Mark Tier beliefs 1 to 5

...cont'd from yesterday...

Continued discussion about Becoming Rich: The Wealth-Building Secrets of the World's Master Investors Buffett, Icahn, Soros and The Winning Investment Habits of Warren Buffett & George Soros

1. Preserving capital is the top priority in investing.

2. Always look for and adopt ways to reduce the risk of losing money.

3. Always Minimize taxes.

4. Always trade in a way that suits your personality, abilities, knowledge, preferences and objectives.

5. Always use your own trading system.


...cont'd tomorrow...

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Investment habits of Buffett, Soros and others

Last week I wrote about Warren Buffett. This week, I am reviewing a book by Mark Tier about Warren Buffett. Mark’s book book that is sold under two different titles:

Becoming Rich: The Wealth-Building Secrets of the World's Master Investors Buffett, Icahn, Soros

The Winning Investment Habits of Warren Buffett & George Soros

According to Mark Tier, do the same thing consistently is what you need to do to succeed in trading/investing. That is, doing the successful things consistently instead of only occasionally. Here’s the list of beliefs that you need to install in yourself so that you can have the habits.

...cont'd tomorrow...

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When to buy, bow much to pay, when to sell

... cont'd from yesterday...

Continued discussion about Warren Buffett and the Interpretation of Financial Statements: The Search for the Company with a Durable Competitive Advantage

Step Four: How Much to Pay for an ECDCA.

Price to Pay < (Pretax Earnings Per Share) / (Corporate Bond Interest Rate).

Provided that the Pretax Earnings Per Share has been consistently growing year-after-year and the prospects of continuing to do so is likely.

Step Five: When to Buy an ECDCA

After a market crash or after the price of the ECDCA has crashed due to a one-time solvable problem.

Step Six: When to Sell an ECDCA

One of three conditions:

1. When you need to raise cash to buy an even better ECDCA.
2. When it looks like the ECDCA is going to disqualify itself from being an ECDCA.
3. During a bull market when the P/E ratio of the ECDCA goes above 40.

...back next week...

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Cashflow clues

... cont'd from yesterday...

Continued discussion about Warren Buffett and the Interpretation of Financial Statements: The Search for the Company with a Durable Competitive Advantage

Step Three: Examine the Cash Flow Statement

1. Capital Expenditures. ECDCA’s use a smaller portion of its earnings for capital expenditure than others. Capital Expenditure per Earnings year-after-year under 25% is good although a number as high as 49% is acceptable.

2. Retirement of Stock. This refers to stock buy-backs by the company. Any amount year-after-year indicates an ECDCA.

...cont'd tomorrow...

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Assets and liabilities as clues

... cont'd from yesterday...

Continued discussion about Warren Buffett and the Interpretation of Financial Statements: The Search for the Company with a Durable Competitive Advantage

Step Two: Examine the Statement of Assets & Liabilities.

1. Cash. Look in the Notes to the Financial Statements or elsewhere to determine where the Cash came from. If it came from Sales, that’s good. If it came from borrowing money, issuing more shares, or selling off parts of the business (other than sale of the company’s products or services), that’s bad.

2. Inventory. Look at the Inventory figure for the last 10 years. An ECDCA’s Inventory figure would be consistently rising at the same time that the EPS has been consistently rising over the last 10 years. Erratic ups and downs in Inventory figures over a 10 year period means the subject company is not an ECDCA.

3. Net Receivables. An ECDCA, when compared to competitors in the same industry, has a consistently lower ratio of Net Receivables/Revenue.

4. Property/Plan/Equipment. An ECDCA’s figure, after adding back Accumulated Depreciation, would be consistently the same year after year.

5. Long-Term Investments. Look in the Notes to the Financial Statements for what is included in this figure. If it is comprised of investments in other ECDCA’s, then that’s good. If not, that’s bad.

6. Short Term Debt. Ratio of STD to Long Term Debt should be less than 1, unless the LTD is zero in which case your calculator will self-destruct in 10 seconds.

7. Long Term Debt. This should be zero or almost zero.

8. Total Liabilities to Shareholders Equity Ratio. Except for companies in the financial business, the debt to shareholder equity ratio should be less than 0.80 to qualify as an ECDCA.

9. Retained Earnings. This should be growing year-after-year to qualify as an ECDCA at a rate of over 6% per year.

10. Treasury Stock. Anything above zero is good.

11. Return on Shareholders Equity. This should be more than 20% per annum year-after-year.

...cont'd tomorrow...

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Income Statement clues

... cont'd from yesterday...

Continued discussion about Warren Buffett and the Interpretation of Financial Statements: The Search for the Company with a Durable Competitive Advantage

Step One: Start with the Statement of Income and Expenses.

1. Profit Income Ratio, namely (Gross Revenue – Cost of Goods Sold)/Gross Revenue. This ratio must year after year be over 40%.

2. Selling, General & Administration Expense (“SGA”). The lower the better, but best of all is a year after year consistent ratio of SGA/Gross Income.

3. Research & Development Expense. This needs to be zero or almost zero to qualify as an ECDCA.

4. Depreciation Expense. This needs to be less than 10% to qualify as an ECDCA.

5. Interest Expense. This needs to be zero or almost zero to qualify as an ECDCA. The subject company’s ratio of Interest/Gross Income should be the lowest in the industry to qualify as an ECDCA.

6. Gain or Loss from Sale of Assets. This number has to be removed from calculating the Net Income for the purposes of deciding if a company qualifies as an ECDCA.

7. Income Taxes Paid. The amount reported is used as an idication of whether the subject company has crooked accountants and therefore disqualified as an ECDCA. If the amount reported as Income Taxes Paid is far off from 35% of Before-Tax Income, then the company is disqualified as an ECDCA. Before-Tax Income is Gross Revenue minus all Expenses (except for Income Tax).

8. Net Earnings. Obvious ECDCA’s have Ratio of Net Earnings/Revenue over 20%. Obvious non-ECDCA have that ratio under 10%. In between 10% to 20% is an area where the Net Earnings/Revenue ratio is not decisive in determining ECDCA status.

9. Earnings Per Share. ECDCA’s have a consistently rising EPS over a 10 year period instead of an erratic up and down movement over a 10 year period.

...cont'd tomorrow...

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Warren Buffett's Stock Picks

Interested in picking stocks the way Warren Buffett does it? Then here’s a “must-read”: Warren Buffett and the Interpretation of Financial Statements: The Search for the Company with a Durable Competitive Advantage

According to the authors, Warren Buffett (hereinafter referred to as “WB”) likes to buy Exceptional Companies with a Durable Competitive Advantage (hereinafter referred to as “ECDCA”). They say that WB likes ECDCA’s that sell one of three things:

1. Products with brand loyalty.
2. Services with brand loyalty.
3. Necessities sold at the cheapest prices by a company with the lowest costs.

Additionally, WB looks at a company’s Financial Statements to find a possible ECDCA in one of the foregoing businesses.

...cont'd tomorrow...

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Gone 'till mid-June 2009

Taking time off to enjoy the weather.