Warren Buffett

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ITHE WISDOM OF WARREN BUFFETT   7/15/16

INVESTING-SUCCESS              Warren's investing secrets

COMPANY-MARGINS            Look at the companies' margins

RECENT HOLDINGS                Current company holdings

Warren Buffett’s Style For Investing

 

The following is

From the Charts & Articles (ARTICLE #3) Page dated 7/15/16

 

Bull and Bear Markets

Note the report from Barron's 12/17/2007 article on Warren Buffett below which also includes his top current holdings.

 

     To give you an idea of the results if you follow Warren Buffett’s (WB) type of investing: a $10,000 investment

     in his company (Berkshire Hathaway) in 1967 would be worth $30 million in 2005.  If you had invested the same

     amount in the S & P 500 Index Fund over the same period of time your investment would be worth ½ million.

 

Warren's secrets of success:

  •       Invest in unpopular or unfashionable companies with value sometimes call “cigar butt” companies. These  companies are no longer of interest to the professional investors and thus are undervalued, but still have a few puffs of life in them.

  •       Warren does exhaustive research into companies and has the approach as if he is going to partner or join the company before he invests. He has to be excited about the company and the business that it is in.

          MANAGEMENT

  •       Buying stock Warren’s style can be compared to buying a car. Look at the company that manufactures the car. Does it produce cars that are top quality, efficient, dependable and maintenance free? Can you sell the car in a couple years with minimum depreciation?

  •       To invest in a company Warren takes a look at management and puts this on top of his list. The more you know about the people running the company the better buy/sell decisions will be made. If you can’t make the annual meetings or talk to management in person like Warren does then read the CEO’s bio.

QUALITY PRODUCTS

     The more high-end its products are the better margins the company will make. Companies charge a premium for new technology, seeker designs, more features, better packaging which all go into high-end products. The low-end products without patents are copied by China companies and sold at a discount.

 

KNOW THE COMPANY AND THE BUSINESS IT IS IN

     You should know if the company is in class by itself or classless.  Whether or not a company can grow its profits should not be a guessing game. Warren stays away from the buzz-generators or the rumor mill that gets the Wall Street herd investing in the popular companies. He stayed away from the dot-com, silicon,

     wireless, DSL, cable and biotech revolutions in the late 1990s. He also missed the big tech bubble explosion in 2000. In other words Warren does not follow cycles or technical analysis. He is a long term value investor.

 

BUYING AT A DISCOUNT

     Warren wants good companies at a good price like buying a car at a good price. To determine if the stock is selling at a good

 price take a look at its price to earnings ratio P/E. Any company with a P/E of 10 is worth looking at. Take a closer look at the

companies future (or forward) projected earnings for the next five years. If the company has a P/E of 10 and its projected annual

earnings over the next five years is 10% the PEG where G is the growth will have the following calculation:

  •       Trailing 12 month P/E= of 10

          Projected annual earnings is at 10%

          PEG = 10:10      10/10= 1.00 which is a good candidate as a buy.

          PEG=1.

  •       Another example: trailing 12 month P/E=12

          Projected annual earnings at 15%

          PEG = 12:15      12/15= 0.8 which is a good candidate as a buy.

      A rule to follow is only consider a company with a PEG under 2 as a candidate  to buy. A better ratio is the EBITDA (Earnings

before interest, taxes, depreciation and amortization) and EV (enterprise value). EV is the market capitalization of a company plus its cash minus its debt. This would be  the companies selling price if it was put on the market. The Yahoo financial statistics web page lists

an EV/EBITDA  ratio for all companies it covers.

 

      Another ratio to consider is the price-to-book (P/B) where price is the price of the stock and book is the net assets or assets minus liabilities. At a P/B of 1, the price per share you’re paying is the same as the value of the net assets per share, which is a great deal.

 any P/B less than 2 is considered a good investment.

 

 The basics for investing like Warren is to look at ratios and not cycles or technical analysis; however, if you put on your thinking caps, Warren does follow the cycles of bull and bear markets because in a full out bear market the good stocks go down with all the others.

It is like the tide, at low tide all ships go lower and at extreme low tide some ships rest on the bottom. So at low tide or at the bottom

 of a bear market the stocks  that Warren is interested in will hit the PEG of 1, and P/B of 1 or better. That is Warrens definition of buying at a discount.

      Tides compared to the market

       BUYING SAFETY

  •       Safety by definition is investing in the kind of companies least likely to tank and are the most insulated when the economy heads south with an economic slowdown, recession or depression.

  •       In an economic downturn the stock market may retreat up to 25% or more. If you follow the “WB” rules you will break even or better in a bear market because you will only buy the stocks when they are selling at a discount which is at or below fair value. If you bought stocks in 1999 the market was overvalued because it was at a peak of a major bull market and most stocks were overvalued. Stocks are like water which seeks its own level and stocks seek there fair value price level.    

  •       Another factor of safety is to buy stocks that have increased their dividends over the last five years. In order to increase dividends the companies must have growth in earnings; The “WB” way is to reinvest the dividends and capital gains to obtain compound exponential growth over decades not just years.

 

FAT MARGINS

  •  Margins are how much profit a company is making from its revenues.

  • Gross margins factor in very basic costs.

  • Operational margins factor in a host of additional costs to operate the business.

  • For investment purposes look at the company’s margins for the last four quarters and check the trend. If the operational margins are increasing, it is a bad sign. If the margins are below 20% and steady, it is a good sign.

 

          WIDE MOAT

There are two kinks of moats:

  1. Companies try to build moats around their products, like INTEL tried to build a moat around its castle of micro-chips and be number 1 in that industry. Along came Advanced Micro Devices (AMD) which has succeeded in building a bridge across that moat.  Other companies like General Motors, Ford and Chrysler were fat and happy with their dominance (moat) in the automotive industry. Honda started including automobiles in their lawn mower and motorcycle production lines, and built a bridge over their moat. A moat offers a company some protection such as patients, top notch R&D, and some government regulations from competitors.  But most moats are only temporary protection and bridges can be built over them.

  2. The other kind of moat is to follow the “WB” rules of investing and build a moat around your portfolio.

DEBT

  • Paying interest on loans lowers net earnings and gives the profit to the banks rather then your company. It also increases the companies risk profile, which could lead to bankruptcy if the company’s revenues decrease below their bottom line.

  • Financially conservative companies expand by using their retained earnings rather than getting bank loans.

  • To measure a company’s debt, take a look at its debt-to-equity ratio (D/E). Debt should be less than 50% of equity and can be found on the company’s balance sheet in its financial report.

CASH FLOW

       Warren’s basic rule is for a company to make more than it spends. A cash flow over 10% after capital

       expenditure (capex) falls in the yes category for WB. Warren also looks at the companies past ten years for

       positive cash flow growth.

QUALITY, SAFETY AND GROWTH

       These are the basis of Warren’s investment success. Berkshire’s portfolio of 38 stocks is worth 45.3 billion in

       2005 and was bought over a period beginning from 1967. A mutual fund that mimics the WB investments is the

       Wisdom Fund (WSDVX) which invests in 33 of the 38 stocks held by Berkshire. Report by Andrew Gordon 

   Edited for the internet by bobs-webdb Service.

Barrons 12/17/2007 article on Warren Buffett by Andrew Barry

   Berkshire Hathaway (BRK) shares are now overvalued up 30% since Aug 1, because investors bid up its shares

          hoping to capitalize on the financial sector's distress. BRK is holding $39 billion in cash and investors believe

Warren will put some on the money in financials which are trading at wholesale prices.

February 1,2011 update

Update for November, 2010

The stocks listed are the largest equity holdings as of October 20, 2010, The chart above shows that BRK-follows the SP500 Index

RANK

2007

COMPANY

STOCK-MKT

VALUE ($BIL)

RANK

1999

COMPANY

STOCK-MKT

VALUE ($BIL)

1

EXXON MOBIL

507

1

MICROSOFT

604

2

GE

380

2

GE

508

3

MICROSOFT

329

3

CISCO

366

4

AT&T

254

4

WAL-MART

308

5

P&G

231

5

EXXON MOBIL

278

6

BERKSHIRE

220

6

INTEL

275

7

GOOGLE

217

7

LUCENT

235

8

CHEVRON

197

8

IBM

194

9

J&J

194

9

CITIGROUP

188

10

WAL MART

194

35

BERKSHIRE

85

 

BERKSHIRE'S TOP TEN DIVIDEND PAYING EQUITY HOLDINGS 7/15/2016

COMPANY/TICKER

#SHARES

(MIL)

CURRENT

$PRICE

MKT VALUE

($BIL)

P/E %YIELD
GENERAL MOTOES/GM 50 30.5 47 5.10 5
IBM/IBM 82.2 148 141 11.15 3.8
PHILLIPS 66/PSX 78.6 78.9 41.2 11.76 3.2
WELLS FARGO/WFC 82.2 48.1 245 11.85 3.2
COCA COLA/KO 196 45.12 196 28.52 3.1
WALMARK/WMT 55 65.28 204 14,21 3.1
DEERE/DE 23.3 83.87 26 15.05 2.9
KARFT/KHC 325 84.76 104 71.54 2.7
US BANKCORP/USB 851 40.6 71.5 13.11 2.5
APPLE/AAPL 9.8 93.66 406 10.04 2.5