Saturday, June 28, 2014

Buffett on inflation & why you should express your earnings in Big Macs

If you (a) forego ten hamburgers to purchase an investment; (b) receive dividends which, after tax, buy two hamburgers; and (c) receive, upon sale of your holdings, after-tax proceeds that will buy eight hamburgers, then (d) you have had no real income from your investment, no matter how much it appreciated in dollars.  You may feel richer, but you won’t eat richer.

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Monday, June 16, 2014

If Warren Buffett, lived in Holland, Warren Buffett wouldn't invest like Warren Buffett ?

Draft / Placeholder blog needs (a lot of work):

On the 26th of June 2014 Steven De Klerck might become a Dr. in Economics based on his doctorate:

                Historical reflections and empirical studies on the effectiveness of fundamental analyses”"

I skimmed throgh it and we had the following (Dutch) conversation, which "needs further research":

Me: Ik begin net met lezen, maar met "Control F" heb gezocht naar antwoorden op vragen die me bezig houden.

In Buffettology schrijft Mary Buffett aan het begin (eerste hoofdstuk als ik me goed herinner?) dat de shift in focus van past accounting measures naar (easy to predict) future earnings predictions had te maken met de Amerikaanse belastingsstelsel dat afwijkt van de Europese.

Steven: Dat ga ik zeker eens lezen. Nu blijkt het wel niet zo eenvoudig om future (long-term) earnings accuraat te voorspellen gebruikmakende van de jaarrekening en bepaalde contextuele variabelen en deze voorspellingen te gebruiken als fundament van een succesvolle aandelenstrategie. Accounting researchers hebben daarvan hun doelstelling gemaakt, zonder enig succes over de voorbije decennia. Finance studies tonen aan dat er quasi geen forecastability in long-term earnings growth rates is. Een studie die afkomstig is van de mensen achter LSV Asset Management in bijlage. De verschuiving van past naar foreward looking situeert zich aldus voornamelijk in de accounting literatuur, niet in de finance literatuur.

Me: Ook Warren E. Buffett zelf heeft het ergens met cijfers voorgerekend waarom een matig buy and hold strategie in de VS beter werkt dan een goede low PE, low PB strategie zoals Graham voorschreef in zijn laatste interview in 1976. 

Steven:  In mijn studies hou ik inderdaad geen rekening met capital gains taxes. Ik ken geen enkele studie in de literatuur die melding maakt van dit aspect. Gelden deze capital gains taxes voor alle spelers in de VS? Er zijn immers bepaalde aandelenstrategieën die een (zeer) hoge turnover hebben op maandbasis. Doch maken ook deze studies geen melding van deze capital gains taxes, wel melding van de impact van transactiekosten op overall profitability.

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Friday, May 23, 2014

“What the hell is ‘percentage’ anyhow ?” – Ingvar Kamprad (IKea)

IKEA founder Ingvar Kamprad dismisses retail planning starting with an average gross margin percentage goal. The excerpt below is from his book Leading by Design.

I say to the economists, “What the hell is ‘percentage’ anyhow ?” – INGVAR KAMPRAD

In 1995 the IKEA furniture store started selling hotdogs at five kronor ($ 0,50) each, as opposed to the usual price of ten to fifteen kronor. This investment was at once successful, and today it contributes to the growing restaurant and food sector by turning over 1,6 billion kronor in 1997, and alone answering for exports from Sweden amounting to 700 million kronor. That makes IKEA Sweden’s leading food exporter.

But behind this success is a special story. The “ten hot dogs strategy” says a great deal about the way the company regards price, competition, and the needs and desires of the customer.

One of IKEA’s basic principles is that of “the substantial price difference.” This is engraved in the first commandment in A Furniture Dealer’s Testament.

The reasoning is very simple. Since IKEA turns to the many people who as a rule have small resources, the company must be not just cheap, nor just cheaper-but very much cheaper. In short, the stores must sell things that, in the eyes of the public, are astonishingly cheap to buy.

So the goods must be such that ordinary people can easily and quickly identify the lowness of the price. That was how Ingvar Kamprad-for it was he-gave birth to the idea of selling hot dogs for five kronor.

He thought that IKEA needed a new kind of item at what he calls a breathtaking price. It was to be sold in the little bistro, which in a compete store is always just where customers emerge from the exit checkouts.

Everyone, including myself, who likes sausages knows what a hot dog costs at a stand. At present it is between ten and fifteen kronor. I suggested to the directors that we sell them at five kronor. They looked at me with dismay and surprise. Perhaps they thought the idea foolish, or perhaps I didn’t explain it very clearly. Talking about selling hot dogs in a multibillion furniture store was not really on the agenda.

To realize the idea, the originator had to participate himself. The target he set was that two people at the counter would be able to sell three hundred hot dogs an hour. A number of trials were carried out, and the best working position as well as the most functional fittings were tested.

It took time, but it soon became a reality. It was an almost immediate success – today hot dogs are sold all over the world on the five kronor principle. Each country has its exact price level (preferably so that only a single coin is necessary), so in Switzerland a hot dog costs one Swiss franc, in Germany one and a half Deutsche mark, in the United States fifty cents, in Austria ten schillings, and so on.

The next objection arose from my staff, who are always concerned with what they call the gross profit margin percentage. We’re selling hot dogs for almost the same amount it costs to make them. Shouldn't we raise the price and take six or seven kronor in profit?

In that case, the project ought to be abandoned, I replied, as the whole idea is based on the substantial price difference, the easily understood price. The hot dog went on costing five kronor regardless of the raw materials. We don’t lose on the deal, nor do we make much profit, but a least we make a little on each hot dog.

In the end, that is what matters.

It is common knowledge within the company that IKEA usually has a breathtakingly priced product in (each part of) its range- a “hot dog”. That has now acquired its own in-house meaning, and Ingvar Kamprad has added yet another eagerly guarded task to his many others.

A little while ago, we advertised a mug costing ten kronor. Come to IKEA and buy the mug, it said. I was upset – the price was much to high. It should have cost five kronor at the most, although it did look pretty nice and was of good quality. It was the price that was wrong.

So it came about that I wrote my philosophy about the ten (twenty nowadays) hot dogs. We have ten different products that live up to “hot dog” pricing.

Take the mug from the above example, called “Bang.”

In Switzerland it costs exactly one franc at IKEA. I haven’t found one on the ordinary market for less than three francs, and even in that case our mug was much better quality. Before, we sold at the most seven hundred thousand mugs per year, and now the “hot dog mug” sells twelve and a half million.

But Ingvar Kamprad is still in search of new hot dogs.

One day I found a wonderful English beer glass for eighteen kronor at our Swedish co-op competitor - I always go and look at what my competitors are doing. It was the kind of English glass with a level measure on it, forty centiliters, heavy and really good to hold. I thought it would be a really good “hot dog.”
I went straight to our most superb buyer and said: “Björn, can you get that glass out at one krona? You can order two million.” He replied: “Nix-I can’t, but maybe in an edition of five million.” The whole thing had the support of the product head, whom, as usual, I had bypassed. The last time I met Björn, he had a supplier who would do the glass at 1,08 kronor.
It’ll work out. So in a short time we’ve put twenty or so “hot dogs” up for sale - the whole organization is up and going.
The reader is right to ask himself or herself why, as the retired head of the firm, I go on with this sort of thing. There are three answers: one is that I find it difficult not to; it also says in my contract that I have a veto in matters of the range; and people in the company often say, “If you’re on to something, let me know.”
So I let them know.
I’m going on with my search for new “hot dogs” – lots of associates are involved. I recently saw a multi-plug we sell for under twenty kronor, while the competitors take about fifty. My belief is that this “hot dog” will sell millions.

Our pricing policy is fundamental.

The stumbling block is when we price ourselves out of the market. Our economists constantly go on that we must keep our “total gross profit margin” to a certain percentage. I say to the economists, “What the hell is ‘percentage’ anyhow?”


Percentage is something mysterious. The only thing that interests us at IKEA is what is left in our pocket when the season is over.

If we had taken ten kronor for that mug, and not five, then we would, of course, have “earned” more on each mug – perhaps one and a half kronor – and had a better “gross profit margin percentage.” But we would have sold only a half million of the instead of almost twelve million, on which we now earn on krona each.

These learning experiences are easy to suppress or ignore. But after having been the subject of endless bickering for over a decade, in this respect we are beginning to wake up with a vengeance.
That pleases me enormously.
"

In March 2000 Kamprad wrote at the end of the IKEA Concept Description:

"There are however dangers lurking in the dark. Small deviations from the well-trodden path can prove to be disastrous. I can depict at least seven major threats to the continued success of the IKEA concept in the future. I would like to share these with you so that you recognize them when one or several appear in your working place, organisation or neighbouring organisation.
False steps may be insignificant in the beginning, but prove to be fatal later on.


Be aware of these trip-wires:
1. Mark-ups in pricing, resulting in an out-of-the-market situation, due to wrong pricing strategies, too high costs, and/or unsound margin-raising instead of counting money."


------------------------

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Monday, May 05, 2014

VOPAK Graham Defensive Analysis ( intrinsic value estimate )

"the stock owner should not be too concerned with erratic fluctuations in stock prices, since in the short term, the stock market behaves like a voting machine, but in the long term it acts like a weighing machine (i.e. its true value will in the long run be reflected in its stock price). " : Benjamin Graham

2013 results,  5 May 2014 price
SECTOR: [PASS]  Vopak is neither a technology nor financial Company, and therefore this methodology is applicable. 

SALES: [PASS] The investor must select companies of "adequate size". This includes companies with annual sales greater than €260 million. Vopak's sales of €1,322 million, based on 2013 sales, pass this test.

CURRENT RATIO: [FAIL] The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. Vopak's current ratio €562m/€560m of 1.0 fails the test.

LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [FAIL] For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that do not meet this criterion lack the financial stability that this methodology likes to see. The long-term debt for Vopak is €2031 million, while the net
current assets are €2 millionVopak fails this test.

LONG-TERM EPS GROWTH: [PASS] Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. Companies with this type of growth tend to be financially secure and have proven themselves over time. Vopak's EPS growth over that period of 335% passes the EPS growth test.

EARNINGS YIELD: [PASS] The Earnings/Price (inverse P/E) %, based on the lesser of the current Earnings Yield or the Yield using average earnings over the last 3 fiscal years, must be "acceptable", which this methodology states is greater than 6,5%. Stocks with higher earnings yields are more defensive by nature. Vopak's E/P of 7% (using last years earnings) passes this test.

Graham Number value: [PASS] The Price/Book ratio must also be reasonable. That is the Graham number value must be greater than the market price. Vopak has a Graham number of (22,5 x €2,8 EPS x €14,5 Book Value) = €30,3 and fails this test.

DIVIDEND 3%

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"We're right and they're wrong": Cost of Capital: WACC ? or Opportunity Cost

I'm no expert, but what Buffett says makes sense and what Buffett does makes cents. If I understand correctly, he's talking about Opportunity Costs. #BRK2014
Morningstar analyst Gregory Warren, who filled the seat left vacant by the dearth of credentialed Berkshire bears, asked for Berkshire's cost of capital and whether it plays into acquisition decisions. Buffett said the term is thrown around a lot and means different things in a lot of those contexts. This gave Munger another chance to make fun of business schools.
"Charlie and I always figure our cost of capital is what can be purchased by our second-best idea, and then we have to exceed it with our best idea," Buffett said. The real test, he said, is whether Berkshire benefits more than the cost of the acquisition. Identifying the cost of capital is often a game, he said. The CFO of a company almost always argues that a purchase exceeds the company's cost of capital.
Cost of capital does not mean what they say it means in business school, Munger said. "The answer is perfectly simple: We're right and they're wrong."
Compare that to WACC Weighted Average Cost of Capital calculation.




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Saturday, May 03, 2014

Royal Dutch Shell RDS.A Graham Defensive Analysis

2013 Results, 2 May 2014 price
SECTOR: [PASS]  RDS.A is neither a technology nor financial Company, and therefore this methodology is applicable. 

SALES: [PASS] The investor must select companies of "adequate size". This includes companies with annual sales greater than €260 million. RDS.A's sales of €334,446 million, based on 2013 sales, pass this test.

CURRENT RATIO: [FAIL] The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. RDS.A's current ratio €76,596m/€66,714m of 1.1 fails the test.

LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [FAIL] For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that do not meet this criterion lack the financial stability that this methodology likes to see. The long-term debt for RDS.A is €29,856 million, while the net
current assets are €9,882 millionRDS.A fails this test.

LONG-TERM EPS GROWTH: [FAIL] Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. Companies with this type of growth tend to be financially secure and have proven themselves over time. RDS.A's EPS growth over that period of 16% fails the EPS growth test.

EARNINGS YIELD: [PASS] The Earnings/Price (inverse P/E) %, based on the lesser of the current Earnings Yield or the Yield using average earnings over the last 3 fiscal years, must be "acceptable", which this methodology states is greater than 6,5%. Stocks with higher earnings yields are more defensive by nature. RDS.A's E/P of 7% (using last years earnings) passes this test.

Graham Number value: [PASS] The Price/Book ratio must also be reasonable. That is the Graham number value must be greater than the market price. RDS.A has a Graham number of (22,5 x €2,4 EPS x €22 Book Value) = €35 and passes this test.

DIVIDEND 5%

2012 buy recommendation
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Koninklijke BAM Groep Graham Defensive Analysis


SECTOR: [PASS]  BAM is neither a technology nor financial Company, and therefore this methodology is applicable. 

SALES: [PASS] The investor must select companies of "adequate size". This includes companies with annual sales greater than €260 million. BAM's sales of €7,042 million, based on 2013 sales, pass this test.

CURRENT RATIO: [FAIL] The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. BAM's current ratio €3,685m/€3,300m of 1.1 fails the test.

LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [FAIL] For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that do not meet this criterion lack the financial stability that this methodology likes to see. The long-term debt for BAM is €772 million, while the net
current assets are €385 million. BAM fails this test.

LONG-TERM EPS GROWTH: [FAIL]  Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. Companies with this type of growth tend to be financially secure and have proven themselves over time. BAM's earnings have declined and were negative in 2012 and thus fails the EPS growth test.

Earnings Yield: [FAIL] The Earnings/Price (inverse P/E) %, based on the lesser of the current Earnings Yield or the Yield using average earnings over the last 3 fiscal years, must be "acceptable", which this methodology states is greater than 6,5%. Stocks with higher earnings yields are more defensive by nature. BAM's E/P of 5% (using the last 3 years earnings) fails this test.

Graham Number value: [PASS] The Price/Book ratio must also be reasonable. That is the Graham number value must be greater than the market price. BAM has a Graham number of (22,5 x €0,3 EPS x €3,5 Book Value) = €4,8

DIVIDEND , but SELLING STOCK
2012
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ASML Graham Defensive Analysis

2013 Results, 2 May 2014 price
SECTOR: [FAIL] ASML is in the Technology sector, which is one sector that this methodology avoids. Technology and financial stocks were considered too risky to invest in when this methodology was published. At that time they were not the driving force of the market as they are today. Although this methodology would avoid ASML, we will provide the rest of the analysis, as we feel times have changed.


SALES: [PASS] The investor must select companies of "adequate size". This includes companies with annual sales greater than €260 million. ASML's sales of €5,245 million, based on 2012 sales, pass this test.

CURRENT RATIO: [PASS] The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. ASML's current ratio €6,856m/2,863m of 2.4 passes the test.

LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [PASS] For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that meet this criterion display one of the attributes of a financially secure organization. The long-term debt for ASML is €1,789 million, while the net current assets are €3,993 million. ASML passes this test.

LONG-TERM EPS GROWTH: [FAIL] Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. EPS for ASML were slightly negative within the last 5 years (2009) and therefore the company fails this criterion.

Earnings Yield: [FAIL] The Earnings/Price (inverse P/E) %, based on the lesser of the current Earnings Yield or the Yield using average earnings over the last 3 fiscal years, must be "acceptable", which this methodology states is greater than 6,5%. Stocks with higher earnings yields are more defensive by nature. ASML's E/P of 5% (using the last 3 years earnings) fails this test.

Graham Number value: [FAIL] The Price/Book ratio must also be reasonable. That is the Graham number value must be greater than the market price. ASML has a Graham number of (22,5 x €2,9 EPS x €17,5 Book Value) = €34

DIVIDEND 1%
2012
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Akzo-Nobel Graham Defensive Analysis

2013 Results, 2 May 2014 price
SECTOR: [PASS] AKZO is neither a technology nor financial Company, and therefore this methodology is applicable. 

SALES: [PASS]  The investor must select companies of "adequate size". This includes companies with annual sales greater than €260 million. AKZO's sales of €14,590 million, based on 2013 sales, pass this test.

CURRENT RATIO: [FAIL]  The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. AKZO's current ratio €6,349m/€5,049m of 1.3 fails the test.

LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [FAIL] For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that do not meet this criterion lack the financial stability that this methodology likes to see. The long-term debt for AKZO is €2,666 million, while the net current assets are €1,300 million. AKZO fails this test.

LONG-TERM EPS GROWTH: [FAIL] Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. EPS for AKZO were negative within the last 5 years (2012) and therefore the company fails this criterion.

EARNINGS YIELD: [FAIL]  The Earnings/Price (inverse P/E) %, based on the lesser of the current Earnings Yield or the Yield using average earnings over the last 3 fiscal years, must be "acceptable", which this methodology states is greater than 6,5%. Stocks with higher earnings yields are more defensive by nature. AKZO's earnings yield of 5,6% (using the current Earnings) fails this test.

GRAHAM NUMBER VALUE: [FAIL] The Price/Book ratio must also be reasonable. That is the Graham number value must be greater than the market price. AKZO has a Graham number of (22,5 x €1,8 EPS x €24,8 Book Value) = €37,5 and fails this test.


DIVIDEND 3%

2012 graph
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Air France KLM Graham Defensive Analysis

2013 results, 2 May 2014 price
SECTOR: [PASS] AF is neither a technology nor financial Company, and therefore this methodology is applicable. 

SALES: [PASS]  The investor must select companies of "adequate size". This includes companies with annual sales greater than €260 million. AF's sales of €25,400 million, based on trailing 12 month sales, pass this test.

CURRENT RATIO: [FAIL]  The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. AF's current ratio of €7,937m/€10,190m of 0.8 fails the test.

LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [FAIL] For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that do not meet this criterion lack the financial stability that this methodology likes to see. The long-term debt for AF is €9,170 million, while the net current assets are €-2,253 million. AF fails this test.

LONG-TERM EPS GROWTH: [FAIL] Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. EPS for AF were negative for 6 of the last 7 years including 2013 and therefore the company fails this criterion.

P/E RATIO: [FAIL] The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which this methodology states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. AFLYY's P/E ratio is not available, the company has no earnings, hence it fails this test.

GRAHAM NUMBER VALUE: [FAIL] The Price/Book ratio must also be reasonable. That is the Graham number value must be greater than the market price. AF is French and an airline, little wonder that it fails this test.


NO DIVIDEND

2013 graph
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ArcelorMittal MT Benjamin Graham Defensive Analysis

2013 results, 2 May 2014 price
SECTOR: [PASS] Arcelor Mittal MT is neither a technology nor financial Company, and therefore this methodology is applicable. 

SALES: [PASS]  The investor must select companies of "adequate size". This includes companies with annual sales greater than €260 million. MT's sales of €58,879 million, based on 2013 sales, pass this test.

CURRENT RATIO: [FAIL] The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. MT's current ratio €25,218m/€32,159m of 0.8 fails the test.

LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [FAIL]  For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that do not meet this criterion lack the financial stability that this methodology likes to see. The long-term debt for MT is €9,362 million, while the net current assets are $-6,941 million. MT fails this test.

LONG-TERM EPS GROWTH: [FAIL]  Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. Companies with this type of growth tend to be financially secure and have proven themselves over time. MT's EPS have declined over the past 10 years, and it made a loss in 2012 and 2013. MT fails this test.

Earnings Yield: [FAIL] The Earnings/Price (inverse P/E) %, based on the lesser of the current Earnings Yield or the Yield using average earnings over the last 3 fiscal years, must be "acceptable", which this methodology states is greater than 6,5%. Stocks with higher earnings yields are more defensive by nature. MT's negative E/P (using the current Loss) fails this test.

Graham Number value: [PASS]  The Price/Book ratio must also be reasonable. That is the Graham number value must be greater than the market price. MT has a Graham number of (22,5 x €0,7 EPS x €26 Book Value) = €15 (if profitable in 2014)

DIVIDEND , but SELLING STOCK

2012 results, 7 Feb 2013 price

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