Monday, 29 June 2015

Value Creation Investments

When Warren Buffett bought Nebraska Furniture Mart (NMF) from Rose Blumkin it was done on a handshake. No inventory check or auditing due diligence. The Blumkin motto of "sell cheap and tell truth" must have been instructive in allowing for Buffett's decision to buy NFM. But this Buffett buy like others would have come to his attention because of a perceived value.

In the Intelligent Investor by Benjamin Graham, he made mention of the intrinsic value of a company and I suspect that Warren Buffett saw where he could enable NFM to create greater value in the future despite any risk posed by the furniture market.

My thoughts are that a simple analysis went into the Buffett buy decision that is:

  1. the USA population will continue to grow into the future
  2. people will need household furniture when they move out of their parent's house
  3. the buyers will buy from the cheapest price place no matter where that value lies.
Nobody sells as well as Rose Blumkin's NFM did.

What I have learnt from value creation investment is that; they are formed around simple steadfast concept executed over long period of time without a wavering strategy.

Most great companies lead off with a strong motto and they stick to it for many years into the future;
  • Just Do It
  • Coke It Is
  • Bigger Better Network
  • 15 minutes could save you 15% off or more
  • Safe and Cheap
  • Buy and Hold.
What is your motto?

What are you creating your value around?

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Sunday, 21 June 2015

Risk Free Investment?

Recently I have been attending general shareholder's meetings in the companies I have an investment. What I have found is that most attendees or otherwise passive minority shareholders know very little about what the companies should be doing to create greater shareholder value let alone the risk free nature of their investment.

Board Members @ Sagicor

The company's management is at liberty to say whatever they want with the assumption that they are responding to questions that the passive minority shareholders may want answers to. Some boards of directors are frank and courteous and some are really just dodgy and unfriendly to passive minority shareholders.

However, I particularly liked the lessons I learned at the Sagicor Investment shareholder's meeting this past week. A minority shareholder asked about the credit card business of the bank subsidiary of Sagicor and was flatly told that the bank had to take risk, but that was not the lesson. The chairman went further into sharing with the shareholder that the greatest loss suffered by the company was on risk free investments and he alluded to the Government of Jamaica (GOJ) debt restructuring program. The GOJ debt restructuring exercise titled JDX and NDX were most impacting to the company's bottom line as it had cost many investors millions in foregone interest payments and mention other counter party losses. GOJ effectively defaulted on their bonds and recalled the bonds at a lower interest rate. Some investors collected their principle and whatever pro rata interest earned up to that point and found another home for the cash. The notion of risk free investment in government papers is no longer as safe as once thought and no matter what the minority shareholder believed the ultimate decision rest with the GOJ. Look at what is happening in Greece now.

Greece is in a similar situation as Jamaica was a couple of years ago and the tailspin of their debt restructuring effort will resonate across all of Euro Zone at bigger scale by far when compared. No one can believe that the International Monetary Fund (IMF) could be so beaten back by its debtor, and this is not like that there won't be consequences, but there is a stand off between Greece and IMF and they are not talking to each other now. Even at this level there is no such thing as risk free investment.

The question for the passive minority investor is, what is the extent of the loss that one will suffer in the worst case scenario should the risk be realized? On one hand banks will, in most cases, have the option to resort to a collateral of greater value than the ordinary loan issued. But in the case of a credit card, the bank charges, what I regard, as excessive usury to compensate for loan default. The concept of "win on a lot" will cancel out the "loss of a few". The passive minority investor unlike the bank has nothing more than a piece of paper with a perceived value, but it gets worse if the investor have no say. The passive minority investor really don't have much power to do much other than to sell your shares and vote with your feet. A t least that exercise don't have to be a standoff.

There is no risk free investment, but make sure there is some margin of safety.

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Saturday, 13 June 2015

Top Five Warren Buffett Videos

  1. How did Warren Buffett made his money?Warren Buffett and Jay-Z interview with Steve Forbes: Video
  2. Warren Buffett, The World Greatest Money Maker: Video
  3. Warren Buffett on Investment Stratey: Video
  4. Secrets of Warren Buffett: Video
  5. The Best Classroom Lesson from Warren Buffett: Video

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Sunday, 7 June 2015

Buffett's Investment Model is the Key

Warren Buffett has made the business of investment a real simple one. He does this with an investment model that serves him well, both as an investor and a businessman by focusing on;

  • his circle of competence
  • capital allocation
  • not paying a dividend (preventing corporate leaking)
  • the strength of company's economic castle and moat
  • copycat any investment practice that is worthy
  • avoid the commission of investment mistakes

Buffett buys a business outright or a piece of the business and he gives it to someone else to do the heavy-lifting and remit the profit to him for future deployment.

His value investing foundation marks the principle of selecting where Buffett's capital goes and this is supported by serious consideration for those businesses that possess a strong economic moat around them to protect the economic castle's cash flow and profit.

There is no way you can escape making mistakes, but if you avoid those risk that are obvious risk and the level of uncertainty is high you will do better.

Focus InSight: Keep it real simple and protect what you have invested in beit time or money.

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