Investing and Finance – Page 3

Difference between Bottom-Line and Top-Line Growth

Bottom-Line and Top-Line Bottom line refers to a company’s net income — the “bottom” number on a company’s income statements. Therefore, bottom line is a company’s income after all expenses, charges, costs, and are subtracted from its revenues. A company’s bottom line is the same as its net earnings or net profits.

Top line refers to a company’s gross revenues or sales.

The terms bottom-line growth and top-line growth refer to the growth of the company as measured by the respective numbers. Both these numbers are helpful in understanding the financial strength of the company. They are not exchangeable.

Bottom line trends measure how efficient the company is with expenditures, operating costs and controlling these costs. Top line trends measure how efficient the company is at selling its products and services. Top line trends do not measure operating efficiencies.

William “Bill” Ackman’s Recommended Books on Investing

William 'Bill' Ackman's Recommended Books on Investing

William “Bill” Ackman is the founder and CEO of New York-based hedge fund Pershing Square Capital Management. Bill is the subject of the book “Confidence Game” by Christine S. Richard. The book explains how Bill Ackman used credit derivatives to short municipal bond insurer MBIA.

The Essays of Warren Buffett: Lessons for Corporate America: Warren E. Buffett, Lawrence A. Cunningham is a thematically arrangement of the lengthy writings of Warren Buffett. This classic book provides an understandable and consistent understanding of the principles and logic of Warren Buffett’s attitude to life, investing, and business.
Security Analysis: Benjamin Graham, David Dodd is the most is perhaps the most influential books on investing and finance ever written, ever since it was first published in 1934. Benjamin Graham and David L. Dodd’s classic discourse on valuing securities and their timeless value investing philosophy.
Quality of Earnings: Thornton L. O’glove on the importance of reading corporate reports, understanding of accounting practices and changes thereof, and how interpreting data related to accounts receivable and inventory levels might help spot problems with a company before these trends can affect a stock’s price.
The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel: Benjamin Graham, Jason Zweig updates timeless “value investing” wisdom from the greatest investment teacher of the twentieth century, Benjamin Graham. This beloved book has been the investors’ bible since its original publication in 1949.
Confidence Game: Christine S. Richard on how hedge fund manager Bill Ackman of Pershing Square Capital Management used credit derivatives to short municipal bond insurer MBIA.
One Up On Wall Street: Peter Lynch, John Rothchild describes a well-revered bottom-up approach to investing in stocks by selecting companies familiar to the investor followed by a comprehensive fundamental analysis with emphasis on a company’s prospects, its business, it’s competitive environment, and then determining a reasonable price for the company’s stock. Peter Lynch is Vice Chairman of Fidelity Management & Research Company.

Seth Klarman’s Recommended Books on Investing

Seth Klarman's Recommended Books on Investing

Seth Klarman is an American private equity investor and founder of the Baupost Group, a Boston-based private investment partnership firm. Seth is himself the author of a renowned book on value investing: “Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor.” One of the world’s most respected value investors, he once said,

It is important to remember that value investing is not a perfect science. Rather it is an art, and necessitates dealing with imperfect information. Knowing you will never know everything must not prevent you from acting. It requires a precarious balance between conviction, steadfastness in the face of adversity, and doubt, keeping in mind the possibility that you could be wrong.

Too Big to Fail: Andrew Ross Sorkin provides an account of the development of the 2008 financial crisis. The subtitle is “The Inside Story of How Wall Street and Washington Fought to Save the Financial System—and Themselves”
Buffett: The Making of an American Capitalist: Roger Lowenstein is a fabulous biography of Warren Buffett, arguably the best investor in the history of the world.
Mr. Market Miscalculates: The Bubble Years and Beyond: James Grant analyzes the deregulation of the financial system and the capital markets since the 1970s and how it led to the housing bubble and the inferior creditworthiness standards.
Money of the Mind: How the 1980s Got That Way: James Grant on how money has ever more become a government-sponsored illusion that aims to beat the natural risk apparatus of a strong credit market system.
When Genius Failed: The Rise and Fall of Long-Term Capital Management: Roger Lowenstein details what brought down the amazingly successful bond-trading hedge fund Long-Term Capital Management.
The End of Wall Street: Roger Lowenstein examines the excesses of the financial system, particularly Fannie May and Freddie Mac, the legislative failure to oversee them, and the failure of the three major rating agencies to identify the liabilities of the mortgage securities — all culminating to the financial collapse of 2008.
The Intelligent Investor: The Classic Text on Value Investing: Benjamin Graham is a reprint of the original 1949 edition that has inspired legions of investors over the decades. According to Warren Buffett, this classic book is undoubtedly the best book ever written on investing.
The Aggressive Conservative Investor: Martin J. Whitman, Martin Shubik provide an investment philosophy based on value investing and risk analysis based on book value and stock price.
Bernard M. Baruch: The Adventures of a Wall Street Legend: James Grant tells the story of extraordinary Bernard Baruch, financier and stock investor and philanthropist. Following his success in business, Bernard devoted his time as a diplomat and advised many U.S. Presidents on money matters.
You Can Be a Stock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits: Joel Greenblatt provides a general idea of event-driven investing involving unusual securities and how unusual securities can present great investment opportunities.
Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor: Seth A. Klarman on using the concept of margin of safety to manage risk in value investing, on investing vs. speculation, and various aspects of overall portfolio management.
The Big Short: Inside the Doomsday Machine: Michael Lewis how the U.S. economy was driven over the cliff and the 2008 crash of the U. S. stock market because of the housing and credit bubble.
Moneyball: The Art of Winning an Unfair Game: Michael Lewis on inefficiencies in the market for sports players and how the brilliant use of statistics and creative thinking made Oakland A’s, previously one of baseball’s poorest teams, win many games.

Warren Buffett’s Investment Criteria for Berkshire Hathaway Investments

Charlie Munger and Warren Buffett, Berkshire Hathaway

Warren Buffett rarely considers aspects of a stock of a company that he might be interested in purchasing for Berkshire Hathaway. He is more interested in the aspects of the business of the candidate company.

Here’s in an effort to clearly summarize Warren Buffett’s strategies on evaluating potential candidate companies for investments of Berkshire Hathaway. While there are not a clear-cut and hard criteria of financial ratios and calculations that Berkshire Hathaway uses to identify potential investments, a compendium of Buffett’s time-tested principles of evaluating potential investments, investors can filter and further research companies that are sound investments and steer clear of the losers they must be avoided at all costs.

A candidate company must not have large capital expenditure, high costs of maintenance, or cash flow need for new investments. In his 1994 letter to Berkshire Hathaway investors, Warren wrote, “If you are right about a business whole value is largely dependent on a single key factor that is both easy to understand and enduring, the payoff is the same as if you had correctly analyzed an investment alternative characterized by many constantly shifting and complex variables.”
A candidate company must be a player in a good and growing economy or industry. In the Chairman’s Letter of 1996, Warren Buffett stated, “Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Over time, you will find only a few companies that meet these standards – so when you see one that qualifies, you should buy a meaningful amount of stock.”
A candidate company’s earnings must be on an upward trend with good and consistent profit margins. “Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio’s market value.”
A candidate company must have high and consistent returns on invested capital. Warren Buffet has written, “Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return. The worst business to own is one that must, or will, do the opposite – that is, consistently employ ever-greater amounts of capital at very low rates of return.” Also, “Buy companies with strong histories of profitability and with a dominant business franchise.”
A candidate company must not be exposed to competition from existing and new companies with abundant resources. To quote Warren Buffett, “In business, I look for economic castles protected by unbreachable moats.” When Berkshire Hathaway acquired Burlington Northern Santa Fe (BNSF,) the economic moat was that no other company could easily afford to build a large new rail network across the United States.
A candidate company must have a demonstrated history of retaining earnings for growth. In one of Berkshire Hathaway’s annual report, Warren Buffet wrote, “… more subjective, element to an intrinsic value calculation that can be either positive or negative: the efficacy with which retained earnings will be deployed in the future. We, as well as many other businesses, are likely to retain earnings over the next decade that will equal, or even exceed, the capital we presently employ. Some companies will turn these retained dollars into fifty-cent pieces, others into two-dollar bills.”
A candidate company must have a strong pricing power and must be free to adjust prices for inflation. In a 2011 interview with the Financial Crisis Inquiry Commission, Warren Buffett stated, “The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.”
A candidate company must enjoy a low debt/equity ratio or a high earnings/debt ratio. To quote Warren Buffet, “I do not like debt and do not like to invest in companies that have too much debt, particularly long-term debt. With long-term debt, increases in interest rates can drastically affect company profits and make future cash flows less predictable.”
A candidate company and it’s products must enjoy a consumer monopoly or have a loyalty-commanding brand. Warren Buffet has said, “I’ll tell you why I like the cigarette business. It costs a penny to make. Sell it for a dollar. It’s addictive. And there’s fantastic brand loyalty.” Charlie Munger, business partner of Warren Buffett, stated about Harley Davidson, “Any company that gets its customers to tattoo ads on their chests can’t be all bad.”
A candidate company must have a strong management that has a history of allocating capital to good business opportunities and profit from such investments. On management, Warren Buffett is quoted as saying, “I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.” On capital allocation, Warren has stated, “To decide whether to retain the capital, we have to answer the question: do we create more than $1 of value for every dollar we retain? Historically, the answer has been yes and we hope this will continue to be the case in the future, but it’s not certain.”

Bladder Theory of Corporate Finance

Corporate Finance

Apple has $137 billion of cash on its balance sheet (as of 12-Feb-2013.) Microsoft has $68 billion, Google $48 billion, Cisco $45 billion, and Oracle has $34 billion.

Too much cash on a company’s balance sheet is not necessarily a good thing. Large cash balances reduce shareholder value because they produce lower returns on invested capital. Further, excess cash puts pressure on corporate management to put the cash to work. Often, management chases wrongheaded acquisition strategies or make poor capital allocation decisions.

Peter Lynch alluded to a bladder theory of corporate finance in his classic, “One Up On Wall Street: How To Use What You Already Know To Make Money In The Market.”

… as propounded by Hugh Liedtke of Pennzoil: the more cash that builds up in the treasury, the greater the pressure to piss it away.

Bladder theory of corporate finance states that the more cash that builds up in the treasury of an organization, the greater the pressure to piss it away. Stock repurchases, dividend increases, and special dividends are effective uses of excessive cash on balance sheets. J Hugh Liedtke, former CEO of Pennzoil, believed that “companies should pay out cash so the managers wouldn’t drain all the money away.”

America is Fascinated by Warren Buffett

Great wealth and entrepreneurial success have always fascinated Americans. The amount of wealth that Warren Buffett has accumulated through astute investing and discipline is awe-inspiring.

Countless portfolio managers, hedge fund managers, investment analysts, mutual funds, institutional pools of capital and individual investors have grown up devouring everything that’s been said or written by or about Warren Buffett and Charlie Munger over the years.

Warren Buffett’s unpretentious life-style draws Americans. His modest, folksy personality is an obvious contradiction to the common American impression of the lifestyles of the rich and wealthy. Warren Buffett does not enjoy the trappings of wealth. He carries a cell phone that usually switched off, does not have a computer at his desk, and drives his own automobile Cadillac DTS. He has lived in the same home he purchased for $31,500 in Omaha, Nebraska since 1958.

For years, Warren Buffett has drawn a moderate base salary of just $100,000 and has denounced excessive executive pay and extravagant purchases by other corporate CEOs.

Warren Buffett’s Legacy

In 2006, Warren Buffett, the world’s third richest man, stunned the world by bequeathing more than 85% of the $44 billion in his Berkshire Hathaway fortune to charity. That is the largest philanthropic gift in history. Five-sixths of his shares in Berkshire Hathaway would go to the Bill & Melinda Gates Foundation. Buffett has said that he was inspired by the philosophy of Andrew Carnegie, who had believed that huge fortunes that flow in large part from society should in large part be returned to society.

Warren Buffett has three children: Susie Buffett is the owner of a knitting-shop Omaha, Howie Buffett is a farmer in Illinois, and Peter Buffett is a new-age musician based in New York. Buffet’s three children received a modest inheritance from Buffett. He stated, “They’re comfortable, but they don’t have tons of money. I consider myself lucky to have three children who want to spend much of their time and energy working on projects that will benefit others.”

Millions of Buffett fans all over the world swear by his philosophy of value investing and have profited from the wisdom of the “Oracle of Omaha.” America admires him. In 2010, President Barack Obama awarded him the Presidential Medal of Freedom.

For a peek at the genius of Warren Buffet, see Alice Schroeder’s “The Snowball: Warren Buffett and the Business of Life.” “The Essays of Warren Buffett: Lessons for Corporate America” is a great anthology of Warren Buffet’s writing.