. He has said that you should invest in companies that you would feel comfortable with even if the markets closed for a few years & you couldn't sell. He views investing as buying a piece of a business, rather than buying shares of stock. He focuses on well-known comp's with strong grth prospects,& often with a strong intrntl presence. He often imagines the market as a single individual (Mr. Market), who has some stock in every company and shows up every day willing to buy your shares or sell you more. Sometimes Mr. Market is rational, & sometimes he's not. Sometimes he's afraid of missing 'the next big thing', and will pay just about anything for that company's shares. And sometimes he doesn't want to get stuck with a dog, and will sell for just about whatever you'll give him. Buffett watches Wall Street only to the extent necessary to take advantage of Mr. Market's shortcomings. Buffett considers the following especially important: return on equity; changes in operating margins, debt levels, and capital expenditure needs; and cash flow. He determines the value of a company by totalling the net cash flows he expects to occur over the life of the company, discounted at the appropriate interest rate (Buffett uses 30 year bond rates), and possibly including a premium based on the risk being taken. By applying this method, he sometimes looks like a 'value' investor, and sometimes like a 'growth' investor, but he doesn't think the distinction is especially meaningful. Unlike nearly all mutual fund managers, Buffett prefers to hold a few great stocks rather than many good stocks. He thinks most investors misunderstand the nature of risk and the need for diversification. Risk doesn't automatically follow from a non-diversified portfolio, if you choose stocks wisely."
If I could own any business, which one business would I select? Make an investment stake in a business using the same attention to fundamentals as I would if I were buying complete ownership of a business. What makes sense in a business makes sense in stocks: An investor should ordinarily hold a small piece of an oustanding business with the same tenacity that an owner would exihibit if he owned all of that business.--WB
In fact, Buffet points out, the index investor will actually outperform the majority of investment professionals. 'Paradoxically,' he notes, when "dumb" money acknowledges its limitations, it ceases to be dumb.' 'On the other hand,' Buffet says, 'if you are a know-something investor, able to understand business economics and to find 5 to 10 sensibly-priced companies that possess important long-term competitive advantages, conventional diversification makes no sense to you. Buffet
+ Nevertheless they are being controled, as powerfully as by a threat of punishment, by that particularly powerful (variable-ratio) schedule of reinforcement.., the effect of which is all too clearly shown in the behavior of the compulsive or pathological gambler.--Skinner
+ "...the people who are professional sellers of investment advice & brokerage services, etc., etc., have an immense vested interest in believing that things that can't be true, are true. & not only that, they've been selected in a Darwinian process to have formidable sales skills & large incomes. (laughter) That makes it dangerous for the rest of us."--Charles Munger
A Lesson on Elementary, Worldly Wisdom as it Relates to Investment Management and Business:
"In the United States, a person or institution with almost all wealth invested, long-term, in just three fine domestic corporations is securely rich. And why should such an owner care if at any time most other investors are faring somewhat better or worse. And particularly so when he rationally believes, like Berkshire, that his long-term results will be superior by reason of his lower costs, required emphasis onlong-term effects, and concentration in his most preferred choices."
Charlie Munger and Warren Buffett believe that "time is the best friend of the great companies and the enemy of the poor ones." Fiddling around with low-quality businesses entails paying theopportunity costs of not allocating that capital to the world-class investment opportunities that make themselvesavailable from time to time. One thing that must be understood about Berkshire is that Buffett and Munger let a lot of ideaspass through their brains. If their brains were gold pans, they would have highly permeable screens in them, and only thebiggest chunks of gold are trapped by the screens. As Buffett says, there are no "called strikes" in investing. They can wait for the great businesses to come to them, which is an"emotional IQ" attribute that can be attributed to WarrenBuffett's training with Ben Graham as well as mind melding with Charlie Munger over the last four decades.
Human nature being what it is, most people assume away worries like those I raise. After all, five centuries before Christ Demosthenes
noted that: "What a man wishes, he will believe". And in self-appraisals of prospects and talents it is the norm, as Demosthenes predicted, for people to be ridiculously over-optimistic.
It is, of course, irritating that extra care in thinking is not all good but also introduces extra error. But most good things have undesired
"side effects", and thinking is no exception. The best defense is that of the best physicists, who systematically criticize themselves to an extreme degree, using a mindset described by Nobel laureate Richard Feynman as follows: "The first principle is that you must not fool yourself and you're the easiest person to fool".
2) The foundation can follow the example of Berkshire Hathaway, and thus get total annual croupier costs below 1/10 of 1% of principal per annum, by investing with virtually total passivity in a very few much-admired domestic corporations.