missedinv101

Warren Buffett's 'Secret' Investment Formula

CaptainJJack, you are correct that Buffett looks for companies that have high consistent ROE as a prime metric when evaluating companies.

However I do want to make a point about your concern w.r.t. Berkshires ROE which is not as high as companies that Buffett looks for. You need to consider that Berkshire has a large portfolio of stocks which if he likes a stock does not typically sell (e.g. KO, PG, AXP, JNJ, WPO, WFC etc). This stock portfolio has over the years grown with the market and has the effect of increasing Berkshire's equity (balance sheet) but apart from dividends from these stocks, any unrealized gains are not get reflected in net income (income statement). This makes the calculation of ROE skewed in the case of Berkshire since any unrealized growth in the stock portfolio actually has a negative impact on ROE. The fact that the ROE is as high as it is for Berkshire should actually be a comfort that the rest of the wholly owned subsidiaries are contributing as much to the income part of the equation that they are offsetting the unrealized gains in the stock portfolio.

On Jan 25 11:24 AM CaptainJJack wrote:

> I think Buffet's strategy is even simpler than you indicate: he buys
> companies with consistently high ROEs. If a company shows a solid
> history of high ROEs, it almost has to have a strong competitive
> advantage. The only other issue then is "how much to pay?".
>
> As an owner of BRK shares, my biggest concern had been that BRK's
> ROE has not been close to 15% over the past few years.
>
> The biggest problem has been that BRK both generates so much cash
> flow and that Buffet sits on the cash if he doesn't see anything
> that meets his 15% ROE standard. He refuses to consider a dividend,
> and he has said he believes that ultimately he will find appropriate
> investments.
>
> Recently, he has opened up his pocketbook and has been putting A
> LOT of cash to work. He's buying BNI and COP, and both are trading
> at exceptional values.
>
> So, I can almost guarantee that BRK will under perform when markets
> have been high for a while, but I expect his buying great companies
> at good prices will payoff -- in fact, I am counting on it.
>
> Finally, I expect that like Jeremy Grantham, the markets will go
> a lot lower before they get better, on the logic that markets tend
> to over correct, and with the S&P earnings projected to be in
> the $55/share range in 2009, the current S&P P/E multiple indicates
> the overall market is no screaming buy.
>

Notes from Steak 'n Shake's Investor Day

"............... which currently, has next to no debt on the books"

I see $169Million in debt on yahoo. The company is also losing money (22Million in the last 12 months) and so is currently not profitable.

Why risk investing in a restaurant chain given the deteriorating economy. Surely there are safer sectors to invest in.

Breaking the Back of Buffett

Other than getting us all to comment on this article, was there any substance in the article? I would agree with most of the comments as they match up with my own analysis of Berkshire, but I derived nothing from the article.

The real news over the last month or so has been the 3 major investments Berkshire has made: 1. GS, 2 GE and finally the CEG deal. These three deals alone are valued at approximately $12-13Billion.

Bridgford Foods: Collapse Defies Logic

This company has not had a profitable quarter in the last 12 months, and we are heading into a more protracted economic environment than the last 12 months.

In addition shareholder equity has decreased $13Million (about 25%) to $34Million, over the last 12 months. At this rate the company would be worth nothing in the next 3 years.

It is not clear why this company is undervalued, given the negatives in the current economy? If the company was profitable that would be another story.