The Four Filters.
What I Learned from Warren Buffett.
By Bud Labitan
CHAPTER ONE OF FIVE: UNDERSTANDING
Over the years, I have read most of the books about Warren Buffett, his teacher Benjamin Graham, and his business partner Charlie Munger. I have also listened to many hours of audio lectures and interviews. During this time, I have been consistently interested in how Warren Buffett frames an investment decision and how he arrives at a winning investment prospect.
Warren Buffett has talked about the Four Filters in several ways, but the sequence is always the same: “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.” Buffett has also phrased the four filter process in this 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.”
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 effectiveness of each individual filter.
This is a small and valuable book that concentrates on the four sequential filters that will make anyone a better and more skillful investment decision maker. It is dedicated to Janine Rueth and Victoria Labitan. In this book, I squeeze “all the lean beef” into five chapters: “the Four Filter chapters and a summary chapter.” The final summary chapter will tie the filters together and demonstrate, with enthusiastic attitude, why these filters work to maximize the probability of investing success from both a mathematical and a practical point of view.
In developing understanding of a company and its products, Buffett framed the diligent mental process this way: “If I were looking at a company, I would put myself in the frame of mind that I had just inherited that company, and it was the only asset my family was ever going to own. What would I do with it? What am I thinking about? What am I worried about? Who are my customers? Go out and talk to them. Find out the strengths and weaknesses of this particular company versus other ones.”
Like a detective, he begins by asking himself basic questions. He looks for simple things that he can count. He looks for companies run by able and owner-oriented people.
Said Mr. Buffett, “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.”
I have played with the four filters and twisted them into 4 clusters this way:
1. Products 2. Customers 3. Management 4. Margin of Safety
Why do the filters work? I will give you a hint - Elaboration and Elimination.
In terms of mathematical probabilities, think of each stop along the four filters as a mutually exclusive and additive event. If a company passes a couple of filters, it is, by the process of elimination, farther to the right on a normal distribution curve, from an “investment prospect” point of view. If this were a field of racing horses, movement along each step of the Four Filters path, the prospect or suspect enters a subset of “better than average” horse. In my view, practicing these steps will make you a better thinker.
The majority of Berkshire Haathaway companies have important competitive advantages that will endure over time. For Warren Buffett and his shareholders, it is comforting to be in businesses where some mistakes can be made and yet satisfactory overall performance can be achieved.
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 both bad and good businesses. Warren Buffett’s advantage is passion and attitude for sensible investing. He learned from Ben Graham that the key to successful investing was the purchase of shares in good businesses when market prices were at a large discount from underlying business values. Sound owner-oriented business principles, along with time, training, and temperment have mabe them even better investors.
So what does Ben Graham add to filter number one, understanding? Graham, according to Buffett, added three basic ideas that can enhance our intellectual investing framework.
Graham’s ideas can help us do reasonably well in stocks.
Buffett on Graham:
His three basic ideas - and none of them are complicated or require any mathematical talent or anything of the sort - are:
1. that you should look at stocks as part ownership of a business,
2. that you should look at market fluctuations in terms of his "Mr. Market" example and make them your friend rather than your enemy by essentially profiting from folly rather than participating in it, and finally,
3. the three most important words in investing are "Margin of safety" - which Ben talked about in his last chapter of The Intelligent Investor - always building a 15,000 pound bridge if you're going to be driving 10,000 pound trucks across it.
I think those three ideas 100 years from now will still be regarded as the three cornerstones of sound investment.
In developing our understanding of a company and its products, Warren Buffett advises students to “Think for yourself.”
He reads annual reports of the company he is looking at, and he reads the annual reports of the competitors. He has said that annual reports are the main source of the study material needed or understanding. Of course, he also cautions students to focus on their own circle of competence. Notice the filtering process of his statement here: “Draw a circle around the businesses you understand and then eliminate those that fail to qualify on the basis of value, good management, and limited exposure to hard times.”
Just as a good leader has been tested by tough times and has a solid followership, a good company will have a loyal followership or customer base. The wonderful ones will have some sort of pricing power.
Charlie Munger understood the importance of thinking about the “Wonderful Business” early, while Warren Buffett was still buying cheap “Cigar-Butts.” Shortly after purchasing Berkshire, Buffett acquired a Baltimore department store called Hochschild Kohn. That was purchased through a retailing company called Diversified Retailing that later merged with Berkshire Hathaway. They now consider this, as well as the original textile company purchase an investing mistake. But, they both admit that they have learned from their mistakes. Now, when buying companies or common stocks, they look for first-class businesses accompanied by first-class managements. They look to what managements do more than what managements say.
Along with learning about GEICO’s low cost advantage from Lorimer Davidson, Warren Buffett learned some things from studying Phil Fisher, Philip Carret, and Henry Singleton. Buffett met Phil Fisher in the early Sixties, after reading his first book. Phil Fisher was a deep thinker into the nature of managements and their business growth potential. According to Buffett, “His ideas, like those of Ben Graham, were simple but powerful, and I wanted to meet the man whose teachings had such an influence on me…It's been over 40 years since I integrated Phil's thinking into my investment philosophy.”
So, part of developing your “circle of competence” is reading, learning, observing and integrating sound ideas into your investment philosophy. According to Buffett, he and Charlie Munger “just read the newspapers, think about a few of the big propositions, and go by our own sense of probabilities.”
Buffett and Munger’s Goal at BRK:
Our long-term economic goal is to maximize the average annual rate of gain in intrinsic business value on a per-share basis. We do not measure the economic significance or performance of Berkshire by its size; we measure by per-share progress.
How do we develop a better frame of reference and make better investing decisions? As you now know, Filter One is to “Develop a Better Understanding” of the company and its products. I got interested in looking at how Buffett and Munger frame their decisions when I was in business school at Purdue University Calumet. This is a quick summary about my views on their “framing.”
Framing in behavioral finance is the choosing of particular words to present a given set of facts. And, framing can influence our choices. Tversky and Kahneman described "Prospect Theory" in 1979 using framed questions. Tversky and Kahneman found that contrary to expected utility theory, people placed different weights on gains and losses and on different ranges of probability. They also found that individuals are much more distressed by prospective losses than they are happy by equivalent gains. Some have concluded that investors typically consider the loss of $1 twice as painful as the pleasure received from a $1 gain. Others believe that this work helps to explain patterns of irrationality, inconsistency, and incompetence in the ways human beings arrive at decisions and choices when faced with uncertainty. An increasing body of literature on framing supports a tendency for people to take more risks when seeking to avoid losses as opposed to securing gains.
Takemura (1992) showed that the effects of framing are likely to be lower when subjects are warned in advance that they will be required to justify their choices, and when more time is allowed for arriving at their choices. Luckily, Buffett and Munger seem to have arrived at practical use of these optimal framing ideas earlier than most.
They try to keep this simple. Notice this example from the latest 2007 annual report:
The Pritzker family decided to gradually sell or reorganize certain of its holdings, including Marmon, a company operating 125 businesses, managed through nine sectors. Marmon’s largest operation is Union Tank Car, which together with a Canadian counterpart owns 94,000 rail cars that are leased to various shippers. The original cost of this fleet is $5.1 billion. All told, Marmon has $7 billion in sales and about 20,000 employees. We will soon purchase 60% of Marmon and will acquire virtually all of the balance within six years. Our initial outlay will be $4.5 billion, and the price of our later purchases will be based on a formula tied to earnings.
A simple valuation example here will demostrate this bargain purchase in a well run company. For fun, lets do a fair "replacement cost" estimate on the 94,000 railcars alone.
94,000 x what? Made out of steel, the boxcar cost about $45000 a copy in 1980. A buddy of mine, says that $90,000 would be a fair price to pay for a mid-age mid-use rail car which can be depreciated over about 40-50 years. So, 94,000 x $90,000 = 8.46 Billion.... just in railcars alone. Furthermore, consider that the Marmon Group is composed of 125 different companies. And, I may be understating the replacement cost of a mid-age mid-use rail car.
Buffett and Munger have employed the principles taught by Dave Dodd and Ben Graham. In my view, Buffett and Munger overcome the conventional framing effects thru rational and thorough business analysis. They simply avoid getting into judgments in some fields. Warren Buffet has said: "If we have a strength, it is in recognizing when we are operating well within our circle of competence and when we are approaching the perimeter. Predicting the long-term economics of companies that operate in fast-changing industries is simply far beyond our perimeter." I call their approach the compounding success theory because I imagined how their sequence of rational decisions push the probability of investment return success into the upper percentiles.
In my masters paper, I must admit that I got too wordy. I have come to realize that the Four Filters encapsulate the most important contributions of John Burr Williams, Benjamin Graham, Phillip Fisher, Warren Buffett, and Charles Munger. Each of the great investors learn from knowledgeable others.
While everyone may take a little different approach to measuring both quantitative and qualitative value; in my view, each of the Four Filters delivers something especially valuable. They help get us closer to the real "intrinsic value" of a good business.
Thursday, March 06, 2008
Wednesday, March 05, 2008
Book: "The Four Filters"
I am working on a new book called "The Four Filters: What I learned from Warren Buffett."
Think: "Practical Best Practices in Behavioral Finance"
My book would be half the size of Charles' "Getting Started in ValueInvesting," and it would focus narrowly on the merits of the "behavioral science"aspects of Warren Buffett's approach.
It could be read on a plane trip across the country.
For sample of my writings, see:
http://www.frips.com/cst.htm
I will describe how the Four Filters relate to Behavioral Finance and how the Four Filters enhance the investment decision making process.
Think: "Practical Best Practices in Behavioral Finance"
My book would be half the size of Charles' "Getting Started in ValueInvesting," and it would focus narrowly on the merits of the "behavioral science"aspects of Warren Buffett's approach.
It could be read on a plane trip across the country.
For sample of my writings, see:
http://www.frips.com/cst.htm
I will describe how the Four Filters relate to Behavioral Finance and how the Four Filters enhance the investment decision making process.
Monday, March 03, 2008
USG
As some of you know, I am bullish about USG. It has gotten its asbestos exposure behind it. And, it has emerged from restructuring as a new and dominant player that is building its protective moat. So, for you quantitatively inclined, some of these present numbers are opportunistically deceptive. BRK owns about 20 percent of the company, up from its initial investment into 15 % of the company.
USG Corporation (USG), through its subsidiaries, is a manufacturer and distributor of building materials, producing a range of products for use in residential, non-residential, and repair and remodel construction, as well as products used in certain industrial processes. The Company's operations are organized into three segments: North American Gypsum, Building Products Distribution and Worldwide Ceilings, the net sales of which accounted for approximately 48%, 38% and 14%, respectively, during the year ended December 31, 2007. The Home Depot, Inc. accounted for approximately 11% of USG's net sales in 2007.
USG Corporation , USG has a (5-year annual average) net income growth rate of negative 11.3 . What competitive advantages does it have? Brand, Technology, Cost of Production, Distribution Network? Are possible advantages sustainable? Does USG have a solid mix of Product, Pricing Power, Placement, and Promotions? When buying companies or common stocks, look for understandable first-class businesses, with enduring competitive advantages, accompanied by first-class managements.
USG has a current market price is 33.18 Using an assumed growth rate of -4.5 percent, the estimated Intrinsic Value is 18.67 per share from ValuePro.net, and there does not appear to be a bargain or 'margin of safety' present here. However, using an assumed growth rate of 7 percent, the estimated Intrinsic Value is 68.36 per share from ValuePro.net, and this may or may not indicate a bargain of 35 dollars. Is it a possible Value Trap? If the growth assumptions used in estimating the Intrinsic Value are accurate and sustainable, this may or may not indicate a price-to-value ratio of .49 , and a possible margin of safety of 51 percent.
The current price/earnings ratio = 42.6 It's current return on capital = 2.09. Using a debt to equity ratio of .56, USG Corporation shows a current return on equity = 4.12
Some industries have higher ROE because they require no assets, such as consulting firms. Other industries require large infrastructure builds before they generate a penny of profit, such as oil refiners. Generally, capital-intensive businesses have higher barriers to entry, which limit competition. But, high-ROE firms with small asset bases have lower barriers to entry. Thus, such firms face more business risk because competitors can replicate their success without having to obtain much outside funding. Growth benefits investors only when the business in point can invest at incremental returns that are enticing; only when each dollar used to finance the growth creates over a dollar of long-term market value. In the case of a low-return business requiring incremental funds, growth hurts the investor. The wonderful companies sustain a competitive advantage, produce free cash flow, and use debt wisely.
Automatic Warning, ( above 0.5 ) on this current debt to equity level of .56
Does USG Corporation make for an intelligent investment or speculation today? Time is said to be the friend of the wonderful company and the enemy of the mediocre one. Before making an investment decision, seek understanding about the company, its products, and its sustainable competitive advantages over competitors. Next, look for able and trustworthy managers who are focused more on value than just growth. Finally ask: Is there a bargain relative to its intrinsic value per share today? Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misapraised. In terms of Opportunity Cost, is USG the best place to invest our money today? What about growth in Free Cash Flow?
Excerpts, comments, and news items: http://finance.yahoo.com/q/h?s=USG
Portions of this report are generated in budlab software on 08-03-03 . Budlab software was designed to help me produce a report that emphasizes conservativism and rationality when making an investment decision.
USG Corporation (USG), through its subsidiaries, is a manufacturer and distributor of building materials, producing a range of products for use in residential, non-residential, and repair and remodel construction, as well as products used in certain industrial processes. The Company's operations are organized into three segments: North American Gypsum, Building Products Distribution and Worldwide Ceilings, the net sales of which accounted for approximately 48%, 38% and 14%, respectively, during the year ended December 31, 2007. The Home Depot, Inc. accounted for approximately 11% of USG's net sales in 2007.
USG Corporation , USG has a (5-year annual average) net income growth rate of negative 11.3 . What competitive advantages does it have? Brand, Technology, Cost of Production, Distribution Network? Are possible advantages sustainable? Does USG have a solid mix of Product, Pricing Power, Placement, and Promotions? When buying companies or common stocks, look for understandable first-class businesses, with enduring competitive advantages, accompanied by first-class managements.
USG has a current market price is 33.18 Using an assumed growth rate of -4.5 percent, the estimated Intrinsic Value is 18.67 per share from ValuePro.net, and there does not appear to be a bargain or 'margin of safety' present here. However, using an assumed growth rate of 7 percent, the estimated Intrinsic Value is 68.36 per share from ValuePro.net, and this may or may not indicate a bargain of 35 dollars. Is it a possible Value Trap? If the growth assumptions used in estimating the Intrinsic Value are accurate and sustainable, this may or may not indicate a price-to-value ratio of .49 , and a possible margin of safety of 51 percent.
The current price/earnings ratio = 42.6 It's current return on capital = 2.09. Using a debt to equity ratio of .56, USG Corporation shows a current return on equity = 4.12
Some industries have higher ROE because they require no assets, such as consulting firms. Other industries require large infrastructure builds before they generate a penny of profit, such as oil refiners. Generally, capital-intensive businesses have higher barriers to entry, which limit competition. But, high-ROE firms with small asset bases have lower barriers to entry. Thus, such firms face more business risk because competitors can replicate their success without having to obtain much outside funding. Growth benefits investors only when the business in point can invest at incremental returns that are enticing; only when each dollar used to finance the growth creates over a dollar of long-term market value. In the case of a low-return business requiring incremental funds, growth hurts the investor. The wonderful companies sustain a competitive advantage, produce free cash flow, and use debt wisely.
Automatic Warning, ( above 0.5 ) on this current debt to equity level of .56
Does USG Corporation make for an intelligent investment or speculation today? Time is said to be the friend of the wonderful company and the enemy of the mediocre one. Before making an investment decision, seek understanding about the company, its products, and its sustainable competitive advantages over competitors. Next, look for able and trustworthy managers who are focused more on value than just growth. Finally ask: Is there a bargain relative to its intrinsic value per share today? Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misapraised. In terms of Opportunity Cost, is USG the best place to invest our money today? What about growth in Free Cash Flow?
Excerpts, comments, and news items: http://finance.yahoo.com/q/h?s=USG
Portions of this report are generated in budlab software on 08-03-03 . Budlab software was designed to help me produce a report that emphasizes conservativism and rationality when making an investment decision.
Recession and Opportunities
Our country appears to be in an economic recession. This will be a painful time to many families and many businesses. Eventually, our country will pull out of this recessionary or stagflationary time into another growth era.
From a Value Investing point of view, quality bargains will be revealed. This will bring equity purchase opportunities because markets tend to overreact. Looking for "mispriced opportunites" is the foundation of sensible investing.
Be on the lookout for QB. Quality Bargains.
Elimination Process and its Effects
In my last article at Gurufocus.com entitled, "Best Practice: The Elaboration Effect" I attempted to tie in concepts from the practices of Warren Buffett and Charles Munger that explain why they appear immune to the convestional framing effects. Link: http://www.gurufocus.com/news.php?id=3051 This next best practice is called "The Elimination Process and Effect" Using the process of eliminating bad and mediocre businesses from investment consideration have pushed their probability of success automatically into the higher percentiles of long term investing success.
How is this done? Chiefly by performing the four filters:
1. Understand the Business and it Products.
2. Is there a Sustainable Competitive Advantage
3. Able and Trustworthy Managers
4. A Margin of Safety if the selling price is significantly below the Intrinsic Value.
In building an A.I. interactive model of WB's Investing Brain, one approach is to use probabilities and elimination. Which words have appeared most frequently in Buffett's writings to shareholders? While this is not a complete study, this sample below shows the "word frequency" from my old compilation of the BBF, Buffett Business Factors. I will add a few comments to point out some patterns I detected.
FREQUENCY, WORD, COMMENT
386, business
No shocker here, the underlying business is always more important than stock's market price.
No shocker here, the underlying business is always more important than stock's market price.
250, not
This one caught me by surprise at first until I remembered WEB talking about the importance of the human mind casting out less than desirable purchases. In the talk to MBA students in Tennessee, Buffett mentioned the reason why great chess champions can beat IBM's best supercomputers. An experienced chess champ has the ability to cast off a lot of information noise.
This one caught me by surprise at first until I remembered WEB talking about the importance of the human mind casting out less than desirable purchases. In the talk to MBA students in Tennessee, Buffett mentioned the reason why great chess champions can beat IBM's best supercomputers. An experienced chess champ has the ability to cast off a lot of information noise.
180, earnings
A lot of focus on real free cash flow
A lot of focus on real free cash flow
155, value
And the sustainable competitive advantage therein
And the sustainable competitive advantage therein
146, businesses
386+146 = 532 times !
386+146 = 532 times !
141, about
A preposition meaning connected or associated with. WEB and CM have lot of experiences to form pattern comparisons
A preposition meaning connected or associated with. WEB and CM have lot of experiences to form pattern comparisons
140, capital
122, investment
99, managers
There is a lot of talk in the writings about able and trustworthy managers and numerous examples
There is a lot of talk in the writings about able and trustworthy managers and numerous examples
96 , market
This is interesting mainly because the concept of market get mentioned so much further down this word frequency list.
This is interesting mainly because the concept of market get mentioned so much further down this word frequency list.
I came to the conclusion that if a truly smart machine interpreted the essence of the discussions portion of his shareholder letters, the conclusion might read something like this:
"Mr. Buffett focused on the importance of individual businesses and what not to value. Because of the frequent use of the words business, not, earnings, value, about, and capital, we can conclude that this piece of literature is a cautionary tale about factors to avoid when making an investment."
Therefore, in addition to the Elaboration Process and Effect, another important Best Practice for investors is the Elimination Process and its Effects on your portfolio.
A Bargain Purchase
From the 2007 BRK Annual Report...
For fun, lets do a fair "replacement cost" estimate on the 94,000 railcars alone.
94,000 x what.?
Made out of steel, the boxcar cost about $45000 a copy in 1980. A buddy of mine, says that $90,000 would be a fair price to pay for a mid-use rail car which can be depreciated over about 50 years.
94,000 x $90,000 = 8.46 Billion.... just in railcars alone. Furthermore, consider that the Marmon Group is composed of 125 different companies.
For fun, lets do a fair "replacement cost" estimate on the 94,000 railcars alone.
94,000 x what.?
Made out of steel, the boxcar cost about $45000 a copy in 1980. A buddy of mine, says that $90,000 would be a fair price to pay for a mid-use rail car which can be depreciated over about 50 years.
94,000 x $90,000 = 8.46 Billion.... just in railcars alone. Furthermore, consider that the Marmon Group is composed of 125 different companies.
Charles Mizrahi's Book: Getting Started in Value Investing
I had the privilege of proofreading early drafts of this book, and I am happy to report that Charles Mizrahi has written a great book called Getting Started in Value Investing. It is a clear guide written by an author with many years of experience in writing newsletters and managing money intelligently.
This book serves as a clear guide from the basic beginning steps to the "things to watch out for" ending summary. I recount his rational guide path here: Chapter 1 begins with the misconceptions of Value Investing. Chapter 2 follows with the basics of sensible value investing. Chapter 3 warns us about Mr. Market. Chapter 4 covers Great Companies, and explains why they may become great investments. Then, in Chapter 5, Mizrahi explains why good managements add more value. Chapter 6 covers the issue of competition and the importance of enduring competitive advantages. Chapter 7 covers the Essential Valuation Variables that matter and Chapter 8 brings these numbers to life. Chapter 9 explains the critical issue of Price of a Stock versus the Value of the Company. Chapter 10 examines our own psychological biases. Then, in Chapter 11, Charles Mizrahi summarizes the essence of the Graham-Dodd-Buffett-Munger style of equity value investing.
While everyone may take a little different approach to measuring both quantitative and qualitative value; in my view, each of these eleven chapters delivers something especially valuable to the reader. They help to get us closer to the real "intrinsic value" of a business. When Charles first told me of his project to write an introductory book on Value Investing for the Wiley investment series that is based on the Warren Buffett value approach to stock investing, I challenged him to swing for the fences and cleverly twist it into a book that could yield enduring value like Ben Graham's classic, The Intelligent Investor.
I think that this book delivers because it gives us useful and valuable information in each chapter. The Mizrahi kids should be proud of what their dad has crafted. This book should be in every library. Since "Getting Started in Value Investing" delivers sound investing principles, and it is written in a clear paternal style, it has a good chance of becoming a bestseller. Charles Mizrahi clearly explains the core of the Graham-Dodd-Buffett-Munger style of equity value investing.
Since "Getting Started in Value Investing" delivers sound investing principles, and it is written in a clear paternal style, it has a good chance of becoming a bestseller. Charles Mizrahi clearly explains the core of the Graham-Dodd-Buffett-Munger style of equity value investing.
Why did Buffett and BRK buy stock in Kraft ?
Why did Buffett and BRK buy stock in Kraft ? Let's examine the reasons together.Brands? Costs Controls? Expanding Markets? Share Buybacks? Irene Rosenfeld?
Berkshire Hathaway, bought more than 132 million shares of food company Kraft, according to a document filed with the Securities and Exchange Commission Thursday. Kraft Foods Inc. (KFT), through its subsidiaries, is engaged in the manufacture and sale of packaged foods and beverages in the United States, Canada, Europe, Latin America, Asia Pacific, the Middle East and Africa. The Company manufactures and markets packaged food products, consisting principally of beverages, cheese, snacks, convenient meals and various packaged grocery products. The Company operates in two segments: Kraft North America Commercial and Kraft International Commercial. It has operations in 72 countries and sells its products in more than 155 countries.
Kraft Foods, KFT has a (5-year annual average) net income growth rate of negative 4.71 . The company is looking forward to a 7-9% forward growth rate. What competitive advantages does it have? Brand, Technology, Cost of Production, Distribution Network? Are possible advantages sustainable? It's current market price is 29.31
The estimated Intrinsic Value, using an assumed 7% forward growth rate, is 43.39 per share from ValuePro.net, and this may or may not indicate a bargain of 14 dollars. Is it a possible Value Trap? If the 7% growth assumptions used in estimating the Intrinsic Value are accurate and sustainable, this may or may not indicate a price-to-value ratio of .67 , and a possible margin of safety of 33 percent in a good company with good brands selling at a fair price.
The current price/earnings ratio = 18.2 It's current return on capital = 5.41 Using a debt to equity ratio of .77, Kraft Foods shows a current return on equity = 9.32 Some industries have higher ROE because they require no assets, such as consulting firms. Other industries require large infrastructure builds before they generate a penny of profit, such as oil refiners. You cannot conclude that consulting firms are better investments than refiners just because of their ROE.
Generally, capital-intensive businesses have high barriers to entry, which limit competition. But high-ROE firms with small asset bases have lower barriers to entry. Thus, such firms face more business risk because competitors can replicate their success without having to obtain much outside funding. Automatic Warning, ( above 0.5 ) on this current debt to equity level of .77
From 2007 excerpts, the company expects that revenue will grow 3% to 4% on an organic basis in 2008 and that "we'll hit our stride" by 2009, said Chief Executive Irene Rosenfeld in a written release. "We'll fully realize the financial benefits of our investments and deliver our long-term targets of at least 4% organic net revenue growth and 7% to 9% EPS growth." In addition to "rewiring" the company, Rosenfeld said Kraft intends to "reframe" its product categories to make them more relevant to consumers, to better exploit its sales abilities and to drive down costs.
One key is to expand the focus in larger, faster-growing categories. As an example, Rosenfeld cited moving away from dying sectors like processed cheese slices and into sandwich, snacking and high-end cheeses. Also important is grabbing market share away from restaurants, she said, vowing that Kraft will strive to provide "restaurant-quality food at home in the office or anywhere ... at a fraction of the cost." Frozen pizza's a case in point. With brands like Jacks' and Tombstone, Kraft has long been a major player in the $4 billion category. Then, about 10 years ago it went after the $11 billion chain business with higher-end offerings like DiGiorno. And now, Rosenfeld said, "we are setting our sights on the $20 billion local pizzeria" category.
Does Kraft Foods make for an intelligent investment or speculation today? Time is said to be the friend of the wonderful company and the enemy of the mediocre one. Before making an investment decision, seek understanding about the company, its products, and its sustainable competitive advantages over competitors. Next, look for able and trustworthy managers who are focused more on value than just growth.
Finally ask: Is there a bargain relative to its intrinsic value per share today? In terms of Opportunity Cost, is KFT the best place to invest your money today? I do not know enough about KFT, but, I am open to talking and discussing Kraft.
Bank of America
Why did Buffett and BRK buy 8,700,000 shares of BAC between $48.34 - $50.14 per share?
BAC also buying Countrywide Financial. While Countrywide reported one in three of its subprime mortgages were delinquent at the end of 2007, and the company lost $422 million in the fourth quarter, BofA chief executive officer Kenneth Lewis has said Countrywide's financial results were consistent with the bank's due diligence and agreed-upon purchase price of $4 billion. The purchase will make Charlotte, N.C.-based BofA (NYSE: BAC) the nation's largest mortgage lender and loan servicer. The deal is slated to close in the third quarter.
Perhaps, my generated report below will also help you better understand this purchase.
Bank of America Corporation (Bank of America) is a bank holding company. Bank of America provides a range of banking and non-banking financial services and products through three business segments: Global Consumer and Small Business Banking, Global Corporate and Investment Banking, and Global Wealth and Investment Management. In December 2006, the Company sold its retail and commercial business in Hong Kong and Macau (Asia Commercial Banking business) to China Construction Bank. In October 2006, BentleyForbes, a commercial real estate investment and operations company, acquired Bank of America Plaza in Atlanta from CSC Associates, a partnership of Cousins Properties Incorporated and the Company. In June 2007, the Company acquired the reverse mortgage business of Seattle Mortgage Company, an indirect subsidiary of Seattle Financial Group, Inc.
Bank of America, BAC has a (5-year annual average) net income growth rate of 9.87 . What competitive advantages does it have? Brand, Technology, Cost of Production, Distribution Network? Are possible advantages sustainable? Does BAC have a solid mix of Product, Pricing Power, Placement, and Promotions? When buying companies or common stocks, look for understandable first-class businesses, with enduring competitive advantages, accompanied by first-class managements.
BAC has a current market price is 38.84 Using an assumed growth rate of 7 percent, the estimated Intrinsic Value is 92.89 per share from ValuePro.net, and this may or may not indicate a bargain of 54 dollars. Is it a possible Value Trap? If the growth assumptions used in estimating the Intrinsic Value are accurate and sustainable, this may or may not indicate a price-to-value ratio of .42 , and a possible margin of safety of 58 percent.
The current price/earnings ratio = 12.It's current return on capital = UnavailableUsing a debt to equity ratio of 4.16, Bank of America shows a current return on equity = 10.8
Some industries have higher ROE because they require no assets, such as consulting firms. Other industries require large infrastructure builds before they generate a penny of profit, such as oil refiners. Generally, capital-intensive businesses have higher barriers to entry, which limit competition. But, high-ROE firms with small asset bases have lower barriers to entry. Thus, such firms face more business risk because competitors can replicate their success without having to obtain much outside funding. Growth benefits investors only when the business in point can invest at incremental returns that are enticing; only when each dollar used to finance the growth creates over a dollar of long-term market value. In the case of a low-return business requiring incremental funds, growth hurts the investor. The wonderful companies sustain a competitive advantage, produce free cash flow, and use debt wisely.
Automatic Warning, ( above 0.5 ) on this current debt to equity level of 4.16
Does Bank of America make for an intelligent investment or speculation today? Time is said to be the friend of the wonderful company and the enemy of the mediocre one. Before making an investment decision, seek understanding about the company, its products, and its sustainable competitive advantages over competitors. Next, look for able and trustworthy managers who are focused more on value than just growth. Finally ask: Is there a bargain relative to its intrinsic value per share today? Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misapraised. In terms of Opportunity Cost, is BAC the best place to invest our money today?
What about growth in Free Cash Flow?
Excerpts, comments, and news items: http://finance.yahoo.com/q/h?s=BAC
Portions of this report are generated in budlab software on 08-03-03 . Budlab software was designed to help me produce a report that emphasizes conservativism and rationality when making an investment decision.
BAC also buying Countrywide Financial. While Countrywide reported one in three of its subprime mortgages were delinquent at the end of 2007, and the company lost $422 million in the fourth quarter, BofA chief executive officer Kenneth Lewis has said Countrywide's financial results were consistent with the bank's due diligence and agreed-upon purchase price of $4 billion. The purchase will make Charlotte, N.C.-based BofA (NYSE: BAC) the nation's largest mortgage lender and loan servicer. The deal is slated to close in the third quarter.
Perhaps, my generated report below will also help you better understand this purchase.
Bank of America Corporation (Bank of America) is a bank holding company. Bank of America provides a range of banking and non-banking financial services and products through three business segments: Global Consumer and Small Business Banking, Global Corporate and Investment Banking, and Global Wealth and Investment Management. In December 2006, the Company sold its retail and commercial business in Hong Kong and Macau (Asia Commercial Banking business) to China Construction Bank. In October 2006, BentleyForbes, a commercial real estate investment and operations company, acquired Bank of America Plaza in Atlanta from CSC Associates, a partnership of Cousins Properties Incorporated and the Company. In June 2007, the Company acquired the reverse mortgage business of Seattle Mortgage Company, an indirect subsidiary of Seattle Financial Group, Inc.
Bank of America, BAC has a (5-year annual average) net income growth rate of 9.87 . What competitive advantages does it have? Brand, Technology, Cost of Production, Distribution Network? Are possible advantages sustainable? Does BAC have a solid mix of Product, Pricing Power, Placement, and Promotions? When buying companies or common stocks, look for understandable first-class businesses, with enduring competitive advantages, accompanied by first-class managements.
BAC has a current market price is 38.84 Using an assumed growth rate of 7 percent, the estimated Intrinsic Value is 92.89 per share from ValuePro.net, and this may or may not indicate a bargain of 54 dollars. Is it a possible Value Trap? If the growth assumptions used in estimating the Intrinsic Value are accurate and sustainable, this may or may not indicate a price-to-value ratio of .42 , and a possible margin of safety of 58 percent.
The current price/earnings ratio = 12.It's current return on capital = UnavailableUsing a debt to equity ratio of 4.16, Bank of America shows a current return on equity = 10.8
Some industries have higher ROE because they require no assets, such as consulting firms. Other industries require large infrastructure builds before they generate a penny of profit, such as oil refiners. Generally, capital-intensive businesses have higher barriers to entry, which limit competition. But, high-ROE firms with small asset bases have lower barriers to entry. Thus, such firms face more business risk because competitors can replicate their success without having to obtain much outside funding. Growth benefits investors only when the business in point can invest at incremental returns that are enticing; only when each dollar used to finance the growth creates over a dollar of long-term market value. In the case of a low-return business requiring incremental funds, growth hurts the investor. The wonderful companies sustain a competitive advantage, produce free cash flow, and use debt wisely.
Automatic Warning, ( above 0.5 ) on this current debt to equity level of 4.16
Does Bank of America make for an intelligent investment or speculation today? Time is said to be the friend of the wonderful company and the enemy of the mediocre one. Before making an investment decision, seek understanding about the company, its products, and its sustainable competitive advantages over competitors. Next, look for able and trustworthy managers who are focused more on value than just growth. Finally ask: Is there a bargain relative to its intrinsic value per share today? Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misapraised. In terms of Opportunity Cost, is BAC the best place to invest our money today?
What about growth in Free Cash Flow?
Excerpts, comments, and news items: http://finance.yahoo.com/q/h?s=BAC
Portions of this report are generated in budlab software on 08-03-03 . Budlab software was designed to help me produce a report that emphasizes conservativism and rationality when making an investment decision.
Sunday, March 02, 2008
WFC
I reviewed WFC and some reasons why Warren Buffett may like its long term prospects.
Wells Fargo & Company is a financial holding company and a bank holding company. The Company provides retail, commercial and corporate banking services through banking stores located in 23 states. It provides other financial services through subsidiaries engaged in various businesses, principally wholesale banking, mortgage banking, consumer finance, equipment leasing, agricultural finance, commercial finance, securities brokerage and investment banking, insurance agency and brokerage services, computer and data processing services, trust services, investment advisory services, mortgage-backed securities servicing and venture capital investment. The Company operates in three business segments: Community Banking, Wholesale Banking and Wells Fargo Financial. In April 2007, First Data Corporation acquired the Instant Cash Services business, from Wells Fargo Bank.
Wells Fargo, WFC has a (5-year annual average) net income growth rate of 7.14 . What competitive advantages does it have? Brand, Technology, Cost of Production, Distribution Network? Are possible advantages sustainable? Does WFC have a solid mix of Product, Pricing Power, Placement, and Promotions? When buying companies or common stocks, look for understandable first-class businesses, with enduring competitive advantages, accompanied by first-class managements.
WFC has a current market price is 31.44 Using an assumed growth rate of 8 percent, the estimated Intrinsic Value is 48.47 per share from ValuePro.net, and this may or may not indicate a bargain of 17 dollars.
Is it a possible Value Trap? If the growth assumptions used in estimating the Intrinsic Value are accurate and sustainable, this may or may not indicate a price-to-value ratio of .65 , and a possible margin of safety of 35 percent.
The current price/earnings ratio = 13.2 and a Price/Book= 2.18
Using a debt to equity ratio of 3.21, Wells Fargo shows a current return on equity = 17.2
Some industries have higher ROE because they require no assets, such as consulting firms. Other industries require large infrastructure builds before they generate a penny of profit, such as oil refiners. Generally, capital-intensive businesses have higher barriers to entry, which limit competition. But, high-ROE firms with small asset bases have lower barriers to entry. Thus, such firms face more business risk because competitors can replicate their success without having to obtain much outside funding.
Growth benefits investors only when the business in point can invest at incremental returns that are enticing; only when each dollar used to finance the growth creates over a dollar of long-term market value. In the case of a low-return business requiring incremental funds, growth hurts the investor. The wonderful companies sustain a competitive advantage, produce free cash flow, and use debt wisely.
Automatic Warning, ( above 0.5 ) on this current debt to equity level of 3.21 However, you will recall that Buffett is tolerant of debt if it is being used to generate more intrinsic value.Does Wells Fargo make for an intelligent investment or speculation today? Time is said to be the friend of the wonderful company and the enemy of the mediocre one. Before making an investment decision, seek understanding about the company, its products, and its sustainable competitive advantages over competitors. Next, look for able and trustworthy managers who are focused more on value than just growth. Finally ask: Is there a bargain relative to its intrinsic value per share today? Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misapraised.
In terms of Opportunity Cost, is WFC the best place to invest our money today?What about growth in Free Cash Flow? Cash from Operating Activities: (2007 was not yet stated) 32,094.0 -9,333.0 6,485.0 31,195.0
To succeed in this industry, a company has to have sustainable competitive advantages in seven key areas: geography, products and businesses, distribution, sales and service culture, efficiency, brand, and most important, people. WFC is strong in all of them. WFC is a national company in wholesale banking, insurance, mortgage lending, and consumer finance. The 23 states in the Midwest and Western United States in which we distribute our full range of financial services products-from Ohio to Alaska-are among the fastest growing markets in the world's best economy. Its community banking franchise includes a leading presence in 12 of the nation's 20 fastest growing states: Alaska, Arizona, California, Colorado, Idaho, Montana, Nevada, New Mexico, Oregon, Texas, Utah, and Washington. Fifty percent of the projected population growth, the next several years, is expected to come in those states.
Excerpts, comments, and news items: http://finance.yahoo.com/q/h?s=WFCAs of 12/31/2007 Warren Buffett's BRK had 289,259,868 shares of WFC.My general impression is a fair bargain of about 30-35% in a quality company with good long term prospects.
Portions of this report are generated in budlab software on 08-02-24 . Budlab software was designed to help me produce a report that emphasizes conservativism and rationality when making an investment decision. I appreciate hearing your views.
Wells Fargo & Company is a financial holding company and a bank holding company. The Company provides retail, commercial and corporate banking services through banking stores located in 23 states. It provides other financial services through subsidiaries engaged in various businesses, principally wholesale banking, mortgage banking, consumer finance, equipment leasing, agricultural finance, commercial finance, securities brokerage and investment banking, insurance agency and brokerage services, computer and data processing services, trust services, investment advisory services, mortgage-backed securities servicing and venture capital investment. The Company operates in three business segments: Community Banking, Wholesale Banking and Wells Fargo Financial. In April 2007, First Data Corporation acquired the Instant Cash Services business, from Wells Fargo Bank.
Wells Fargo, WFC has a (5-year annual average) net income growth rate of 7.14 . What competitive advantages does it have? Brand, Technology, Cost of Production, Distribution Network? Are possible advantages sustainable? Does WFC have a solid mix of Product, Pricing Power, Placement, and Promotions? When buying companies or common stocks, look for understandable first-class businesses, with enduring competitive advantages, accompanied by first-class managements.
WFC has a current market price is 31.44 Using an assumed growth rate of 8 percent, the estimated Intrinsic Value is 48.47 per share from ValuePro.net, and this may or may not indicate a bargain of 17 dollars.
Is it a possible Value Trap? If the growth assumptions used in estimating the Intrinsic Value are accurate and sustainable, this may or may not indicate a price-to-value ratio of .65 , and a possible margin of safety of 35 percent.
The current price/earnings ratio = 13.2 and a Price/Book= 2.18
Using a debt to equity ratio of 3.21, Wells Fargo shows a current return on equity = 17.2
Some industries have higher ROE because they require no assets, such as consulting firms. Other industries require large infrastructure builds before they generate a penny of profit, such as oil refiners. Generally, capital-intensive businesses have higher barriers to entry, which limit competition. But, high-ROE firms with small asset bases have lower barriers to entry. Thus, such firms face more business risk because competitors can replicate their success without having to obtain much outside funding.
Growth benefits investors only when the business in point can invest at incremental returns that are enticing; only when each dollar used to finance the growth creates over a dollar of long-term market value. In the case of a low-return business requiring incremental funds, growth hurts the investor. The wonderful companies sustain a competitive advantage, produce free cash flow, and use debt wisely.
Automatic Warning, ( above 0.5 ) on this current debt to equity level of 3.21 However, you will recall that Buffett is tolerant of debt if it is being used to generate more intrinsic value.Does Wells Fargo make for an intelligent investment or speculation today? Time is said to be the friend of the wonderful company and the enemy of the mediocre one. Before making an investment decision, seek understanding about the company, its products, and its sustainable competitive advantages over competitors. Next, look for able and trustworthy managers who are focused more on value than just growth. Finally ask: Is there a bargain relative to its intrinsic value per share today? Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misapraised.
In terms of Opportunity Cost, is WFC the best place to invest our money today?What about growth in Free Cash Flow? Cash from Operating Activities: (2007 was not yet stated) 32,094.0 -9,333.0 6,485.0 31,195.0
To succeed in this industry, a company has to have sustainable competitive advantages in seven key areas: geography, products and businesses, distribution, sales and service culture, efficiency, brand, and most important, people. WFC is strong in all of them. WFC is a national company in wholesale banking, insurance, mortgage lending, and consumer finance. The 23 states in the Midwest and Western United States in which we distribute our full range of financial services products-from Ohio to Alaska-are among the fastest growing markets in the world's best economy. Its community banking franchise includes a leading presence in 12 of the nation's 20 fastest growing states: Alaska, Arizona, California, Colorado, Idaho, Montana, Nevada, New Mexico, Oregon, Texas, Utah, and Washington. Fifty percent of the projected population growth, the next several years, is expected to come in those states.
Excerpts, comments, and news items: http://finance.yahoo.com/q/h?s=WFCAs of 12/31/2007 Warren Buffett's BRK had 289,259,868 shares of WFC.My general impression is a fair bargain of about 30-35% in a quality company with good long term prospects.
Portions of this report are generated in budlab software on 08-02-24 . Budlab software was designed to help me produce a report that emphasizes conservativism and rationality when making an investment decision. I appreciate hearing your views.
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