Warren Buffett's Genius...

My term project in one of my Masters classes is to fully analyze and reformulate a publicly traded company's financial statements - for at least 8 years. Immediately I knew which company I was going to choose - Berkshire Hathaway.

With Berkshire's annual reports being 75+ pages long each year, I've only read through 2 years, so far. (Plus I need to find more recycled paper to print on. Save some trees and all.) And already, I can see Warren Buffett's genius shining through. The "Oracle from Omaha," as he's so belovedly called, is the single greatest investor in this lifetime - I think anyway. His annual report and letter to shareholders are filled with humor and just an overall great feel to it.

A sample of his genius and hilarity (all directly quoted from the 1998 annual report):

"If we are to disappoint you, we would rather it be with our earnings than with our accounting." [on fraudulent accounting practices to make earnings estimates]

"If options aren't a form of compensation, what are they? If compensation isn't an expense, what is it? And, if expenses shouldn't go into the calculation of earnings, where in the world should they go?"

"Here, I need to make a confession (ugh): The portfolio actions I took in 1998 actually decreased our gain for the year. In particular, my decision to sell McDonald's was a very big mistake. Overall, you would have been better off last year if I had regularly snuck off to the movies during market hours."

"Berkshire's primary investment strategy contemplates that most equity investments will be held for very long periods of time. Thus, Berkshire management is not necessarily troubled by short term price volatility with respect to its investments provided that the underlying business, economic and management characteristics of the investees remain favorable."

"As for the allocation of capital, that's an activity both Charlie [Munger, Vice Chairman of Berkshire] and I enjoy and in which we have acquired some useful experience. In a general sense, grey hair doesn't hurt on this playing field: You don't need good hand-eye coordination or well-toned muscles to push money around (thank heavens). As long as our minds continue to function effectively, Charlie and I can keep on doing our jobs pretty much as we have in the past"

Mr. Buffett knows his limitations and isn't afraid to praise his subsidiaries' managers for their talent and ability. And from reading these annual reports, you honestly get the feeling that no matter how small a position you own in Berkshire, he still considers you a full-on owner of the company.

Corporate America would be a totally different scene if every CEO was as flexible and ingenious as Mr. Warren E. Buffett.

I'm such a fan now.

p.s. If I don't write for awhile, that means I'm still up to my ears in annual reports.

Cell phones for everyone!

Motorola just unveiled their new i930 smartphone - complete with high-speed internet hookups and software provided by none other than Microsoft. The smartphone has a price tag of $500 attached to it, which makes it pricier than most peoples' cell phones as is. But there is a market for ridiculously expensive cell phones, especially for those whose cell phones double as their PDA. Think it's too expensive? You're in luck.

Just yesterday, Motorola announced their plans to start carrying more inexpensive phones (around $30 each) for developing countries. (Nokia's phones in these similar markets cost around $120 each). Back in February, Motorola "won a similar contract...to provide $40 phones to emerging markets," according to Motley Fool's Alyce Lomax. Motorola's move into these emerging markets has huge potential for growth in the coming years. While global expansion is usually tied to China or India these days, it's nice to know that some companies still care about the underdog countries out there.

Nokia, too, is trying to build up their presence in developing countries. But their phone sells for over $100. How would people in these countries pay over $100 for the luxurious commodity that is the cell phone? Motorola's two alternatives makes owning a cell phone much more affordable.

Motorola's two announcements, made a day apart, really only signals one thing - they're expanding aggressively. They must still be daydreaming of the days when they had the #1 market share. It's obvious they want it back.

With Motorola's P/E at 20.15, it trades at a premium to the cell phone market share leader Nokia (P/E 16.99). However, with Nokia trying to sell expensive cell phones to the developing countries, I'd have to say their strategy is somewhat off. It seems like Motorola understands that the bottom line may have to be cut, in order to get into markets with potential growth. And for that, I'd pay the additional premium for Motorola.

The super expensive phone, the super inexpensive phone, the Razr, the Rokr (with Apple's iTunes) - there's a little bit for everyone.

This article takes information from: Motorola moves upscale with gadgets by Scott Banerjee, MarketWatch and Motorola goes on the cheap by Alyce Lomax, Fool.com

Fear leads to...

smaller returns.

I was chatting it up with my boyfriend's mom the other day - trading stock secrets. And honestly, she has really good ideas right now - looking into all the right areas- energy, construction companies, REITs, ETFs, biotech, etc. But she can't seem to get over the huge tech bubble burn of the late 90's. That fear causes her to sell when she's only made a few bucks. And of course, after she sells, they skyrocket. (Practically investing's Murphy's Law). She does her research and chooses great companies, but she's simply too afraid to wait it out.

I, on the other hand, am here to invest for the long term. Since I'm younger and have more years of earning power ahead of me, I'm not as risk averse as she is.

Solution? I tried suggesting to her that maybe if she was too afraid of losing her entire position, to sell off the majority of it, and just keep a small portion - so that if it goes up, at least you're in on it too. And if it goes down, it doesn't matter - it was only a minimal position. She kind of laughed at the idea of keeping 10-20 shares of a company, saying that such a small amount is worthless. To each his own, I guess.

I own a few small positions. One of them, XOM, was merely because I miscalculated when I transferred money into my account to buy a position. Apparently I miscalculated by about $650 (after I bought whatever it was I originally wanted to buy). So I'm thinking, should I just withdraw it out or actually buy something with it? I bought a whopping 11 shares of XOM. (This was back in April) It's not too shabby - I've made a 12% return on it, and I can now expect nice quarterly dividends. So eventhough it's a small amount, they'll add up.

My new motto: Small amounts of money do make a difference.


P.S. Now that the markets have been wildly going up and down these past few days, maybe you should consider dividend stocks a little more seriously. (MCD just increased their dividend by 22%. Just a thought) Disclosure: I own shares of MCD.

I can't wait until retirement...

I have 36 1/2 years before I can touch any of my retirement savings money. I guess what's more surprising (other than the fact that I'm already counting down to retirement), is that I have a retirement savings account.

I overheard three women at lunch the other day - all of them said that none of their parents had any retirement savings whatsoever. NONE. Now these women were easily in their mid-thirties. Their parents were probably baby boomers. Very nearing retirement age. How can you get to that point in your life and not have saved a penny? The moral of the story is: No one can save money, unless they actively try to. One theme I like to stress is that people are consumers. If people still don't believe me, then is there another explanation for why people could have 40 years of earning power, and not have saved a single cent?

Maybe they're all waiting for social security checks to start coming in the mail. What they don't realize is that their social security checks, compared to their paychecks, would probably cut their current income by a huge percentage. Are they ready to start living on a budget when they're older? Why not budget a bit when you're younger? And spend the rest of your days living them out comfortably. That sounds like the good life to me.

I'm going to end this entry with a story from Sex and the City. Carrie Bradshaw, in the show, owned 100 pairs of $400 shoes. (That's $40,000 on shoes alone!) She wanted to buy her apartment and didn't have the down payment money. So, you can either have 100 pairs of shoes, or a house. And I am that person - that has a house.

Theory of Efficient Markets

Apparently, stock research is unnecessary. Than why am I writing this blog anyway? The general gist of the theory is that since technology is so advanced nowadays, it allows information travel practically at the speed of light. Because information about anything, more specifically what's going on within a company, is made available the instant it happens, the stock price always reflects the public's full knowledge of the company.

While this theory seems plausible, it just doesn't seem rational enough to actually use it as a strategy to invest. If blindly following the theory, one would just invest in $100 and upwards stocks, because if the market thinks these stocks are worth the price, than I do too. But what about valuation? Analysts are always screaming about stocks being overvalued or undervalued. If analysts are still doing that, then the obviously don't believe in the theory. Because in my interpretation, in the theory of efficient markets, there are no valuation concerns. Each stock price is at where it's at, because all the information available points to that specific share price.

I've learned about this theory in a few investing and finance classes I've taken. The theory is still in the textbooks, but should it be? Is the theory telling us, as investors, to just be irrational and trust the share price as an indicator of value? I'd rather not bank on it.

There are so many means of evaluating a stock before purchasing it. Blind faith is not one of them. Things that are more important than stock price: Cash flow from operations, Assets on the balance sheet, Liabilities on the balance sheet.

In response to Jubak's Journal

I love reading Jim Jubak's journal. I think he has some great points and makes some great arguments. However, I'm going to have to disagree with his most recent entry on the possibility of a recession.

Sure, there's a short-term energy and oil situation that could last for a few months. In his article, Jubak says that since Katrina hit the U.S. energy sector the worst, come winter time, we'll see an economic slowdown. While rising energy costs are a concern, would it be alright to assume that consumers would stop spending? He noted a 1/3 rise in heating costs between last year and the year before. It didn't stop consumer spending. As August's consumer spending numbers tell us: People are still spending! Regardless of the fear of higher gas prices (which have been looming for awhile), regardless of the fear of higher heating costs. If people are so concerned where their Christmas spending money is going to come from, then lower your thermostat a little bit, and bring on the blankets. Save money that way.

However, with the American public already spending more than they save, we have to honestly level with the fact that yes - we are a society of consumers. Jubak seems to suggest that if costs around us are rising, people would be less likely to really push the Christmas retail season. Christmas, whether we're religious or not, has become a national "reason to spend money." And I think that while retail sales have the potential to be not be as impressive as the previous years, it'll still be good enough to keep the economy going.

And plus, let's not forget the fact that a lot of peoples' mentalities are still "Buy now, pay later." Right now, many Americans are already up to their ears in debt. I'm not talking about mortgages and education loans. I mean straight up consumer credit card debt. The savings account interest rate has already been steadily increasing, but it hasn't influenced people to actually save more and spend less. In July, the consumer savings rate was at zero. And then in August, consumer spending actually outpaced saving (saving was at a -0.6% - the lowest level since the government started keeping track in 1959).

I'm sorry Jim. If you think that consumers will suddenly start saving (and not spending) because of higher prices, I have to say:

If banks can offer 3.30% interest in savings accounts, and people aren't already taking advantage of it and beginning to save, than when will they ever have the motivation to start?

In a Post-Katrina Portfolio...

Katrina is throwing the U.S. economy into a million different directions. I've heard that Katrina may usher the economy into a long recession. I've also heard that it may boost the economy in the same way that wartime boosts our economy. I can see arguments for both sides... Where do you stand?

With normal things, I'm more of a pessimist. But with the economic conditions we're in right now, I don't think that recession would necessarily be the outcome. I thought long and hard about this recently - and I think (and hope) this will cause a boom in the long run. (My next post will address this)

How to weather this storm? Re-buildling materials.

CEMEX (CX) was a recent addition to my parents' portfolio, which I manage. While CEMEX, as well as everyone else, will face rising energy costs in the months to come, I think it'll still fare well in the rebuildling process. Not to mention, it's probably always a good idea to diversify outside of the United States (being an ADR from Mexico). CX also has a respectable dividend yield at 2.40% right now. A combination of demand, bearish-weathering qualities (dividends), and value (P/E is at 11) makes it a buy for me.

Lowe's (LOW) - also a good choice is Home Depot (HD) - I personally chose Lowe's instead of Home Depot because Lowe's has more locations in the south that can provide assistance when necessary. Home Depot is the nation's largest home building store, with more locations, but I think Lowe's is more prevalent in the south (I looked at a map of both their store locations for the U.S. - sometimes investing is also about looking at non-financial things like that). Also, Lowe's stock also just moves more. The 52-week range is 50.26 - 67.01, whereas Home Depot has stayed between 34.56 - 44.30.

Both honestly are good choices, with analysts recommending both very highly (HD has one Strong Sell recommendation though). Both pay out dividends, although Home Depot has a higher yield at 1.0% (Lowe's is at 0.40%). Both are well valued with forward P/E ratios at 15.40 (HD) and 19.30 (LOW).

So really either one is a great choice.

And some that I already owned prior to Katrina,

Walgreens (WAG) - With other examples of flooding throughout the world, the next big bad thing that'll happen from Katrina is widespread disease. Flooding always brings out all the nastiness in the streets and combine that with stale water that just doesn't move, and disease is the outcome. Not to mention, (and this is honestly with no disrespect to New Orleans in general) New Orleans is just not a clean place to begin with. I visited there last summer, and walking up and down the French Quarter, there was trash everywhere! Now, where I come from, businesses have large trash bins out back where they throw all their trash (contained in a bin). In New Orleans, they just throw out bags and leave them on stores' doorsteps and sidewalks. No bin. No containment. I got so sick when I went there because of sanitation issues - I rushed myself to a Walgreens for antibiotics. However, Walgreens has already suffered a large loss having to close 74 stores in the southern region of the country.

Caterpillar (CAT) - Maker of farming and construction equipment, CAT was a buy before Katrina and still is, now. Cities and towns are always expanding. People build more than they tear down. Construction equipment was just the next logical step. And now that New Orleans is literally going to have to be rebuilt, I think CAT's worth buying. It's trading at around $58 today.

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Oh and more importantly, in addition to figuring out how to tweak your portfolio post-Katrina, one should also considering making tax-deductible donations to help the effort. I know I did. Here's a good place to start: Red Cross.