1 month ago, a close relative of mine recommended me to this
book of “Essays from Warren Buffett”. After “Intelligent Investor” and “Security
Analysis”, it grants me a new perspective of evaluating stocks especially where
they mentioned, figure on the balance is taken as a beginning, not at end. True
enough, skepticism is a must for every investor if their decisions making are
aimed for a very long time frame. Well, I will just highlight matters that will
bring a lot of impacts (sometimes only for me but not you). I hope this can
serve as your summary for the whole book. Better, if my writings can make you
to pick up the book to authenticate my summary. (Talking about skepticism)
On diversification:
Less diversification allow you to focus fully on your portfolios while making serious
considerations upon buying stocks of your own choice. To me, this
diversification must be spread to other class of assets such as commodities,
real estate, paper assets and business. (Rather than MAS or AIRASIA, they are
still paper assets) Venturing into different class of assets at different
points of economy cycles grant you the biggest security of your investments
against economic vulnerability.
Outstanding business
determinants: Product itself, management, competitors and debt levels (cash
flow management). These are also known as the moat of protecting a business from
different kinds of threats.
Price Vs. Value: Price
is what you pay, value is what you get. In the stock market, this two is often
mixed up. Value is in term of book value( shown in the balance sheet as total
assets minus liabilities) and intrinsic value (take in accounts of the company’s
future prospect). Comparing these with the market price is a must.
On junk graded bond: Seemingly
attractive with their high yields, it simply cannot cover the possibility of
you losing your total principal invested in this kind of investments. Investing
in paper assets (partial ownership of certain companies) takes a lot of common
sense. Even loan sharks apply the theory better than corporate sometimes. ( If
you know what I mean)
On retained earning: Company
must consider about their ability to utilize every 1 dollar they retained to
reproduce 1 extra dollar of profit. Failing to fit in this requirement, it is
often better for the company to distribute their earnings rather than keeping
it.
On stock splits: It
is a movement that will attract short term speculators which bring more
fluctuations to the market price. A true company will focus on increasing value
for its existing shareholders.
On Goodwill: There
are two kinds of goodwill which are accounting and economic. Accounting
goodwill is calculated based on the purchase price minus net asset of its subsidiary.
This kind of goodwill will undergo annual amortization for certain number of
years which appear in income statement as expense. Secondly, it is the economic
goodwill that represents the brand name and patent. This kind of amortization
cost can be ignored because there is a very huge possibility that it will be
reflected in a higher price if it is truly a splendid company. Well, that’s all
for the first part.
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