Book Review – “The Warren Buffett Stock Portfolio”

Recently, I have been reading books on the basics of value investing to reinforce the ideas of value investing. It always good to read about the tenants of value investing again once in a while, so that I can keep my legs firmly planted into the world of value investing and not let my views be diluted by the masses. This book review covers the book called “The Warren Buffett Stock Portfolio” written by Mary Buffett and David Clark. It delves into some of the stock purchases of Warren Buffett under Berkshire Hathaway and why Warren bought them. The stocks covered in this book includes:

  • American Express
  • BNY Mellon
  • The Coca-Cola Company
  • ConocoPhilips
  • Costco Wholesale Corporation
  • GlaxoSmithKline
  • Johnson & Johnson
  • Kraft Foods, Inc.
  • Moody’s Corporation
  • Procter & Gamble
  • Sanofi
  • Torchmark Corporation
  • Union Pacific Railroad
  • U.S. Bancorp
  • Wal-Mart Stores, Inc.
  • Washington Post
  • Wells Fargo & Company
Warrren Buffett likes consistency in earnings in his companies. By buying a company with a durable competitive advantage with predictable earnings, the common stock equity is kind of a “bond”. He calls this equity bonds. Another value, the book value per share (BVPS) gives a rough figure of the company’s intrinsic value. Long-term growth in BVPS can be loosely used to measure long-term growth in intrinsic value of the business.
For each company analysed in the book, the industry the company is involved in and key snapshots like latest net earnings, earnings per share (EPS), BVPS, dividend and yield, etc are shown. Then, a brief summary of the business is given. Lastly, how the company is analysed is revealed. I will take one of my favourite companies, Johnson & Johnson as example and show you how to analyse it below as per the book.
  1. Look at the EPS from 2001 to 2011. For J&J, the EPS increased from $1.91 in 2001 to $4.95 in 2011. This is a 159% increase in EPS or a compounded annual growth rate (CAGR) of 9.99% for the last ten years. The after-corporate tax initial rate of return is then determined by using latest EPS divided by current share price of $65 at time of writing. ($4.95/$65) x 100% = 7.6%. The initial rate of return can grow at its historical annual EPS growth rate of 9.99%.
  2. Look at BVPS from 2001 to 2011. The BVPS in 2001 was $7.95 and in 2011 was $23.05. This is a CAGR of 11.23%.
  3. Determine how much the J7J equity bond will yield by dividing EPS and BVPS of latest year. ($4.95/$23.05) x 100% = 21.4%. However, one can’t buy the share at BVPS but at current market price of $65.
  4. Determine how much will a $4.95 initial after-corporate tax rate of return growing at a yearly rate of 9.99% look like in ten years. To do that, you can use the Future Value Calculator. Key in “Interest Rate Per Time Period” as 9.99, “Number of Time Periods” as 10 and “Present Value” as 4.95 to get a future value of $12.83. This means that in 2021, one will get an after-corporate tax figure of $12.83, which is a 19.7% return for a $65 purchase price.
  5. How much will a EPS of $12.83 be worth in 2021? It depends on the price-to-earnings (PE) ratio of the stock in 2021. Use the ten-year historical low PE ratio of 12 to be conservative. $12.83 x 12 = $153.96 a share in 2021.
  6. If one bought J&J in at $65 and sold it off at $153.96 in 2021, the total return will be 136.8% or a CAGR of 9.01%.
  7. J&J has raised dividends every year for the last ten years. Conservatively, if J&J maintains its 2011 dividends of $2.28/share till 2021, we get a total of $22.80 of dividends per share. $22.80 + $153.96 = $176.76. Thus, at the end of 2021, our returns from the total gain would actually be 171% or a CAGR of 10.52%.

This book makes a good read for anyone who wants to know how Warren analyses companies before purchasing them and those who wish to recap the value investing dogma.

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Why you should invest during a market downturn?

The stock markets have once again gone into panic mode. Investors are fearful of a Greece exit from the Euro and are dreading the repercussions it will bring. With such fear in the markets and dropping prices, opportunities are once again presented to those who have a long-term view of the stock market. Below is something I did up in Excel to show how much one can gain by buying stocks at depressed prices. Please be reminded that this only works if you buy fundamentally strong companies with good cash flow, low debts and good industry prospects. If a stock is down 10%, a gain back to break-even point is a 11.1% gain bagged. For example, a stock drops from $1 to $0.90 (a decrease of 10% from purchase price). For it to gain the $0.10 and back to break-even point, it has to gain ($0.10/$0.90)  x 100% = 11.1% gain. The more the stock drops, the more you should rejoice as you can buy your favourite company at a cheaper price. When it goes back to break-even point, you make much more depending on how much the price drops. When stocks become cheap, valuations are low and the risk is low. When you invest during a market euphoria, the risk is much higher when compared to a market downturn. Therefore, one should always invest when prices are depressed instead of running away from the stock market. Warren Buffett has said that we should be greedy when others are fearful. The market is fearful now. Are you greedy enough?

Kingsmen Annual General Meeting – FY 2011

I had the opportunity to attend Kingsmen Creative’s AGM on 26th April 2012. This year, the AGM was held at a new room on the ground floor near the main entrance. This room was previously part of a showroom showcasing Kingsmen’s designs to potential clients. In the previous year, the AGM was held in another room in one of the upper floors. That room has since been converted to a design studio due to the growth of Kingsmen. When I was signing in my attendance before entering the room, Andrew, the Group General Manager noticed me and he jokingly said, “You also need to sign in ah?”. I was humbled by that comment. It’s not as if I’m a substantial shareholder of the company but he surely made me feel at ease. I also asked him how come the AGM has shifted to a new place. He said the other room on top has been converted to a design studio and he joked that next year, the AGM might have to be held outside the building under a tentage. The growth of Kingsmen surely bodes well for the shareholders.

Before the AGM kicked off, Andrew, gave a snapshot of how Kingsmen fared for the year. The AGM proper began after that. I will summarise below the salient points of the AGM.

  • One shareholder asked about the competitors of Kingsmen. Benedict Soh, the co-founder and Executive Chairman,  said that the competitors vary for each division. He also said something very significant. He said that Hans Bruder, Managing Director of Octanorm, told him, “No other company in the world has the same breadth of services as Kingsmen”. I felt elated at hearing this. Ben joked that now he has someone to quote instead of him always saying that Kingsmen is a strong company.
  • 70% of Kingsmen’s clients are repeat customers. Ben said that clients come back to Kingsmen just like how patients always visit the same family doctor for illnesses. Word-of-mouth recommendations have also helped Kingsmen’s business.
  • Revenue contributions from Singapore takes a huge percentage of total revenue. Many of the projects done overseas are still billed in Singapore as the Singaporean teams are involved in the project overseas even though the clients are overseas clients.

Honestly, there weren’t many questions asked during the AGM this year unlike the previous year. I learnt more about the business last year than this year. Probably, the rising share price placated the investors present and thus, didn’t bother asking much questions.

After the meeting, a few of the shareholders and I had the chance to chat with Simon Ong, the other co-founder and Group Managing Director. I asked about the succession plan for Ben and himself. He said that the systems and processes are in place and the 2nd echelon of managers are already trained and are capable. If they were to leave tomorrow, the business will still run as usual. Both of them are taking a step back to look at the various competition so that they would not be taken by surprise if something crops up. Simon also said that shares are issued as bonuses to employees so that they have a belonging to the company. Almost 100% of the senior managers and almost 60% of total workforce (including overseas employees) own shares of Kingsmen. Furthermore, Simon added that training is very much emphasized in Kingsmen. This was the first time I chatted with Simon and I realised he is really affable and knows his stuff as a businessman.

Coffee with FFN and Robert Miles

Robert P. Miles is an internationally acclaimed keynote presenter, author and distinguished authority on Warren Buffett and Berkshire Hathaway. Pursued by journalists and media moguls on just about each and every move that Mr. Buffett makes, Robert is a long-term shareholder of Berkshire Hathaway. He also has had the great honor of getting to know Warren Buffett, the man and the remarkable wealth-building strategist. 

FFN: In which year did you start divulging into the world of Warren Buffett and what got you started in the first place?

Robert Miles (RM): I first became interested in investing with Warren Buffett’s company Berkshire Hathaway [NYSE: BRK/a] [NYSE: BRK/b] at the end of 1995. After reading Roger Lowenstein’s book Buffett: The Making of an American Capitalist, I knew that I wanted to invest alongside Warren Buffett. The company announced that it would be offering ‘b’ shares at 1/30th the ‘a’ share. The ‘a’ share was then $30,000 per share and so the ‘b’ share became available for $1,000. Subsequently the ‘b’ shares have been further split now trading at 1/1500 the ‘a’ share. I attended my first annual meeting, the first Saturday in May, in Buffett’s hometown of Omaha, Nebraska and have returned every year.

FFN: If you could describe your workings with Warren Buffett in one word, what would it be?

RM: Teacher

FFN: What is your favourite quote from Warren Buffett? 

RM: Be greedy when everyone else is fearful and fearful when everyone is greedy.

FFN: Knowing about management by just reading the annual reports is difficult as most managers will say wonderful things about the company. How then can small retail investors know in-depth about the integrity of the management? Warren Buffett can just call up the management when he wants to invest in a particular company and size them up but retail investors don’t have such a luxury. 

RM: Believe it or not, Warren does not phone management. He does what every retail investor can and should do – he reads the annual report. Warren says you can tell a lot about management by the way they write. Are they taking credit for other people’s work? Is management compensating themselves richly? Is management increasing shareholder wealth or their own personal wealth?  Conversely, is management running the business for the benefit of the shareholders? Are they revealing their mistakes or blaming others?

FFN: You should be a value investor yourself following Warren Buffett’s tenets. What are some of the companies you have invested in and why? 

RM: I have invested in Berkshire Hathaway and recommend your readers consider the same when the stock is being purchased back by Warren Buffett. His goal is to buy back whenever the stock is less than 110% of book value. Current book value is around $100,000 per share, so he is a buyer whenever the ‘a’ shares dip before $110,000.

FFN: You have travelled to Singapore a number of times already. Have any Singapore-listed companies caught your attention? If yes, what are they and why do you like them? 

RM: Yes I have visited Singapore and presented here probably more than any other country outside the USA. I haven’t invested in Singapore because it is outside my circle of competence.

FFN: What psychology do people need to succeed in value investing?

RM: Investors need to be rational. Remember there is a difference between the price of a stock and its value. Only buy when the price is below its value.

FFN: What lessons have you learnt over the years as an investor?

RM: There are many methods towards investment success. My preference is to examine those investors that have far exceeded the overall market and follow their principles.

FFN: What advice would you give for beginners who want to start investing?

RM: Visit www.berkshirehathaway.com and begin reading Warren Buffett’s letters to shareholders. Each one is packed with practical advice from the master.

FFN: What is your ultimate goal in life?

RM: To be happy.

FFN: Give us an “insider look” of a typical day in your life from the moment you wake up to the moment you sleep

RM: No typical day for me. If I am home I read, write and talk on the phone most of the day. For exercise, I go for a daily walk. I also enjoy tennis and the theater.

FFN: If you could summarise your life in one word, what would it be?

RM: Charmed

FFN: A parting shot for the readers…

RM: Become the person you wish to be. Never stop dreaming. The act of creating is the secret to happiness.

Learn more about Robert Miles at http://www.robertpmiles.com. He also conducts a course (http://cba.unomaha.edu/execmgmt/buffettgenius/) on Warren Buffett and takes part in the Value Investor Conference (http://www.valueinvestorconference.com) as well.

Adampak – Signed, Sealed and Delivered!

This morning, at 8.30am, I dropped a pink envelope into the Singpost letterbox. Contained in the pink envelope was the acceptance letter to sell off my Adampak stake to Navis Capital. Navis made an offer to buy over Adampak at $0.42/share.

My initial plan was to wait out till around 24th May to accept the offer. However, I accepted the offer much earlier as Navis had acquired 88.76% of Adampak as of yesterday and it was no point holding out any longer. This evening, after posting my letter, news was released that Navis had acquired 91.74% of Adampak and has exercised the right to completely acquire Adampak. It was a “right” timing to post my letter, so to speak.

Now, I have to look for other companies to invest my funds in…

OKP’s Annual General Meeting FY2011

OKP’s Annual General Meeting (AGM) for FY2011 was conducted on 25th April 2012 at their Headquarters at Tagore Building and I was there for it. This post will indulge in some of the more important points that were discussed in the AGM.

The AGM was held at the conference room and luckily, I arrived early to grab my seat in front of the Management. The AGM was slated to start at 11am and more people streamed in at that time. The room was not that huge and it was filled to the brim. Extra chairs had to be brought in and even then, a few people did not have seats and had to stand around. Mr Or Toh Wat, Group MD of OKP (“Management”, hereafter) said the turnout was bigger than previous year’s. This shows positively that more people are getting interested in OKP and the business prospects. Management said that next year, they will shift to another building where the conference room is much bigger. Next year’s AGM will be held in there.

Some of the more important points that were covered in the AGM:

  • Property business – Won’t be going in a big wave and are currently looking for a partner to tie up with
  • Competitive advantage of OKP – vast experience of over 100 years, solid track record with government bodies and  have been award contracts even if their bid wasn’t the lowest one
  • A shareholder asked what allowed OKP to have 94% tender success in 2010. Management replied that LTA uses the price-quality method for tender evaluation to decide which company to award a contract to. (Under this method, “both price and quality criteria are assigned weightings which are then translated into quantitative scores. The tenderer with the best combined price-quality scores will be recommended for award of the contract. PQM also serves to assure the public that the procurement and tender evaluation processes take into account the non-price attributes and is not merely decided by the lowest compliant offer” (extract from LTA site). Also, “performance in past or ongoing projects in areas such as timeliness, safety and quality, relevant track records or specific competencies that enhances the tenderer’s suitability for the job” are also considered (extract from BCA site)).
  • Material costs takes up around 80% of total costs and labour the other 20%.
  • Some of the material costs are pegged with supplier to prevent fluctuations.
  • The foreign worker levy increase’s full impact will be in 2015. However, the total increase in costs for OKP will be less than 1%.
  • Now, 30-35% of the OKP’s foreign construction workers are under the core-trade, allowing OKP to enjoy a lower levy for them. OKP has plans to get 100% of the workers to be core-trade trained. Training the workers is essential to OKP.
  • One shareholder asked in the long-term, what are the difficulties OKP will face. Management said OKP is dependent mostly on government projects (it bodes well for OKP if government is rolling out more public jobs in the future). Next, Management also said rising raw material cost can impact OKP. However, these factors are external in nature and cannot be controlled by OKP. What OKP can control is the training of the staff and as said earlier, OKP focuses a lot on training.
  • Another shareholder asked between going into property development business  and overseas expansion, which is better. Management said for overseas expansion, need to choose  a good partner and have been exploring for many years for overseas expansion opportunities. Going into property development is a safer bet as it involves Singapore which the Management is more familiar with. Also, Management agreed that the local property market might be at the peak now. Thus, OKP is prudent on when to enter into the fray. If OKP wasn’t prudent, it would have entered into the property development business already. Lastly, Management said t’s their duty to enhance shareholder value and therefore, if doing business in Singapore is no longer viable, it will look for greener pastures overseas.
  • For the North-South highway project, the whole highway is a total of 14km. 8km of it will be viaduct, 5km will be tunnel and around 1km of semi-tunnel. Building viaduct is OKP’s expertise but not the tunnels. LTA will probably open the project for tender in 2015 and project will commence in 2016. OKP might face stiffer competition from foreign companies if back in their home country, the economy slows down.
  • Site managers and supervisors in-charge ensure that the workers are not talking on the phone and being unproductive during working hours. There’s a reporting system and work is monitored and measured. There are heads (something like foreman) put in place to look after each small group of workers. The heads are still foreign workers but with more years of experience.
  • OKP assured the shareholders that it is all the while looking into increasing productivity of the workers.

After the meeting, I managed to ask Mr Or if the high margins seen in FY2011 is sustainable going forward. He said the high margins is one-off. The high margins seen were due to savings in some design-and-build construction projects. Overall, I got the feeling that Management is very prudent and knows what it is doing. I have more confidence in this Management after attending the AGM.