Perhaps you've noticed that I switch between discount rates. Maybe you've seen me throw the past out the window and use future owner earnings assumptions that differ from past median growth rates. Or, you may have noticed that I'll use 8-year timeframes on some companies and 15 year timeframes on others.

I think it is human nature to seek out the perfect spreadsheet or formula to predict the future of the markets. It doesn't exist, so it is best to understand various methods and assumptions so you can draw your own rational conclusions based on reasoning and data.

Continue Reading Do The Math In Your Head ››

I know—Enron is old news. If you don't remember the scandal, Enron was an energy and commodities trading company that went from massive to bankrupt in just 16 months. Once the largest marketer of natural gas in North America and the United Kingdom and the largest marketer of electricity in the United States, Enron was wrought with scandal and deception which resulted in a total loss to many investors.

Could investors have avoided the loss altogether? Can we protect ourselves from accounting scandals?

Continue Reading Enron: Accounting Scandal or Bad Business ››

How about a round of applause for Wall Street? Once again, they've managed to sell the dream, and are failing to deliver. Hedge Funds—unregulated mutual funds—have been the talk of the town for years. That is, of course, until their hyper-aggressive, no-fear strategies hit a market that was...volatile?

I've said it before: More risk usually means greater losses. When you focus on short-term results instead of the fine print or the strategy, don't be surprised when you can't protect your portfolio from harm. There's a new scandal brewing on Wall Street—hedge fund investors may not be able to pull their money out. I smell losses, lawsuits, and new regulation. Still, investors are to blame.

Continue Reading The Hedge Fund Debacle ››

The two most important factors that go into buying companies are moat and margin of safety. You could, and likely will, be wrong on your future owner earning projections. You may be overly optimistic or overly cautious and end up buying too soon or passing on a great opportunity.

Your moat helps promote consistency. Your margin of safety helps minimize losses. Still, there's a business in there and we need to look at and understand it as well. Such is the case with Harley Davidson.

Continue Reading On Buying Harley Davidson ››

Interestingly enough, quick asked a question that was going to be the topic for today. When does the discounted cash flow model work? When does it not? Is this a method that can be used for all businesses at all times?

The short answer is: The discounted cash flow method always works for valuing a business. But, I'm not known for short answers, so let's explore the weaknesses in this model. Considering that my spreadsheets have been taken, used, and modified around the web, I think I should qualify a few of the assumptions in there.

Continue Reading Does Discounted Cash Flow Always Work? ››

We're in a tough spot—financial services companies, particularly banks, are getting hammered right now because of the sub-prime mess. When a stock gets hammered, the underlying company may become very attractive at the new price. Unfortunately, Morningstar doesn't give us the free cash flow data for these companies, so we have to dive into the annual reports.

Continue Reading Valuing a Financial Services Company ››

I believe that 401k plans, in theory, are phenomenal. I also believe that Wall Street F-ed them up so bad and use them as tiny, recurring profit centers to ignore the "little guy" and sell their mutual funds. Oh, they'll call you when you're ready to roll over your old 401k; still, don't expect much help or support when you're socking away $500 a month—you're small potatoes on Wall Street and they have investment banking deals to tend to.

So, what is one to do?

Continue Reading What To Do With A Bad 401k ››

401k plans seemed like a good idea at the time. Individualized retirement plans. Personalized portfolios to replace the stogy old pension. Real growth for young, aggressive investors; safety for senior employees facing retirement.

Many years ago, there was no 401k—it simply didn't exist. Companies had pensions—giant pools of money conservatively invested to provide employees with lifetime incomes after they retired. It was a wonderful system if for no other reason than accountability.

Continue Reading The Problems With 401k Plans ››

Worried about the markets? Are things a little too crazy or volatile right now? Guess what: You probably hold too many investments or you hold investments for the wrong reasons. If you can't get excited when the markets drop suddenly, you should check your portfolio and strategy to find (and fix) the holes.

Continue Reading I Say: Let Them Crash ››

When valuing a business, you discount the expected future cash back to today to get an idea of what the company is worth. Of course, predicting future cash flows is part art, part science. Piled on top of that is the fact that the discount rate you use greatly affects the intrinsic value calculation. So, what rate should you use?

Continue Reading What Discount Rate Should I Use? ››

I've been asked a number of times to analyze Wal-Mart. My goal here is not to offer stock tips; rather, I want you to be able to do it yourself. Still, I looked at (and bought) Wal-Mart for myself, so here it is:

Continue Reading Looking At Wal-Mart ››

Every three months, Buffett and Berkshire have to report their holdings to the SEC. Good news for us because we can see them for free. Click here for the report. Let's see what Buffett is buying, selling, and arbitraging.

Continue Reading Berkshire Reports June Buys, Sells, and An Arbitrage Play ››

In 1934, David Dodd and Benjamin Graham (Buffett's teacher) wrote what would later be known as the foundation for value investing. Security Analysis knocked Wall Street for focusing on reported earnings and pointed the finger at the brokerages for dismissing their fiduciary responsibilities to clients, ultimately causing the Crash of 1929.

(In reading the latter section, if you didn't know the book was from 1934, you would think he was describing the dot-com boom and bust of the early 2000s. It's actually scary.)

Continue Reading The Graham And Dodd Method ››

Take one of my old spreadsheets (found elsewhere on this site), plug in BNI's past performance, and you'll get a per share value of $60.15. Mike and I both did it, and we were both perplexed. Did Buffett pay upwards of a 30% premium for BNI? Let's pick it apart.

Continue Reading Yesterday vs. Tomorrow: The Value of BNI ››

I just wanted to quickly post that I am going on vacation today (August 9, 2007) and will be back on Monday. If I get a chance, I'll try to get something online for Friday...but no guarantees (or should I say, weather permitting).

I will have access to email if you want to drop me a line.

And no, I won't be watching my stock prices while I'm gone.

Berkshire Hathaway bought another 1.62 million shares of Burlington Northern Santa Fe (BNI) in the past few days, according to a recent filing with the Securities and Exchange Commission. If you recall, Buffett's company disclosed in April that it had bought 39.03 million shares of BNI, sending the stock some 10% higher.

Months later, BNI regressed back to its low-80s price, right around where Buffett was buying. As you can imagine, he bought more.

Continue Reading Lament The Short Term ››

If your business doesn't have a moat, it is unpredictable at best. Can money be made in no-moat businesses? Absolutely—but it is a gamble at best. Ben Graham, Warren Buffett's mentor and friend, stated:

An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.

Though a small- or no-moat business may offer a "satisfactory" return, it does not promise safety of principal. So, we invest in wide, deep, shark-infested moat businesses. But, how do we put a value on that moat and factor it into our price?

Continue Reading The Value Of A Moat ››

When a business changes your language, it likely has a good moat. Still, plenty of businesses have huge moats—and it is just a matter of understanding and uncovering them. Why do you need a moat? As Buffett says,

to protect you from the guy who is going to come along and offer [your product] for a penny cheaper.

Continue Reading Big Moat Business Part II ››

Moat—one of the most important concepts in value investing. Every company has a value; but, the companies with big moats are generally less sensitive to outside forces which means you can invest with more confidence and comfort.

There are a million different types of moats. Some are economic; some are brand; some are position. Some are right in front of our faces; some require a bit of digging.

Continue Reading How To Find A Stock With A Moat ››

Yesterday, a visitor brought up a couple of points regarding the analysis of Johnson & Johnson. It looks as though growth might be slowing based on the 2001-2006 owner earnings growth rate and he brought up a good point—is it a cause for concern?

Continue Reading When growth slows down ››

Hope. It can kill a portfolio. The more rational, cold, and calculated you are in your investing, the more confidence you can have in your portfolio. Each emotion you introduce only digs you further into the hole. You can hold a company because you love their products; but, you better be sure that the business is generating enough cash to keep those products rolling off the lines.

Continue Reading How To Recover Losses ››