TAG | Business
Warren Buffett Just Said “Buy!”
by Alexander Green, Investment U Chief Investment Strategist
Monday, November 21, 2011: Issue #1647
If you needed heart surgery, you’d try to find the most talented heart surgeon around.
If you were about to be subjected to a full audit by the IRS, you’d hire the most capable tax advisor you could find.
And if you needed investment advice? I hope you’re not one of them, but I know some folks who would read financial blogs by complete unknowns, take hot tips from friends and colleagues, or listen to a sales pitch from someone selling insurance or other financial products.
Big mistake. It makes a lot more sense to listen to the world’s smartest investors, instead. And one of the very best – if not the best – is Berkshire Hathaway Chairman Warren Buffett. (Ten thousand dollars invested in Berkshire Hathaway when Buffett took the helm in 1965 is worth well over $65 million today.)
And thanks to disclosures last week, we now know what Buffett has been doing during the last few months of crazy market activity. He’s been buying.
Specifically, Buffett has plowed $10.7 billion into IBM. He has increased his stake in Wells Fargo from 361.4 million shares to 352.3 million shares. He has boosted his Dollar General stake to 4.5 million shares from 1.5 million. And he has increased his holdings in insurer Torchmark to 4.2 million shares from 2.8 million.
There are a few interesting things to note here. The first is that while most investors have been either running to cash or nervously sitting on their hands lately, Buffett has been actively capitalizing on fresh opportunities. You should be doing the same.
Second, it’s worth mentioning that Buffett has generally avoided technology stocks like IBM. But upon reading not some super-secret briefing but rather the firm’s annual report, he learned that IBM enjoys an entrenched position providing technology services to major businesses.
Buffett likes companies with a “moat” like this and has famously said that his favorite holding period is “forever.” Indeed, he recently told The Washington Post that “IBM fits all my principles … it’s something we’d like to own indefinitely.”
Then there’s the price he paid for IBM. I often get emails from readers who are baffled that I sometimes recommend companies trading at or near their highs. Buffett bought IBM as it hit new highs – even as the broad market was cratering. Indeed, the stock has more than doubled since the depth of the 2008 recession.
Buffett’s response? He says the fact that IBM has doubled doesn’t bother him. Indeed, over the years he could have bought the firm at a tiny fraction of its current price. “What matters is what the company does in the future,” says Buffett.
There are a number of important lessons here:
1. As Buffett often points out, you should be greedy when other investors are fearful.
2. You shouldn’t be reluctant to modify your investment approach a bit (as Buffett has with one of his first significant forays into technology).
3. You shouldn’t fret about how much cheaper a stock was in the past if the business is sound and growing today.
And when it comes to investment advice, history shows it pays to listen to the best of the best. That’s one reason we’ve owned Berkshire Hathaway in our Oxford All-Star Portfolio for well over a decade.
Good investing,
Alexander Green
14
If You Knew What Warren Buffett Knows…
0 Comments | Posted by Alexander Green in Alexander Green
If You Knew What Warren Buffett Knows…
by Alexander Green, Chief Investment Strategist
Monday, March 14, 2011: Issue #1468
My publisher recently forwarded me a note from an Investment U reader…
“You guys are recommending a 5% gold allocation in your model portfolio. That’s not nearly enough. I currently have an 80% gold allocation. Given the sorry state of the world, I’ll bet I’m going to make a lot more money than you will in stocks.”
I’m tempted to take that bet.
Sure, gold is up five-fold over the last decade and three-fold over the last five years. But that tells you nothing about where gold will be a year from now, or a month from now.
True, gold may go higher. Perhaps a lot higher. But would I bet 80% of my portfolio on it?
Not a chance. This investor – who clearly lacks experience more than confidence – may be right about the near-term direction of gold. But he’s taking a boatload of risk.
More importantly, he’s making a fundamental investing mistake…
Successful Investing Comes Down to Two Choices
When it comes to the financial markets, no one knows for certain what the future holds. That means every investor faces a stark choice.
- Either: Run your portfolio by making a series of guesses about what lies ahead for the economy and the stock market, jumping in and out of stocks, or bonds, or gold, or sector funds.
- Or: Invest according to proven, time-tested principles.
It amazes me just how many investors opt for the former, following some dubious analysis or making outlandish guesses. It’s even more surprising when you consider the stakes.
Protect and enhance your investment capital over time and you can live a life with all kinds of choices, plenty of financial security and the peace of mind that goes with it.
On the other hand, if you gamble with your savings, you might find that not only have your savings vanished but, more importantly, you no longer have enough time to make up for your mistakes.
People who grossly mismanage their portfolios almost always make the same mistake. They forget to ask that one basic question: What if I’m wrong?
A Powerful Statement From the World’s Greatest Investor
Given recent events, I understand why there’s a lot of skepticism about the outlook for stocks. The media harps on unrest in the Middle East, the spike in oil prices, the real estate slump, high unemployment and unwieldy federal deficits.
But they spend much less time on rock-bottom interest rates, low inflation, an improving economy and record corporate profits.
Listen to different sources and you can come up with completely different conclusions about the future. But here’s someone worth hearing:
Warren Buffett – the world’s greatest investor – recently told CNBC: “I’m 100% enormously optimistic about the future for this country. There’s no way you can bet against America and win… We’ve unleashed human potential and will continue to do so. Twenty years from now, your kids and grandchildren will live far better than you live.”
Most Americans don’t agree with this. Some find it completely unbelievable. That’s why The Oxford Club has put together a special report explaining why America’s best days are still ahead – and inviting you to take full advantage of a more optimistic investment outlook.
Good investing,
Alexander Green
Publisher’s Note: There was a problem with the data featured in Friday’s Investment U article, “Electric Vehicles: Green Power or Just Adding to the Pollution Problem.”
The data came from the North American Electric Reliability Corporation and indicated where power for electric vehicles would likely come from in the future, once the electric vehicle fleet has matured. We wrongly implied that the data referred to the current power grids of various U.S. regions. We regret the error and thank our readers for helping to point it out. We have corrected the article.
~ Jay Livingston, Publisher, Investment U
8
Why Share Buybacks Are One of the Most Bullish Signals You Can Get
0 Comments | Posted by Alexander Green in Alexander Green
Why Share Buybacks Are One of the Most Bullish Signals You Can Get
by Alexander Green, Investment U’s Chief Investment Strategist
Monday, November 8, 2010: Issue #1383
For months, U.S. public companies have sat on record piles of cash – more than $1.8 trillion. Now, many are finally putting it to work.
But they’re not hiring more workers, building more factories, or paying down debt. Instead, they’re using the money to buy back their own shares.
So far this year, companies have announced that they’ll purchase more than $273 billion of their own shares. That’s more than five times as much as last year, according to Birinyi Associates.
Some economists argue that this money could be better put to work in job-generating activities that might produce economic growth. However, management’s first obligation is to shareholders, not economists or “the public.”
And if your business outlook is cloudy, you don’t want to commit that cash to building new manufacturing facilities or taking on new employees that aren’t needed.
Regardless of whether you’re an individual or a corporation, sitting on cash isn’t terribly rewarding these days, with the average money market fund paying less than one tenth of one percent.
So buying back shares makes good sense. Why?
The Share Buyback Boost
Because when you divide net income into a smaller number of shares outstanding, you get greater growth in earnings per share. And ultimately, that’s what drives share prices higher.
(If the economy shows more promise down the road, a firm can always do a secondary stock issue to raise capital for expansion.)
A partial list of companies that announced major share buybacks last month includes:
- PPG Industries (NYSE: PPG),
- Cypress Semiconductor (Nasdaq: CY),
- eBay (Nasdaq: EBAY),
- Weight Watchers (NYSE: WTW),
- EMC (NYSE: EMC),
- Coca-Cola (NYSE: KO),
- Walgreen (NYSE: WAG),
- Iron Mountain (NYSE: IRM),
- Family Dollar (NYSE: FDO),
- And Chevron (NYSE: CVX).
In addition…
- Two months ago, Microsoft (Nasdaq: MSFT) borrowed $4.75 billion by issuing new bonds at rock-bottom interest rates and announced that it would use a significant portion to buy back shares.
- In August, Hewlett-Packard (NYSE: HPQ), the world’s biggest maker of personal computers, said it would spend $10 billion buying back its shares.
- A few months earlier, snack-food giant Pepsico (NYSE: PEP) said it would buy back $15 billion in common stock over the next three years.
- Washington Post (NYSE: WPO) authorized executives to buy back as much as 750,000 shares of its Class B shares.
Why Share Buybacks Are Important… And What They Mean for the Market
Many investors recognize the importance of top executives buying back their own companies’ shares with their own money at current market prices (i.e. insider buying).
But they underrate share buybacks because they sometimes don’t do anything more than offset the new shares created by option compensation. (And, indeed, that is occasionally the case.)
But when a company announces a major buyback, it often means the executives and board of directors are betting their jobs that the company’s shares are undervalued.
Why? Because if management spends tens of millions of dollars of the firm’s money buying shares back and the stock is sharply lower in six months or a year, they may well be out of a job.
Yet history shows that share buybacks are generally well-timed. It’s a positive development for shareholders.
And the large number of share buybacks announced this year is yet another reason why the market should keep trending higher.
Good investing,
Alexander Green
5
Why You Should Do What Wal-Mart Just Did
0 Comments | Posted by Alexander Green in Alexander Green
Why You Should Do What Wal-Mart Just Did
by Alexander Green, Chief Investment Strategist
Monday, October 4, 2010: Issue #1358
last week, Wal-Mart (NYSE: WMT) made a $4.6 billion offer for Massmart Holdings, a major South African retailer with operations in 12 other African nations, too.
What’s the attraction?
Massmart operates low-cost, high-volume stores in general retailing, making it a good fit. The buyout will serve as an entry point to the entire continent.
Yet there are risks aplenty. South Africa is only beginning to emerge from recession. It’s plagued by high crime and unemployment and has a heavily unionized work force known for long, sometimes violent, strikes.
So why is Wal-Mart doing this? Because it can’t afford not to…
Why Wal-Mart is Heading to South Africa
Over the past decade, Wal-Mart shares have flatlined, just like the broad market. Yet shares of its major rival, Target (NYSE: TGT) have more than doubled.
Wal-Mart has also lost ground to its global archrival Carrefour. The French-based chain got to South America and Asia ahead of Wal-Mart. Carrefour is even the largest international retailer in China, the most coveted retail market in the world.
Wal-Mart must move aggressively to maintain growth in a difficult global marketplace. And so must investors who want to achieve financial independence in the years ahead.
Five Reasons Why You Need to Invest in Emerging Markets
Why should you diversify into emerging markets? The reasons are five-fold…
- Demographics: Emerging markets contain three-quarters of the world’s land mass and roughly the same percentage of its people. China and India alone make up nearly a third of the world’s population.
- Stronger Growth Rates: If you were a businessman, where would you rather operate – in an economy growing at 2% a year or in one growing four times that fast? It’s not a difficult question to answer.
- Better Valuations: In the United States, you might pay 30 times earnings for a company growing at a 20% annual rate. In Brazil or Indonesia, you’re more likely to pay about 15 times earnings. If you believe in buying growth at a reasonable price, you need to own companies in developing markets.
- Currency Diversification: The old greenback isn’t what it used to be. And there’s a risk that it may get weaker in the years ahead. Some emerging markets, on the other hand, hold their currencies artificially low to promote exports. That means investors are likely to see currency appreciation as well as capital appreciation.
- Safety: This is a shocker to many investors: Investing in inherently riskier emerging markets makes your portfolio less volatile. Why? Because emerging markets aren’t perfectly correlated with developed markets. When our markets zig, theirs often zag. The final effect is that your portfolio shows higher returns with less overall risk, the whole point of diversification.
Why U.S. Growth Will Come From Abroad… And Where You Need to Be
A few days ago, a friend with a local business told me he can’t imagine where – with the domestic economy in a funk and the home refinancing game over – future U.S. economic growth is going to come from.
It will come from companies who are moving aggressively overseas – like Wal-Mart, which has boosted its international sales to nearly one-quarter of the company’s total, compared with just 4% in 1995. It will also come from American companies that are able to service these firms.
Consumers in emerging markets need everything we take for granted in the West: better quality food, clothing, shelter, health care, credit cards, computers, cell phones, insurance and so on.
But make no mistake: Countries like Brazil and India and China are not going to let Western firms come in and just pick all the low-hanging fruit. If you want to reap the maximum benefit from the world’s biggest economic development story, you need to move a percentage of your portfolio into these markets themselves.
That’s the real lesson behind the Bentonville Behemoth’s aggressive South African new acquisition.
Good investing,
Alexander Green
11
Buying Stocks: Don’t Succumb to The Siren Song of the Naysayers
0 Comments | Posted by Alexander Green in Alexander Green
Buying Stocks: Don’t Succumb to The Siren Song of the Naysayers
by Alexander Green, Chief Investment Strategist
Wednesday, August 11, 2010: Issue #1321
Comedian Dennis Miller used to joke that he was at the airport when his ship came in.
A year from now, plenty of investors are likely to feel the same way. Why?
Because they’re ignoring the good news out there right now and not buying stocks. Instead they’re succumbing to the siren song of the naysayers.
And while no one can know for certain what the stock market will do in the year ahead, there are good reasons to believe that stocks may be substantially higher.
That’s because there are two traditional indicators that investors are wise to heed:
- Don’t fight the Fed
- Don’t fight the tape
Let’s take a closer look at each of these and I’ll show you why…
Don’t Battle with Bernanke
As we all know, the Federal Reserve has taken short-term interest rates to near zero. Moreover, Fed Chairman Bernanke has repeatedly said that he expects to keep them there “for an extended period.”
This is a green light for Fed-watchers. Low interest rates…
- Make it cheaper for corporations to borrow.
- Reduce the cost of owning stocks on margin.
- Make cash and time deposits unattractive relative to stocks.
A stock investor today certainly isn’t fighting the Fed.
Let’s take a closer look at the “don’t fight the tape” part…
Don’t Fight the Tape
The stock market is in a confirmed uptrend. Seventeen months ago, the Dow bottomed near 6,500. It has had its ups and down this year, but the big trend is up, not down.
- If you’re buying stocks, you’re with the tape.
- If you’re short the market or out of stocks, you’re fighting the tape. And that’s not good.
(The tape, of course, is a reference to the ticker tape of yore.)
Some investors tell me they’re not comfortable buying stocks during a recession.
Hello?
It’s true we’re not experiencing robust economic growth. But a recession is defined as two consecutive quarters of negative economic growth. We haven’t had a single negative quarter in the past year. In fact, GDP growth has averaged 2.84% a quarter over the past 12 months.
It doesn’t feel that way, of course, because housing is in a funk, unemployment is high and consumers are reluctant to spend. But for the third consecutive quarter, profits have mostly beaten expectations.
Why? Partly because companies have laid off unnecessary personnel, refinanced debt at lower levels and cut other costs. Even a modest uptick in revenue is causing a big jump in bottom-line profits.
Plus, businesses are benefiting from technological innovation, negligible inflation and booming new markets overseas, particularly in Asia and Latin America.
Feel the Fear… And Buy Stocks Anyway
Other investors tell me they can’t buy stocks because there is just so much gloom and doom out there.
Apparently, they don’t realize that negative sentiment is a powerful contrary indicator. (Or as Warren Buffett often says, you want to be fearful when other investors are greedy and greedy when others are fearful. And without a doubt, investors are fearful right now.)
Of course, there is a lot of negativity because this is an election year, too. Republicans are talking up how bad things are to increase their chances in November. Democrats are conceding that things are bad – and still blaming things on Bush – because they don’t want to seem out of touch.
Indeed, there is plenty to dislike about how the folks in Washington are running the show. But a decision to buy stocks is not an endorsement of any political party or a statement that all is right with the world. It’s merely an acknowledgement that business conditions – and profits – are likely to improve in the future.
If you disagree, that’s fine. But at least concede that you’re fighting the Fed, fighting the tape – and fighting the sentiment indicator.
Historically, that has not been a profitable strategy.
Good investing,
Alexander Green
19
Is Apple the Perfect Growth Stock?
0 Comments | Posted by Alexander Green in Alexander Green
Is Apple the Perfect Growth Stock?
by Alexander Green, Chief Investment Strategist
Monday, July 19, 2010: Issue #1304
I’ve often said that my stock-picking approach can be boiled down to this mantra:
Share prices follow earnings.
I challenge you to look back through history and find even a single company that increased its earnings quarter after quarter, year after year, and the stock didn’t tag along.
By the same token, try to find a company whose earnings were flat or declining year after year and the shares kept rising. It doesn’t happen, even in a roaring bull market.
But is growth in earnings per share all you really need? Could it be that simple?
Of course not.
Any company can increase its earnings for a while merely by cutting expenses. But eventually, a firm reaches a point where it can’t cut costs further without damaging the underlying business. (Obviously, if you reach the point where you’re selling off key infrastructure or laying off top people to boost short-term profits, you’re hurting the company’s long-term prospects.)
There are other important factors as well and I can illustrate a few of them by pointing to a near-perfect growth stock…
Want to See If a Company is Growing? Look to These Three Crucial Factors
In order to see robust bottom-line growth, you need to see substantial top-line growth. In other words, sales have to rise, too.
And Apple, Inc. (Nasdaq: AAPL) is doing just that.
- Sales & Earnings: The company is selling boatloads of iPods, iMacs, iPhones and iPads. In many instances, it’s been unable to keep up with demand. In the most recent quarter, sales jumped 49%. That enabled earnings to soar 90%.
- Profit Margins: This is another important factor. If competitors can come in and easily underprice you, your business is vulnerable.
But Apple is well-protected with its iron-clad patents on the Mac operating system and many of the key features of its bestselling products. So it’s no surprise that operating margins top 29%. Or that Apple is up 63% over the last 52 weeks, even after the recent market dip.
Over time, Apple has brought down the price of most of its products, but not because competitors were forcing them down. Management did it because they wanted to broaden the potential market for Apple’s products. That’s key.
- Return on Equity: This key metric is calculated by dividing earnings per share by book value (or net assets) per share.
Why is this important? Because it tells you how efficiently management is deploying the firm’s capital. Warren Buffett – who puts a great deal of emphasis on ROE – says anything above 17% is good. Apple’s return on equity is twice that.
Happy Customers… Happy Shareholders
Apple has done plenty of other things right, too. It’s a consistent innovator and is a world-class marketer. (Its products are so cool, customers find themselves lusting over things they don’t even need.) And it’s done a good job of keeping a lid on costs.
The end result? Earnings per share have boomed over the last decade. And while the broad market has gone nowhere, shares of Apple are up several-fold.
It’s a classic story of a company that keeps its customers coming back because it makes them happy. And the resulting increase in earnings keeps shareholders delighted, too.
Good investing,
Alexander Green
