NIC’s Weblog

ClickMe

http://dahhuilaudavid.blogspot.com/search/label/Mohnish%20Pabrai

http://retail.seekingalpha.com/article/11652

http://www.e85fuel.com/index.php

For more info:

http://money.cnn.com/2006/01/31/news/economy/pluggedin_fortune/index.htm
http://money.cnn.com/magazines/fortune/fortune_archive/2006/02/06/8367959/index.htm

Annual Report – what do they mean

http://www.google.com/search?hl=en&q=howto+read+annual+report+of+a+company

http://websites.quincy.edu/~jschlepp/anrpread.html

http://www.globeinvestor.com/resources/help/help_filters_company.html

http://www.investopedia.com/articles/fundamental/04/060204.asp

http://baystreet.investopedia.com/terms/e/eps.asp

http://www.fool.com/FoolFAQ/FoolFAQ0016.htm

http://www.fool.com/FoolFAQ/FoolFAQ0016.htm

USD INR Fallout

For said companies – short term drop in stocks>?

Participants in FICCI’s current round of export survey have reported that exports in segments such as textiles, gems and jewellery, tea, spices, leather and marine products that contribute strongly to India’s overall exports are extremely price sensitive and the recent movement in the Rupee’s value has started impinging on their export performance.

Cash is King

Shareholder value ultimately derives from liquid assets, the assets that can easily be converted into cash. A company’s value is determined by how much in the way of liquid assets it can amass. There are two ways to think about this. The first is to look at terminal value, which assumes for the sake of calculating potential return that at some future point a company will close down its operations and turn everything into cash, giving the money to shareholders. The second is to look at where tangible shareholder value comes from — returns on invested capital generated by the company’s operations. If a company has excess liquid assets that it does not need, it can deploy those assets in two ways to benefit shareholders — dividends and stock buybacks.

1. Current Ratio = Current Assets/Current liabilities.

1. Should be ~1.5.
2. Too high Current ratio mean company may be hoarding assets
3. Check Industry CR to verify

2. Quick Ratio = (Current Assets – Inventories)/Current Liabilities

1. Ideally, ratio should be equal to or greater than 1.

3. Cash Ratio – Total Cash/Current Liabilities (Not used often)

4. Working Capital – is the aboslute lifeblood of the company.

Working Capital = Current Assets – Current Liabilities – inventories (optional)

1. +ve WC is good
2. –ve WC is bad

5. Market Capitalization = Shares Outstanding + Long term debt + Preferred shares

6. Market valuation = Working Capital / Market Cap

Working Capital   (Current Assets - Current Liabilities)

--------------- = --------------------------------------

 Market Cap.  (Shares Out * Share Price) + Debt

1. Basically, if you see working capital to market capitalizations of 50% or higher, things are pretty good.

8. Cash/Equivalents/Market Cap > 10% means company has enough cash.

9. Also, you might want to net out the inventories from working capital and check that percentage just to make sure that the number is not all that different

10. Financial Ratios – See attached jpg

(I am supposed to be adding more ratios here…remind me)

It can go without saying how sick I am over the awful events in NY and DC, however that is for another forum. The comment that this event will cause intrest rates to drop is most likely very true. The mortgage rates in the US are generally based on the value of US Government Bonds. (If you understand bonds skip to the next paragraph) For those of you that are not familiar with the bond market, bond quotes work in a sort of backward way. When you see the price of bonds go up, the yield (intrest rate) drops. I will now make a very simplified explanation. If you gave me $100 and I promised you a 7% return for one year, at the end of
12 months I would give you $107 back. Now, if my promises of returning the money plus intrest became a high demand investment, I would eventually raise my price. At the same time I would still only return $107 back to you at the end of 12 months even though you had to pay me more than $100 for the promise to pay you $107. So, when person 1 gave me $100 and I gave him back $107 in 12 months, person number 2 had to pay me $101 for which I promised to pay back $107. Thus person number two only received a intrest rate of 5.9% because he paid more for the right to receive $107 in
12 months. (Does this help?)

Anyway, US Government Bonds are considered the safest investment in the world. Essentially the world feels that the safest place to lend money is to the US Government because assumedly, if the US Government can’t repay its bond debts, the world has much bigger problems to worry about. Additionally (even though this would destroy the economy) if the Government could not repay its debts for some reason, they can always just print more money to pay you back with…
(Oy!)

Ok so, that being said, if you were an investor and faced with serious world stability questions and economic uncertainty (recession comming) where would you trust your money to be… Answer: US Government Bonds. Demand for bonds then rise and thus yields (intrest rates) drop. (Keep in mind that the Federal Reserve will also be lowering rates even further to help stave off a recession which is all but certain).
Additionally consider that even without this, I won’t explain why, but when the Federal Reserve lowers intrest rates it usually takes 3 to 6 months for those rate drops to effect the mortgage market. The fed made their 6th cut since January last month, so all of the previous rate cuts have not yet even been absorbed in to the mortgage market.

So where I am going with this? Well the economy was shaky as it was last week and rates were amazingly low and dropping. Now, with unbelieveable financial instability in the market, as people flock to US Bonds as a safe haven and the fed cuts rates, mortgage rates should drop even faster. Note however that on Thursday the banks raised rates in the morning out of fear but they started dropping by the end of the day.

Here is my advice (legal disclaimer – unless you become a client of mine, this advice is for informational purposes I do not warrant or imply any agency with you and will not be responsible for anything you do to which I am not a party): if you refinance, look at the 3/1 or 5/1 adjustable – INSIST ON NO PRE-PAYMENT PENALTY. You might be able to save a few hundred to a few thousand dollars a month today depending on your loan size, you should look to have this savings surpass your loan costs within a few months. The 3/1 and 5/1 adjustable offer you a locked in fixed rate loan for 3 to 5 years and after that it becomes adjustable. The reason to use these loans are that you will get a very low rate today for accepting a loan that converts to an adjustable later. Then in the next 3 to 5 years could be tomorrow could be in a year and could be in 5, when you think that rates have bottomed you refi again and smile with your perfectly comfortable low rate 30, 20 or 15 year fixed rate loan. This even works if you want the insurance policy of buying a 30 year fixed today. IE you can still refi it again when you feel rates have bottomed. You may be asking what about my costs of refinancing multiple times? Well the issue becomes more an issue of cash flow than cost. If a new loan costs $1000 and you save $500 a month, you will spend $1000 that is true but in the next 12 months you will save $5000 over all…

A word of caution. Watch out for brokers that promise you no money upfront on your loan. You seem to hear that in commercials all the time these days…
Remember you dont get anything for free. We brokers get a fee from the lender based on how high an intrest rate we submit you at. So, if somone tells you there will be no fee for an appraisal or credit or whatever, what they are not telling you is that you are paying those costs, they are just charging you more in your intrest rate and getting paid a higher commission. If you are in California, read your MORTGAGE BROKER FEE DISCLOSURE it explains this to you in other states its called something else.

So what should you do? Well if you are paying 7% or higher on ANY mortgage, conforming, jumbo etc (if you have an adjustable at that rate or higher get offline and refinance now hehehe). I would at least shop around and see what rates you might be able to get and how that would affect your current monthly payment. I also would suggest that you contact a mortgage broker… if you find an honest broker his rates should almost always beat the banks rate even if you both shop at the same bank. The reason… the broker shops for you on the banks wholesale pricing while you will shop retail if you contact the bank directly.

Like any business there are good people and bad. Some brokers charge a very high price and some treat you right.

Another suggestion would be that you get your fico from equifax at www.myfico.com. In case you didn’t know, getting a credit report run on you drops your credit score each time you do it. If you do it yourself at myfico, it does not effect your score because it is a personal consumer request. This way you can give the broker your score and he can quote you properly without having to run your fico just to quote you. Then if you decide to use the broker he can run a credit report on you for use with your loan and you won’t have 5 inquiries on there dropping your score causing a higher rate on your mortgage.

Two thousand five hundred years later, Confucius’ words could not be more apt for investors. We all have our areas of expertise: Mine might include retailers and railroads, while yours may be homebuilders and health-care concerns. What’s imperative, though, is knowing what isn’t your area of expertise. As Berkshire Hathaway (NYSE: BRK.A) Chairman Warren Buffett wrote:

The most important thing in terms of your circle of competence is not how large the area of it is, but how well you’ve defined the perimeter. If you know where the edges are, you’re way better off than somebody that’s got one that’s five times as large but they get very fuzzy about the edges.

When assessing a company, you should always be asking yourself, “What don’t I know?” Do I really understand how the business makes its money? Am I aware of how the company intends to grow? Do I know how the managers view the company’s money — as the shareholders’ or their own? Is it clear how future free cash flows will be used? Will they be used for repurchases? Capital expenditures? Acquisitions? Do I clearly understand the financial statements of the company? And the footnotes? Do I know what the industry will look like in five years? Ten years? How about in 15 years?

Those aren’t the only questions you should ask yourself — not even close. But after asking and answering all of your questions, if your number of “don’t knows” outweighs the “knows,” move on… as tempting as it might be to do otherwis

The Key to Investing Is Nothing NewBy Selena Maranjian (TMF Selena)
January 28, 2005

The more things change, the more they remain the same. — Alphonse Karr

Inspiration stuck me at the American Sanitary Plumbing Museum, in Worcester, Mass. Always curious about how things work and now a homeowner with occasional plumbing needs and questions, I was there to see what I could learn about the history of plumbing. I got more than I bargained for.

Proprietor Russell Manoog (and later his wife, B.J.) spent several hours showing me most of the items in their impressive collection. I learned that there is such a thing as a functional pipe made of wood. (Wooden pipes were in use in America during the 1600s and 1700s.) That chamber pots often sat below platforms with seats. That toilet paper is not a recent invention — an early form of it, which came in boxes of sheets, was called “boudoir paper.” (Historical alternatives to toilet paper include leaves, soaked corn husks, sponges, clamshells, and more.)

The principles remain the same
The most interesting lesson of the day for me was how little has changed in the world of plumbing over many, many years. The shape of a toilet is essentially the same — a bowl with a seat over it. That’s true for a fancy 1891 “Nautilus” toilet I saw at the museum and a less-fancy American Standard (NYSE: ASD) toilet I saw at Home Depot (NYSE: HD). The shape of pipes under a sink has also remained fairly constant for a long time — essentially, all that’s needed is a trap, such as the common P-shaped one. (I used to think that a trap under a sink was there merely to facilitate the removal of things that fell down the drain. How wrong I was — its most important function is to contain some water to block smells and gases from coming back into the house. A vent is also important.)

If you look at wood pipes and think that copper piping is a new and valuable development, you’d be wrong. The ancient Romans were using copper piping several millennia ago.

So what does all this have to do with investing? A lot, if you think about it. I’ve been a student of investing for nearly a decade now, and I’ve seen lots of investing strategies pitched. Some seem sensible, and some seem dubious. Most worrisome are those alleged gurus who have new, ”amazing” secrets to building wealth that they’ll share with you — if you attend an expensive seminar or give them a lot of money in some other fashion.

My visit to the plumbing museum made me think, again, that perhaps the best ways to invest are not the new ones but the old, tried-and-true ones. After all, at the heart of successful investing, aren’t we most likely to find an attempt to buy something for less than it’s worth? This seems to me to be an inescapable truth, kind of like how water always seeks the lowest level.

Old investing wisdom
So what exactly are the old investing truths that we should pay attention to? Well, one source of venerable advice is Berkshire Hathaway’s (NYSE: BRKa, BRKb) chairman and superinvestor Warren Buffett, who freely shares his thoughts through his very accessible annual letters to shareholders. His impressive decades-long track record makes him someone worth listening to. (Whitney Tilson has regularly summed up the master’s musings at the company’s annual meetings.) Buffett is himself a student of an earlier superinvestor, Ben Graham.

Another giant of investing, though less well known, is Phil Carret. Carret started Pioneer, one of the first mutual funds, in 1928. His average annual return, calculated from 1928 to 1974, is estimated to be a solid, market-beating 14%. (That’s enough to increase an investment’s value 50-fold over 30 years.) Carret died in 1998 at the age of 101, but he left behind many thoughts on how to invest successfully:

• “Never borrow money for speculation in stocks. When you do borrow, do so sparingly, and only when rates are low or falling and business is depressed.”
• “Never hold fewer than 10 stocks covering five different fields of business.”
• “More fortunes are made by sitting on securities for years at a time than by active trading.”
• “Reappraise every holding at least every six months.”
• “Be quick to take losses, reluctant to take profits.”
• “Avoid inside information as you would the plague.”
• “Diligently seek facts; advice, never.”
• “Keep at least half [your investment portfolio] in income-producing securities.” (This would include not only bonds but also dividend-paying stocks. If you’re looking for hefty dividend-payers, grab a free sample of our Income Investor newsletter.)
• “Never put more than 25% of (your investment portfolio) into securities about which detailed information is not readily and regularly available.” (I actually think that you might be best off avoiding such securities entirely.)

Other lessons can be gleaned from Carret’s life. It wasn’t one spent with eyes glued to the stock ticker. He made time for things he enjoyed, such as solar eclipses, which he would travel virtually anywhere to observe. He was generous with and loyal to friends. When he prepared his housekeeper’s tax return for her, he quietly paid the taxes due, as well. Buffett is also known for enjoying his life and doing all the fun things he wants to do.

You can learn more about a bunch of other great investing minds in this special collection of profiles we ran some years ago.

Lost and found
Interestingly, many important inventions in the world of plumbing were lost for many years, only to be rediscovered or reinvented much later. Some 3,700 years ago, for example, the Minoan Palace of Knossos on Crete featured terra cotta pipes, hot and cold running water, drainage systems, and a flushing toilet. It’s sad to think of the millions of people who lived without such amenities for most of the years since then.

Similarly, in investing, big truths and principles often need to be rediscovered by each of us budding superinvestors. Fortunately, the toilet has indeed been reinvented, and effective investing strategies such as value investing are still being studied and advocated — perhaps a little more so, after the market’s recent speculative bubble popped. (For examples of promising value investments, grab a free sample of our Inside Value newsletter.)

Durability
One highlight of my visit to the plumbing museum was seeing a beautiful water heater from 1929 that was used for some 70 years. (Are you recalling a water heater you recently saw at Lowe’s (NYSE: LOW) that came with a 70- or even 50-year guarantee? I thought not.) In fact, this water heater might well have continued to be in use today had it not ended up donated to the museum. The latest design isn’t always the best design.

Now that I’ve seen what’s possible in the realm of water heaters, I find myself regarding some investment-strategy hype-ists as purveyors of flimsy water heaters with five-year warranties. Why would I be interested, when I should be demanding more robust machines?

Keep learning
This is an age of information overload. You’ll see investment advice coming at you from myriad sources. You may find yourself confused and frustrated. If so, look for long-lasting truths. Seek wisdom that has been around for a long time. Go visit a plumbing museum.

You can read more about investing’s best brains in these articles:

• The Secrets of Master Investors
• Charlie Munger in Rare Form
• Value Investing 101
• Value Investing’s 10 Commandments

Selena Maranjian’s favorite discussion boards include Book Club, The Eclectic Library, and Card & Board Games. She owns shares of Berkshire Hathaway and Home Depot. For more about Selena, view her bio and her profile. You might also be interested in these books she has written or co-written: The Motley Fool Money Guide and The Motley Fool Investment Guide for Teens. The Motley Fool is Fools writing for Fools.

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Finding Lynch’s 10-Baggers
Tom Gardner has made it his mission to uncover the best underfollowed,
underappreciated companies before Wall Street gets on board. The
legendary Peter Lynch once had a few things to say on the subject, and
Tom thinks investors should listen up.

By Tom Gardner
January 26, 2005

Peter Lynch is recognized by investors the world over. More than 1
million read his book One Up on Wall Street — or, at least, that many
bought it. Sadly, many seem to have either disregarded or forgotten the
book’s tenets for finding great investments.

And that’s a shame. After all, the greatest of these investments — in
his words, the “10- to 40-baggers… even 200-baggers” — can rise
10-200 times in value.

I haven’t forgotten. A “student” of Lynch for years, I don’t deny that
what I’ve learned has influenced the way I invest. Nor that, when we
conceived of our Motley Fool Hidden Gems newsletter service and online
community, digging up just a few of these “10- to 40-baggers” was very
much on our minds.

It might be worthwhile, then, to take a look at six of his primary
principles, all of which are core components to our Hidden Gems
investing approach. I strongly encourage you to consider them when
building or fine-tuning your own stock portfolio.

1. Small companies
Lynch loves emerging businesses with strong balance sheets, and so do I.
His extraordinary returns in La Quinta Inns came at a time when the
company was young and small, traded at a discount to estimated future
growth, and sported a healthy balance sheet. Why did he veer away from
larger franchises such as Fairmont Hotels & Resorts (NYSE: FHR) and Four
Seasons Hotel (NYSE: FS) in favor of the promising upstart? He writes,
“Big companies don’t have big stock moves… you’ll get your biggest
moves in smaller companies.”

Couldn’t have said it better myself. When searching for prospects, I
focus explicitly on strong, well-run companies capitalized under $2
billion.

2. Fast growers
Among Lynch’s favorites are companies whose sales and earnings are
expanding 20%-30% per year. The classic Lynch play over the past decade
might be Starbucks, which has consistently grown sales and earnings at
superior rates. The company has a sterling balance sheet and generates
substantial earnings by selling an addictive product, repurchased every
day at a premium by its loyal customers.

The real trick is to find fast growers such as Starbucks or eBay
(Nasdaq: EBAY) in their early stages. At the same time, don’t shy away
from a slower-growth business selling at a truly great price. Hidden
Gems can take either form.

3. Dull names, dull products, dead industry
You might not think this of the world’s greatest — and, arguably, most
famous — mutual fund manager, but Lynch absolutely loved dreary,
colorless businesses in stagnant or declining industries. A company such
as Masco Corporation, which developed the single-handle ball faucet
(yawn), rose more than 1,300 times in value from 1958 to 1987.

And if he could find that kind of business with a ridiculous name, like
Pep Boys, all the better. No self-respecting Wall Street broker could
recommend such an absurdly named unknown to his key clients. And that
left the greatest money managers an opportunity to scoop up a truly
solid business at a deep discount. (Crazy Woman Creek Bancorp (OTC BB:
CRZY), anyone?)

4. Wall Street doesn’t care
Lynch’s dream stock at Fidelity Magellan was one that hadn’t yet
attracted any attention from Wall Street. No analysts covered the
business, which was less than 20% institutionally owned. None of the big
money cared. Toys “R” Us, though it might not be so great an investment
today, after being spun out from bankrupt parent Interstate Department
Stores went on in relative obscurity to rise more than 55 times in
value.

And Lynch is effusive in explaining the wonderful returns from funeral
and cemetery business Service Corporation, which had no analyst
coverage. Compare that to the 30 analysts who cover Pfizer (NYSE: PFE)
or the 34 following Lucent (NYSE: LU).

The point is clear: Small, underfollowed companies present the greatest
opportunities to long-term investors.

5. Insider buying and share buybacks
Lynch loves companies whose boards of directors and executive teams put
their money where their mouths are. A combination of insider buying and
aggressive share buybacks really piqued his interest. He would have
given a close look to a tiny company like Spar Group, which has featured
persistent insider buying, but also Coca-Cola (NYSE: KO), which
methodically buys back its shares on the open market.

“Buying back shares,” Lynch writes, “is the simplest, best way a company
can reward its investors.” Bingo.

6. Diversification
Finally, don’t forget that Lynch typically owned more than 1,000 stocks
at Fidelity Magellan. He embraced diversification and focused his
attention on upstart businesses with excellent earnings, sound balance
sheets, and little to no Wall Street coverage. He admits that, going in,
he never knew which of his investments would rise five or 10 times in
value. But the greatest of his investments took three to four years to
reward him with smashing returns.

Personally, I anticipate an average holding period of three years, with
the greatest of the group being held for a decade or more. I believe you
can and should run a broad, diversified portfolio of stocks, if you have
the time and the team to do so — like we do here at the Fool and within
our Hidden Gems community.

Finding the next prospect
Peter Lynch created loads of millionaires with his Fidelity Magellan
Fund — investors who went on to live comfortably, send their kids to
college, and give generously to deserving charities.

You might be surprised to hear that he thinks you can succeed at stock
investing without giving your whole life over to financial statement
analysis. He’s outlined a method whereby the total research time to find
a stock “equals a couple hours.” And he doesn’t think you need to check
back on your stocks but once a quarter. Doing more than that might lead
to needless hyperactive trading that wears down your portfolio with
transaction costs and taxes.

Motley Fool Hidden Gems practices each and every one of these Lynchian
precepts. If this is how you like to invest, I guarantee you’ll love our
newsletter service. Try it free for 30 days, and if you don’t absolutely
love it, you can cancel without paying a tin-lizzy nickel.

The next 10-bagger is out there. Good luck finding it!

This classic investing column originally ran on Sept. 3, 2003. It has
been updated.

Fool co-founder Tom Gardner owns shares of Pfizer and Coca-Cola. The
Motley Fool is investors writing for investors.

BORING PORTFOLIO
Sustainable Competitive Advantage
By Whitney Tilson (Tilson@Tilsonfunds.com)
February 28, 2000

Warren Buffett was once asked what is the most important thing he looks for when evaluating a company. Without hesitation, he replied, “Sustainable competitive advantage.”

The value of a company is the future cash that can be taken out of the business, discounted back to the present. Thus, the key to valuation — and investing in general — is accurately estimating the magnitude and timing of these future cash flows, which are determined by:

• How profitable a company is (defined not in terms of margins, but by how much its return on invested capital exceeds its weighted average cost of capital)
• How much it can grow the amount of capital it can invest at high rates over time
• How sustainable its excess returns are

It’s easy to calculate a company’s historical growth and costs and returns on capital. And for most companies, it’s not too hard to generate reasonable growth projections. Consequently, I see a large number of high-return-on-capital companies (or those projected to develop high returns on capital) today with enormous valuations based on the assumption of rapid future growth.

Professor Porter argues that, in general, sustainable competitive advantage is derived from the following:

• A unique competitive position
• Clear tradeoffs and choices vis-à-vis competitors
• Activities tailored to the company’s strategy
• A high degree of fit across activities (it is the activity system, not the parts, that ensure sustainability)
• A high degree of operational effectiveness

He concludes that “when activities complement one another, rivals will get little benefit unless they successfully match the whole system. Such situations tend to promote a winner-take-all competition.” It is my aim to invest in these winner-take-all companies.

Good fund managers past and present

Peter Lynch, Marty Whitman, Sir John Templeton…

Many are students of the masters themselves and their successors. They are battletested, honest professionals like…

Rick Aster
John Thompson
Whitney George

Philip Fisher?