Oct 14, 2014

Warren Buffett rolls out the Berkshire Hathaway brand

Warren Buffett plans to license the Berkshire Hathaway name to estate agencies in Europe and Asia, in the next phase of a campaign to turn his widely respected investment company into a consumer brand.

After decades buying into some of the most valuable brands in the world, Berkshire has this year dramatically expanded the use of its own name, rebadging its family of utility companies, US estate agents and a newly acquired car dealership group.

Marketing consultants and company insiders believe the group is sitting on a valuable asset in the Berkshire Hathaway brand, which they say taps into 84-year-old Mr Buffett’s reputation for financial acumen and longevity.

“Like Virgin reflects Sir Richard Branson’s rebelliousness and Apple reflects the genius of Steve Jobs, Berkshire Hathaway has brand equity around trust, stability and integrity,” said Oscar Yuan, partner at consultancy Millward Brown Vermeer.

The number of US estate agencies using the Berkshire Hathaway HomeServices brand will swell to almost 1,400 by next spring, said Earl Lee, chief executive of HSF Affiliates, a franchising joint venture between Berkshire and Brookfield Asset Management.

The company will then shift to looking for partnerships with big players in parts of the US where it is not yet strong, including the Midwest, and internationally, including the UK, continental Europe and Asia.

“The values of trust, customer service and longevity are important characteristics for people who are making the largest single financial investment they will ever make,” Mr Lee said.

“We are proud to carry the Berkshire Hathaway brand and we understand the obligation.”

Revenues in the Berkshire division that includes the real estate business jumped 26 per cent to $1.2bn in the first six months of this year, according to a company filing. HomeServices of America, the property broker owned by Berkshire, and HSF Affiliates have been rebranding their existing network since 2012.

The Van Tuyl car dealership chain that Berkshire acquired for an undisclosed sum earlier this month – the fifth largest in the US with over $8bn in annual sales – plans to continue making acquisitions after being rebranded Berkshire Hathaway Automotive, it said at the time of the deal.

Meanwhile, the holding company for Mr Buffett’s utilities, including MidAmerican Energy and PacifiCorp, was this year renamed Berkshire Hathaway Energy to reflect, it said at the time, “the benefits we gain from Berkshire Hathaway’s ownership”.

Berkshire has a substantial interest in 10 of the top 100 most valuable brands in Millward Brown’s latest annual BrandZ survey, reflecting Mr Buffett’s penchant for enduring names such as Coca-ColaAmerican Express and Walmart. As he wrote in his 2011 letter to shareholders: “‘Buy commodities, sell brands’ has long been a formula for business success.”

Berkshire Hathaway was the name of the now defunct textiles company Mr Buffett acquired in the 1960s.

May 20, 2014

Return on Capital and Shareholder Return

The market often takes a long time to reward shareholders with a return on stock that corresponds to a company's return on capital. To better understand this statement, it is crucial to separate return on capital from return on stock. Return on capital is a measure of a company's profitability, but return on stock represents a combination of dividends and increases in the stock price (better known as capital gains). The two simple formulas below outline the return calculations in more detail:

Return on Capital: Profit / (Invested Capital) 

Sometimes known as ROIC (Return on Invested Capital)

Return on Stock: Shareholder Total Return = Capital Gains + Dividends
This is measured on capital appreciation from beginning of the year until the end of the year. Example. January 2, 2014 - stock price USD100.00. By December 30, the stock price is USD150.00. [(USD150-USD100)/USD100] That would mean it has given Shareholder return 50%.

The market frequently forgets the important relationship between return on capital and return on stock. A company can earn a high return on capital but shareholders could still suffer if the market price of the stock decreases over the same period. Similarly, a terrible company with a low return on capital may see its stock price increase if the firm performed less terribly than the market had expected. Or maybe the company is currently losing lots of money, but investors have bid up its stock in anticipation of future profits.

In other words, in the short term, there can be a disconnect between how a company performs and how its stock performs. This is because a stock's market price is a function of the market's perception of the value of the future profits a company can create. Sometimes this perception is spot on; sometimes it is way off the mark. But over a longer period of time, the market tends to get it right, and the performance of a company's stock will mirror the performance of the underlying business.

(Source: Morning Star)

Total Shareholder Return and competitiveness
I’d like to start off the series with a look at Total Shareholder Return, or TSR, and its usefulness in helping us measure Shell’s competitiveness and attractiveness to investors. In later installments, I will describe some of the key performance indicators that contribute to it. 

TSR is a measure that combines changes in our share price with the dividends (the ongoing cash “reward” for making an investment - currently $1.68 or around 5% per share per year), and is regarded as the total financial return to the owner of Shell shares.

Calculated over a period of time - usually from one quarter or one year to the next - TSR makes an assumption that shareholders reinvest their dividends in Shell shares. In reality, that may not be the case, but this assumption gives us an easy way to compare ourselves with competitors.

Sometimes people ask me why TSR matters when stock markets seem so unpredictable and our business model depends on solid performance over long periods of time. Well, put simply, TSR reflects all the publicly known information about our company. That includes financial numbers, but also the effects of important news and events, which are mirrored in our share price. As such, TSR becomes the simplest and most important reflection of performance for investors to judge us by. 

Reputation counts
The share price reflects the value that investors believe reflects Shell’s capability to create future returns such as earnings (or profit), cash flows (the amount of money entering and leaving the business), and its dividend payments. In this context, what plays a crucial role is investors’ confidence in Shell’s ability to keep performing into the future. 

Like any other company, Shell’s future value depends on how good we are at extracting value from existing assets and creating new business opportunities. For us, that means delivering new Upstream projects or building new Downstream markets as two examples. But it also depends crucially on our ability to operate existing assets safely and reliably, at a competitive cost. Other important factors are quality of technology and strength of management.

More than ever before, investors are concerned about the challenges our industry faces. These include responsible safety, social and environmental performance, addressing the climate change challenge, gaining access to upstream resources and growing downstream markets. If anybody doubted the value of safety and environmental factors to investors, they would only need to see the effects of the Deepwater Horizon incident on BP.

All these factors contribute to our overall reputation, and all can influence investor confidence. In turn, that influences our share price.

By Simon Henry - Royal Dutch Shell Chief Financial Office.

Apr 28, 2014

Buffett Wisdom to Berkshire Hathaway Shareholder


Chairman of the Board March 1, 1994

We define intrinsic value as the discounted value of the cash that can be taken out of a business during its remaining life. Anyone calculating intrinsic value necessarily comes up with a highly subjective figure that will change both as estimates of future cash flows are revised and as interest rates move. Despite its fuzziness, however, intrinsic value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.


Chairman of the Board
In The Theory of Investment Value, written over 50 years ago, John Burr Williams set forth the equation for value, which we condense here: The value of any stock, bond or business today is determined by the cash inflows and outflows - discounted at an appropriate interest rate - that can be expected to occur during the remaining life of the assetNote that the formula is the same for stocks as for bonds. Even so, there is an important, and difficult to deal with, difference between the two: A bond has a coupon and maturity date that define future cash flows; but in the case of equities, the investment analyst must himself estimate the future "coupons." Furthermore, the quality of management affects the bond coupon only rarely - chiefly when management is so inept or dishonest that payment of interest is suspended. In contrast, the ability of management can dramatically affect the equity "coupons." The investment shown by the discounted-flows-of-cash calculation to be the cheapest is the one that the investor should purchase - irrespective of whether the business grows or doesn't, displays volatility or smoothness in its earnings, or carries a high price or low in relation to its current earnings and book value. Moreover, though the value equation has usually shown equities to be cheaper than bonds, that result is not inevitable: When bonds are calculated to be the more attractive investment, they should be bought. 


Chairman of the Board

Book value is an accounting concept, recording the accumulated financial input from both contributed capital and retained earnings. Intrinsic business value is an economic concept, estimating future cash output discounted to present value. Book value tells you what has been put in; intrinsic business value estimates what can be taken out. 

March 1, 2000 Chairman of the Board 
Common yardsticks such as dividend yield, the ratio of price to earnings or to book value, and even growth rates have nothing to do with valuation except to the extent they provide clues to the amount and timing of cash flows into and from the business. Indeed, growth can destroy value if it requires cash inputs in the early years of a project or enterprise that exceed the discounted value of the cash that those assets will generate in later years. 


February 27, 1987 Chairman of the Board 

Appendix Purchase-Price Accounting Adjustments and the "Cash Flow" Fallacy

First a short quiz: below are abbreviated 1986 statements of earnings for two companies. Which business is the more valuable?

(000’s Omitted)
Company O Company N
 Revenues $677,240 $677,240
Cost of Goods Sold Historical Costs Excluding Depreciation 341,170 341,170
Special non-cash inventory costs 0 4,979
Depreciation of plant and equipment 8,301 13,355
Total 349,471 359,504

Gross Profit 327,769 317,736
Selling and Administrative Expense 260,286 260,286
Amortization of Goodwill 0 595
Total 260,286 260,881
 Operating Profit 67,483 56,855
Other Income, Net 4,135 4,135
Pre-Tax Income 71,618 60,990
Applicable Income Tax Historical deferred and current tax 31,387 31,387
Non-Cash Inter-period Allocation Adjustment 0 998
Total 31,387 32,385
Net Income 40,231 28,605

As you've probably guessed, Companies O and N are the same business - Scott Fetzer. In the "O" (for "old") column we have shown what the company's 1986 GAAP earnings would have been if we had not purchased it; in the "N" (for "new") column we have shown Scott Fetzer's GAAP earnings as actually reported by Berkshire. It should be emphasized that the two columns depict identical economics - i.e., the same sales, wages, taxes, etc. And both "companies" generate the same amount of cash for owners. Only the accounting is different. So, fellow philosophers, which column presents truth? Upon which set of numbers should managers and investors focus? Before we tackle those questions, let's look at what produces the disparity between O and N. We will simplify our discussion in some respects, but the simplification should not produce any inaccuracies in analysis or conclusions.

The contrast between O and N comes about because we paid an amount for Scott Fetzer that was different from its stated net worth. Under GAAP, such differences - such premiums or discounts - must be accounted for by "purchase-price adjustments." In Scott Fetzer's case, we paid $315 million for net assets that were carried on its books at $172.4 million. So we paid a premium of $142.6 million.

The first step in accounting for any premium paid is to adjust the carrying value of current assets to current values. In practice, this requirement usually does not affect receivables, which are routinely carried at current value, but often affects inventories. Because of a $22.9 million LIFO reserve and other accounting intricacies, Scott Fetzer's inventory account was carried at a $37.3 million discount from current value. So, making our first accounting move, we used $37.3 million of our $142.6 million premium to increase the carrying value of the inventory.

Assuming any premium is left after current assets are adjusted, the next step is to adjust fixed assets to current value. In our case, this adjustment also required a few accounting acrobatics relating to deferred taxes. Since this has been billed as a simplified discussion, I will skip the details and give you the bottom line: $68.0 million was added to fixed assets and $13.0 million was eliminated from deferred tax liabilities. After making this $81.0 million adjustment, we were left with $24.3 million of premium to allocate.

Had our situation called for them two steps would next have been required: the adjustment of intangible assets other than Goodwill to current fair values, and the restatement of liabilities to current fair values, a requirement that typically affects only long-term debt and unfunded pension liabilities. In Scott Fetzer's case, however, neither of these steps was necessary.

The final accounting adjustment we needed to make, after recording fair market values for all assets and liabilities, was the assignment of the residual premium to Goodwill (technically known as "excess of cost over the fair value of net assets acquired"). This residual amounted to $24.3 million. Thus, the balance sheet of Scott Fetzer immediately before the acquisition, which is summarized below in column O, was transformed by the purchase into the balance sheet shown in column N. In real terms, both balance sheets depict the same assets and liabilities - but, as you can see, certain figures differ significantly.

(000’s Omitted)
Company O Company N
Assets Cash and Cash Equivalents $3,593 $3,593
Receivables, net 90,919 90,919
Inventories 77,489 114,764
Other 5,954 5,954
Total Current Assets 177,955 215,230
Property, Plant, and Equipment, net 80,967 148,960
Investments in and Advances to Unconsolidated Subsidiaries and Joint Ventures 93,589 93,589
Other Assets, including Goodwill 9,836 34,210
Total $362,347 491,989
Liabilities Notes Payable and Current Portion of Longterm Debt 4,650 4,650
Accounts Payable 39,003 39,003
Accrued Liabilities 84,939 84,939
Total Current Liabilities 128,592 128,592
Long-term Debt and Capitalized Leases 34,669 34,669
Deferred Income Taxes 17,052 17,052
Othered Deferred Credits 9,657 9,657
Total Liabilities 189,970 176,993
Shareholders’ Equity 172,377 314,996
Total $362,347 $491,989

The higher balance sheet figures shown in column N produce the lower income figures shown in column N of the earnings statement presented earlier. This is the result of the asset write-ups and of the fact that some of the written-up assets must be depreciated or amortized. The higher the asset figure, the higher the annual depreciation or amortization charge to earnings must be.

The charges that flowed to the earnings statement because of the balance sheet write-ups were numbered in the statement of earnings shown earlier:
1. $4,979,000 for non-cash inventory costs resulting, primarily, from reductions that Scott Fetzer made in its inventories during 1986; charges of this kind are apt to be small or non-existent in future years.

2. $5,054,000 for extra depreciation attributable to the write-up of fixed assets; a charge approximating this amount will probably be made annually for 12 more years.

3. $595,000 for amortization of Goodwill; this charge will be made annually for 39 more years in a slightly larger amount because our purchase was made on January 6 and, therefore, the 1986 figure applies to only 98% of the year.

4. $998,000 for deferred-tax acrobatics that are beyond my ability to explain briefly (or perhaps even non-briefly); a charge approximating this amount will probably be made annually for 12 more years.

It is important to understand that none of these newly-created accounting costs, totaling $11.6 million, are deductible for income tax purposes. The "new" Scott Fetzer pays exactly the same tax as the "old" Scott Fetzer would have, even though the GAAP earnings of the two entities differ greatly. And, in respect to operating earnings, that would be true in the future also.

However, in the unlikely event that Scott Fetzer sells one of its businesses, the tax consequences to the "old" and "new" company might differ widely.

By the end of 1986 the difference between the net worth of the "old" and "new" Scott Fetzer had been reduced from $142.6 million to $131.0 million by means of the extra $11.6 million that was charged to earnings of the new entity. As the years go by, similar charges to earnings will cause most of the premium to disappear, and the two balance sheets will converge. However, the higher land values and most of the higher inventory values that were established on the new balance sheet will remain unless land is disposed of or inventory levels are further reduced.

 * * * What does all this mean for owners? Did the shareholders of Berkshire buy a business that earned $40.2 million in 1986 or did they buy one earning $28.6 million? Were those $11.6 million of new charges a real economic cost to us? Should investors pay more for the stock of Company O than of Company N? And, if a business is worth some given multiple of earnings, was Scott Fetzer worth considerably more the day before we bought it than it was worth the following day? If we think through these questions, we can gain some insights about what may be called "owner earnings." These represent (a) reported earnings plus (b) depreciation, depletion, amortization, and certain other non-cash charges such as Company N's items (1) and (4) less _ c_ the average annual amount of capitalized expenditures for plant and equipment, etc. that the business requires to fully maintain its long-term competitive position and its unit volume. (If the business requires additional working capital to maintain its competitive position and unit volume, the increment also should be included in _ c_ . However, businesses following the LIFO inventory method usually do not require additional working capital if unit volume does not change.) Our owner-earnings equation does not yield the deceptively precise figures provided by GAAP, since_ c_ must be a guess - and one sometimes very difficult to make. Despite this problem, we consider the owner earnings figure, not the GAAP figure, to be the relevant item for valuation purposes - both for investors in buying stocks and for managers in buying entire businesses. We agree with Keynes's observation: "I would rather be vaguely right than precisely wrong." The approach we have outlined produces "owner earnings" for Company O and Company N that are identical, which means valuations are also identical, just as common sense would tell you should be the case. This result is reached because the sum of (a) and (b) is the same in both columns O and N, and because_ c_ is necessarily the same in both cases.

And what do Charlie and I, as owners and managers, believe is the correct figure for the owner earnings of Scott Fetzer? Under current circumstances, we believe _ c_ is very close to the "old" company's (b) number of $8.3 million and much below the "new" company's (b) number of $19.9 million. Therefore, we believe that owner earnings are far better depicted by the reported earnings in the O column than by those in the N column. In other words, we feel owner earnings of Scott Fetzer are considerably larger than the GAAP figures that we report.

That is obviously a happy state of affairs. But calculations of this sort usually do not provide such pleasant news. Most managers probably will acknowledge that they need to spend something more than (b) on their businesses over the longer term just to hold their ground in terms of both unit volume and competitive position. When this imperative exists - that is, when _ c_ exceeds (b) - GAAP earnings overstate owner earnings. Frequently this overstatement is substantial. The oil industry has in recent years provided a conspicuous example of this phenomenon. Had most major oil companies spent only (b) each year, they would have guaranteed their shrinkage in real terms.

All of this points up the absurdity of the "cash flow" numbers that are often set forth in Wall Street reports. These numbers routinely include (a) plus (b) - but do not subtract _ c_ . Most sales brochures of investment bankers also feature deceptive presentations of this kind. These imply that the business being offered is the commercial counterpart of the Pyramids - forever state-of-the-art, never needing to be replaced, improved or refurbished. Indeed, if all U.S. corporations were to be offered simultaneously for sale through our leading investment bankers - and if the sales brochures describing them were to be believed - governmental projections of national plant and equipment spending would have to be slashed by 90%. 

Apr 27, 2014

Magic Formula Investing


May be some of you already read about this.
Magic Formula Investing Performance
Magic Formula Investing Performance

Gotham Capital. they manage to achieve average return around 30% yearly. The founder, Joel Greenblatt, has shared the secret of this fund manager. He is a professor on the adjunct faculty of Columbia business school.
Joel Greenblatt
Joel Greenblatt
He did share his investment wisdom on how to achieve this so-called "Magic Investing". However, his techniques so far has been tested for US Stock Exchange. Whether this formula has been tested or back tested in other stock exchange (particularly Bursa Malaysia), it is not yet proven. Some may be skeptical. It is up to you whether you want to believe or not. May be you want to test it out. I believe option 2 may be more applicable for Bursa Malaysia. Anyway, risk on your own if you decided to follow this formula Big Boss

Below is the excerpt from his book, "The Little Book that Still Beats the Market" (page 140-143)

Option 1: MagicFormulaInvesting.com

Step 1
Go to magicformulainvesting.com.

Step 2
Follow the instructions for choosing company size (e.g., companies with market capitalizations over $50 million, or over $200 million, or over $1 billion, etc.). For most individuals, companies with market capitalizations above $50 million or $100 million should be of sufficient size.

Step 3
Follow the instructions to obtain a list of top-ranked magic formula companies.

Step 4
Buy five to seven top-ranked companies. To start, invest only 20 to 33 percent of the money you intend to invest during the first year (for smaller amounts of capital, lowerpriced Web brokers such as foliofn.com, buyandhold.com, and scottrade.com may be a good place to start). 

Step 5
Repeat Step 4 every two to three months until you have invested all of the money you have chosen to allocate to your magic formula portfolio. After 9 or 10 months, this should  result in a portfolio of 20 to 30 stocks (e.g., seven stocks every three months, five or six stocks every two months).

Step 6
Sell each stock after holding it for one year. For taxable accounts, sell winners after holding them a few days more than one year and sell losers after holding them a few days less than one year (as previously described). Use the proceeds from any sale and any additional investment money to replace the sold companies with an equal number of new magic formula selections (Step 4).

Step 7
Continue this process for many years. Remember, you must be committed to continuing this process for a minimum of three to five years, regardless of results. Otherwise, you will most likely quit before the magic formula has a chance to work!

Step 8
Feel free to write and thank me.

Option 2: General Screening Instructions

If using any screening option other than magicformulainvesting.com, you should take the following steps to best approximate the results of the magic formula:
  • Use Return on Assets (ROA) as a screening criterion. Set the minimum ROA at 25%. (This will take the place of return on capital from the magic formula study.)
  • From the resulting group of high ROA stocks, screen for those stocks with the lowest Price/Earning (P/E) ratios. (This will take the place of earnings yield from the magic formula study.) 
  • Eliminate all utilities and financial stocks (i.e., mutual funds, banks and insurance companies) from the list.
  • Eliminate all foreign companies from the list. In most cases, these will have the suffix “ADR” (for “American Depository Receipt”) after the name of the stock. 
  • If a stock has a very low P/E ratio, say 5 or less, that may indicate that the previous year or the data being used are unusual in some way. You may want to eliminate these stocks from your list. You may also want to eliminate any company that has announced earnings in the last week. (This should help minimize the incidence of incorrect or untimely data.) 
  • After obtaining your list, follow steps 4 and 8 from the magicformulainvesting.com instruction page.

Jan 21, 2014

Revalued Net Asset Valuation (RNAV) & Sum-of-Parts Valuation (SOP)


These are 2 common valuation that are rarely used by Retail investors. Reason being because lack of resource and it requires proficiency in understanding and estimating business earning by division/business segment.
Example below are the valuation for CMSB (Cahya Mata Sarawak Berhad). Remember this is NOT a BUY NOR SELL recommendation. I will not be held responsible for any action taken by you.

Revalued Net Asset Valuation
It is based on so called experts' judgement that the market value of certain assets of a company far exceeds that of their book value, and a revaluation is justified. The most well known example would be that of property companies where market benchmarks can be easily established and revaluation based on such benchmarks are credible.


Sum of Parts Valuation
Sum of the parts valuation, in most cases, is done roughly basis. First, a firm is broken down into asset classes or businesses, even though there may be overlap across businesses or centralized support services. Second, the earnings or other operating metric for each asset class/business is converted to an estimated value, using the average multiple at which publicly traded companies in that business trade for. Third, the estimated values of the businesses are added up and compared the actual market value.

What is the different between SOP and RNAV? if you noticed, RNAV is normally used to value land banking asset. SOP is particularly used to project earning (Profit before tax or EBITDA) plus (Net Cash- Net debt) plus holding in other subsidiaries. Of course we can combine both RNAV and SOP into one valuation.

To be on the safe side, we reduce the value using margin of safety (MOS) discount as a buffer against over valuation. MOS discount can be in the form of 30-50%. Considering Market Price versus MOS Price, if the gap is so high, You know what it means. It is massively undervalued.

Of course I bought CMSB when it was RM2.45++. At the time I bought, it is really massively undervalued. Now, Considered as Fairly valued.


Hope you have learned something.