Monday, August 31, 2009
Sunday, August 30, 2009
Saturday, August 29, 2009
- With an entire business, you have to run it, or find someone who can. To be successful, this requires an enormous amount of dedication.
- In the stock market, you're buying a business that is already staffed, yet you still get to share in the earnings.
- With whole businesses, often the sellers know a lot more about the business than the buyers, and furthermore the prices offered are not usually as attractive as they can be in the stock market.
- Buying an entire business requires a large investment. In the stock market, however, you can start with just a tiny amount of capital, and add to that capital over the years - a tremendous advantage.
- The selection offered to buyers of private businesses does not compare to that offered by the stock market. With a few brokerage accounts, the investor has the option to purchase from 100,000 companies worldwide. On the other hand, how many private businesses are for sale with a 25 mile radius of the investor?
- In the purchase of a private business, transaction costs can add a good 5 to 10% to the price of the transaction. The frictional costs in the stock market, however, even for an extremely active investor, are extraordinarily low.
Friday, August 28, 2009
Thursday, August 27, 2009
CFD Earning CapacityProfiting from trading CFDs is a brilliantly simple process. Pick an asset, decide if it will rise or fall in value, stake an amount per point, choose well, and make money! Stop-loss tools can help manage your risk, and profits made are 100% tax free!
Wednesday, August 26, 2009
For most companies, both income gains and income losses are attenuated to a large extent by taxes. In this regard, the government acts as a business partner, reducing the risk of loss in any one period (as long as offsetting gains were achieved in the recent past or can be achieved in the future!), but also sharing in the gains. But in certain situations, investors can sometimes stumble upon companies that do not have to share such gains.
Consider Key Tronic (KTCC), a designer and manufacturer of keyboards and other computer input devices. Over the last 8 years (including this one), Key Tronic has been profitable, as it has garnered business from original equipment manufacturers participating in a trend towards low-cost outsourcing. But Key Tronic has barely paid any taxes over that period. In fact, due to a storied past, Key Tronic has net operating loss carryforwards (i.e. losses that can be applied to future income for the purposes of calculating taxes) of over $40 million. The company's market cap is only half of that, as it earned about $1.5 million this year!
Some of these carryforwards expire every year, but management believes it will be able to apply most of those losses, reducing the company's tax rate considerably. For many companies, every dollar of operating income translates to about 65 cents of income. For this company, each dollar of operating income translates directly into a dollar of income, representing a 50% bonus to shareholders! Such future benefits should have the company trading at a premium to its peers, yet this company trades at a discount to its net current assets.
By going beyond a company's headlines and by reading the notes behind a company's financial statements, investors put themselves in a position to find value that would otherwise go uncovered. Tax-loss carryforwards represent just one of the many useful items investors can find in the notes to the financial statements.
Disclosure: Author has a long position in shares of KTCC
Tuesday, August 25, 2009
Monday, August 24, 2009
Sunday, August 23, 2009
- Buy an existing business: each of the businesses described in the first four chapters had defined business models; nothing new was being invented.
- Buy businesses in simple industries with a low rate of change: all of the businesses described were necessary and were not about to be replaced.
- Buy distressed businesses in distressed industries: the very best time to buy a business is when it is hated and unloved.
- Buy businesses with a durable competitive advantage: this advantage can come from being low-cost to having a brand to having captive customers.
- Bet heavily when the odds are in your favour: in the businesses described, sometimes the investor did not make moves for several years, but when the opportunity was clear (odds in favour, with excellent returns), he invested much.
- Focus on arbitrage: in all cases, the investors saw a discrepancy between price and value that they exploited.
- Buy businesses at big discounts to their intrinsic values: the odds of a permanent loss are low when this approach is followed.
- Look for low-risk, high-uncertainty businesses: the uncertainty leads to severely depressed prices.
- It's better to be a copycat than an innovator: "innovation is a crapshoot, but scaling carries far lower risk."
Saturday, August 22, 2009
Friday, August 21, 2009
Thursday, August 20, 2009
Wednesday, August 19, 2009
Consider a company which pays its management in stock options (indeed it is rare not to find such a company today). If management were to pay a dividend, shareholders would receive cash, but the value of management's options would drop. (For an explanation of this phenomenon, see this discussion.) On the other hand, when a company buys back and cancels its own shares, each share ends up owning a proportionately larger amount of the company, which
Stock options aside, managements are in their positions because of their abilities in running the operations of the business. They are not experts at capital allocation, nor are they good predictors in the field of macroeconomics. Yet when they buy back shares at certain times but don't at others, they are implying that they can allocate capital better than shareholders. Rather than give the cash to the shareholder, at which point the shareholder can decide what's best for himself, management has made this decision for him.
As an example, here is a look at the dividends and buybacks of the four quarters ending mid-2008 for some of America's most prominent retailers. The dividends are small, but the buybacks are enormous. Unfortunately, investors would have been much better off with the cash in their hands. The chart shows what the dividend yield would have been had the money used for buybacks been paid out. It also shows the average price at which companies bought back shares, and compares it to their current prices:
Each of these companies save for Wal-Mart (NYSE: WMT) paid significant premiums over the current stock price. In the case of Home Depot (NYSE: HD), had it paid out the cash used in its buyback, the dividend yield would have represented a staggering 27% of the current stock price. Certainly, this dividend represented a one-time outlay and is not sustainable, but it would have represented a shareholder-friendly action from a company looking to regain shareholder confidence after a difficult few years.
But this chart only shows the premium these companies paid over their current stock prices. During the stock market lows of late 2008 and early 2009, their prices dropped even lower. Nevertheless, most of these companies did not buy back a single share in the first half of this year, with Walmart being the exception once again.
Tuesday, August 18, 2009
Monday, August 17, 2009
Sunday, August 16, 2009
- Started Virgin Airlines with a one-year low-cost lease on single airplane
- Developped Virgin Pulse with guaranteed distribution and outsourced manufacturing
- Launched Virgin Mobile with no cell-phone network
- Offered Virgin Mortgage without a banking infrastructure
Saturday, August 15, 2009
To dispel the idea that the story described in Chapter 1 was simply a matter of fortunate timing and luck, Pabrai describes another successful entrepreneurial venture where the risks were low but the potential upside was high. The story is that of Manilal Patel, a man who immigrated as an accountant, but could not land a job due to his broken English.
Friday, August 14, 2009
Thursday, August 13, 2009
Last Friday, the Federal Reserve reported that consumer debt levels continued to fall in June. While this de-leveraging of the consumer has been occurring for several months, it still has a long way to go from a historical point of view. The following chart illustrates how consumer debt levels have evolved over the last 70 years:
Clearly, consumer debt levels are quite elevated in a historical context, despite the recent well-publicized reductions. This indicates that there could be more debt reductions in store, which would reduce the consumer's ability to spend.
Will consumer debt return to the levels that they were in the year 2000, when the last recession took place? Nobody really knows. But investors should ensure they are prepared for debts to continue to reduce, by owning companies with flexible cost structures.