Bud Labitan

A Letter to Warren Buffett

When is it a good time to invest? The simple answer is when we can find QB, quality bargains. My book "The Four Filters Invention of Warren Buffett and Charlie Munger" examines the basic behavioral finance steps they perform in making an investment decision. It attacks the questions from both practical as well as behavioral finance points of view.

Lehman Brothers Holdings Inc. (Lehman Brothers) serves the financial needs of corporations, governments and municipalities, institutional clients and high-net-worth individuals worldwide.
The Company operates three business segments: Capital Markets, Investment Banking and Investment Management. Lehman Brothers generates client-flow revenues from institutional, corporate, government and high-net-worth clients by advising on and structuring transactions; serving as a market maker and/or intermediary in the global marketplace, including having securities and other financial instrument products; originating loans for distribution to clients in the securitization or principals market; providing investment management and advisory services, and acting as an underwriter to clients.

Lehman Bros. Holdings, LEH has a (5-year annual average) net income growth rate of 35.41 . What competitive advantages does it have? Brand, Technology, Cost of Production, Distribution Network? Are possible advantages sustainable? Does LEH have a solid mix of Product, Pricing Power, Placement, and Promotions? When buying companies or common stocks, look for understandable first-class businesses, with enduring competitive advantages, accompanied by first-class managements.

LEH has a current market price of 18.9 Using an assumed growth rate of 5 percent, the estimated Intrinsic Value is 10.87 per share from ValuePro.net, and there does not appear to be a bargain or 'margin of safety' present here. The current price/earnings ratio = Unavailable. It's current return on capital = negative .13
Using a debt to equity ratio of 6.54, Lehman Bros. Holdings shows a current return on equity = negative 3.4

Some industries have higher ROE because they require no assets, such as consulting firms. Other industries require large infrastructure builds before they generate a penny of profit, such as oil refiners. Generally, capital-intensive businesses have higher barriers to entry, which limit competition. But, high-ROE firms with small asset bases have lower barriers to entry. Thus, such firms face more business risk because competitors can replicate their success without having to obtain much outside funding.

Growth benefits investors only when the business in point can invest at incremental returns that are enticing; only when each dollar used to finance the growth creates over a dollar of long-term market value. In the case of a low-return business requiring incremental funds, growth hurts the investor. The wonderful companies sustain a competitive advantage, produce free cash flow, and use debt wisely. Automatic Warning, ( above 0.5 ) on this current debt to equity level of 6.54

Does Lehman Bros. Holdings make for an intelligent investment or speculation today? Time is said to be the friend of the wonderful company and the enemy of the mediocre one. Before making an investment decision, seek understanding about the company, its products, and its sustainable competitive advantages over competitors. Next, look for able and trustworthy managers who are focused more on value than just growth. Finally ask: Is there a bargain relative to its intrinsic value per share today? Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misapraised. In terms of Opportunity Cost, is LEH the best place to invest our money today? What about growth in Free Cash Flow? This author's book is at frips.com

These days, Warren Buffett mentions the Four Filters this way: "Charlie and I look for companies that have a) a business we understand; b) favorable long-term economics; c) able and trustworthy management; and d) a sensible price tag." These Four Filters can enhance the probability of our investment success. I think they will help you in your search for intrinsic value and sensible investment.