State-Run Oil Co Needs $3Bn Every Month
IOC has no money,
bonds to buy crude
Sanjay Dutta TNN 26th July 2008
New Delhi: Oil’s relentless rally till the last fortnight combined with government lethargy in issuing bonds to make up losses on fuel sales have put Indian Oil Corporation in a spot. The flagship refiner-marketer has run out of money as well as the Centre’s IOUs—which the company has been encashing for foreign exchange—to buy crude.
Indian Oil needs roughly Rs 12,000 crore ($3 billion) every month to buy crude but loses Rs 413 crore daily on fuel sales. As a result, the company has been borrowing heavily from banks and incurring further expense on interest. Lately, it has also been encashing the bonds under an RBI mechanism. In June, IndianOil used up the last of the bonds it had to raise about Rs 9,900 crore through the RBI mechanism. It is now left with bonds worth about Rs 4,300 crore that had already been securitised for raising funds from the overnight call market.
Indeed, IndianOil—as also HPCL and BPCL—has been running on borrowed money. “Our borrowing had reached Rs 42,000 crore in May. In June, it came down to Rs 35,000 crore but if another tranche of bonds does not come through quickly, the borrowings will rise again,’’ a top IndianOil executive said. The company board sometime back had cleared an enabling provision to raise the borrowing limit to Rs 80,000 crore.
The oil ministry has asked the finance ministry for over Rs 50,600 crore bonds to partially make up the losses during the first half of 2008 calendar. The ministry has sought Rs 14,956.17 crore bonds for the last quarter of 2007-08 and Rs 35,672.70 crore more for the first quarter of 2008-09. The total loss on fuels in 2007-08 has been put at Rs 70,579 crore.
Ironically, the situation has been created by none other than the government itself. The government refused to raise pump prices or reduce taxes periodically and let the losses pile up as oil kept climbing. Till last fortnight, the oilmarketers were losing Rs 16.70 on each litre of petrol, Rs 27.61 on diesel, Rs 38.09 on kerosene and Rs 338.53 on each cylinder of cooking gas. This is after the government raised pump prices on June 4 by Rs 5 a litre for petrol and Rs 2 a litre of diesel and Rs 20 per cooking gas cylinder. The government is expected to review the prices in October, but another round of price increase looks unlikely in an election year. If pump prices do not go up and crude remains in the $130 a barrel range, IndianOil reckons it will close the year with a Rs 121,015 crore loss.
Saturday, July 26, 2008
Sunday, July 20, 2008
CANSLIM --- HOW TO PICK STOCKS
http://www.canslim.net/what.htm
What is CAN SLIM®?CAN SLIM® is a formula created by William J. O'Neil, who is the founder of the Investor's Business Daily and author of the book How to Make Money in Stocks - A Winning System in Good Times or Bad.
Each letter in CAN SLIM® stands for one of the seven chief characteristics that are commonly found in the greatest winning stocks. In his book, he cites many examples including:
Texas Instruments, whose price rose from $25 to $250 from January 1958 to May 1960
Xerox, which went from $160 to the equivalent of $1340 from March 1963 to June 1966
Syntex, which leaped from $100 to $570 in the last six months of 1963
Dome Petroleum advanced 1000% in the 1978-1980 market
Prime Computer rose 1595% in the 1978-1980 market
Limited Stores' 3500% increase from 1982 to 1987.
The C-A-N-S-L-I-M characteristics are often present prior to a stock making a significant rise in price, and making huge profits for the shareholders!
O'Neil explains how he conducted an intensive study of 500 of the biggest winners in the stock market from 1953 to 1990. A model of each of these companies was built and studied. Again and again, it was noticed that almost all of the biggest stock market winners had very similar characteristics just before they began their big moves.
C - A - N - S - L - I - M
C = Current quarterly earnings per share.
They should be up a minimum of 25% - 50% over the year earlier. In fact, of the 500 best performing stocks O'Neil studied in the 38 years from 1953 to 1990, three out of four had earnings increases averaging more than 70% in the latest publicly reported quarter before the stocks began their major price advance. The one out of four that didn't show solid quarterly increases did so in the very next quarter, and those increases averaged 90%!
C - A - N - S - L - I - M
A = Annual earnings per share.
There should be meaningful growth over the last five years. The annual compounded growth rate of earnings in the superior firms should be from 25% to 50%, or even more, per year. With all of this emphasis on earnings, it is important to understand something about Price-Earnings Ratios (P/E). Factual analysis of the greatest winning stocks shows that P/E ratios have very little to do with whether a stock should be bought or not! In fact, you will automatically eliminate most of the best investments available if you're not willing to by a stock that trades with a high P/E. Remember earlier when I mentioned Xerox? In 1960 it traded at a 100 P/E - before it went up 3300% from $5 to $170 (adjusting for the stock splits). Genentech was priced at 200 times earnings in November 1985, and it bolted 300% in the next 5 months. Syntex sold for 45 times earnings in 1963, before it advanced 400%. For years analysts have misused P/E ratios, and it's amazing to me how so many people will still ask about a company's P/E before they ask about a company's earnings growth.
C - A - N - S - L - I - M
N = New product/management/price high.
Usually it is a new product or service that causes the big earnings acceleration we're looking for. Consider these examples:
Rexall's new Tupperware division, in 1958, helped the stock go from $16 to $50.
Thiokol came out with new rocket fuels for missiles back in 1957-1959. The stock blasted from $48 to the equivalent of $355.
In 1957-1960, Polaroid came out with the "picture in a minute" self-developing camera, the stock went from $65 to $260. Then in 1965-1967 they came out with a color-film version. The stock repeated with an amazing, split adjusted, rise from $23 to $133.
Syntex, in 1963, began marketing the oral contraceptive pill. In six months the stock soared from $100 to $550.
Computervision stock advanced 1235% in 1978-1980, with the introduction of Cad-Cam factory automation equipment.
Price Company went up 15 fold in 1982-1986 while opening their chain of wholesale warehouse membership stores.
Get the point? 95% of the greatest winners in the 38 year study O'Neil conducted were companies that had a major new product or service.
The other important thing to consider is the price of the stock. Most people miss the biggest winners in the market because of what O'Neil refers to as "the great paradox" of the stock market. It is hard to accept, but the stocks that seem too high and risky to the majority usually go higher and what seems low and cheap usually goes lower. If you don't think this is true, I challenge you to look in an old newspaper from a few months ago and observe a good number of stocks highlighted because they hit new highs and new lows. Then see where they are today. Most of the highs will be higher, and the lows will be even lower.
C - A - N - S - L - I - M
S = Supply/Demand: Small Cap + Volume
Supply and demand dictates the price of almost everything in your life. The law of supply and demand is more important than all the analyst opinions on Wall Street. The price of a stock with 400 million shares is hard to budge up because of the large supply of stock available. Yet, if a company has only 2 or 3 million shares outstanding, a reasonable amount of buying can push the price up rapidly because of the small available supply. If you are choosing between two stocks to buy, one with 60 million shares outstanding and one with 10 million shares, with all other factors equal, the smaller one will usually be the bigger mover. Stocks that have a large percentage owned by top management are generally better prospects. Again referencing O'Neil's 38 year study, more than 95% of the companies had less than 25 million shares outstanding when they had their greatest period of earnings improvement and stock price performance.
Foolish stock splits can hurt a stock's performance. Watch out for companies that split their stock 2 or 3 times in just a year or two. The splitting creates a larger supply and may make a company's stock performance more lethargic, like many "big cap" companies. Large holders who thinking of selling are often inclined to sell their 100,000 share positions before a 3-for-1 split would have them looking to sell 300,000. Smart short sellers (an infinitesimal group) pick on stocks beginning to falter after enormous price runups and splits, realizing that the potential number of shares for sale (particularly by funds) has dramatically been increased.
C - A - N - S - L - I - M
L = Leader
People often buy stocks they're comfortable and familiar with, like an old pair of shoes. Usually these are draggy, slow-pokes rather than leaping leaders. It is really important to look at how your stock is performing in relation to the overall market. The 500 best performing stocks from 1953 to 1990 averaged a relative price strength of 87 (scale of 1-99) just before they began their major advances in price. Avoid laggard stocks and look for genuine leaders.
C - A - N - S - L - I - M
I = Institutional Sponsorship
It takes big demand to move a stock significantly higher in price. Institutional buyers are the most powerful source. You don't need a large number of institutional owners, but should have at least a few. No institutional sponsorship in a stock is a bad sign because odds are that many institutional investors looked at the stock and passed it over. The things we are looking for with C-A-N-S-L-I-M are really signs that the bigger money (mutual funds, banks, insurance companies, pension funds, etc.) is coming into the stock. See that there is a better-than-average performance record by at least a few of the institutional owners.
Another good thing about some institutional sponsorship is that it provides buying support for the stock. Beware of stocks that become "over owned". By the time performance is so obvious that almost all institutions own it, it is probably too late. Pay attention to whether the number of institutional owners is increasing or decreasing.
C - A - N - S - L - I - M
M = Market Direction
You can be right on everything else, but if you are wrong about the direction of the broad market you are still likely to lose money. The best way to analyze the overall market is to follow and understand every day what the general averages are doing. The difficult to recognize, but meaningful changes in the behavior of the market averages at important turning points is the best indicator of the condition of the whole market.
What signs should you look for to detect a market top? On one of the days in the uptrend, the total volume for the market will increase over the preceding day's high volume, but the Dow's closing average will show stalling action, or substantially less upward movement, than on prior days.
The spread between the daily high and low of the market index will likely be a bit larger than on the earlier days. Normal market liquidation near the market peak will only occur on one or two days, which are part of the uptrend. The market comes under distribution while it is advancing! This is one of the reasons so few people know how to recognize distribution (selling).
Immediately following the first selling near the top, a vacuum exists where volume may subside and the market averages will sell off for four days or so. The second, and probably the last early chance to recognize a top reversal is when the market attempts it's first rally, which it will always do after a number of days down from it's highest point. If this first attempt to bounce back follows through on the third, fourth, or fifth rally day either on decreased volume from the day before, or if the market average recovers less than half of the initial drop from it's former peak to the low, the comeback is feeble and sputtering when it should be getting strong. Frequently the first attempt at a rally during the beginning of a downtrend will fail abruptly. Possibly after a one day resurgence, the second day will open up strong, only to sell off toward the end of the day and suddenly close down.
After an advance in stocks for a couple of years, the majority of the original price leaders will top, and you can be fairly sure the overall market is going to get into trouble. It is very important to pay attention to the way the leading stocks are acting.
C - A - N - S - L - I - M
What is CAN SLIM®?CAN SLIM® is a formula created by William J. O'Neil, who is the founder of the Investor's Business Daily and author of the book How to Make Money in Stocks - A Winning System in Good Times or Bad.
Each letter in CAN SLIM® stands for one of the seven chief characteristics that are commonly found in the greatest winning stocks. In his book, he cites many examples including:
Texas Instruments, whose price rose from $25 to $250 from January 1958 to May 1960
Xerox, which went from $160 to the equivalent of $1340 from March 1963 to June 1966
Syntex, which leaped from $100 to $570 in the last six months of 1963
Dome Petroleum advanced 1000% in the 1978-1980 market
Prime Computer rose 1595% in the 1978-1980 market
Limited Stores' 3500% increase from 1982 to 1987.
The C-A-N-S-L-I-M characteristics are often present prior to a stock making a significant rise in price, and making huge profits for the shareholders!
O'Neil explains how he conducted an intensive study of 500 of the biggest winners in the stock market from 1953 to 1990. A model of each of these companies was built and studied. Again and again, it was noticed that almost all of the biggest stock market winners had very similar characteristics just before they began their big moves.
C - A - N - S - L - I - M
C = Current quarterly earnings per share.
They should be up a minimum of 25% - 50% over the year earlier. In fact, of the 500 best performing stocks O'Neil studied in the 38 years from 1953 to 1990, three out of four had earnings increases averaging more than 70% in the latest publicly reported quarter before the stocks began their major price advance. The one out of four that didn't show solid quarterly increases did so in the very next quarter, and those increases averaged 90%!
C - A - N - S - L - I - M
A = Annual earnings per share.
There should be meaningful growth over the last five years. The annual compounded growth rate of earnings in the superior firms should be from 25% to 50%, or even more, per year. With all of this emphasis on earnings, it is important to understand something about Price-Earnings Ratios (P/E). Factual analysis of the greatest winning stocks shows that P/E ratios have very little to do with whether a stock should be bought or not! In fact, you will automatically eliminate most of the best investments available if you're not willing to by a stock that trades with a high P/E. Remember earlier when I mentioned Xerox? In 1960 it traded at a 100 P/E - before it went up 3300% from $5 to $170 (adjusting for the stock splits). Genentech was priced at 200 times earnings in November 1985, and it bolted 300% in the next 5 months. Syntex sold for 45 times earnings in 1963, before it advanced 400%. For years analysts have misused P/E ratios, and it's amazing to me how so many people will still ask about a company's P/E before they ask about a company's earnings growth.
C - A - N - S - L - I - M
N = New product/management/price high.
Usually it is a new product or service that causes the big earnings acceleration we're looking for. Consider these examples:
Rexall's new Tupperware division, in 1958, helped the stock go from $16 to $50.
Thiokol came out with new rocket fuels for missiles back in 1957-1959. The stock blasted from $48 to the equivalent of $355.
In 1957-1960, Polaroid came out with the "picture in a minute" self-developing camera, the stock went from $65 to $260. Then in 1965-1967 they came out with a color-film version. The stock repeated with an amazing, split adjusted, rise from $23 to $133.
Syntex, in 1963, began marketing the oral contraceptive pill. In six months the stock soared from $100 to $550.
Computervision stock advanced 1235% in 1978-1980, with the introduction of Cad-Cam factory automation equipment.
Price Company went up 15 fold in 1982-1986 while opening their chain of wholesale warehouse membership stores.
Get the point? 95% of the greatest winners in the 38 year study O'Neil conducted were companies that had a major new product or service.
The other important thing to consider is the price of the stock. Most people miss the biggest winners in the market because of what O'Neil refers to as "the great paradox" of the stock market. It is hard to accept, but the stocks that seem too high and risky to the majority usually go higher and what seems low and cheap usually goes lower. If you don't think this is true, I challenge you to look in an old newspaper from a few months ago and observe a good number of stocks highlighted because they hit new highs and new lows. Then see where they are today. Most of the highs will be higher, and the lows will be even lower.
C - A - N - S - L - I - M
S = Supply/Demand: Small Cap + Volume
Supply and demand dictates the price of almost everything in your life. The law of supply and demand is more important than all the analyst opinions on Wall Street. The price of a stock with 400 million shares is hard to budge up because of the large supply of stock available. Yet, if a company has only 2 or 3 million shares outstanding, a reasonable amount of buying can push the price up rapidly because of the small available supply. If you are choosing between two stocks to buy, one with 60 million shares outstanding and one with 10 million shares, with all other factors equal, the smaller one will usually be the bigger mover. Stocks that have a large percentage owned by top management are generally better prospects. Again referencing O'Neil's 38 year study, more than 95% of the companies had less than 25 million shares outstanding when they had their greatest period of earnings improvement and stock price performance.
Foolish stock splits can hurt a stock's performance. Watch out for companies that split their stock 2 or 3 times in just a year or two. The splitting creates a larger supply and may make a company's stock performance more lethargic, like many "big cap" companies. Large holders who thinking of selling are often inclined to sell their 100,000 share positions before a 3-for-1 split would have them looking to sell 300,000. Smart short sellers (an infinitesimal group) pick on stocks beginning to falter after enormous price runups and splits, realizing that the potential number of shares for sale (particularly by funds) has dramatically been increased.
C - A - N - S - L - I - M
L = Leader
People often buy stocks they're comfortable and familiar with, like an old pair of shoes. Usually these are draggy, slow-pokes rather than leaping leaders. It is really important to look at how your stock is performing in relation to the overall market. The 500 best performing stocks from 1953 to 1990 averaged a relative price strength of 87 (scale of 1-99) just before they began their major advances in price. Avoid laggard stocks and look for genuine leaders.
C - A - N - S - L - I - M
I = Institutional Sponsorship
It takes big demand to move a stock significantly higher in price. Institutional buyers are the most powerful source. You don't need a large number of institutional owners, but should have at least a few. No institutional sponsorship in a stock is a bad sign because odds are that many institutional investors looked at the stock and passed it over. The things we are looking for with C-A-N-S-L-I-M are really signs that the bigger money (mutual funds, banks, insurance companies, pension funds, etc.) is coming into the stock. See that there is a better-than-average performance record by at least a few of the institutional owners.
Another good thing about some institutional sponsorship is that it provides buying support for the stock. Beware of stocks that become "over owned". By the time performance is so obvious that almost all institutions own it, it is probably too late. Pay attention to whether the number of institutional owners is increasing or decreasing.
C - A - N - S - L - I - M
M = Market Direction
You can be right on everything else, but if you are wrong about the direction of the broad market you are still likely to lose money. The best way to analyze the overall market is to follow and understand every day what the general averages are doing. The difficult to recognize, but meaningful changes in the behavior of the market averages at important turning points is the best indicator of the condition of the whole market.
What signs should you look for to detect a market top? On one of the days in the uptrend, the total volume for the market will increase over the preceding day's high volume, but the Dow's closing average will show stalling action, or substantially less upward movement, than on prior days.
The spread between the daily high and low of the market index will likely be a bit larger than on the earlier days. Normal market liquidation near the market peak will only occur on one or two days, which are part of the uptrend. The market comes under distribution while it is advancing! This is one of the reasons so few people know how to recognize distribution (selling).
Immediately following the first selling near the top, a vacuum exists where volume may subside and the market averages will sell off for four days or so. The second, and probably the last early chance to recognize a top reversal is when the market attempts it's first rally, which it will always do after a number of days down from it's highest point. If this first attempt to bounce back follows through on the third, fourth, or fifth rally day either on decreased volume from the day before, or if the market average recovers less than half of the initial drop from it's former peak to the low, the comeback is feeble and sputtering when it should be getting strong. Frequently the first attempt at a rally during the beginning of a downtrend will fail abruptly. Possibly after a one day resurgence, the second day will open up strong, only to sell off toward the end of the day and suddenly close down.
After an advance in stocks for a couple of years, the majority of the original price leaders will top, and you can be fairly sure the overall market is going to get into trouble. It is very important to pay attention to the way the leading stocks are acting.
C - A - N - S - L - I - M
Warren Buffet's Tenets
http://www.investorweb.com.au/school/buffett.asp
Warren Buffett Methodology
Content
Who Is Warren Buffett?The Warren Buffett Investment MethodologyBuffett's TenetsSummary of Buffett's Investment Process
Who Is Warren Buffett?
Warren Buffett is Chairman of Berkshire Hathaway Inc., a holding company, with interests in several subsidiaries engaged in a number of diverse business activities. Included in these subsidiaries is GEICO Corporation, the seventh largest auto insurer in the United States. Publicly traded companies include a 10.5% holding in American Express Company, 8% of The Coca-Cola Company, 9.5% of Federal Home Loan Mortgage Corporation, 8.5% of The Gillette Company, 16.5% of The Washington Post Company and 8% in Wells Fargo & Company. Berkshire Hathaway Inc. also has holdings or owns several private companies.
The Warren Buffett Investment Methodology
Warren Buffett's investment methodology is based on the following 12 tenets.
Buffett's Tenets
Business Tenets
Is the business simple and understandable?
Does the business have a consistent operating history?
Does the business have favourable long-term prospects?
Management Tenets
Is Management rational?
Is Management candid with its shareholders?
Does management resist the institutional imperative?
Financial Tenets
Focus on return on equity, not earnings per share
Calculate "owner earnings"
Look for companies with high profit margins
For every dollar retained, make sure the company has created at least one dollar of market value
Market Tenets
What is the value of the business?
Can the business be purchased at a discount to its real value?
Summary of Buffett's Investment Process
When Buffett invests, he sees a business whilst most investors see a stock price. According to Buffett, the investor and the business person should look at the company in the same way, because they both want essentially the same thing. The business person wants to buy the whole company and the investor wants to buy portions of the company. Buffett believes that in the long run, the price of the stock should approximate the change in value of the business. He believes it is foolish to use short-term prices to judge a company's success. Instead, he lets his companies report their value to him by economic progress. Once a year, he checks several key variables:
Return on beginning shareholder's equity
Change in operating margins, debt levels and capital expenditure needs:
The company's cash generating ability
If these economic variables are improving then Buffett concludes that the share price should reflect this in the long term.
Buffett avoids companies that are in need of major overhauls. He will only purchase companies that have shareholder-orientated managers. His investment methodology follows a four step process.
Step 1: Turn off the stock market
Buffett does not have a stock quote service in his office. He believes that by owning shares in an outstanding business for a number of years, what happens in the market on a day-to-day basis is inconsequential.
Step 2: Don't worry about the economy
Except for his preconceived notions that the economy has an inflation bias, Buffett dedicates no time or energy to analysing the economy. He prefers to buy a business that has the opportunity to profit regardless of the economy.
Step 3: Buy a business not a stock
Before investing in a company Buffett addresses the following key questions:
Is the business simple to understand?
Does the business have a consistent operating history?
Does the business have favourable long-term prospects?
Is management rational?
Is management candid with its shareholders?
Does management avoid the institutional imperative – irrationality?
From a financial point of view Buffett advocates.
Focus on return on equity, not earnings per share – a true measure of annual performance because it takes into consideration the company’s ever-growing capital base, the ratio of operating earnings to shareholders equity.
Calculate the "owner earnings" – Buffett seeks out companies that generate cash in excess of their needs as opposed to companies that consume cash. To determine owner earnings add depreciation and amortisation charges to net income and then subtract the expenditures the company needs to maintain its economic position and unit volume
Look for companies with high profit margins
For every dollar that has been retained, make sure the company has created at least one dollar of market value – to calculate this subtract from the company’s net income, all dividends paid to shareholders. Add the company’s retained earnings over a 10-year period. Then find the difference between the company’s current market value an its market value 10 years ago. If the change in the market value is less than the sum of retained earnings, the company is going backwards.
Then from a market perspective Buffett asks:
What is the value of the business – the value of the business is determined by the estimated cash flows expected to occur over the life of the business discounted at an appropriate interest rate. Buffett uses the 30-year US Treasury bond rate to discount expected cash flows.
Can the business be purchased as a significant discount to its real value – Buffett’s rule is: purchase the business only when its price is at a significant discount to its value.
Importantly, it is only at the final step that Buffett looks at the stock’s market price.
Buffett believes that whilst calculating the value of the business is not difficult, problems can arise when an analyst wrongly estimates a company’s future cash flow. Buffett deals with this problem in two ways:
He increases his chances of correctly predicting future cash flows by sticking with businesses that are simple and stable in character; and
He insists that each company he purchases there must be a margin of safety between the purchase price and the determined value.
Step 4: Manage a portfolio of Businesses
Buffett believes that wide diversification is only required when investors do not understand what they are doing. "On the other hand if you are a know-something investor able to find five to ten sensibly priced companies that possess long-term competitive advantages, conventional diversification makes no sense to you".
Back to TopDISCLAIMER This report is prepared exclusively for clients of InvestorWeb. The report contains recommendations and advice of a general nature and does not have regard to the particular circumstances or needs of any specific person who may read it. Each client should assess either personally or with the assistance of a licensed financial adviser whether the InvestorWeb recommendation or advice is appropriate to their situation before making an investment decision. The information contained in the report is believed to be reliable, but its completeness and accuracy is not guaranteed. Opinions expressed may change without notice. Neither InvestorWeb, nor its parent IWL Limited accept any liability, whether direct or indirect arising from the use of information contained in this report. No part of this report is to be construed as a solicitation to buy or sell any investment. The performance of the investment in this report is not a representation as to future performance or likely return. © 2008. IWL Limited. The material contained in this report is subject to copyright and may not be reproduced without the consent of the copyright owner.
Warren Buffett Methodology
Content
Who Is Warren Buffett?The Warren Buffett Investment MethodologyBuffett's TenetsSummary of Buffett's Investment Process
Who Is Warren Buffett?
Warren Buffett is Chairman of Berkshire Hathaway Inc., a holding company, with interests in several subsidiaries engaged in a number of diverse business activities. Included in these subsidiaries is GEICO Corporation, the seventh largest auto insurer in the United States. Publicly traded companies include a 10.5% holding in American Express Company, 8% of The Coca-Cola Company, 9.5% of Federal Home Loan Mortgage Corporation, 8.5% of The Gillette Company, 16.5% of The Washington Post Company and 8% in Wells Fargo & Company. Berkshire Hathaway Inc. also has holdings or owns several private companies.
The Warren Buffett Investment Methodology
Warren Buffett's investment methodology is based on the following 12 tenets.
Buffett's Tenets
Business Tenets
Is the business simple and understandable?
Does the business have a consistent operating history?
Does the business have favourable long-term prospects?
Management Tenets
Is Management rational?
Is Management candid with its shareholders?
Does management resist the institutional imperative?
Financial Tenets
Focus on return on equity, not earnings per share
Calculate "owner earnings"
Look for companies with high profit margins
For every dollar retained, make sure the company has created at least one dollar of market value
Market Tenets
What is the value of the business?
Can the business be purchased at a discount to its real value?
Summary of Buffett's Investment Process
When Buffett invests, he sees a business whilst most investors see a stock price. According to Buffett, the investor and the business person should look at the company in the same way, because they both want essentially the same thing. The business person wants to buy the whole company and the investor wants to buy portions of the company. Buffett believes that in the long run, the price of the stock should approximate the change in value of the business. He believes it is foolish to use short-term prices to judge a company's success. Instead, he lets his companies report their value to him by economic progress. Once a year, he checks several key variables:
Return on beginning shareholder's equity
Change in operating margins, debt levels and capital expenditure needs:
The company's cash generating ability
If these economic variables are improving then Buffett concludes that the share price should reflect this in the long term.
Buffett avoids companies that are in need of major overhauls. He will only purchase companies that have shareholder-orientated managers. His investment methodology follows a four step process.
Step 1: Turn off the stock market
Buffett does not have a stock quote service in his office. He believes that by owning shares in an outstanding business for a number of years, what happens in the market on a day-to-day basis is inconsequential.
Step 2: Don't worry about the economy
Except for his preconceived notions that the economy has an inflation bias, Buffett dedicates no time or energy to analysing the economy. He prefers to buy a business that has the opportunity to profit regardless of the economy.
Step 3: Buy a business not a stock
Before investing in a company Buffett addresses the following key questions:
Is the business simple to understand?
Does the business have a consistent operating history?
Does the business have favourable long-term prospects?
Is management rational?
Is management candid with its shareholders?
Does management avoid the institutional imperative – irrationality?
From a financial point of view Buffett advocates.
Focus on return on equity, not earnings per share – a true measure of annual performance because it takes into consideration the company’s ever-growing capital base, the ratio of operating earnings to shareholders equity.
Calculate the "owner earnings" – Buffett seeks out companies that generate cash in excess of their needs as opposed to companies that consume cash. To determine owner earnings add depreciation and amortisation charges to net income and then subtract the expenditures the company needs to maintain its economic position and unit volume
Look for companies with high profit margins
For every dollar that has been retained, make sure the company has created at least one dollar of market value – to calculate this subtract from the company’s net income, all dividends paid to shareholders. Add the company’s retained earnings over a 10-year period. Then find the difference between the company’s current market value an its market value 10 years ago. If the change in the market value is less than the sum of retained earnings, the company is going backwards.
Then from a market perspective Buffett asks:
What is the value of the business – the value of the business is determined by the estimated cash flows expected to occur over the life of the business discounted at an appropriate interest rate. Buffett uses the 30-year US Treasury bond rate to discount expected cash flows.
Can the business be purchased as a significant discount to its real value – Buffett’s rule is: purchase the business only when its price is at a significant discount to its value.
Importantly, it is only at the final step that Buffett looks at the stock’s market price.
Buffett believes that whilst calculating the value of the business is not difficult, problems can arise when an analyst wrongly estimates a company’s future cash flow. Buffett deals with this problem in two ways:
He increases his chances of correctly predicting future cash flows by sticking with businesses that are simple and stable in character; and
He insists that each company he purchases there must be a margin of safety between the purchase price and the determined value.
Step 4: Manage a portfolio of Businesses
Buffett believes that wide diversification is only required when investors do not understand what they are doing. "On the other hand if you are a know-something investor able to find five to ten sensibly priced companies that possess long-term competitive advantages, conventional diversification makes no sense to you".
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Sam Walton's Ten Rules
Sam Walton 1918 - 1992
Sam Walton, the founder of Wal-Mart, grew up poor in a farm community in rural Missouri during the Great Depression. The poverty he experienced while growing up taught him the value of money and to persevere.
After attending the University of Missouri, he immediately worked for J.C. Penny where he got his first taste of retailing. He served in World War II, after which he became a successful franchiser of Ben Franklin five-and-dime stores. In 1962, he had the idea of opening bigger stores, sticking to rural areas, keeping costs low and discounting heavily. The management disagreed with his vision. Undaunted, Walton pursued his vision, founded Wal-Mart and started a retailing success story. When Walton died in 1992, the family's net worth approached $25 billion.
Today, Wal-Mart is the world's #1 retailer, with more than 4,150 stores, including discount stores, combination discount and grocery stores, and membership-only warehouse stores (Sam's Club). Learn Walton's winning formula for business.
Rule 1: Commit to your business. Believe in it more than anybody else. I think I overcame every single one of my personal shortcomings by the sheer passion I brought to my work. I don't know if you're born with this kind of passion, or if you can learn it. But I do know you need it. If you love your work, you'll be out there every day trying to do it the best you possibly can, and pretty soon everybody around will catch the passion from you — like a fever.
Rule 2: Share your profits with all your associates, and treat them as partners. In turn, they will treat you as a partner, and together you will all perform beyond your wildest expectations. Remain a corporation and retain control if you like, but behave as a servant leader in your partnership. Encourage your associates to hold a stake in the company. Offer discounted stock, and grant them stock for their retirement. It's the single best thing we ever did.
Rule 3: Motivate your partners. Money and ownership alone aren't enough. Constantly, day by day, think of new and more interesting ways to motivate and challenge your partners. Set high goals, encourage competition, and then keep score. Make bets with outrageous payoffs. If things get stale, cross-pollinate; have managers switch jobs with one another to stay challenged. Keep everybody guessing as to what your next trick is going to be. Don't become too predictable.
Rule 4: Communicate everything you possibly can to your partners. The more they know, the more they'll understand. The more they understand, the more they'll care. Once they care, there's no stopping them. If you don't trust your associates to know what's going on, they'll know you really don't consider them partners. Information is power, and the gain you get from empowering your associates more than offsets the risk of informing your competitors.
Rule 5: Appreciate everything your associates do for the business. A paycheck and a stock option will buy one kind of loyalty. But all of us like to be told how much somebody appreciates what we do for them. We like to hear it often, and especially when we have done something we're really proud of. Nothing else can quite substitute for a few well-chosen, well-timed, sincere words of praise. They're absolutely free — and worth a fortune.
Rule 6: Celebrate your success. Find some humor in your failures. Don't take yourself so seriously. Loosen up, and everybody around you will loosen up. Have fun. Show enthusiasm — always. When all else fails, put on a costume and sing a silly song. Then make everybody else sing with you. Don't do a hula on Wall Street. It's been done. Think up your own stunt. All of this is more important, and more fun, than you think, and it really fools competition. "Why should we take those cornballs at Wal-Mart seriously?"
Rule 7: Listen to everyone in your company and figure out ways to get them talking. The folks on the front lines — the ones who actually talk to the customer — are the only ones who really know what's going on out there. You'd better find out what they know. This really is what total quality is all about. To push responsibility down in your organization, and to force good ideas to bubble up within it, you must listen to what your associates are trying to tell you.
Rule 8: Exceed your customer's expectations. If you do, they'll come back over and over. Give them what they want — and a little more. Let them know you appreciate them. Make good on all your mistakes, and don't make excuses — apologize. Stand behind everything you do. The two most important words I ever wrote were on that first Wal-Mart sign: "Satisfaction Guaranteed." They're still up there, and they have made all the difference.
Rule 9: Control your expenses better than your competition. This is where you can always find the competitive advantage. For twenty-five years running — long before Wal-Mart was known as the nation's largest retailer — we've ranked No. 1 in our industry for the lowest ratio of expenses to sales. You can make a lot of different mistakes and still recover if you run an efficient operation. Or you can be brilliant and still go out of business if you're too inefficient.
Rule 10: Swim upstream. Go the other way. Ignore the conventional wisdom. If everybody else is doing it one way, there's a good chance you can find your niche by going in exactly the opposite direction. But be prepared for a lot of folks to wave you down and tell you you're headed the wrong way. I guess in all my years, what I heard more often than anything was: a town of less than 50,000 population cannot support a discount store for very long.
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Sam Walton, the founder of Wal-Mart, grew up poor in a farm community in rural Missouri during the Great Depression. The poverty he experienced while growing up taught him the value of money and to persevere.
After attending the University of Missouri, he immediately worked for J.C. Penny where he got his first taste of retailing. He served in World War II, after which he became a successful franchiser of Ben Franklin five-and-dime stores. In 1962, he had the idea of opening bigger stores, sticking to rural areas, keeping costs low and discounting heavily. The management disagreed with his vision. Undaunted, Walton pursued his vision, founded Wal-Mart and started a retailing success story. When Walton died in 1992, the family's net worth approached $25 billion.
Today, Wal-Mart is the world's #1 retailer, with more than 4,150 stores, including discount stores, combination discount and grocery stores, and membership-only warehouse stores (Sam's Club). Learn Walton's winning formula for business.
Rule 1: Commit to your business. Believe in it more than anybody else. I think I overcame every single one of my personal shortcomings by the sheer passion I brought to my work. I don't know if you're born with this kind of passion, or if you can learn it. But I do know you need it. If you love your work, you'll be out there every day trying to do it the best you possibly can, and pretty soon everybody around will catch the passion from you — like a fever.
Rule 2: Share your profits with all your associates, and treat them as partners. In turn, they will treat you as a partner, and together you will all perform beyond your wildest expectations. Remain a corporation and retain control if you like, but behave as a servant leader in your partnership. Encourage your associates to hold a stake in the company. Offer discounted stock, and grant them stock for their retirement. It's the single best thing we ever did.
Rule 3: Motivate your partners. Money and ownership alone aren't enough. Constantly, day by day, think of new and more interesting ways to motivate and challenge your partners. Set high goals, encourage competition, and then keep score. Make bets with outrageous payoffs. If things get stale, cross-pollinate; have managers switch jobs with one another to stay challenged. Keep everybody guessing as to what your next trick is going to be. Don't become too predictable.
Rule 4: Communicate everything you possibly can to your partners. The more they know, the more they'll understand. The more they understand, the more they'll care. Once they care, there's no stopping them. If you don't trust your associates to know what's going on, they'll know you really don't consider them partners. Information is power, and the gain you get from empowering your associates more than offsets the risk of informing your competitors.
Rule 5: Appreciate everything your associates do for the business. A paycheck and a stock option will buy one kind of loyalty. But all of us like to be told how much somebody appreciates what we do for them. We like to hear it often, and especially when we have done something we're really proud of. Nothing else can quite substitute for a few well-chosen, well-timed, sincere words of praise. They're absolutely free — and worth a fortune.
Rule 6: Celebrate your success. Find some humor in your failures. Don't take yourself so seriously. Loosen up, and everybody around you will loosen up. Have fun. Show enthusiasm — always. When all else fails, put on a costume and sing a silly song. Then make everybody else sing with you. Don't do a hula on Wall Street. It's been done. Think up your own stunt. All of this is more important, and more fun, than you think, and it really fools competition. "Why should we take those cornballs at Wal-Mart seriously?"
Rule 7: Listen to everyone in your company and figure out ways to get them talking. The folks on the front lines — the ones who actually talk to the customer — are the only ones who really know what's going on out there. You'd better find out what they know. This really is what total quality is all about. To push responsibility down in your organization, and to force good ideas to bubble up within it, you must listen to what your associates are trying to tell you.
Rule 8: Exceed your customer's expectations. If you do, they'll come back over and over. Give them what they want — and a little more. Let them know you appreciate them. Make good on all your mistakes, and don't make excuses — apologize. Stand behind everything you do. The two most important words I ever wrote were on that first Wal-Mart sign: "Satisfaction Guaranteed." They're still up there, and they have made all the difference.
Rule 9: Control your expenses better than your competition. This is where you can always find the competitive advantage. For twenty-five years running — long before Wal-Mart was known as the nation's largest retailer — we've ranked No. 1 in our industry for the lowest ratio of expenses to sales. You can make a lot of different mistakes and still recover if you run an efficient operation. Or you can be brilliant and still go out of business if you're too inefficient.
Rule 10: Swim upstream. Go the other way. Ignore the conventional wisdom. If everybody else is doing it one way, there's a good chance you can find your niche by going in exactly the opposite direction. But be prepared for a lot of folks to wave you down and tell you you're headed the wrong way. I guess in all my years, what I heard more often than anything was: a town of less than 50,000 population cannot support a discount store for very long.
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