Warren Buffet's Financial Analysis: How I doubled up in 3 months Part II

[Lambo]

Alright for those who missed the first part of the analysis, you can view the thread here
http://www.youngentrepreneur.com/for...cks-45500.html

In the past I never knew exactly how to analyze a stock and I was all over the map. Recently due to the large dip in the stock market I was able to use this analysis to pick up a few stocks and they have done extremely well.

For example I picked up EXM (Excel Maritime Carriers) for $4.00 and it recently more than doubled and was hovering around $11, it has since come down to $8, but still not bad for a 100% return on investment!

Anyways the following post completes the analysis which anyone can use when purchasing stocks. This part includes all the financial statements and how to analyze them. So print it out and before you buy your next stock, analyze a firms statements, and sit back and watch your wealth grow!

Shareholders equity/Book value

1)Absence of preferred stock
a)Firms that have no preferred stock have a durable advantage due to their lack of obligation for preferred dividends.

2)Retained earnings
a)The rate of growth of a firms retained earnings is a good indicator of whether or not it is benefiting from having a durable competitive advantage

b)The more earnings that a firm retains, the faster it grows it’s retained earnings pool which in turn will increase the growth rate for future earnings.

3)Treasury Stock
a)Firms that have a durable competitive advantage tend to have lots of free cash that they can spend on buying back their shares which appears on the balance sheet under treasury stocks.

b)A company that buys its own shares and holds them as treasury stock is effectively decreasing the firm’s equity. Since a high return on shareholders’ equity is 1 sign of a durable competitive advantage, it is good to know if the high returns on equity are being generated by financial engineering or good business economics, or a combo of the two.

c)To distinguish the two, convert the negative value of the treasury shares into a positive number and add it to the shareholders equity instead of subtracting it. Then divide the firm’s net earnings by the new total shareholders’ equity. This will give us the firms return on equity minus the effects of financial engineering.

4)Return on shareholders’ equity
a)Net earnings / shareholders equity =return on shareholders’ equity.

b)Calculates how good a job management does at allocating our money so we can earn even more.

c)Firms with a durable advantage show higher than average R.O.S.E. ie) coke 30% Wrigley’s 24% and Hershey 37%.

d)High returns on equity will add up and increase the value of the business which will be reflected over time in the stock market.

e)Note- If a firm shows a negative number for shareholders equity, but has a long history of strong earnings then it is probably a durable company with an advantage. This is because some strong firms don’t have any retained earnings and pay them all out to shareholders, so the balance shows a negative.

f)Stay away from firms who use a lot of leverage.

Read The Rest Of The Post Here

[pboychuk]

everything has double in the last 3 months..

[Lambo]

not everything my friend....but regardless a lot of stocks have had a strong run, but which of those will keep going up and which of those will cool off and stabilize?

Using the buffet analysis you will see consistent gains month after month, year after year.

Short term mentality is not for investors, its for guessers

[akula]

not everything my friend....but regardless a lot of stocks have had a strong run, but which of those will keep going up and which of those will cool off and stabilize?

Using the buffet analysis you will see consistent gains month after month, year after year.

Short term mentality is not for investors, its for guessers

take some pointers from your idol and apply a degree of critical analysis to your new found, stock picking abilities

thousands of "value" fund managers all around the world do what u're talking about every day...with predictably dismal results...because, as a matter of fact, there is no scientific validity for fundamental analyst

put the pop-finance aside and study this stuff a tertiary level

..sad to say..but for all the apparent logic in using retained earnings and ROE etc for finding value...it's all utter hogwash and nonsense..don't believe me? look at morningstar

[pboychuk]

I don't doubt buffets methods arent valid im just saying, if you would have done the same thing the previous 3 months you probably would have lost half 50%

I really have no faith in the stock market although I would like to jump into something for some long term while things are down..

[jonathanfigaro]

Alright for those who missed the first part of the analysis, you can view the thread here
http://www.youngentrepreneur.com/for...cks-45500.html

In the past I never knew exactly how to analyze a stock and I was all over the map. Recently due to the large dip in the stock market I was able to use this analysis to pick up a few stocks and they have done extremely well.

For example I picked up EXM (Excel Maritime Carriers) for $4.00 and it recently more than doubled and was hovering around $11, it has since come down to $8, but still not bad for a 100% return on investment!

Anyways the following post completes the analysis which anyone can use when purchasing stocks. This part includes all the financial statements and how to analyze them. So print it out and before you buy your next stock, analyze a firms statements, and sit back and watch your wealth grow!

Shareholders equity/Book value

1)Absence of preferred stock
a)Firms that have no preferred stock have a durable advantage due to their lack of obligation for preferred dividends.

2)Retained earnings
a)The rate of growth of a firms retained earnings is a good indicator of whether or not it is benefiting from having a durable competitive advantage

b)The more earnings that a firm retains, the faster it grows it’s retained earnings pool which in turn will increase the growth rate for future earnings.

3)Treasury Stock
a)Firms that have a durable competitive advantage tend to have lots of free cash that they can spend on buying back their shares which appears on the balance sheet under treasury stocks.

b)A company that buys its own shares and holds them as treasury stock is effectively decreasing the firm’s equity. Since a high return on shareholders’ equity is 1 sign of a durable competitive advantage, it is good to know if the high returns on equity are being generated by financial engineering or good business economics, or a combo of the two.

c)To distinguish the two, convert the negative value of the treasury shares into a positive number and add it to the shareholders equity instead of subtracting it. Then divide the firm’s net earnings by the new total shareholders’ equity. This will give us the firms return on equity minus the effects of financial engineering.

4)Return on shareholders’ equity
a)Net earnings / shareholders equity =return on shareholders’ equity.

b)Calculates how good a job management does at allocating our money so we can earn even more.

c)Firms with a durable advantage show higher than average R.O.S.E. ie) coke 30% Wrigley’s 24% and Hershey 37%.

d)High returns on equity will add up and increase the value of the business which will be reflected over time in the stock market.

e)Note- If a firm shows a negative number for shareholders equity, but has a long history of strong earnings then it is probably a durable company with an advantage. This is because some strong firms don’t have any retained earnings and pay them all out to shareholders, so the balance shows a negative.

f)Stay away from firms who use a lot of leverage.

Read The Rest Of The Post Here

If you actually double everything in 3 months, then congratulations on your success!

[Lambo]

take some pointers from your idol and apply a degree of critical analysis to your new found, stock picking abilities

thousands of "value" fund managers all around the world do what u're talking about every day...with predictably dismal results...because, as a matter of fact, there is no scientific validity for fundamental analyst

put the pop-finance aside and study this stuff a tertiary level

..sad to say..but for all the apparent logic in using retained earnings and ROE etc for finding value...it's all utter hogwash and nonsense..don't believe me? look at morningstar

thanks, but if you actually read the rest of the post you would see that buffet uses some strategies that go against mainstream financial analysis. But that's alright, thanks for your opinion.

[akula]

thanks, but if you actually read the rest of the post you would see that buffet uses some strategies that go against mainstream financial analysis. But that's alright, thanks for your opinion.

Ok..sure..we can have a discussion

On my side, I've linked to over half a decade of unbiased, Nobel prize winning research which proves a scientific fact that there is no such thing as a successful system for stock picking

This fact is further underlined by my link to real world Morningstar data which shows that the Warren Buffet way (an incorrect term..but one you seem to like) for picking stocks is ineffective

Can you point to any peer reviewed, unbiased research, argument or real world data to negate the research which I have linked to? Or will you continue to ignore the information I'm presenting you with and go on saying what you yourself want to hear?

Personally, I think that if you want the responsibility for teaching people finance, you also have the responsibility to explain your self when you are presented with data that implies you being full of shit...only fair isn't it?

In that sense, I take offense at you suggesting that I'm presenting my opinions. You know me better than that What I'm doing is adding to your post about fundamental research by tempering it with contradictory view points expressed by some of the most preeminent scientists in the world; including people like Eugene Fama and Merton Miller

As far as stocks go, there is not a bit of Danny Nerezov in anything I've said so far..

[byzantium]

Ok..sure..we can have a discussion

On my side, I've linked to over half a decade of unbiased, Nobel prize winning research which proves a scientific fact that there is no such thing as a successful system for stock picking

This fact is further underlined by my link to real world Morningstar data which shows that the Warren Buffet way (an incorrect term..but one you seem to like) for picking stocks is ineffective

Can you point to any peer reviewed, unbiased research, argument or real world data to negate the research which I have linked to? Or will you continue to ignore the information I'm presenting you with and go on saying what you yourself want to hear?

Personally, I think that if you want the responsibility for teaching people finance, you also have the responsibility to explain your self when you are presented with data that implies you being full of shit...only fair isn't it?

In that sense, I take offense at you suggesting that I'm presenting my opinions. You know me better than that What I'm doing is adding to your post about fundamental research by tempering it with contradictory view points expressed by some of the most preeminent scientists in the world; including people like Eugene Fama and Merton Miller

As far as stocks go, there is not a bit of Danny Nerezov in anything I've said so far..

Warren Buffett was in some ways just lucky, riding the wave of the big boom in the markets between 1983 and 2008. After he took money out of the market and applied his philosophy to businesses, he bought furniture stores and industrial tool makers and even a builder of manufactured homes, since he is all about avoiding the intangible (thus his famous statement that tech stocks were worthless because you can't see electrons). The thing is, all those businesses are down quite a bit in the depression. So his net worth got slashed. His stock portfolio is only 20% of his total holdings now. He bought the wrong types of businesses, businesses dependent on the housing bubble. He is too old to recover those losses. He recently said that stocks are a great investment over the long term. When an 80 year old man starts talking about "the long term", it's time to worry.

That said, the basic philosophy that when you buy a stock, you're buying ownership in a business and thus should buy only businesses with excellent fundamentals and predictable earnings, is better than the approach most people (even billionaire fund managers) take, which is that it's a big casino and that every stock pick is a speculative roll of the dice, so shoot for seven. Much of our current problems in the economy comes from people treating life as a casino. Literal casinos are everywhere, and the gambling mentality is even more widespread. Ultimately, they bet civilization on an eternal winning streak, and came up snake eyes, as every gambler does if they play long enough. Compared to that, Buffett has a better idea. It may or may not make you rich. But it will make you smarter than the average bull.

[akula]

That said, the basic philosophy that when you buy a stock, you're buying ownership in a business and thus should buy only businesses with excellent fundamentals and predictable earnings, is better than the approach most people (even billionaire fund managers) take, which is that it's a big casino and that every stock pick is a speculative roll of the dice, so shoot for seven. Much of our current problems in the economy comes from people treating life as a casino. Literal casinos are everywhere, and the gambling mentality is even more widespread. Ultimately, they bet civilization on an eternal winning streak, and came up snake eyes, as every gambler does if they play long enough. Compared to that, Buffett has a better idea. It may or may not make you rich. But it will make you smarter than the average bull.

interesting stuff...i'll avoid the existential debate...as much as i hate to though

this thread is about stock picking

on the one hand, we have some sort of a system which utilises screening criteria based on ratios found in fin statements....it's somehow been attributed to buffett here, which of course is nonsense...but that's besides the point...the point is that the 1990 nobel prize for economics was awarded to some people who've proved again and again that the above system does not work

more than that, in addition to debunking fundamental analysis, these scientists have come up with their own stock picking system, which has been proven to be the best in the world...and in that sense, the whole point of this thread is about recognising this phenomenal, nobel prize winning breakthrough in science and discussing its implications

in all reasonableness, finance research has advanced to the point where it's no longer a mystery as to what works and what doesn't..as far as stock picking goes

[MadisonAv]

Lambo, do you have a list with the stocks you traded during the past months? Or did you only buy this one stock that doubled?

[Lambo]

Here is the list:

Bought RY (Royal bank of Canada) at $21 now its 51.32
Bought EXM (Excel Maritime Carriers) at $4 sold at $9
Bought Sohu (Internet Chinese Stock) at $35 now its $62
Bought TLM (talisman energy) at $8 now its $16

[MadisonAv]

Here is the list:

Bought RY (Royal bank of Canada) at $21 now its 51.32
Bought EXM (Excel Maritime Carriers) at $4 sold at $9
Bought Sohu (Internet Chinese Stock) at $35 now its $62
Bought TLM (talisman energy) at $8 now its $16

Thx. Nice picks dude.