Wednesday, June 22, 2016


The ideal valuation process is an intelligence gathering operation. It should include both qualitative and quantitative data gathering and assessment.

Some of my clients are quick to jump into the quantitative estimation methods. However, notice that the four filter methods used by Warren Buffett and Charlie Munger take an approach that emphasizes three qualitative steps/filters prior to trying a quantitative estimation of intrinsic value per share. For example, take a look at this look into NVO where I place an admonition in front of the quantitative estimate pasted in further below.

"A November 2014 newspaper article suggested that a recent medical research breakthrough at Harvard University (creating insulin-producing cells from embryonic stem cells) could potentially put Novo Nordisk out of business. Dr Alan Moses, the chief medical officer of Novo Nordisk, commented that the biology of diabetes is incredibly complex but also that Novo Nordisk's mission is to alleviate and cure diabetes. If this new medical advance "...meant the dissolution of Novo Nordisk, that'd be fine." then, look here...

A look at NVO with an assumed growth rate of 7 percent.
Does NVO make for an intelligent investment or intelligent speculation today?1. Understand the economics of this business.2. Are there Sustainable Competitive Adantages?3. Are there Able and Trustworthy Managers?4. Is there a Margin of Safety from a bargain price

Starting with a base estimate of annual Free Cash Flow at a value of approximately $30,000,000,000 and the number of shares outstanding at 1,960,000,000 shares; I used an assumed FCF annual growth of 7 percent for the first 10 years and assume zero growth from years 11 to 15.  

The resulting estimated intrinsic value per share (discounted back to the present) is approximately $227.84.
Market Price = $52.42 Intrinsic Value = $227.84 (estimated) Debt/Equity ratio = .01 Price To Value (P/V) ratio = .23 and the estimated bargain = 77. percent.

Mr. Market may have overreacted downward recently. Here is an article below that you can discuss. The big question is whether NVO can maintain my conservative growth rate of 7% with current offerings and/or new product offerings. If so, then it is a great bargain in a high quality business that has produced impressive net incomes and free cash flow.

NVO has very little debt and it has impressive net profit margins.

Why This Pharma Giant Lost $8 Billion in Market Cap This WeekIts diabetes drug didn't cut heart attacks and other risks as much as expected.

Further "intelligence gathering and assessment" is obviously needed.

Tuesday, March 25, 2014

Introduction to the Second Edition of the Four Filters of Buffett & Munger

Having read the first edition 5 years ago, Charlie Munger recently wrote: "I applaud your effort and many of your conclusions."

How do we improve and optimize our investing decision making? This was the goal of the first edition of this book. Now, about 5 years later, this journey continues with more insights and examples.

We can use the Four Filters Invention of Warren E. Buffett and Charles T. Munger. Their four filters investing process helps us eliminate many inferior investing prospects. This filtering process helps us find high-quality winning investments. Their steps include evaluating a business’ economics, its competitive position, its managers, and its intrinsic value. It provides us a tested and effective toolset.

How and why are these filters effective? Warren Buffett said it best: “An investor cannot obtain superior profits from stocks by simply committing to a specific investment category or style.  He or she can earn them only by carefully evaluating facts and continuously exercising discipline.” These four filters focus on the business facts about the Products, Customers, Management, and the Financial Safety given by a bargain purchase.
The Four Filters are a search for: “Understandable first-class businesses, with enduring competitive advantages, accompanied by first-class managements, available at a bargain price.”[i]

In my view, Warren Buffett and Charlie Munger invented an investing formula that is underappreciated by the business and academic communities. It is an amazing intellectual achievement in both practical and Behavioral Finance.  The filters are an important set of steps used by the world’s greatest investors for finding high quality investments. 

As a useful guide for assessing intrinsic value and sensible price, the filters function as an effective time-tested focusing process for investing success. They help us frame our investing decision making process correctly, and help us prevent foolish and costly losses.  Using this process, you and I will become better investors.  We improve the way we think about businesses. This innovation uses qualitative factors as well as quantitative factors to help us find and insure a good stock or whole business for investment.  It raises the odds of investing success. 

The first edition received some criticism from casual readers stating that it restated many of the writings and talks of Buffett and Munger. Yes, it did. I tried to tell the story from their perspective. So the use of many quotations was necessary, and they were approved for use.

These critical readers did not realize that I was trying to design a book as if Warren or Charlie had written it themselves. Perhaps, I did not explain that clearly enough. For example, if I insert a passage like this next one by Charlie Munger, it illustrates his frame of mind: “The way to win is to work, work, work, work and hope to have a few insights…. And you’re probably not going to be smart enough to find thousands in a lifetime.  And when you get a few, you really load up. It’s just that simple.”[ii]

This book is about the intellectual collaboration and experiences of two good friends who smartly changed the world of investing and invented a thoughtful and effective process. They made a lot of money for themselves and their shareholders.  There is another treasure hidden in these words: how to improve and optimize our decision making process.

This is also a story about exercising self-discipline.  Look to the future and think clearly for yourself.  Be open to new ideas from wise people. Study the past, and learn from it. As Ben Graham said in the introduction of his book, The Intelligent Investor: “No statement is more true and better applicable to Wall Street than the famous warning of Santayana: “Those who do not remember the past are condemned to repeat it.” 

History is important to Charlie Munger as well. He said this: “Business schools fail by teaching what is easy to teach but less useful. Going back to teaching business history as Harvard used to would be good; there’s a lot to be learned from the rise and fall of GM, or the rise and fall and rise of railroads.”

This book is about one smart way to frame a decision process using sound principles. How do we develop a better understanding of a business, its products, its present, its management, its earnings, and its future? Charlie Munger said, “We read a lot. I don’t know anyone who’s wise who doesn’t read a lot.   But that’s not enough: You have to have a temperament to grab ideas and do sensible things.”[iii] 

This year, 2014, I learned something new from the 2013 annual letter. I learned that retained earnings can be a “powerful competitive advantage.” Warren Buffett put it this way: “Here’s a little known fact: Last year MidAmerican retained more dollars of earnings – by far – than any other American electric utility. We and our regulators see this as an important advantage – one almost certain to exist five, ten and twenty years from now.”

Over the years, I have read all of the Letters to Shareholders of Berkshire Hathaway. I have also read most of the books and articles about Warren Buffett, his teacher Benjamin Graham, and his business partner Charlie Munger. I also served as the editor of Scott Thompson’s fine textbook: “The Art & Science of Value Investing.”

Having listened to many hours of audio lectures and interviews, I have been consistently interested in how Warren Buffett and Charlie Munger “frame” an investment decision, and how they find a winning investment prospect.  This book is a story about their rational filter process. It helps them make better investing decisions.  In the words of Charlie Munger, “You have to understand the odds and have the discipline to bet only when the odds are in your favor.”[iv] And, I hope that this second edition adds more meat (examples) into your decision making process.

Warren Buffett has written about the Four Filters in several ways. This behavioral sequence is always similar: “Charlie and I look for companies that have a) a business we understand; b) favorable long-term economics; c) able and trustworthy management; and d) a sensible price tag.”[v]  While Charlie Munger has described the process as getting into high quality businesses, Warren Buffett has also phrased the Four Filter process in this slightly different way: “When buying companies or common stocks, we look for understandable first-class businesses, with enduring competitive advantages, accompanied by first-class managements, available at a bargain price.”[vi]

In 1996, Buffett wrote this about investing in public companies. It is a twist on the Four Filter formula that sets the bar towards realism and conservativism: “The art of investing in public companies successfully is little different from the art of successfully acquiring subsidiaries.  In each case you simply want to acquire, at a sensible price, a business with excellent economics and able, honest management. Thereafter, you need only monitor whether these qualities are being preserved.”[vii]

After devoting hours of thinking time into their investing ideas and guiding principles[viii], I felt like a man who stumbled upon hidden treasure in the middle of his back yard. I rediscovered a simple sequence called the Four Filters! They were there all the time.

In the 2003 Berkshire Hathaway annual meeting, a man asked Warren Buffett this question: “Could you just take us thru your filter process when it comes to, selecting a company?” Warren Buffett answered, “It’s a question of a. Can I understand it?...if it makes it thru that filter…b. Does it have some kind of sustainable long-term competitive advantage…” If it makes it thru that filter…How do I feel about the management in terms of, their ability and honesty?.. and if it makes it thru that filter,…What’s the price?... And if it gets it thru all four filters, I sign my name to the check.”

These ideas sound so simple. Many people hear them at the Berkshire Hathaway annual meeting in Omaha each year. Yet, few people have stopped to think about the importance and usefulness of each individual filter.

As a formula, the Four Filters function as a set of “Investing Best Practices.” They help us develop better “self-control.” They force us to focus on “Wonderful Businesses.”[ix]  They function as a smart targeting system steering us with clear goals. And, using the Four Filters, promotes investing “self-discipline.” This book unveils how the Four Filters are a significant intellectual achievement in Behavioral Finance.

In addition to the framing aspects to this decision making, the checklist nature of these Four Filters serve as a logical and sensible justification mechanism.  A standard checklist serves to confirm or disconfirm evidence.  Like pilots who use checklist prior to flying, the Four Filters help us frame a rational investment decision. Charlie Munger believes in using checklist routines to help us avoid a lot of errors.  These errors occur because our human brains are wired to find shortcuts, or what Munger calls “shortcut types of approximations.” 

Charlie Munger said: “The main antidotes to miscues from Availability-Misweighing Tendency often involve procedures, including the use of checklists, which are almost always helpful.”[x]  At the USC Law School Commencement speech in 2007, he said: “You should have all of this elementary wisdom, and you should go through a mental checklist in order to use it. There is no other procedure that will work as well.”[xi] Munger has also said: "You need a different checklist and different mental models for different companies. I can never make it easy by saying, 'Here are three things.' You have to derive it yourself to ingrain it in your head for the rest of your life."

To be fair, other great investors used quality checklists to earn profits. And, other great investors contributed “Best Practices” to the art of effective investing. Later in this book, we see the contributions of several investing thought leaders.

Do you have a “Happy Zone?”  The Four Filters serve to increase the probability of investment success by defining “the right ball to hit.” Buffett tells students this Ted Williams baseball analogy: “I put heavy weight on certainty. Use probability in your favor and avoid risk.   It’s not risky to buy securities at a fraction of what they are worth.  Don’t gamble.  You’re dealing with a lot of silly people in the marketplace; it’s like a great big casino, and everyone else is boozing.  Watch for unusual circumstances. Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised. In appraising the odds, Ted Williams explained how he increased his probability of hitting:   "My argument is, to be a good hitter, you've got to get a good ball to hit.  It's the first rule in the book.”
This book trims “all the lean beef” into five chapters: “the Four Filter chapters and a summarizing chapter.” The final summary chapter ties the filters together and demonstrate why these filters work to maximize the probability of investing success from both a mathematical and a practical point of view. This second edition adds in more solid examples as well as insights I have learned in the past five years. See the new section on Coca-Cola and their “Yield On Cost” estimation.

So, how were these Four Filters developed? Over the course of their investing experiences, Warren Buffett and Charlie Munger have had many discussions about the qualities of bad, good, and mediocre businesses they had invested in. Also, keep in mind that Charlie Munger believes wisdom acquisition is a moral duty.[xii]  So, the Four Filters seem to have evolved from their discussions and their early business and investing experiences.

Interestingly, the 1977 Letter to Shareholders of Berkshire Hathaway is the earliest one listing the Four Filters. It is also the earliest letter posted at the company’s website: ( ).  This Four Filters Formula was presented in this form:  “We select our marketable equity securities in much the same way we would evaluate a business for acquisition in its entirety.  We want the business to be (1) one that we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) available at a very attractive price.”[xiii]

Charlie Munger said that once they had gotten over the hurdle of recognizing that a business could be a bargain based on quantitative measures that would have horrified Ben Graham, they started thinking about better businesses.  Their results show the bulk of the billions earned at Berkshire Hathaway have come from the better businesses.  Munger described their system this way: “We came to this notion of finding a mispriced bet and loading up when we were very confident that we were right.  So we're way less diversified. And I think our system is miles better.”[xiv]

For years, Buffett and Munger would site See’s Candies as the best example of a “wonderful business.” See's Candies taught Buffett and Munger much about the evaluation of franchises. Both men admit that they have made significant money because of the lessons they learned at See's. See’s Candies is the wonderful business.

In their talks and writings, they refer to a great business as a “franchise” or a “wonderful business.” Buffett wrote: “An economic franchise arises from a product or service that: (1) is needed or desired; (2) is thought by its customers to have no close substitute and; (3) is not subject to price regulation. The existence of all three conditions will be demonstrated by a company's ability to regularly price its product or service aggressively and thereby to earn high rates of return on capital. Moreover, franchises can tolerate mismanagement. Inept managers may diminish a franchise's profitability, but they cannot inflict mortal damage.”

Buffett and Munger respect able and trustworthy managers. As you read about these great businesses, think about the product or service that: (1) is strongly desired; (2) has no close substitute and; (3) has pricing power. As Buffett said, “A moat that must be continuously rebuilt will eventually be no moat at all. Additionally, this criterion eliminates the business whose success depends on having a great manager.” He summarizes it this way: “We believe that our formula - the purchase at sensible prices of businesses that have good underlying economics and are run by honest and able people - is certain to produce reasonable success. We expect, therefore, to keep on doing well.” 

[i] The Four Filters, Berkshire Chairman’s Letter to Shareholders, 2007.
[ii] From the talk called “A Lesson on Elementary, Worldly Wisdom As It Relates To Investment Management & Business” by Charles Munger, USC Business School, 1994.
[iii] Berkshire Hathaway Annual Meeting, 2004.
[iv] Charlie Munger talk at Harvard Law School, 2001.

[v] Berkshire Chairman’s Letter to Shareholders, 2007, 6.
[vi] Berkshire Chairman’s Letter to Shareholders, 1989,(
[vii] Berkshire Chairman's Letter to Shareholders, 1996.

[viii] Owner-oriented principles, Berkshire Hathaway Owner’s Manual, 1996.
[ix] Berkshire Chairman’s Letter to Shareholders, 1989,(
[x] (The Psychology of Human Misjudgment Revised Speech by Charles T. Munger), Kaufman, Peter D., Poor Charlie’s Almanack, Virginia Beach, VA: PCA Publication, LLC, 2005.

[xi] Charlie Munger’s speech at USC Law School Commencement, 2007.

[xii] Charlie Munger’s speech at USC Law School Commencement, 2007.

[xiii] Berkshire Chairman’s Letter to Shareholders, 1989, (
[xiv] A Lesson on Elementary, Worldly Wisdom As It Relates To Investment Management & Business”. Charles Munger, USC Business School, 1994.

Saturday, December 07, 2013

Winners Of The Great Recession

By Bud Labitan

Over the past five years, these businesses have prospered mightily. They have produced excellent returns in generating free cash flow for shareholders.

Apple Inc.         AAPL
Google, Inc.      GOOG
CF Industries    CF    PCLN
BlackRock, Inc.   BLK
ExxonMobil     XOM

How did these businesses manage to prosper in a time many consider to be the worst economic period since the great depression of the 1930’s? First, let me place this disclaimer. Some of these business descriptions are taken directly from each company’s marketing material as well as other online sources.

The Great Global Recession of 2009 began around December 2007 and it took a sharper dive in September 2008. Recall that U.S. housing bubble peaked in 2006. But, irrational bubble valuation forces caused the values of securities tied to U.S. real estate pricing to plummet and damage financial institutions globally. It was sparked by the outbreak of the U.S. subprime mortgage crisis and financial crisis of 2007–08. The exact start and end-point for the recession greatly varied from country to country. Overall, it was the worst global recession since World War II.

Let’s review how these businesses prospered during this Great Global Recession.

First, Apple designs, manufactures, and markets personal computers, mobile communication devices, and portable digital music and video players. It sells a variety of related software, services, peripherals, and networking solutions. It’s products and services include iPhone®, iPad®, Mac®, iPod®, Apple TV®, a portfolio of consumer and professional software applications, the iOS and OS X® operating systems, iCloud®, and a variety of accessory, service and support offerings. Apple sells its products through its online stores, retail stores, direct sales force, and third-party wholesalers, resellers, and value-added resellers.

Apple also sells and delivers digital content and applications through the iTunes Store®, App StoreSM, iBookstoreSM, and Mac App Store. In addition, the Company sells a variety of third-party iPhone, iPad, Mac and iPod compatible products, including application software, and various accessories, through its online and retail stores. Its reportable operating segments consist of the Americas, Europe, Japan, Asia-Pacific and Retail. The Europe segment includes European countries, as well as the Middle East and Africa. The Asia-Pacific segment includes Australia and Asian countries. Apple’s success has been in creating appealing devices that attract loyal customers who are willing to pay premium prices to own this brand.

Next, Google Incorporated became the most popular internet search service. This global technology company is engaged in improving the ways people connect with information.  It is now focused around the key areas of: search, advertising, operating systems and platforms, enterprise and hardware products. It integrates innovative features into its search service and offer specialized search services to help users tailor their search.

In January 2012, the Company launched Search plus Your World. When a user performs a signed-in search on Google, the user’s results page may include Google+ content from people that the user is close to. Advertising includes Google Search, Google Display, Google Mobile and Google Local. AdWords is the Company’s auction-based advertising program delivering ads relevant to search queries or Web content.

The Company, along with Open Handset Alliance has developed Android mobile software platform that any developer can use to create applications for mobile devices and any handset manufacturer can install on a device.

Google Chrome OS is an open source operating system with the Google Chrome Web browser as its foundation. The Chrome browser runs on Windows, Mac, and Linux computers. Google TV is a platform that enables the consumers to experience television and the Internet on a single screen, with the ability to search and find the content they want to watch. It is based on the Android operating system and runs the Google Chrome browser.

Google’s enterprise products provide Google Apps. These include Gmail, Google Docs, Google Calendar, and Google Sites. The Company provides hosted, Web-based applications that people use on any device with a browser and an Internet connection.

The Company also provides versions of its Google Maps Application Programming Interface (API) for businesses, as well as Google Earth Enterprise (a behind-the-company-firewall software solution for imagery and data visualization).

Google competes with Yahoo! Inc., Microsoft Corporation’s Bing, YouTube, Facebook, Twitter, WebMD for health queries, Kayak for travel queries, for job queries, and and eBay for e-commerce. Google’s success has been in creating an appealing and useful search service and the Android operating system that attract customers.

This next business was a bit of a surprise to me. I did not realize how much the fertilizer industry has grown until I viewed an insightful PBS documentary called “America Revealed.”

With only 2,600 employees, CF Industries Holdings, founded in 1946, manufactures and distributes nitrogen and phosphate fertilizer products around the world. The business of the Company is divided into two operating segments, the nitrogen segment and the phosphate segment. The Nitrogen segment includes the manufacture and sale of ammonia, urea, and UAN. The Company’s principal products in the nitrogen segment are ammonia, granular urea, urea ammonium nitrate solution, or UAN, and ammonium nitrate, or AN. The Company’s other nitrogen products include urea liquor, diesel exhaust fluid, or DEF, and aqua ammonia, which are sold primarily to its industrial customers. The Company operates seven nitrogen fertilizer production facilities in North America.

The phosphate segment includes the manufacture and sale of DAP and MAP. The Company’s principal products in the phosphate segment are diammonium phosphate, or DAP, and monoammonium phosphate, or MAP. The Company’s core market and distribution facilities are concentrated in the Midwestern United States and other major agricultural areas of the U.S. and Canada.

CF Industries Holdings also exports nitrogen fertilizer products from its Donaldsonville, Louisiana manufacturing facilities and phosphate fertilizer products from its Florida phosphate operations through its Tampa port facility. In the nitrogen segment, the Company’s primary North American-based competitors include Agrium and Koch Nitrogen Fertilizers. In the phosphate segment, the Company’s primary North American-based competitors include Agrium, Mosaic, Potash Corp. and Simplot.

CF Industries’ success has been in creating a large and efficient producer and distributor of nitrogen and phosphate based fertilizers around the world.

Next, is Incorporated. It shows us that customers took their bargain hunting practices online and found Priceline appealing. is an online travel company that offers its customers a range of travel services, including hotel rooms, car rentals, airline tickets, vacation packages, cruises and destination services.

Priceline also operates a retail, price-disclosed hotel reservation service in the United States, which enables its customers to select the exact hotel they want to book. Then, the price of the reservation is disclosed prior to booking. It offers such reservations through a merchant model, as well as through an agency model for hotel room night reservations sourced through is the internet hotel reservation service, with offices worldwide. works with over 185,000 hotels and accommodations in over 160 countries offering hotel reservations on various websites and in 41 languages. In May 2010, it acquired the business, a United Kingdom-based international rental car reservation service formerly known as TravelJigsaw. offers its car hire services in more than 4,000 locations throughout the world, with customer support provided in 38 languages.

Priceline competes with both online and traditional sellers of the services it offers. The market for the services it offers is intensely competitive, and current and new competitors can launch new sites at a relatively low cost. However, over the past five years, customers found Priceline to be the appealing leader in this space.

Next, Blackrock Incorporated made my list because it showed tremendous growth and profitability during this period. BlackRock, Inc. is the publicly traded investment management firm. BlackRock along with its subsidiaries provides investment management and securities lending services to institutional clients and to individual investors through various investment vehicles.

Investment management services mainly consist of the management of fixed income, cash management and equity client accounts, the management of a number of open-end and closed-end mutual fund families, exchange traded funds and other non-U.S. equivalent retail products serving the institutional and retail markets, and the management of other investments funds, including common trusts and alternative funds, developed to serve various customer needs.

BlackRock also provides market risk management, financial markets advisory and enterprise investment system services to a base of clients. Financial markets advisory services include valuation services relating to illiquid securities, dispositions and workout assignments, risk management and strategic planning and execution.

BlackRock’s clients include taxable, tax-exempt and official institutions, high net worth individuals and retail investors. On December 1, 2009, BlackRock acquired Barclays Global Investors (“BGI”) from Barclays Bank PLC (“Barclays”), referred to as the “BGI Transaction”, adding investment and risk management capabilities and more than 3,500 new colleagues to the combined organization.

BlackRock’s BGI Products include equity, Fixed income, Multi-Asset Class, Alternative Investments, Alternative Investments, Cash Management, BlackRock Solutions and Advisory, Transition Management Services and Product Performance Notes. BGI has long been recognized for product innovation in indexed and scientific investing, including pioneering iShares, the industry’s ETF platform, sophisticated retirement solutions and liability-driven investment strategies. These strengths complement BlackRock’s active fundamental portfolio management capabilities, global mutual fund platform, customized solutions, risk management and advisory services.

BlackRock operates in a global marketplace characterized by a high degree of market volatility and economic uncertainty, factors that can significantly affect earnings and stockholder returns in any given period. The Company’s product offerings, which enhance its ability to offer a variety of traditional and alternative investment products across the risk spectrum and to tailor single- and multi- asset class investment solutions to address specific client needs. In addition, through BlackRock Solutions, the Company offers a broad spectrum of investment management and risk management products and services.

Investment management offerings include single- and multi-asset class portfolios, which might be structured to focus on a particular investment style, capitalization range, region or market sector; credit or maturity profile; or liability structure. It uses Aladdin and other state-of-the-art tools and work closely with BlackRock’s trading cost research team to manage four dimensions of risk throughout the transition: exposure, execution, process and operational risk.

BlackRock manages money for institutional and retail investors worldwide. Its client base is by both geography and client type. The Company serves clients through 74 offices across four regions: United States and Canada, EMEA, Asia Pacific and Latin America and Iberia.

BlackRock clients include tax-exempt institutions, such as defined benefit and defined contribution pension plans, charities, foundations and endowments; official institutions, such as central banks, sovereign wealth funds, supranationals and other government entities; taxable institutions, including insurance companies, financial institutions, corporations and third party fund sponsors; and retail and high net worth investors. Since customers found Blackrock managers to be able and trustworthy, it grew and profited mightily during this period.


Finally, I mention the giant energy company ExxonMobil. I read that Berkshire Hathaway's portfolio has recently shown a new position of 40.1 million shares valued at $3.4 billion.

ExxonMobil (NYSE: XOM) is the largest of the vertically integrated oil companies. It is also the second largest publicly-traded corporation in the world by market cap and revenue. With a market value of $417 billion, and smart strategic investments, ExxonMobil has longevity. It also pays a 2.7% dividend yield.

In his 2011 shareholder letter, Buffett wrote: “A century from now... ExxonMobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions...”

Recent investments in shale and natural gas production indicate that ExxonMobil will be earning cash for its shareholders for the next several decades. It has invested more in natural gas. ExxonMobil completed a $30 billion project to develop the world's largest natural gas field. This field is located in the Persian Gulf state of Qatar. It is expected to boost the company's gas production and make ExxonMobil the world's largest natural gas producer. The North Field is expected to contain 900 trillion feet of natural gas. ExxonMobil also agreed to a joint venture with Royal Dutch Shell and Chevron to construct a liquefied natural gas facility on Barrow Island off the coast of Australia. Chevron will own 50% of the facility while Shell and Exxon will each have 25%.

Exxon strengthened itself in Natural Gas by the acquisition of XTO Energy (shale). XTO has a strong hold in shale, including the Marcellus, Haynesville and the Bakken basins.

XTO drove a surge in U.S. fuel output by exploiting fracking. XTO Energy’s resource was reported to consist of 45 trillion cubic feet of gas. The XTO acquisition complimented Exxon’s presence in other shale areas such as the Piceance Basin in Colorado. The company has been producing natural gas from the basin for more than 50 years and it has a reported estimate of 1.5 trillion barrels of in-place oil shale resources.

So, what about an estimate of ExxonMobil’s stock value? Here, I propose that ExxonMobil has created a sustainable competitive advantage that I did not appreciate prior to reading about Buffett and Berkshire’s recent investment. Its moves to secure future sources of oil, shale, and natural gas has secured more years of future cash flows for its shareholders.

If we do a simple one or two stage DCF valuation estimation based on 10 to 15 years, a big piece of value may be missed. I argue that ExxonMobil has created a valuable advantage for itself and its shareholders that stretch the Excess Return Period (yrs) to at least 20 years, and maybe even more years. So, here is my argument simplified. For the sake of simplicity and estimation, let’s first take a look at the DCF estimate posted at  Is it reasonable? Did Buffett and Berkshire get a good bargain?

Here is one view to consider. For the sake of conservatism, we may drop the growth rate to 5% at their model. However, I argue that, in view of long rage planning and investments in shale and natural gas, you may also conservatively extend the Excess Return Period (yrs) to 20 years. This would result in an estimated intrinsic value of about $135 per share. And, if Buffett and Berkshire purchased XOM at an average cost of $85, they got a bargain of around 37% in a large business leader.

Over time, the world economies will demand more energy production.  In consideration of ExxonMobil‘s added durable competitive advantages, the “Yield On Cost” of this investment may prove to be even more profitable.

In summary, how do we tie all these good stories together? Think of the times when customers are pleased by the terms of supply and demand. As Ben Franklin wisely said, “No nation was ever ruined by trade.”

* * * *

Bud Labitan is the author and editor of “MOATS : The Competitive Advantages of Buffett & Munger Businesses.” Moats discusses the competitive advantages of 70 Berkshire Hathaway businesses and it is targeted towards business school students, investors, and business managers. He is also the author of other books on investment decision framing and decision making. These include the “1988 Valuation of Coca-Cola”, “Price To Value”, “Valuations”, and “The Four Filters Invention of Warren Buffett and Charlie Munger.”

Thursday, April 18, 2013

Yield on Cost Is Warren Buffett’s Coca-Cola Magic

A nagging feeling came over me while finishing this latest book with the help of my friend Scott Thompson. While I was happy with our new book "1988 valuation of Coca-Cola: Estimated Intrinsic Value," I felt like we did not fully explain the importance, value and power of that bargain purchase. How could a man who wrote a book on Buffett and Munger’s “Four Filters Invention” investing process, “Price to Value” and "MOATS," fail to understand the power of this purchase?

I started emailing friends and doing simple, somewhat crazy math estimations to see if I could find the truth myself. I am even embarrassed to say that I sent an email to Mr. Buffett with flawed math. Friends, with their good intentions, would tell me to return to “Time Value of Money” calculations, and learn those well. They would say something like, "Coca-Cola is a great company with nice rate of returns and steadily increasing dividends, but it only gives you a range of 9% to 11% returns."

I would think, “How can that be? My investing heroes, Warren Buffett and Charlie Munger” always smile and resist cries from shareholders to sell the the Coca-Cola (KO) shares. What I rediscovered is that the magic of Warren Buffett’s and Charlie Munger’s 1988 purchase of Coca-Cola stock is: yield on cost.

Think of yield on cost” as “yield relative to my cost” or “the yield received per share cost” or "yield/per share cost." It can be described as “yield/cost per share.”

I sort of backed into finding that bond concept. My initial thinking went something like this: Think of it as getting an average of a $570 million dividend every single year from that principal investment cost of $1.299 billion in Coca-Cola. If you multiply $570 million x 24 years, we get $13.15 billion. Add this $13.15 billion to the $1.29 billion principal, and we get very, very close to the current value of $14.44 billion in BRK's ownership of Coca-Cola.

Bear with me on this basic "non-compounding" math below and you will see how Buffett received about $570 million for every year of that his principal investment of $1.299 billion in Coca-Cola. Keep in mind, I was trying to stay with simple math. Look at their cost of $1.299 billion, 0.44 rate of average annual return, and 0.57, which represents my assumption of $570 million.

0.57 x 23 (23 because of end-of-year adjustment), plus one-half of year of approximately 0.29, so 1.299 + 13.43 = 14.73, is darn close.

I found an old 2010 article that said: When Buffett began purchasing stock in Coca Cola in 1988, many Wall Street analysts were skeptical because it seemed only a matter of time before other beverage companies would take away its market share. In addition, Coca-Cola had reported earnings down 2 percent from the previous year, and had an unimpressive P/E ratio of between 14 to 19. At the time, shares of KO were worth between $35 and $45. The stock has split three times since then, and is now priced in the $60 range. By 1995, Buffett owned 100,000 shares of the company with a cost basis of roughly $1.2 billion. As of September 2010, Buffett’s unrealized gains on KO were $10.4 billion. This comes out to a 766 percent increase in value. This is one of Buffett’s greatest investing triumphs.

Using the same simple logic... When $2 grows into $6, no matter the duration, we say 6/2=3 and 3*100 = a 300% increase in value, no matter if it takes 1 or 900 years. In this simple math, duration is irrelevant.

Now, by 2013, KO stock had split 4 times and BRK has 400 million shares with a cost basis of $1.299 billion, and a market value of $14.5 billion. Forget for a moment that it took about 24.5 years to get there. Furthermore, suspend the idea of splits because we know the cost and the present dollar value that is already split-adjusted.

When $1.299 billion grows to $14.500 billion, we say 14.500/1.299=11.16 and *100 is a 1,116% increase in value. Again, in simple math, how much can we allocate to each year? Let us use a simple average and make it even. Now, a simple rough average of 1116/24.5 years=45.55% approximate gain per year, and this does not even count the value of the dividends.

(Next, I get a little theoretical.) Let us add in the low-ball but fair figure of $5 billion for all the dividends (with no major time value of money adjustments). When $1.299 grows to $19.500, we say 19.500/1.299=15.01 and *100 is a 1,501% increase in value. Now, a simple rough average of 1501/24.5 years=61.27% gain in value (on top of the $1.29 billion) per year, or around $570 million each year.

Now, I felt like I was getting close to why Buffett's 1988 bargain purchase of KO is so powerful and important. Next, I got a nice email from Richard Griebe. Griebe said he was starting to see the way I was looking at this investment in KO. “Rather than looking at the compounding of value over time, you are looking at the average annual increase in value against the original $1.299 billion invested. So, if I think of the original stock purchase as buying a bond instead, that “bond” has paid a continuously increasing interest rate over time. Following your computations to where you included dividends to calculate an average 61.27% gain per year or, in my bond model, Buffett bought a bond for $1.299 billion that has paid on average coupon of 61.27% annually. This is a feat that would make gangsters jealous. Thanks for patiently discussing this fascinating case study with me.

With Griebe’s positive words, I felt encouraged and I thanked him. Next, I kept searching the Internet for this “yield” concept that I was looking for. I was looking for Buffett’s effective yield per share compared to my yield per share. I stumbled upon the concept of yield on cost.

WOW! That is it! Yield per “share cost.”

Did I realize that 1.299 billion/400 million shares = Buffett's $3.25 per share cost per share of KO? Did you?

From the website Investopedia, Yield on cost (YOC) is defined as: “The annual dividend rate of a security divided by the average cost basis of the investments. It shows the dividend yield of the original investment. If the number of shares owned by the investor does not change, the yield on cost will increase if the company increases the dividend it pays to shareholders; otherwise it will remain the same."

To calculate yield on cost for a stock, an investor must divide the stock's annual dividend by the average cost basis per share and multiple the resulting number by 100 (to get a percentage). For example, an investor who purchased 10 shares of stock at $15 and 20 shares at $18 would have an average cost basis of $17 per share ($15*10 + $18*20)/(10 + 20). If the annual dividend is $0.90 per share, the yield on cost would be 5.29% ($0.90/$17 * 100).

Using this information, and knowing that Buffett's cost per share of KO is $3.25, can I calculate his yield on cost for 2012? The 2012 dividends per share were: March 13, 2013 $0.28, Nov. 28, 2012 $0.26, Sept. 12, 2012 $0.26, June 13, 2012 $0.26, March 13, 2012 $0.26, and the sum is $1.30

So, $1.30 / $3.25 = 0.40 and 0.40 * 100 = 40%. Buffett and Berkshire Hathaway received a 40% yield on cost just for the year 2012 dividends alone!

Alternatively, and again thinking in bond-like thoughts, if we believe the $570 million average return per year on top of the $1.299 billion principal. $570 million / 400 million shares is 1.43, and that is like a gain of 43% each year over the initial investment.

Prediction: Since 45% + 40% = 85%, I predict that the total yearly return will soon surpass the initial $1.29 billion cost basis of this Coca-Cola investment.

Sunday, April 07, 2013

Coca Cola's Valuation, Warren Buffett's 1988 Purchase

For years, we have wondered how Warren Buffett valued Coca-Cola ( NYSE: KO ) stock at such a deep bargain in 1988. In this book, we estimate the intrinsic value of each Coca-Cola share when Warren Buffett purchased 7% of the company that year. This book describes a simple two stage discounted cash flow model that delivers a close approximation of the stock’s intrinsic value at that point in time.

In 1987, Coca-Cola was refocusing on its core business and sold its Columbia Pictures subsidiary. The “New Coke” fiasco of 1985 was past. The company was repurchasing common stock. So, how did the business look in the eyes of Buffett and Munger?

As some of you know, “The Four Filters Invention of Warren Buffett and Charlie Munger” book explored their investment decision making process.” We believe that Buffett and Munger made a major contribution to the field of Behavioral Finance by applying these four sequential filter steps:

Filter #1: Look for a business you understand, within your “circle of competence.”
Filter #2: Look for a Durable Competitive Advantage
Filter #3: Insist on Able & Trustworthy Managers
Filter #4: Insist on Ben Graham’s Margin of Safety where your purchase price is significantly below the intrinsic value.

Coca-Cola passed these filters. Consider the significance of each filter like this. Filter #1: Understanding means finding an understandable business with good economics. Filter #2: Look for a Durable Competitive Advantage. This means having repeat customers. Filter #3: Insist on Able & Trustworthy Managers because management must have both qualities. Why? The able but untrustworthy manager can lead to disaster.

Filter #4: Insist on a Margin of Safety where your purchase price is significantly below the intrinsic value. This is Ben Graham’s quest: to buy a business at a significant bargain so that the risk of capital loss is minimized; and, the probability of capital appreciation is maximized. Therefore, let us look at Coca-Cola’s intrinsic value per share in 1988. Coca-Cola is a business with a differentiated and continuing competitive advantage. Its economic moat is deep and wide. It has a combination of a special brand advantage, a large-scale “cost of production” advantage, and a global network distribution advantage. We could say that it has three moats around its economic castle. In addition, its managers work to build this moat bigger every day.

A customer generally asks for a Coke by name. Customers do not buy a ‘cola’. Charlie Munger said, “The social proof phenomenon which comes right out of psychology gives huge advantages to scale—for example, with a very wide distribution, which of course is hard to get. One advantage of Coca-Cola is that it's available almost everywhere in the world.”

In 1988, Warren Buffett and Charlie Munger began buying stock in the Coca-Cola Company for the Berkshire Hathaway portfolio. They purchased about 7% of the company for $1.02 billion. This turned out to be one of Berkshire's most lucrative investments. Berkshire Hathaway now owns 8.9 percent or 400 million shares of Coca-Cola.

Buffett and Munger knew that commodity companies sell products or services that can be reproduced. In 1982, Buffett said this about commodity companies: “Businesses in industries with both substantial over-capacity and a "commodity" product (undifferentiated in any customer-important way by factors such as performance, appearance, service support etc.) are prime candidates for profit troubles.” There are also companies that market commodity products so well that they distinguish their commodity product from that of their competitors. These put their own special ‘brand’ upon their product. They can achieve this by the marketing mix of price, product, placement, and promotions. In addition, continuous improvement in terms of higher quality production and service is always a plus.

In 1993, Warren Buffett said this about companies with competitive advantages: ‘Is it really so difficult to conclude that Coca-Cola and Gillette possess far less business risk over the long term than, say, any computer company or retailer? Worldwide, Coke sells about 44% of all soft drinks, and Gillette has more than a 60% share (in value) of the blade market.’ Leaving aside chewing gum, in which Wrigley is dominant, I know of no other significant businesses in which the leading company has long enjoyed such global power.’
Coca-Cola has a strong brand identity in the global market and it has pricing power. It is one of most respected brands in the world. Coca-Cola utilizes a great amount of positive advertising to maintain the Coke brand. The amount of advertising is also a barrier to entry; it makes it impossible for brands with low capital to gain a comparable amount of brand awareness. This creates an expensive barrier to entry.

Recently, Coca-Cola’s 5Yr Gross Margin (5-Year Avg.) is approximately 62%. Its Net Profit Margin (5-Year Avg.) is approximately 22%, while the industry Net Profit Margin (5-Year Avg.) is 18.0%. Coca-Cola also has better earning power efficiency in term of Free Cash Flow per unit of sale.

As of 2012, Coca-Cola has a 5-Year Average Return on Equity (ROE) of 29.9%. Its worldwide distribution system is also major competitive advantage.

Are these advantages sustainable for the next 10 years? Yes. However, Coca-Cola has recently dropped out of the top ten brand value list for the first time. This may be underpinned by a consumer trend towards healthier, non-carbonated drinks. Coca-Cola recognized “obesity and health concerns” as potential risks for the company in the 2010 annual report. However, there is little doubt that Coca-Cola’s loyal brand following will sustain its competitive advantage. Coca-Cola recognizes the need to sustain marketing and increase innovation.

In its 2010 annual report, they acknowledged the need to continue to selectively expand into other profitable segments of the nonalcoholic beverages segment.

From the 2012 annual report: “Obesity and other health concerns may reduce demand for some of our products. Consumers, public health officials and government officials are highly concerned about the public health consequences associated with obesity, particularly among young people. In addition, some researchers, health advocates and dietary guidelines are encouraging consumers to reduce consumption of sugar-sweetened beverages, including those sweetened with HFCS (High-Fructose Corn Syrup) or other nutritive sweeteners. Increasing public concern about these issues; possible new taxes on sugar-sweetened beverages; additional governmental regulations concerning the marketing, labeling, packaging or sale of our beverages; and negative publicity resulting from actual or threatened legal actions against us or other companies in our industry relating to the marketing, labeling or sale of sugar-sweetened beverages may reduce demand for our beverages, which could adversely affect our profitability.”

A historically wonderful business, Coca-Cola’s able and trustworthy managers are motivated to invest in its supply chain network to “leverage the size and scale of the Coca-Cola system to gain a competitive advantage.” With this “moat building” in mind, we believe that that Coca-Cola will be successful in maintaining its economic franchise and current barriers to entry.

On October 18, 2012, Coca-Cola announced that it planned to purchase up to 500 million shares of the company's common stock. Such actions add value to the “intrinsic value” of each remaining share outstanding.

Consider why the Coca-Cola Company is such a good business from an investor’s point of view. Both Coke and Pepsi make products we enjoy. As an investor, we prefer the Coca-Cola Company. One reason is the amount of Free Cash Flow generated for every sale. Another reason is the amount of Free Cash Flow generated after expenses.

Charlie Munger once stated: "Warren often talks about these discounted cash flows, but I've never seen him do one." Warren Buffett responded: "It’s sort of automatic... It ought to just kind of scream at you that you've got this huge margin of safety." Buffett went on to state: "We define intrinsic value as the discounted value of the cash that can be taken out of a business during its remaining life. Anyone calculating intrinsic value necessarily comes up with a highly subjective figure. This figure will change both as estimates of future cash flows are revised and as interest rates move. Despite its fuzziness, however, intrinsic value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses."

This exercise is our quantitative estimation of Coca-Cola's Intrinsic Value Per Share in 1988. First, we describe our 2-stage "discounted cash flow" valuation model. This estimating model is strict. It assumes a good business will only "live" for 20 years. Within this model, we apply compounding growth to the first 10 years. Then, we assume a lower growth rate for years 11 until the end of year 20. This restriction of lesser growth in years 11 thru 20 means that this restriction imposes a degree of conservatism on top of the estimator’s optimism during the model’s early growth years. Then, after we sum up all the individual end of year cash, we should apply a discount rate and bring that sum back to present value. At this point, we divide by the number of shares outstanding.

First, keep in mind, Warren Buffett said: "Intrinsic value as the discounted value of the cash that can be taken out of a business during its remaining life. Anyone calculating intrinsic value necessarily comes up with a highly subjective figure. This figure will change both as estimates of future cash flows are revised and as interest rates move. Despite its fuzziness, however, intrinsic value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses."

Again, we emphasize that our model is an "estimation method" that imposes conservatism by limiting growth in the final ten years. It is just a model for 1988. At that time, KO stock traded between $35 and $45.25. From 1987 to 1988, the net income grew 14% and the net income per common share grew 17.3%. The number of shares outstanding in 1988 was 364,612,000 shares. We used a discount rate of 6.0% because that is the approximate 20-year average from 1988 to 2008. (see below)

Average: 10-Year US Treasury Rates from 1988–2008

1988 8.50% 1998 5.26%
1989 8.50% 1999 5.64%
1990 8.55% 2000 6.03%
1991 7.86% 2001 5.02%
1992 7.01% 2002 4.61%
1993 5.87% 2003 4.02%
1994 7.08% 2004 4.27%
1995 6.58% 2005 4.29%
1996 6.44% 2006 4.79%
1997 6.35% 2007 4.63%
2008 3.67%
AVERAGE: 5.95%

Coca-Cola’s 1988 Annual Report does not show Free Cash Flows. We can calculate FCFs below using available information from its 1988 financial statements like this:

The formula for calculating Free Cash Flow (FCF) is:
Free Cash Flow = Operating Cash Flow – Capital Expenditures

Free Cash Flow = (EBIT x (1–Tax Rate)) + (Depreciation & Amortization) – (Changes in Working Capital) – Capital Expenditure

Remember that Operating Income is referred to as EBIT or (Earnings Before Interest & Taxes, shown on the Income Statement.

Working Capital = (Current Assets) – (Current Liabilities)

EBIT is also known as Operating Income = $1,598,300,000
EBIT = Earnings Before Interest & Taxes

Tax Rate in 1988 = .34 or 34%

Depreciation & Amortization = $169,768,000

Changes in Working Capital = $227,993,000

1988’s Working Capital = 1988 Total Current Assets – 1988 Total Current Liabilities
$376,535,000 = $3,245,432,000 – $2,868,897,000

1987 Working Capital = 1987 Total Current Assets – 1987 Total Current Liabilities
$148,542,000 = $4,231,921,000 – $4,083,379,000

Capital Expenditures = $387,000,000

(EBIT x (1–Tax Rate)) + (Depreciation & Amortization) – (Changes in Working Capital) – Capital Expenditure = Free Cash Flow
($1,598,300,000 x (1– .34)) + $169,768,000 – $227,993,000 – $387,000,000 = FCF
($1,598,300,000 x (.66)) + $169,768,000 – $227,993,000 – $387,000,000 = FCF
$1,054,878,000 + $169,768,000 – $227,993,000 – $387,000,000 = FCF
$1,054,878,000 + $169,768,000 – $227,993,000 – $387,000,000 = $609,653,000

We used an assumed FCF annual growth of 15 percent for the first 10 years; and we assume 12 percent growth from years 11 to the end of year 20. Keep in mind that this is how our estimating model was designed. In the real world, you should adjust your model to better fit a superior or inferior business’ longevity.

In fact, for a great company like Coca-Cola, you could lengthen the second stage of your model out to another 5-20 years. For the purpose of conservatism, we chose to stay with our 20 year two-stage model with the compounding growth set at 15% and 12% respectively. These are reasonable expectations for that period, based on Warren Buffett’s 1990 letter where he wrote: “we hope to have look-through earnings grow about 15% annually.”

In our model, the resulting estimated intrinsic value per share (after discounting the sum back to the present) is approximately $78.67. If Warren Buffett bought at or around the Market Price of $40, he obtained a margin of safety of around 49%.

At this point, it is important to remember that Intrinsic Value is not a precise number. It is an estimated range. It is better to be approximately right than precisely wrong. As you can see below, both valuation models have estimated valuations that are fairly close to one another. The DCF/FCF model inspired by John Burr Williams estimates Coca-Cola's intrinsic value at around $79. Alternatively, Benjamin Graham's classic formula estimates the value of Coca-Cola to be approximately $87.48.

We believe that it is better to go with the more conservative estimation, and examine the business qualities within the Four Filters Process. The Four Filters are a search for: “Understandable first-class businesses, with enduring competitive advantages, accompanied by first-class managements, available at a bargain price.” This is discussed in the next chapter.

Here is the Ben Graham formula: V = EPS = (8.5 + 2g)
Where V = Intrinsic Value
EPS = Earnings Per Share for ttm (trailing twelve months)
8.5 = Price/Earnings (P/E) ratio for a no-growth business
G = reasonable expected 7–10 year growth rate

For our 1988 Coca-Cola valuation:
V = $2.43 x (8.5 + (2x14))
V = $2.43 x (8.5 + 28)
V = $2.43 x 36.5
V = $88.70

Alternatively, if we imagine Buffett performing this calculation in his head, his modified Graham formula might resemble something like this:
V = EPS = (8 + 2g)
V = $2.43 x (8 + (2x14))
V = $2.43 x (8 + 28)
V = $2.43 x 36
V = $87.48


Remember that intrinsic value estimations comprise Filter #4 of Buffett & Munger's Four Filters investment process. Be sure to consider all four filters during your investment research & analysis.

No matter which estimation method you adopt, keep in mind that Warren Buffett bought an understandable business with sustainable competitive advantages, able trustworthy managers, and a significant bargain relative to its intrinsic value. These four filter factors describe the wonderfulness or magic of a business.


Friday, January 20, 2012

MOATS : Competitive Advantages of 70 Buffett and Munger Businesses

MOATS : The Competitive Advantages of Buffett and Munger Businesses discusses the "competitive advantages" of 70 selected businesses purchased by Warren Buffett and Charlie Munger for Berkshire Hathaway Incorporated. This is a very useful resource for investors, managers, students of business around the world. It also looks at the sustainability of these competitive advantages in each of the 70 chapters.

find it here:

The MOATS book introduction audio mp3 file:

audio file of Wells Fargo, WFC chapter from MOATS book:

audio file of the Johnson and Johnson chapter from MOATS:

audio file of the Costco chapter in MOATS

audio file of the American Express chapter:

The IBM Chapter from MOATS. Why did Buffett buy into a technology services
company after so many years?

Here is a 1 min : 32 sec audio file of Warren Buffett talking about an
economic castle and its moat

Monday, October 24, 2011

Herman Cain May Change World View On Taxes

Who ever thought that a conservative man from Georgia running for President of The United States could affect taxation and democracy debates around the world?

Herman Cain's 9-9-9 Plan is a Vision for Economic Renewal that can be good for America and the world's economies. He believes that the natural state of our economy is prosperity. Freedom from excessive regulation and excessive taxation ensures that.

Cain believes that in order to return to prosperity, Government must get off our backs, out of our pockets and out of our way.

His Economic Guiding Principles include:

1. Production drives the economy, not spending. Production is the engine, consumption is the caboose. We can not spend our way to prosperity. Government spending is like taking a bucket of water from the deep end of the pool, pouring it in the shallow end. Then they HOPE that the water level will CHANGE.

2. Risk taking drives growth. Business formation and job creation are dependent on entrepreneurs taking risks. Investors who fund those entrepreneurs likewise take risks.

3. Measurements must be dependable. A dollar must always be a dollar just as an hour is always 60 minutes. Sound money is crucial for prosperity.


Cain states that when one party is so focused on spending so that the other must focus on cutting, we must unite around economic growth. Unite income tax payers with payroll taxpayers so we all pull for low rates Unite those wanting to eliminate deductions with those seeking lower rates. Unite the Flat-Taxers with the Fair-Taxers.