A visitor just sent this email to me and I figured (as per his last line) that it would be better suited in a post rather than in a private email response. The question: Should I use the owner's margin on lowered sales as I project the intrinsic value of a company rather than sticking with historical growth and projections?

Continue Reading Predicting The Future of a Troubled Business ››

When asked how to value financial institutions, I've always taken the cop out plea: They're outside my sphere of competence. What makes that statement extremely interesting is that I own and operate one and I still can't value them!

Robert posted one of the finest, most eloquent, and thoroughly researched answers to the question of why it is so difficult to value financial services companies.

Continue Reading Robert Explains Financial Institution Valuation ››

It is no secret that Buffett tends to shy away from technology companies. One one side, people say he simply doesn't understand them and can't predict the future with any degree of certainty or comfort; on the other side of the fence, people say the industry changes too fast and today's leader could be tomorrow's old news.

Continue Reading Let's Look At Apple ››

One of Mohnish Pabrai's favorite quotes goes something like this: Heads I win; tails, I break even or don't lose much. When it comes to investing in the stock market, that seems like an ideal to strive for.

Let's examine some worst case scenarios in owning pieces of businesses.

Continue Reading Heads I Win Big; Tails, I Don't Lose Much ››

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 ››

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?

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By now, you have determined what your desired rate of return is. Personally, I like to use 15%. At that rate, my money will double approximately every 5 years. Why 15%? Considering that I have to find the companies, analyze them, say "no" to most of them, and patiently wait on the sidelines until an opportunity comes along, 15% is the minimum annual return I want to justify the work that I have put in.

Continue Reading Calculating The Value Of A Business - Part IV ››

In Part I, we looked at Shareholder Equity as the first step in calculating the intrinsic value of a company. Then, we looked at Buffett's owner earnings and further explored intrinsic value in Part II. When you buy stock, you are buying a piece of a business—usually, a small piece. You are essentially becoming a silent partner in that business.

Continue Reading Calculating The Value Of A Business - Part III ››

In Part I, we looked at Shareholder Equity as the first step in calculating the value of a company. Shareholder Equity essentially tells us how much our company is worth if it shut down operations, sold off its assets, paid its debts, and distributed the cash to the shareholders. Though Shareholder Equity tells us the "wind up" value of the company, we do not expect our company to, well, wind up its operations.

Thus, we need to know its intrinsic value—our company's value as an ongoing business. Once again, as always, we turn to Warren Buffett for advice.

Continue Reading Calculating The Value Of A Business - Part II ››

The Greater Fool Theory is a belief that you can buy a stock at any price and sell it to some other, bigger fool for a profit. In times of ever-increasing markets, this theory often shows itself to be true. Still, reality must come crashing down at some point. It always does. And that is precisely when great fools lose tons of money, and great investors come to life.

Continue Reading Calculating The Value Of A Business - Part I ››

Okay. I gave you Johnson & Johnson. I analyzed the less-than-stellar 0.89% average annual return Coca-Cola has provided investors from 1996 to 2006. I've even talked about how easy investing should be if we follow Warren Buffett's lessons. Still, you have asked for something more exciting—a smaller company offering the potential for a ton of growth.

So, here it is.

Continue Reading American Eagle Outstanding ››

Arguably the world's greatest investor, Warren Buffett says that you should value a stock as you would value a private business. In the private sector, P/E means nothing. In fact, earnings mean nothing. The only thing that matters in buying a private business is the amount of cash that it can generate—its free cash flow.

Continue Reading The Importance Of Valuing A Stock ››