Editor's note:

Read Buffett's letter and Graham's book "the intelligent investor", I found the answer.

"Smart investors" 19 year old Buffett first read, still think, this is the greatest investment works. In 1973, Graham died 3 years ago, the book was amended in the fourth and final.

In the book, Graham summed up the value of the investment strategy of his own. Its core is to buy shares, only with respect to the intrinsic value of profit or assets estimated significantly undervalued, margin of safety is quite cheap, then to sell holdings rose 50% after two years, if not held up 50% also can sell. Since the evaluation of the intrinsic value of error prone and stock market volatility often big, in order to avoid mistakes, should always invest more in stock 100 . From 1925 to 1956 retirement, Graham's investment performance is quite good, return rate as high as 20%, far outperforming the market.

Tutor after retirement, in 1956, Buffett alone start-up investment partnership, completely imitate the value investment strategy for teacher looking for bargains, also achieved great success. 1957 to 1969 achieved astonishing achievements 1503 times, the average annual compound rate of return of up to 30%.

In 1969 the stock market rose too high, according to Buffett Graham's strategy, could not find a bargain, so decided to dissolve the company, to withdraw from the stock market. While waiting for the market down the emergence of new investment opportunities, while Buffett reflection mentor investment strategy.See the teacher last revised "smart investors" after be startled at a time, he.

In 1948, Graham wrote, "the years of smart investors" first edition written, he bought a half share in GEICO insurance company. Later, although the company after the listing of shares rose, but Graham has been regarded as the family business, and not as the past investment bargains that rose more than 50% sold, but has been held for the long term, the results as the business is getting better and better, the stock rose higher and higher, and finally rose more than 200 times.

"The great irony is, only this time the investment decision of total profit, total profit of more than the two partners in the past 20 years in their professional fields in a wide range of investment activities are obtained, although the 20 years they were analyzed many investigations, and inexhaustible thinking over, made of stock investment decision the innumerable."

Graham of the GEICO insurance company investment over the past 20 years, more than he had done countless times investment!

His feeling is: "an investment opportunity, lucky or an extremely shrewd investment decision, it may make a lot of money, more than one investment experts had a lifetime earned all investment."

In 1973, Buffett saw the tutor postscript after deep insights, to influence his partner Munger,Buffett slowly abandoning the original focus only on the cheap investment strategy, try to long-term investment in a good company strategy.

It is this year, he bought Washington Post $10620000 by 1985, it earned 50 times. He said in his letter: "the investment Washington Post, I put 10000000 into 5 hundred million". By 2004 the highest profit 160 times.

In 1976, Buffett invested 19420000 dollars to buy to let his instructor most profitable company GEICO shares, to the end of 1980, a total investment of 47140000 US dollars, to 1989 rose 22 times.

In 1989, Buffett on the first 25 years of his investment career, finally out of the misunderstanding only buy cheap goods:"To buy the general price of an unusual good enterprise, than with non good price with general buy a company generally much better."

In this year, Buffett bought his money stock the most: Coca-Cola. From 1988 to 1989 he accumulated to buy Coca-Cola for $1000000000, the results to make money fast make money than to his surprise. In a letter to shareholders in 1991, he said: "three years ago when we buy large sum of Coca-Cola stock, Berkshire's net worth is about $3400000000, but now we are holding Coca-Cola's stock market value of more than this number". In fact, in 1998, Buffett in Coca-Cola stock is $12000000000.

It is this year, Buffett summed up let him become a long-term investment success the richest man in the world:"The company's management and we are always looking for those business clear, consistently superior results, by the extraordinary ability and for the sake of shareholders to operate. The Target Corp is not enough to ensure that our investment profit: not only do we have to buy at reasonable prices, and we bought the company's future performance but also with our estimates. But this kind of investment method -- searching for super star -- gives us towards the only chance of real success".

Searching for super star company, like treasure. Then Buffett looking for what is super star company's treasure map?

Company earnings.

 Buffett financial analysis code08: cost decision most enterprise destiny

Have a strong brand, such as the one and only patent resources and has the ability to raise prices only a few enterprises, most enterprises production is the alternative strong general merchandise, industry competition is intense, can only accept the market pricing. As Buffett said: "if the cost and price is decided according to the fierce market competition, the product will tend to pile up in excess of requirement, the customer also don't care product manufacturers and sales channels have what different, so this industry inside the company days certainly not."

If the industry is very bad, all businesses are booming, but often the capacity expansion rate is much higher than the market demand growth, once the market downturn in demand, production capacity is not fall right away, then all enterprises can only price promotions. When the market price is reduced to below its cost, the high cost of enterprises will face closure, the higher the cost, died sooner. In this highly competitive industry, the last surviving, but also the only way to survive is long-term, reduce costs.

Buffett know that the cost of the cruel competition, because he has two profound lessons:

The first lesson is cost competition forced him to close the Berkshire textile factory.

In 1965 Buffett bought Berkshire, at that time, the company is a textile factory, the main production suit lining. Buffett said: "I spent many years to understand that this is not a very good business. In spite of the textile industry, the textile factory occupies America Mens Suit lining for more than half of the market share. If you wear a men's suits, may be the production of Hathaway brand lining.SearsDepartment of our named 'best supplier annual'. They appreciate our. But the problem is, even if we only want to raise prices half cents per yard, they also do not agree, the reason is very simple: no one walks into a men's clothing store to buy the specified using Hathaway brand lined suit. The customer does not see who is the production of lining."

In 1985, Buffett managed to maintain Berkshire textile business for 20 years, had to shut down the business, because the labor cost is too high: "most of the trouble we meet can directly or indirectly attributed to competition from abroad, the country the wages of the workers and the minimum wage in the United States only a small part of the."

The second lesson is cost competition forced the Dexter footwear successive loss.

1993 Buffett paid $475000000 for USA famous high-grade shoe brand Dexter, the brand competitiveness of the company be able to resist the cost competition in Asia Pacific shoe, he completely mistaken.

"In 1999 we under almost all manufacturing, retail and service business has made outstanding achievements, the only exception is the Dexter shoes. But this is not the company management problems. In management skills, ability and dedication and so on, the management of Dexter compare favorably with other company. But most of our shoes are American local production, and America local manufacturers and overseas manufacturers competition becomes very difficult. 1999 years in the America 1300000000 pairs of shoes consumption, about 93% of imported products, very cheap foreign labor is the decisive factor".

In 2001, Buffett had to admit: "Dexter indemnities again when we bought a few years before, in fact we acquired after a few years, even in the face of cutthroat competition overseas shoe enterprises, business is prosperous. I think Dexter should be able to cope with international competition, the results show that my wrong."

Buffett has a lesson, also has experience. The most successful example is GEICOThe carThe insurance company.

The insurance industry competition is more intense, one is the product especially easy to copy, two is the product supply no restrictions, so, the main competition is cost competition. The insurance company mainly take the sales agent, the agent to pay the Commission usually accounted for 15% of premium income. GEICO in the auto insurance industry focus on the development of government employees these life cautious, safe driving, but also through direct mail letters to buy insurance, direct marketing than sell cost is much lower, so it can be a substantial reduction in the price to attract more customers, and customers to the insurance rate is very high. Other insurance companies and damage to the original market share because of unwilling to give up agent distribution channels available, cannot imitate GEICO, therefore, GEICO can keep the cost advantage for a long time: "in the huge capacity of the automobile insurance market, most companies as sales channel structure limits the flexible management, GEIGO has positioned itself as a low operating costs company. GEIGO operates according to its location, not only create beautifully value for customers, but also earn a beautifully in return for their."

In 1986 Buffett in the annual report analysis of GEICO has become the most important cause of the global performance of the best insurance company is the cost advantage: "GEICO's track record is the best insurance company in the world, even than Berkshire does business records but also much better. GEICO can be the most important factor for success, because of its ability to operating costs to a minimum, which makes it with all other Motors Insurance Corporation like stand head and shoulders above others. In 1986 GEICO companies underwriting and loss adjustment expense expenditure proportion of the premium income of only 23.5%, many large insurance company's comprehensive cost ratio to 15% higher than GEICO."

Remember Buffett's lessons and experience, if the company does not have the ability to raise prices, then we must have a look, the company operating costs are lower than the industry average

After deduction of costs, revenue is the gross profit margin; after deduction of business expenses, profit and profit; after the deduction of income tax expense, is the net profit to shareholders.

Operating expenses include the cost of sales, management fees and finance charges. In this three charges, the most important sales costs, often the largest amount.

Cost of sales is refers to the costs of enterprises in the sale of goods and materials, providing services in the process, including the companies selling products in the course of the insurance fees, packaging fees, fees and advertising fees, commodity exhibition fee is expected to repair, product quality assurance, transportation, loading and unloading loss costs and sales of the enterprise products and set up sales offices (including sales, after sale service outlets) employee pay, business expenses, depreciation, fixed assets repair costs.

Dabu Zhao wolf could not bear children, to increase sales revenue, it must increase the cost of sales, sales of the most effective way is to increase the advertising fee. But Buffett analysis of cost of sales growth of only one standard: "if every dollar spent to create more than a dollar value." The classic case and Buffett analysis of cost of sales is the GEICO insurance company.

Since the 1996's acquisition of GEICO company and holding the remaining 50% of the shares of this company, Buffett started to pay attention to the company's sales increase of medical expenditure, because the cost of sales growth and constantly promote the growth in the number of company policy.

In 1998, Buffett carried out a detailed analysis: "in 1995, is a year ago Berkshire acquired completely GEICO insurance company, the company's marketing cost is 33000000The dollar, 652 telephone consultant; in 1998, the company's marketing costs increased to $143000000, the number of telephone counseling staff increased to 2162, these efforts by the results from this company new policy and effective policy data growth at."

Improve the cost of sales of the effect was very good: in 1998, the new policy count grew 260% than 1993, effectively protect the singular growth 77%. Therefore, Buffett is willing to continue to improve the sales expenses to boost revenues: "in 1999 we will once again improve marketing budget, at least $190000000. The fact that Berkshire is willing to GEICO and develop new business action on the investment is no limit, as long as our investment will help the company to build infrastructure for better customer service insurance." "We simply to weigh, whether for every dollar spent to create more than a dollar value. If the estimate is cost-effective, it is to spend more money, the more I happy."

In 1999, Buffett once again increase sales expenses: "improve the 1999 marketing expenses to $242000000, telephone consultant to 2631 the number of bits. Huge growth also is only the beginning, 2000 market sales expenditure will increase. In fact, as long as we can smoothly new business, and we expect to increase every dollar expenditures are able to lower the cost of additional business, we are willing to happy to improve sales and marketing expenses to $1000000000 a year." The effect is very good: in 1999, the new policy number 32% increase over the previous year, effectively protect the singular growth 22%.

But the number of effective policy in 2000 grew by 8%, while new and odd even 11% lower than the previous year, completely to Buffett's surprise. But Buffett the courage to admit mistakes and seriously reflect on: "the first reason is, we in the advertisement greatly improve 'exposure', lead us in some media exposure is too frequent. You know, by any media to increase advertising information input quantity effect will certainly is decreasing, positive effect of third times of advertising in a cable television channel hours less than the first advertisement."

GEICO's CEO Tom Nicely to take action immediately, cut off part of the advertising. In 2001, GEICO company's premium income grew 6.6%, float is increased to $308000000, made $221000000 in underwriting profit. But the effective policy declined 0.8%. In 2002, Buffett to increase the cost of sales at the same time at large to improve the ratio of cost efficiency of advertising, this measure finally blossom fruit: "2002 GEICO all things are so good that we couldn't believe. Business growth range is quite big, the profit is very excellent, guaranteed renewal rate continued to increase, while sales of business efficiency is greatly improved."

In 2003, Buffett was pleased to see GEICO operations continue to increase. In 2005, Buffett further improve advertising costs to more than $500000000. In 2007, Buffett took the advertising expenses increased more than 50%. In 2008, Buffett Hin to see the company increased market share.

In 2010, Buffett's letter to shareholders in 2010 pointed out, GEICO company has become American thirdThe carThe insurance business, the market share is 8.8%. In 1995, company premium income of $2800000000. By 2010, the premium income of $14300000000, and continues to rise.

The 15 annual premium income grows 5 times, an important driving force is Buffett continuously improve the sales cost especially advertisement expense.

But increase the sales expense is not difficult, difficult is like Buffett said, take out every piece of money to create more than a dollar value.

In 2011 03 months 24 days 01:38
Author:Liu Jianwei

After deduction of costs, revenue is the gross profit margin; after deduction of business expenses, profit and profit; after the deduction of income tax expense, is the net profit to shareholders.

Operating expenses include the cost of sales, management fees and finance charges. In this three charges, the most important sales costs, often the largest amount.

Cost of sales is refers to the costs of enterprises in the sale of goods and materials, providing services in the process, including the companies selling products in the course of the insurance fees, packaging fees, fees and advertising fees, commodity exhibition fee is expected to repair, product quality assurance, transportation, loading and unloading loss costs and sales of the enterprise products and set up sales offices (including sales, after sale service outlets) employee pay, business expenses, depreciation, fixed assets repair costs.

Dabu Zhao wolf could not bear children, to increase sales revenue, it must increase the cost of sales, sales of the most effective way is to increase the advertising fee. But Buffett analysis of cost of sales growth of only one standard: "if every dollar spent to create more than a dollar value." The classic case and Buffett analysis of cost of sales is the GEICO insurance company.

Since the 1996's acquisition of GEICO company and holding the remaining 50% of the shares of this company, Buffett started to pay attention to the company's sales increase of medical expenditure, because the cost of sales growth and constantly promote the growth in the number of company policy.

In 1998, Buffett carried out a detailed analysis: "in 1995, is a year ago Berkshire acquired completely GEICO insurance company, the company's marketing cost is 33000000The dollar, 652 telephone consultant; in 1998, the company's marketing costs increased to $143000000, the number of telephone counseling staff increased to 2162, these efforts by the results from this company new policy and effective policy data growth at."

Improve the cost of sales of the effect was very good: in 1998, the new policy count grew 260% than 1993, effectively protect the singular growth 77%. Therefore, Buffett is willing to continue to improve the sales expenses to boost revenues: "in 1999 we will once again improve marketing budget, at least $190000000. The fact that Berkshire is willing to GEICO and develop new business action on the investment is no limit, as long as our investment will help the company to build infrastructure for better customer service insurance." "We simply to weigh, whether for every dollar spent to create more than a dollar value. If the estimate is cost-effective, it is to spend more money, the more I happy."

In 1999, Buffett once again increase sales expenses: "improve the 1999 marketing expenses to $242000000, telephone consultant to 2631 the number of bits. Huge growth also is only the beginning, 2000 market sales expenditure will increase. In fact, as long as we can smoothly new business, and we expect to increase every dollar expenditures are able to lower the cost of additional business, we are willing to happy to improve sales and marketing expenses to $1000000000 a year." The effect is very good: in 1999, the new policy number 32% increase over the previous year, effectively protect the singular growth 22%.

But the number of effective policy in 2000 grew by 8%, while new and odd even 11% lower than the previous year, completely to Buffett's surprise. But Buffett the courage to admit mistakes and seriously reflect on: "the first reason is, we in the advertisement greatly improve 'exposure', lead us in some media exposure is too frequent. You know, by any media to increase advertising information input quantity effect will certainly is decreasing, positive effect of third times of advertising in a cable television channel hours less than the first advertisement."

GEICO's CEO Tom Nicely to take action immediately, cut off part of the advertising. In 2001, GEICO company's premium income grew 6.6%, float is increased to $308000000, made $221000000 in underwriting profit. But the effective policy declined 0.8%. In 2002, Buffett to increase the cost of sales at the same time at large to improve the ratio of cost efficiency of advertising, this measure finally blossom fruit: "2002 GEICO all things are so good that we couldn't believe. Business growth range is quite big, the profit is very excellent, guaranteed renewal rate continued to increase, while sales of business efficiency is greatly improved."

In 2003, Buffett was pleased to see GEICO operations continue to increase. In 2005, Buffett further improve advertising costs to more than $500000000. In 2007, Buffett took the advertising expenses increased more than 50%. In 2008, Buffett Hin to see the company increased market share.

In 2010, Buffett's letter to shareholders in 2010 pointed out, GEICO company has become American thirdThe carThe insurance business, the market share is 8.8%. In 1995, company premium income of $2800000000. By 2010, the premium income of $14300000000, and continues to rise.

The 15 annual premium income grows 5 times, an important driving force is Buffett continuously improve the sales cost especially advertisement expense.

But increase the sales expense is not difficult, difficult is like Buffett said, take out every piece of money to create more than a dollar value.

Buffett financial analysis code12Company R & D cost of the best zero

   The new accounting system introduced the fair value concept. Fair value (Fair Value) also known as fair market value, fair price, is to determine the familiar with the market situation of the seller and the buyer in the condition even bargain price, or unrelated parties in even bargain under the condition of an asset can clinch a deal the price be sold or a debt can be serviced. Buy business to business combinations records need the use of fair value information.

Listing Corporation profit table a corresponding increase in profits and losses from changes in fair value, fair value changes caused by the loss or profit, accounting scope included in the initial recognition of measured in fair value and the changes included in the current profits and losses of the financial assets or financial liabilities and for subsequent measurement to fair mode of investment real estate.

Changes in fair value are recognised unrealized gains, is not a real return on investment, to the disposal of assets can be realized, the equivalent of floating book profit.

A review of Buffett over the past 40 years letter to shareholders, I summed up Buffett's point of view: the Holding Company stock did not realized investment gains or losses (i.e., changes in fair value gains and losses) annual change is not important. In comparison, the Holding Company performance annual change is very important, because Buffett is a long-term investment, as long as the company for several years to achieve good investment performance, the company's share price will accordingly increase. "In 1973 we were insurance business in the stock investment. As the financial statements show that, by the end of 1973 there are unrealized investment losses considerable book stock investment we, more than 12000000 yuan. Nevertheless, we believe that we measured at historical cost of stock portfolio if within the business value with good value. Although at the end of 1973 there is substantial unrealized investment losses, we expect the next term we will from the entire portfolio achieved satisfactory returns."

"In 1975 to achieve a $2888000 pre tax net investment losses, but now we are expected in 1976 will be a year of investment income. In 1976 March 31 day, not belonging to the equity investment net income totaled about $15000000. Few of US equity investment is concentrated in the following three standards of several companies: has the economic features of good management ability, high strength and honesty, to buy shares and according to the company by value contrast completely privately held very investment attraction. When we seek to meet three conditions above the stock, we would want to hold. In fact, our biggest Chong Canggu is 10600000 yuan to buy the Washington Post B, and we want to keep Washington Post stock. Because we use the above investment strategy, so the fluctuation of the stock market can not only provide us with a good opportunity to buy, for us almost no what meaning, and the company's performance has very great significance. We are very happy, we are now investing much in the operating results are really made progress."

"Last year we said, we expect 1976 to be a year of investment income, indeed, achieved in 1976 pre tax investment income of $9962000, mainly from the stock investment. The current situation that 1977 will also be a net investment income of the year. A few years ago the book have unrealized investment losses is considerable, and now we have no book realized investment gains considerable. Here we are again, this market annual fluctuations in fact is not important, we hold the stock has not realized investment gains in the end of 1976 a total of $45700000, but when I'm writing this letter to shareholders in March 21st, less than 3 months on the reduction of 5000000 dollars. However, we think we owned listing Corporation annual business growth is very important. Here we are very happy in our portfolio holdings most companies have achieved good performance in 1976. If we owned listing Corporation for several years and achieved excellent performance, no matter how great the annual fluctuation of stock price, we will get a good return on investment from these holdings."

Please note, Buffett think, for the preparation of held to maturity of the bond investment, the annual fair value gains also does not have what meaning.

"In recent years the annual report, we have said we bonds account for the presence of unrealized investment losses, but we also explained, we think, although bond market volatility resulting unrealized investment losses, but taking into account our ample liquidity and the overall financial strength, we will be held to maturity and will not sell in advance in other ways, these bonds carrying loss of little significance. In 1976 the bond market has rebounded considerably, so that our banks and insurance companies hold bonds appeared not to achieve a certain degree of net investment income. This is not much meaning, because most of US bonds are held to maturity. Cause bond prices are the new issues of bonds investment rate of return lower."

Great changes in 2007 and 2008 compared to the fair Chinese listing Corporation annual report of changes in the value of net income, you will find, net income is really just floating book profit from changes in fair value, annual changes are huge stock market fluctuations.

Have is money, the mouth to eat is meat. Despite the changes in fair value gains short is not important, but in the long term, it has realized capital gains important.

In 2011 05 months 19 daysAuthor:Liu Jianwei

Operating income and operating expenditure refers to the balance of payments of enterprises have no direct relationship with the daily business activities. But operating income and operating income can increase profit, operating expenses and operating cost can reduce profits, sometimes huge operating income as a windfall, and huge expenses as Henghuo, creates a total profit and net profit to the enterprise the influence, but Buffett analysis, profitability it will first eliminating the influence of operating income.

Don't expect to be careful whose fortunes

Operating income includes gains from disposal of non current assets, non monetary assets exchange gains, gain arising from debt restructuring, government subsidies, investment gains, donated profits etc.. These operating income and not by the business cost arising from the enterprise, do not need to pay the price. Operating income is actually a net income, may not need not ratio and related expenses. Therefore, in accounting, should be strictly distinguished operating income and operating income.

A small amount of operating income does not have what meaning, but the impact on profit big huge operating income from the majority of the reorganization of assets, major shareholders donation, government subsidies, so called windfall, not sustainable.

Operating expenses include loss on disposal of non current assets, non monetary assets loss, switching loss from debt restructuring, public welfare donation very loss, loss, loss.

If the profit big huge operating income effect is a windfall of words, so the huge expenses most is a disaster, such as the loss from debt restructuring or very loss. Operating income and operating expenses shall be accounted for separately, not to business expenditure directly decrease the operating income, or by the operating income and reducing operating expenses.

Undeniably, a few lucky people, occasionally a windfall, not worry about the life and.

But most people can't expect to. A pie in the sky, walk to pick up a wallet, occasionally once is not impossible, but every day so good luck, it is absolutely impossible, the main income is to depend on their own honest work hard. The company also is such, most of the profits are from the daily business activities.

A few particularly unfortunate people, out of a big disaster, a lifetime in the poor.

We do not expect a windfall, but must be careful whose, because disaster will affect our daily activities. Compared to operating income, Buffett paid more attention to operating expenses, because business expenditure tends to affect the normal business activities.

Buffett in the analysis of the profit statement, particularly shown abnormal asset disposal income (unusual sales of assets), the income statement is mainly shown as the gain or loss on disposal of non current assets, gains from disposal of business income account, disposal losses are included in operating expenses, and operating expenses are listed separately in the profit statement in the.

Gains from disposal of non current assets or loss of fixed assets and intangible assets, including the sale of gains or losses. The gain or loss on disposal of fixed assets, an enterprise of fixed assets obtained price or fixed assets scrapped material value and sales income, after deducting the book value of fixed assets, cost of cleaning, handling tax net income or net loss; intangible asset sale gain or loss, the enterprise sells intangible assets obtained price deducted from the sale of the intangible assets book value, tax net income or net loss.

Operating profit is able to reflect the performance of the company

Buffett analysis method of business income is very simple, is to remove the effect of business income and expenditure analysis enterprise normal profitability.

Operating income minus expenses is the net operating income. If the net operating income accounted for the proportion of profits is quite large, such as 30% or even higher, similar to a person's income for the year quite a chunk from winning the lottery or family donated, such short-term profits soared by chance and not sustainable, so, in our analysis, to eliminate the chance non recurring profit and loss effects, focuses on the analysis of the daily business activities from operating profit. Buffett think, business profit is able to reflect the performance of the company. The asset restructuring, debt restructuring or government subsidies and short-term gains boom is certainly not sustainable over the long term.

In 1993 Buffett wrote in a letter to shareholders: "from the US after the acquisition, Scott Fetzer's profitability has been sustained and stable growth, but its book value is not synchronous growth. So we bought the company when it returns shareholders have very good rate, now become particularly outstanding. If Scott Fetzer is a separate companies magazine, compared to its performance and the wealth of the world top 500 enterprises, we can see how excellent. According to the most we can get new is also in 1993 the Fortune 500 list of enterprises, if the Scott Fetzer is one of them, the rate of return on equity level can be discharged into the fourth. The story is far from over. Rate of return on equity ranked in the top three were Insilco, LTV and Gaylord, the three companies are all in 1993 before out of danger from the brink of bankruptcy, except in the bankruptcy proceedings due to debt relief obtained profit in 1993, no company has really meaningful profit. If after these belong to the operating revenue windfall, then Scott Fetzer's rate of return on equity will be in the Fortune 500 enterprises in the first place, far ahead of second place enterprise. Ranked first in fact Scott Fetzer the rate of return on equity is two times ranked tenth enterprises."

Buffett financial analysis code 21: profit before tax can better reflect the real corporate profitability

The profit of the enterprise must pay tax. The payment of enterprise income tax before the profit after tax profit before tax, for after tax profit, we usually called net profit.

Most investors are very concerned about the profit after tax, for example, most of the attention to earnings per share, refers to the after tax profits per share, but also for each stock price divided by the earnings per share earnings valuation indexes obtained rate we often use.

But in the past 40 years of Buffett's letter to shareholders, we found, Buffett special attention than the after tax profit, but the profit before tax, he calculated the stock price earnings ratio is calculated according to the pre tax profit. Reason why Buffett was so preference of pre tax profits is simple, effect of pre tax profits from different actual tax rate, which can reflect the business performance of the company.

　　More attention to company profit before tax

The number of Buffett's use of pre tax profit in the letter to shareholders is far greater than the after tax profits, especially to measure corporate profitability. We use the latest Buffett 2010 letter to shareholders as an example:

"I can estimate Berkshire now owned assets in the normal profitability, about net capital gains or losses, the annual pre tax profit of $17000000000, or $12000000000 a year after tax profit."

"TTI is an electronic component distributor. Sales revenue in 2010 compared to 2008 hit a record increase of 21%, pre tax profits increased by 58% than the original record."

"CTB is an agricultural equipment company. Earnings in 2010 a record....... In 2010, CTB pre tax profits of $106000000. Increase in pre tax profits should be mainly attributed to the improvement of production efficiency."

"Furniture building materials business continued to face difficulties, Johns Manville, MiTek, Shaw and Acme Brick continue to maintain itsCompetitive advantageStatus, however, its profit is greatly reduced compared with a few years ago. In 2010 the company a pretax profit of $362000000, down from $1300000000 in 2006, the number of employees has cut about 9400."

"In 2010 the two leasing companies have improved, although the point before the year is very low. XTRA equipment utilization rate increased from 63% in 2009 to 75% in 2010, so pre tax profits increased from $17000000 to $35000000; with the passage of time, CORT furniture business in the economic recovery, at the same time, a sharp tightening of operating costs, the two because of the comprehensive effects of the substantial increase in profitability, a pre tax loss of $3000000 in 2010 2009, pretax profit of $18000000."

　　Calculate stock price earnings ratio in pre tax profit

Buffett's 1990 letter to shareholders said: "in 1990 we buy Wells Fargo Bank due to the stock market turmoil. This confusion is behoove: each month will have a past everyone has been optimistic about the bank because of stupid loan decision-making by public exposure. Due to a huge loss after another was exposed, often on managers just take an oath devoutly to Surety Company after operation in all normal, so investors will get a conclusion: any bank disclosed figures can not be trusted. Investors sold shares in Bank of wave, we can simply buy $290000000 - 10% of Wells Fargo shares, we buy shares lower after tax profit 5 times, 3 times lower than the pre tax profit."

　　A measure of profitability with pre tax profit

Buffett's 2007 letter to shareholders said: "the 1972 US $25000000 acquisition of the candy company, the sales revenue of $30000000, less than 500 million pre tax profits. Running the business capital spending $8000000 a year, and in a few months to take moderate seasonal debt, therefore, the company made a pre tax profit of 60% in accordance with the calculation of the rate of return on investment capital. Two factors make the required the company operating capital investment is reduced to minimization. First, product sales by cash settlement, so there are no what accounts receivable; secondly, the production cycle and distribution cycle is very short, which makes the company inventory can be reduced to the minimum level."

In 1987 Buffett pointed out in the discussion of the new tax law, tax changes will have a great impact on the profit after tax:

"In our opinion, the 1986 act was over the past decade the impact is the biggest economic event in the insurance industry. The 1987 bill further the enterprise investment receive dividend ratio can be exempt from 80% to 70%, unless the taxpayer has been at least 20% of the equity investment company. Investors in the company as an intermediary rather than through the qualified investment holdings of stocks or bonds, and their direct holdings of these securities are often very unfavorable compared. Especially in the tax reform act of 1986 passed, unfavorable the degree to which this tax increase greatly, especially investors by insurance company intermediary that hold stocks or bonds. We have no way to offset this increase tax level. Simply put, this means, the same amount of pre tax profit after tax, now our shareholders can enjoy the after tax profit was much less than before."

This example clearly shows that, the same profit before tax, the tax law changes, will lead to a big change in after tax profit. Therefore changes in tax will lead to profit after tax misrepresent, real operating performance, while pre tax profits can more truly reflect the company

Buffett financial analysis password 22: don't look at tax profit

 

Buffett financial analysis code 24: comprehensive measure of the rate of return on net assets

Buffett measured the rate of return on net assets, pay special attention to three points: first, the correct molecular: deducting non recurring gains and losses to the after tax profits. Second, the right denominator: to exclude some high debt ratio, asset valuation and other special cases. Third, robust overall: to pursue the high rate of return on net assets at the entire firm financial soundness condition.

Buffett financial analysis code 24: comprehensive measure of the rate of return on net assets

In 2011 07 months 07 days Liu Jianwei Chinese Securities Daily

Buffett's choice of enterprises, is not concerned with enterprise size, but the profit ability, one of the most important indicator is the rate of return on net assets. He said: "I would rather have a capital of $10000000 and net assets yield rate of 15% of small companies, also do not want a capital of $100000000 and net assets yield only 5% big companies."

Buffett believes that the best indicator of the rate of return on net assets is a measure of enterprise long-term performance. He to the shareholders in the 1980 letter said: "our single year measure for operating performance is operating profit by shareholders' equity (securities investment according to the cost), but the long-term performance of our measure to include all realized or unrealized capital gains or losses."

But as the student ability evaluation score is most important, but must not only look at scores, but also with other aspects of the comprehensive evaluation, evaluation of the performance of the company uses the rate of return on net assets Buffett will consider many factors. Among them, three aspects of his most valued:

First, the correct molecular: deducting non recurring gains and losses to the after tax profits.

Non recurring profit and loss means no direct relationship with the normal business profits or losses, doesn't happen very often, is disposable, so I called the fortune or disaster. We measure the performance of the company, should excluding non recurring gains and losses from the after tax profits, so the rate of return on net assets can be a better measure of normal business profitability.

"From the US after the acquisition, the profitability of Scott Fetzer has been growing steadily, but its book value is not synchronous growth. So we bought the company was already very good return on net assets, now become particularly outstanding. If Scott Fetzer is a separate companies, "fortune" magazine can be ranked the world top 500 enterprises."

So, please pay attention toListing CorporationA regular report on indicators, namely the deducting non recurring gains and losses after the rate of return on net assets.

Second, the right denominator: to exclude some high debt ratio, asset valuation and other special cases.

Buffett in the 1977 letter to shareholders said: "except in special circumstances (such as debt to equity ratio is particularly high, or is an important asset in the balance sheet value is not real company), we believe that the 'rate of return on net assets' is the measure of a more appropriate management to obtain economic performance."

If the debt rate is particularly high, it means that companies are highly dependent on borrowed debt capital, rather than relying on the shareholders of the investment capital. Because of the high liabilities, only require considerably less equity capital can achieve the same profit, molecular unchanged, the denominator is small, the rate of return on net assets more. Despite the high debt ratio can obtain a higher rate of return on net assets, but high returns that have high risk, if the performance of the company suddenly dropped, banks for payment of a debt, the company could fall into bankruptcy. Buffett hope that the company in low debt and debt free cases achieved a higher rate of return on net assets, financial risk is small and the profit rate is high, is his most loved satisfy both sides of the company.

Besides the important assets in the balance sheet value is not real. Very high practical value of assets, but only at very low prices, such as the interests of shareholders, the book value of the denominator of the far less than the actual value, accordingly, the company's net assets yield will be artificially high.

Third, robust overall: to pursue the high rate of return on net assets at the entire firm financial soundness condition.

Everyone will try every way to make more money, but money is not the only purpose, not for the money what all regardless, we must also maintain the balance of life and make money.

So, the company also is such.

Buffett in the 1973 letter to shareholders said: "the management objective is to achieve the average net assets yield higher than the overall level of America rate of enterprises future long term, and use the correct and reasonable accounting policy and debt policy. Over the past few years we have achieved this goal, we try to take these measures to make the future we will be able to continue to maintain good performance of such."

Buffett in the 1973 letter to shareholders said: "although the 1975 performance is disappointing, but we will continue to make efforts to promote the diversification of sources of earnings growth and profitability. Our goal is to become a fiscal conservative and has very high liquidity of enterprises, with more than banking and insurance financial strength in the balance sheet and had an extra margin of safety, the future long-term rate of return on net assets of more than America enterprise overall average."

Buffett in the 1980 letter to shareholders put forward their pursuit of three conditions of high rate of return on net assets: "in any case, we are planning to run in the following condition: to maintain adequate liquidity, the total scale of debt is and the structure is reasonable, have very strong capital strength. Although this conservative approach that we have reduced the rate of return on investment in a certain extent, but this is the only one that can make us feel at ease way."

Buffett in the 2008 letter to shareholders said: "once I guarantee, including guarantee to shareholders, rating agencies and myself, always let Berkshire operations with cash basis is very abundant. We never want to rely on to pray for the kindness of strangers to repay the debt maturity. If forced to choose, I would rather choose to be firm and secure sleep last night, is not willing to go in order to earn more profits."

Driving, safety first, speed second.

Investment, safety first, money second.

 

Buffett financial analysis code 25:EBITDA is a asshole index

(2011-07-21 11:15:11)

Buffett saw EBITDA get angry, he thinks that EBITDA is a asshole index, because the index of maximum error is ignored although don't pay cash but it is definitely true cost of depreciation expense. Buffett in the 2000 letter to shareholders said: "when Charlie and I read the financial report of the company, we don't have any interest in those executives, factory or product photos. But the company's annual report mentioning EBITDA (earnings before interest, taxes, depreciation and amortization expense income before), will let us trembling with anger: did the company management believes that a Buddism godness Guanyin Bodhisattva will be paid for their capital expenditure?"

Buffett financial analysis code 25:EBITDA is a asshole index

Authors: Liu Jianwei

Source: China Securities News in network 2011-07-21

EBITDA is now a very popular measure of cash flow index, but to cherish a deep-seated hatred for Buffett EBITDA.

The origin of EBITDA

To understand EBITDA, we need to talk about EBIT.

EBIT (Earnings Before Interest and Taxes, EBIT) is a very common performance measures. The biggest difference between EBIT and the after tax profit is EBIT, the deduction of interest expenses and the income tax expenses, like to use EBIT for the same industry in the different enterprise profit, can not consider how different the corporate income tax rate or capital structure, so as to make the comparison more objective.

In 2002 Buffett bought MidAmerican energy. From 2003 Buffett each year to discuss Sino US energy business in a letter to shareholders, in the financial indicators are specifically listed in EBIT. MidAmerican Energy's three major electric power companies, often with tax incentives utilities for such high debt ratio and, more suitable to measure the profitability of the business with EBIT.

In twentieth Century 80, accompanied by a leveraged buyout tide, many companies and investment banks like EBIT could not meet their needs, and then step forward, after deducting depreciation (depreciation ) that EBDIT, or go one step further to deduct amortization expense (Amortization) obtained by EBITDA, EBDIT or EBITDA to measure the company's ability to service or profitability ability. With the passage of time, EBITDA has been widely accepted in industry, because it is very suitable for the evaluation of some of the early capital expenditure is huge, but also need to invest the amortization of the industry for a long time, such as the electric power industry, the hotel industry, the property rental industry etc.. Nowadays, more and more listing Corporation, securities analysts and market review we use EBITDA to analyze the performance of the company.

EBITDA has often been compared with the cash flow, it and EBIT compared to join the two main cost does not have any effect on the cash items -- depreciation and amortization amortization, as contained in the previous accounting period of intangible assets to pay a cost, and not the investors pay more attention to the current cash payments and depreciation itself; the capital spending the past indirect measurement, depreciation calculation will be removed from the profits, investors can be more intuitive to see the estimated future capital expenditure.

The deficiency of EBITDA

As Lenin said, the truth to go a step further, is a fallacy.

Buffett saw EBITDA get angry, he thinks that EBITDA is a asshole index, because the index of maximum error is ignored although don't pay cash but it is definitely true cost of depreciation expense.

Buffett in the 2000 letter to shareholders said: "when Charlie and I read the financial report of the company, we don't have any interest in those executives, factory or product photos. But the company's annual report mentioning EBITDA (earnings before interest, taxes, depreciation and amortization expense income before), will let us trembling with anger: did the company management believes that a Buddism godness Guanyin Bodhisattva will be paid for their capital expenditure?"

Business spending can be classified as revenue expenditure (revenue expenditure) and capital expenditure (capital expenditures). Expenditure only and in the accounting period, shall be regarded as revenue expenditure; expenditure in several accounting period, should be regarded as capital expenditure. Capital expenditure by the benefited annual revenue burden sharing, revenue expenditure by the operating income compensation.

In 2002, Buffett again criticized EBITDA index: "trumpeted the EBITDA (net profit before depreciation and amortization tax on interest income) is a kind of harm is particularly great moves. The use of EBITDA means that just because of depreciation expense is a "non cash" fees will be not as a real depreciation expenses. This is complete nonsense. Depreciation is a particularly attract sb.'s attention expense, because before depreciation and related cash expenditure in fixed assets has not for the enterprise benefit is paid in advance. Imagine, if you will, the beginning of this year's upfront payment of all pay all employees of the company over the next ten years to provide services (such as for the purchase of a service life of ten years of fixed assets to pay cash, then, pay all) in the next 9 years, will become a no cash expenses, as this year have to pay cash to buy assets depreciation. In this case who dare to say that from second years to tenth years 9 years recorded on account of depreciation expense is only a nominal cost account and has nothing to do with the real cost?"

Buffett is very hate EBITDA, the most important reason is that the index ignoring depreciation expense. Buffett in the process of enterprise management, has deep feeling for the importance of depreciation expense.

Buffett's acquisition of FSI company's main business is to provide flight simulation training for pilots, need to purchase various types of flight simulator, the model update soon, the simulator must also update quickly, so the annual depreciation expense.

"In 2000 we FSI spent $272000000 buying a flight simulator, the 2001 purchase of flight simulator is roughly the same amount. If anyone should think annual depreciation costs do not reflect the real situation, so he should be a Flight Simulation Company practice for a period of time, so he would know the depreciation expense each point are the same and staff wage costs or cost of raw material is true. Every year we should invest considerable depreciation expense in the purchase of capital equipment spending money, to maintain our business scale invariant, and if we want to achieve business growth, we must spend more money."

"After the 2001 9 · 11 events, commercial aircraft training business decline, but so far still very depressed, but the main business aviation and general aviation pilots of our training is maintained at a normal level, and will continue to grow. In 2002, we expect to invest $162000000 to buy 27 aircraft flight simulator, the investment amount is far more than US $95000000 a year depreciation expenses. We welcome those who believe EBITDA (net profit tax on interest income before depreciation and amortization) are equal to the true earnings to pay for our."

 

Buffett financial analysis code 26: pay attention to the performance of the company to see at least 5 years

(2011-07-28 12:40:24)

   Buffett believes that the analysis the performance of the company to see at least 5 years: we never too much data for a single year. After all, why the business activities of enterprises to obtain the length of time the return to and the earth around the sun takes time accurately consistent? On the contrary, we suggest that performance with a minimum of not less than 5 years as a general index to measure enterprise performance levels. If the enterprises in the past 5 years the average performance levels were significantly lower than the average level USA enterprise, red light will begin to shine
   Pay attention to the performance of the company to see at least 5 years　　

Many investors are very concerned about the past or the future a year a year performance, the media has also launched a listing Corporation annual performance ranking. But Buffett warned us, analysis of enterprise performance, not only at a single year, long-term performance to see at least 5 years.

Don't focus too much on the single year performance

Buffett in the 1977 letter to shareholders said: "in 1977, in addition to dividend and interest income, we have realized a $6900000 pre tax investment income, of which about 1/4 are from the bond investment, the rest from stock investment. By the end of 1977 does not implement the investment income of about $74000000. But the data for a single year, like any other date unrealized investment income data (at the end of 1974, our unrealized investment losses of $17000000), don't be too serious. Most of us will grow period Chong Canggu held for many years, our investment decision scorecard is according to our portfolio of Companies in the long years of operating performance during the performance score, rather than on them at any date of stock prices. The overall acquisition of a company only pay attention to short-term earnings prospects must be stupid. Similarly, we think, a small part of the shares to buy a company, such as a part to buy tradable shares, excessive attention to predict future short-term profit or recent earnings growth trend, also stupid."

To digress for a moment, for example to illustrate this point, may let you feel very interesting. Berkshire fine spinning company and Hathaway textile company merged with Boxill Hathaway in 1955. If the time back to 1948, according to the prediction of consolidated financial statements, the two companies merged after tax profit of $18000000, which owns 12 factories throughout New England, the total number of employees up to 1 million people. In that era of business circles, the two textile enterprises is absolutely powerful enterprises. As in 1948, IBM's profits of just $28000000 (to 1977 profit of $2700000000), Safeway Stores profit of only $10000000, 3M is only $13000000, but only $9000000 times magazine. However, in the two companies merged to become the Boxill Hathaway company after ten years, the company accumulated sales revenue of $595000000, but the accumulated losses of $10000000. In 1964, the business of large-scale reduction, only two factories, the book net assets shrink from the merger of 5300 million by the end of 1964 to $22000000. This example is enough to tell us, a company data for a single year is far not enough to fully reflect the business situation of the entire firm.

Analysis of enterprise performance to see at least 5 years

Then, the length of time the company's performance in our analysis should be how long? Buffett recommends a minimum of 5 years.

Buffett in the 1983 letter to shareholders said: "in 1983 we Berkshire's book net assets increased from last year's $737 to $975, the growth rate was 32%. We are never too much data for a single year. After all, why the business activities of enterprises to obtain the length of time the return to and the earth around the sun takes time accurately consistent? On the contrary, we suggest that performance with a minimum of not less than 5 years as a general index to measure enterprise performance levels. If the enterprises in the past 5 years the average performance levels were significantly lower than the average level USA enterprise, red light will begin to shine."

Buffett is so important to the long-term performance and the single annual performance is not a short-term, an important reason is that Berkshire often underwriting catastrophe insurance, annual performance easily fluctuations.

Explains Buffett in a 1996 letter to shareholders: "in our catastrophe insurance business, our customers are those facing the volatility of earnings is huge and they want to reduce the insurance company, and the products we sell are voluntarily put their earnings volatility risk transfer to our company on the book insurance service, hope we charge for this service and reasonable prices of course. Berkshire reported profits under the drastic changes do not let us worry and anxiety: I and Mr. Munger would rather have the fluctuations of 15% annual rate of return, not smooth 12% annual rate of return. I think if the volatility of Berkshire shareholders and partners can also accept the company's profit, so we will be more relaxed to do in the operation and management, this is the reason why we must regularly repeated the warning annual performance may decline."

The performance of the company and the stock price performance should also look 5 years

Review of Berkshire Buffett over the past 45 years management performance and its relative to the performance of the stock market in 2010, using 5 years of data analysis.

"need to pay attention to is, the annual performance data, which should not be ignored, should not be regarded as the most important. Revolution of the earth around the sun takes a year around, but let the idea or operational decisions have profit need time and not of the earth around the sun a circle complete synchronization. For example, in the GEICO insurance company, in 2010 we enthusiastically support $900000000 advertising, to attract customers to insure, but these policies will not immediately create a profit that year. If we can effectively put advertising spending doubled, we will be very happy to do so, despite our annual performance short term would be damaged. We in the railway andPublic utilityMany large investments are made to look very long after many years return decision."

"In order to give shareholders a long-term vision to look at our performance, we put the annual performance data of annual report on page 2 into a 5 year performance data. These numbers tell us an interesting story. Relatively speaking, performance of our best years in the last century 80's. But it is the golden age of the stock market over the next 17 years, during which Berkshire made absolutely brilliant performance, despite the relative performance and index compared lead down the."

Buffett financial analysis code 27: Buffett is more concerned with the balance sheet than most people

(2011-08-05 10:14:54)

Buffett answered: "I am concerned about the company's balance sheet is more than most people, of course, all the information in the company annual report I have not missed. By reading the financial report, I want to know the company in three years, maybe five years, after ten years of profitability, then and now the market price comparison. Economic characteristics, I must be very understanding of the business, if not a conclusion, I won't buy this company."

Buffett financial analysis code 28: Buffett is more concerned with the balance sheet than most people
In 2011 08 months 04 days 08:33 source: Chinese securities to the author: Liu Jianwei
Http://stock.hexun.com/2011-08-04/132078995.html

Liu Jianwei


In 2011 May, during the Berkshire shareholders' meeting, a reporter interviewed Buffett when asked: "if investors decide to invest in stocks, they should be how to get more information about the company?"

Buffett answered: "investors want to know if they know enough, whether or not the high returns. Investors should be like me to read the company's financial statements, including annual and quarterly reports. But if you carefully read these public documents, or aren't sure how the company business, it is best not to invest or buy an index fund."

Reporter asked: "what you care about most when reading financial statements? The first reading what?"

Buffett answered: "I am concerned about the company's balance sheet is more than most people, of course, all the information in the company annual report I have not missed. By reading the financial report, I want to know the company in three years, maybe five years, after ten years of profitability, then and now the market price comparison. Economic characteristics, I must be very understanding of the business, if not a conclusion, I won't buy this company."

Please note, Buffett said through reading financial statements, hope to know as much as possible about the company in three years, five years, ten years after the profit ability, so I think, Buffett first reading is the profit table, so as to analyze the profitability of the company.

But please note, Buffett said "I focus on the company's balance sheet is more than most people."

In fact, corporate annual report or quarterly, complete set of financial statements include the income statement, balance sheet, cash flow statement, most people will first look at the income statement, and most of the time used in the analysis of the profit statement, some people even only profit table. The seasoned professional investors were able to analyze the balance sheet with a lot of time.

Why?

First, for the company to survive, the balance sheet is more important than profit table.

The income statement is the reflection of the external performance, the balance sheet reflects the internal support. The car running speed depends largely on the power of the engine and chassis braces, the strength and the scale of investment, how much profit depends largely on the asset specificity, and earnings will eventually be transformed into asset accumulation. If the profit is water, then the balance sheet is the mountain; if profit is meat, so the balance sheet is bone; if profit is the software, so the balance sheet is a hardware; if the statement is a flower, so the balance sheet is the root and trunk. The biggest investment risk is not the company's development is too slow, but the company shareholder all perish. So, like the long-term investment Buffett Be anyone pay more attention to the balance sheet.

Second, for long-term shareholders, balance sheet is more important.

The performance of the management mainly rely on profits, so the management should pay special attention to the profit table. But the shareholder wealth by balance sheet to reflect, so shareholders pay special attention to the balance sheet.

Perhaps some people will say that, for listing Corporation, mainly related to stock price and profit, earnings per share is higher, the higher price of natural.

Wrong.

This is the small shareholders thinking, is a small retail investors thinking.

If you are a big shareholders, and is the sole shareholder, and you will be long-term holders of shares of the company, stock prices have any meaning for you?

The stock price just floating clouds, really belongs to the shareholders of the asset is the kingly way.

Buffett said: "after we bought the stock, even when the stock market was closed for one or two years, we would not therefore Hung Up. For our 100% See holding the "s and H. H. Tom Brown Corp, we don't need daily stock price that we share the risk. Then we hold 7% stake in Coca Cola Co, why need to stock market quotations to prove that we share risk?"

Buffett does not focus on short term stock, is not concerned about the company's short-term performance, he focused on the long-term performance of the company, and the long-term performance in many aspects and the company's assets and liabilities, the balance sheet reflects the support long-term development of the company's financial strength.

Third, only the income statement to reflect the development speed, balance sheet can reflect the strength of size.

The income statement is the reflection of the output, the balance sheet reflects the investment. First pay will be put in first, will have the final decision output, input output. The income statement is the reflection of the temporary results, the balance sheet is a world of accumulation, how much a year do not a lifetime money important. The income statement reflects the enterprise a stage of development is good or bad, the balance sheet reflects the enterprise is of vital importance foundation strength. The balance sheet reflects the financial strength of the enterprise size, the ultimate strength of the size of the company decided to competitive advantage.

Describe the development target of Berkshire Buffett in a 1975 letter to shareholders, special emphasis has strong financial strength in the balance: "our goal is to become a fiscal conservative and has very high liquidity of the enterprise, fiduciary duty liability on the balance sheet has more than with banking and insurance industry keeps consistent level of financial strength and had an extra margin of safety, the future long-term rate of return on net assets of more than America enterprise overall average level."

In 1984 Buffett proudly proclaimed that Berkshire has the strongest peers in the financial strength: "over the past few years I tell you again and again, one day, we have the most first-class financial strength will help us get the insurance business competition from rivals real. This day will come, we Berkshire's insurance accident insurance performance is undoubtedly the most powerful, our capital strength is far stronger than those business larger, more well-known insurance company."

In 1985 Buffett said happily: "in the past few years the annual reports, I have told you, Berkshire's strong capital strength, is absolutely the best in the business, someday will let us have the one and only competitive position in the insurance industry. With the tightening of the market, that day has come, our premiums after long-term remain stagnant growth after 1985, more than three times, Berkshire's financial strength is that we get a good business the most important assets."

The financial crisis of 2008, AIG, the insurance giant failed, but Buffett's Berkshire not only without any problems, but also the acquisition of a large number of enterprises and holding a large amount of money buying stocks, one of the key reason is that Buffett attached great importance to the balance sheet management, keep the company has strong financial strength.

Buffett financial analysis code 28: balance sheet three elements

 

Buffett said: "we will regularly report to our company's book value per share, the data is easy to compute, but of limited use. At the same time, we also regularly told shareholders, what really matters is the intrinsic value, although this data may not accurately calculated, but the estimated intrinsic value is very important."In 2011 08 months 18 days 00:46

   Unlike the profit statement reflects a year or a quarter of the profits, the balance sheet is a reflection of the last day of the financial status of a year or a quarter. Look from the structure, the balance sheet is divided into two columns and three plate. The left column is the right column is the assets, liabilities and owners' equity, assets, liabilities and equity are the three elements of the balance sheet, also analysis the key balance sheet. Buffett tells us, corporate balance sheets are in the historical cost, so the book value of the liability is the most reliable, the book value of assets is not reliable, the book value of the equity is not reliable.

Balance sheet of three elements

Assets by enterprises formed by past transactions or events, owned or controlled by enterprises, is expected to bring economic benefits to the enterprise resources; sheet is formed by enterprises of past transactions or events, the obligation is expected to result in an outflow of economic benefits from the enterprise; owners' equity refers to the enterprise equity, residual rights by the owner to enjoy. The rights and interests of the owners also known as shareholders. Because our analysis is mainly the shares of the company, so we called the shareholder rights and interests. Equity is the residual claim right of shareholders as owners of enterprise assets, it is the enterprise assets after deducting the interests of creditors by the shareholders enjoy parts, maintenance and appreciation can reflect the capital contribution by shareholders, but also embodies the protection of creditor rights concept. Like have the Spring Festival, you and wife count all the things at home in the home, this is your assets, and inventory under others how much money, this is the debt owed, deduction of liabilities, belong to you all the rest, this is the interests of shareholders. The balance sheet of the three elements that are reflected in the companyLegal personThe shareholders, creditors and the interests of three parties.

The intrinsic value of the company is more important

Enterprises in the measurement of assets and liabilities for accounting elements, generally adopt historical cost, the actual payment is made or the manufacture of certain property supplies of cash or other equivalent. In the historical cost measurement, assets in accordance with the cash or cash purchase to pay the amount paid, or purchase assets in accordance with the fair value of the consideration. Liabilities for the present obligation according to the actual amount of proceeds or assets, or assume the obligations of the contract amount, or in accordance with daily activities in order to repay their debts expected measurement need to pay the amount of cash or cash equivalents.

Buffett tells us, corporate balance sheets are in the historical cost, so the book value of the liability is the most reliable, the book value of assets is not reliable, the book value of the equity is not reliable.

Buffett over the past 20 years Berkshire's book value per share in 1994 (i.e. stockholders' equity per share and net assets per share) and intrinsic value per share relatively great change said: "we will regularly report to our company's book value per share, the data is easy to compute, but of limited use. At the same time, we also regularly told shareholders, what really matters is the intrinsic value, although this data may not accurately calculated, but the estimated intrinsic value is very important."

"For example, in 1964, we can certainly report Berkshire's book value per share is 19.46The dollar. But this data is much higher than the per share intrinsic value, because of the low all resources are the profit level of textile business fully occupied. Our textile assets both to is lower than its book value operation or closure of the liquidation value. In 1964, it is a year we took over Berkshire, any ask Berkshire's balance sheet the reliability of the people, should be a very suspicious, particularly unreliable notorious Hollywood tycoon has given the answer: 'don't worry, all liabilities are absolutely reliable!'."

"Now the Berkshire has exactly the opposite: the intrinsic value of most enterprises of our control is far higher than its book value. But we still for all shareholders with book value data, because although the book value is seriously underestimated the intrinsic value, but still can be used as a track changes in Berkshire's intrinsic value index. In fact in 1994, change, these two indexes is consistent pace: book value increased by 13.9%, and the intrinsic value of the growth is also very close."

Buffett financial analysis code 29: money more and more

(2011-08-25 07:44:26)

Buffett concern has been to create excess cash, sometimes suddenly encountered significant but temporary business difficulties, short-sighted, investors will be crazy to sell stock, resulting in the company's share price plummeted. Buffett is a careful analysis of the company, if the product competitive advantage has not fundamentally changed, and there are plenty of cash or cash equivalents account, to Surety Company have enough financial strength to solve financial difficulties at present, Buffett will take the opportunity to buy into a large number of low-cost.

Buffett financial analysis code 29: money more and more

In 2011 08 months 25 days 02:56  Source:Chinese Securities Daily  Author:Liu Jianwei

Http://funds.hexun.com/2011-08-25/132782093.html

   A feature rich people is money home, have lots of money.

For enterprises, a sign of good business is a cash account, there are many idle money.

In addition to the gold and silver, "Everything is nothing".

The monetary fund includes three kinds: cash, bank deposits, other monetary funds, another three month maturity treasury bonds and other high liquidity assets are cash equivalents.

　　BuffettLook at the balance sheet, see first is the company carrying on the number of cash and cash equivalents. Buffett paid special attention to three points: the company money a lot? Over the years has been a lot of money? The money is the company created?

　If many idle funds

We always keep some cash, for normal consumption needs. Under normal circumstances, the company also will retain some of the cash, in order to maintain the business turnover need.

If a company carrying on with little cash, may encounter difficulty on management turnover. And if a company has a lot of cash account, far beyond the working capital needs, and over the years has been so, then can be roughly determined, this company is particularly rich.

Buffett office wall hung a sentence: the rich fool welcome everywhere.

Buffett himself is so in terms of investment, very "Xianpinaifu", he just like those fat.

　Idle money is created for the enterprise

There are three main sources of money.

First, the company products or services with a strongCompetitive advantage, and can continue to earn large amounts of cash, year after year, more and more. This is one of the best, most want to see is Buffett.

Second, a large number of companies issuing shares or bonds, or a large amount of loans to banks, a lot more than one time account. These shareholders to raise or borrow money, has a price, sooner or later will have to be. It is the purpose of financing, financing the money over a period of going out, just book temporarily money many.

Third, company by selling some of its assets or business, such as the sale of an office building or a subsidiary, get a large amount of money, the formation of a large number of idle cash in the book will be out before. This is not always the case, and often is not a good thing. In general, cannot but not to, a company that does not sell the value of many assets, will not sell very profitable subsidiary. The company was forced to sell a large amount of assets, is often a very bad signal, although there is a lot of cash account temporarily, but not for a long time, this is Buffett's most reluctant to see.

To understand the source of the company carrying large amounts of cash, the method is very simple, as long as have a look the last 5 to 10 years of balance sheet.

To see if a substantial increase in liabilities. If it is, that the company a loan from the bank or issuing bonds.

Two see the interests of shareholders is a substantial increase in capital paid. If it is, that a large number of companies issuing stocks.

Three see the fixed assets of the company is to reduce the number of. If it is, that the company sell a large amount of assets or the holding subsidiary company.

Long term equity investments of four to see if the company is to reduce the number of. If it is, that the company sell a large number of holdings.

The above matters generally the amount is huge, is a major event, will be detailed in the annual report and accounts.

If not, the company's main business money is earned. If the company on the cash accounts over the past 5 years to 10 years increased year by year, suggests that this is a very good money making enterprise, the super money machine is Buffett sought.

Buffett in the 1980 letter to shareholders said: "our acquisition of enterprise, favors those who generate cash rather than cash depleting enterprises."

Buffett in Berkshire owners manual said: "to achieve our long-term business objectives through direct investment choice, with some able to generate cash and continued to be able to obtain a higher than average rate of return on investment of enterprises formed a diversified group. Our second choice is owned in part similar to the wholly owned companies, this is mainly by our insurance subsidiaries buying negotiable shares of common stock to achieve."

　A large amount of cash is not idle and waste

Maybe you would like to, on account of idle funds, if as cash, zero is the rate of return; if the deposit into short-term bank deposits, or the purchase of short-term debt, yields are very low. Why not do higher yielding investment? The reason is very simple, in order to make provision against a rainy day.

In this dangerous world, a company to keep more capital reserves are not excessive. When the outbreak of the crisis, the enterprise will truly appreciate: cash is king. If a company has a large number of cash and marketable securities, and almost no what debt, even if temporarily suffered a major crisis, this company also often can smoothly through the dark period. But if a company account, cash is not enough, also borrowed a lot of debt, so once the crisis hit, the company will be unable to cope with the business needs, banks and creditors would come Dun, such internal and external attacks, enterprises may fail.

Buffett always keep company account with $10000000000 of cash, although the income rate is very low, but pay the price is worth, the so-called food in hand, heart do not panic, money, it is not difficult to. But once the opportunity comes, you can immediately hand.

"My grandfather Ernest had never read what business college, in fact he did not finish high school, but he is very clear, as to ensure that the premise of survival, liquidity is very important. At Berkshire, we strictly follow him to keep enough cash to the principle, but the amount of cash reserves than his $1000 some, we promise to hold at least $10000000000 in cash, and is removed from the US under the government control of the utilities and the railway company's cash holdings outside. Because of this commitment, we used the hand to keep at least $20000000000 in cash, can not only make us against the huge insurance claims losses exceeding one's expectations, and allows us to quickly grasp the acquiring companies or securities investment opportunities, especially in the financial crisis....... We very much agree with investment writer Ray DeVoe Views: "more money loss in the pursuit of profit rather than the loss at gunpoint. ""

Buffett concern has been to create excess cash, sometimes suddenly encountered significant but temporary business difficulties, short-sighted, investors will be crazy to sell stock, resulting in the company's share price plummeted. Buffett is a careful analysis of the company, if the product competitive advantage has not fundamentally changed, and there are plenty of cash or cash equivalents account, to Surety Company have enough financial strength to solve financial difficulties at present, Buffett will take the opportunity to buy into a large number of low-cost.

 

Buffett: the stock market more or I buy more(2011-08-26 22:20:23)

Buffett: the stock market more or I buy more

Authors: Liu Jianwei

Source: Chinese Securities News 2011-08-27

Http://www.cs.com.cn/gppd/19/201108/t20110827_3031415.html

The stock market crash but Buffett wedding

America Eastern time on August 5th night, one of the three major international standard Pool Co Rating firm announced, will USA "AAA" long-term sovereign debt rating cut to "AA", ratings outlook for the "negative", this is the first downgrade USA 1994, were American stock market crash. In August 4th, the S & P 500 index fell 4.78% in August 8th, fell 6.66%, the Fed announced in August 9 Japan until at least 2013 will keep interest rates near zero levels, America rebound in the stock market in August 10th 4.74%, but fell 4.42%.

When all the people fear when the stock market crashed in August 9th, Buffett received the fortune magazine reporter Andy Serwer telephone interview, said he "felt very good." Buffett said: "the lower the price of the stock, I would to large purchases. At present we are buying opportunity." Buffett to buy both the circulation of stocks, including the overall acquisition of large companies.

Buffett a lot of buying and not based on the Fed's policy. The Fed kept interest rates low decision by the rebound in the stock market on Tuesday, Fortune magazine reporter asked Buffett about this? He said: "I rarely consider this kind of thing." The reporter asked him, in his grasp of the data, whether there are signs of worry him America into a new round of recession? Buffett said: "there is No. May also need a little time to show."

Obviously, Buffett is the collapse of the stock market and buy a lot of stock. According to reports, Berkshire are taking advantage of record low interest rates, through the issuance of bonds, raise dirt cheap capital. For Buffett, it is not fear, it is a good time to take action to buy large.

　　Buffett investment tips:

Greedy when others fear

Buffett reiterated on many occasions, his investment secret: greedy when others fear, fear in the greedy when others.

He is saying, such also doing.

Buffett wrote in a February 28, 2011 letter to shareholders: "at the beginning of 2008, we had $44300000000 in cash assets, after receiving $17000000000 in operating profit. However, by the end of 2009, our cash assets reduced to $30600000000 (including $8000000000 slated for Burlington railroad company)....... In the past two years, the financial market turmoil we have large-scale investment. Two years is the most desirable investment period of Real Investors in the past, the atmosphere of fear is an investor's best friend. Investors who make the optimistic evaluation only analysts in before buying, in order to meaningless guarantee pay too high a price."

In March 1, 2010 Buffett interview with CNBC said: "I always look for in a funk began. If I find some looks very attractive investment targets, I start greedily buying. But first I will pay attention to any possibility of the failure of investment. I mean, if you won't lose money, you will make money. This is what we always do a good reason. This is a point I learned from my mentor Graham at the age of 20."

2011 in the two fall in the middle of the August 9th, Buffett told Fortune magazine in a telephone interview Omaha said: "between fear and greed are not comparable. Fear is generated instantly, widespread, intense emotions. Avarice more slowly. Fear is the fatal."

Buffett a lot of buying record

The 2 quarter of 2011, Buffett to buy the stock of cash expenditure of $3619000000, a record in recent 3 years the largest single season record buying.

After the stock market crash of August, Buffett continued to buy a large number of.

USA local time on August 15th, Buffett appeared in America public television (PBS) "Charlie Ross interview" (Charlie Rose show) program.

Ross said: "you said often in the past, very difficult, to you is the best, because you can get more opportunities to buy better price in line with your good company requirements."

Buffett replied: "indeed. It's like the mall sale to buy things. Last Monday, we buy the stock market stock funds this year than any since the day to."

Buffett said that the August 8th black Monday, the first trading day is America relegated after the three major stock indexes all fell, the Wall Street, the Dow Jones index fell 5.55%, the S & P 500 index tumbled 6.66%, its biggest one-day fall since 2008 December.

What is Buffett buy a lot of stock? Unfortunately, Buffett never revealed his business what stock. Hope that we can find the answer to Buffett in the next quarter bulletin. (the author is Tianfu Health Fund chief investment division, this paper represent only individual opinions.)

Buffett financial analysis code 31: inventory turnover rate as high as possible

(2011-09-01 10:57:00)

From theBuffettOver the last 40 years of letters to shareholders, Buffett paid special attention to the following points: inventory valuation is reasonable? Provision for the loss on inventory enough? Enterprise inventory level is reasonable?

Tianfu health fund Liu Jianwei: inventory turnover rate as high as possible

In 2011 08 months 31 days 23:39  Source:Chinese Securities Daily  Author:Liu Jianwei

Inventory is held by an enterprise in the daily activities of the goods, including for the sale of finished goods or commodities, in the production process of the product, used in the production process or the provision of services in the process of material, material etc.. The most basic characteristics of stock from the fixed assets and other non current assets is the ultimate goal of enterprise, holding the inventory to sell.

Inventory is the most important current assets of enterprises, related to the enterprise production and sales of the normal. Entrepreneurs have attached great importance to inventory management, investor also attached great importance to analyze the inventory management of enterprises.

From theBuffettOver the last 40 years of letters to shareholders, Buffett paid special attention to the following points: inventory valuation is reasonable? Provision for the loss on inventory enough? Enterprise inventory level is reasonable?

Inventory valuation is reasonable

Enterprises to buy raw materials, and we buy food at home, not enough to buy a year, but the installment purchase.

The same food we buy, but because it is the time to buy, the price may vary. Similarly, the raw material quantity or price enterprises every time you buy is different. So, how to calculate these inventoriable costs?

The actual situation of enterprises should be based on all kinds of inventory of material transfer mode, enterprise management requirements, the nature of the inventory, a reasonable choice of inventory costing method. Enterprises in the cost of inventories is determined, can be the first in first out method, the weighted moving average method, at the end of a weighted average method and specific identification method of four kinds of methods. Enterprise shall first out of inventories is determined by the cost.

The FIFO method should be the first issued by the first inventory purchased (the sale or consumption) such an inventory turnover hypothesis, on the issue of inventory valuation. Using this method, the first purchase of inventory cost to purchase inventory costs before transferring in the post, to determine the inventory and the cost of the ending inventory. LIFO method on the contrary.

If prices rise, the advanced inventory and low prices, the first in first out method, calculated the current used in the production of inventory cost is low, so the profit will be more. If the first out the backward, the result is just the opposite. Now the domestic does not allow the first out the backward.

The properties and uses of similar inventories, shall be calculated using the same cost to determine the actual cost of inventories. If the enterprise changes the inventory costing method, investors must understand the change is reasonable, whether the maoni.

Since the oil embargo, chemical fiber raw material prices skyrocketing, Berkshire the inventory valuation method from the FIFO LIFO method change. Buffett in the 1973 letter to shareholders this is explained: "because appeared in 1973 the price of raw materials out of the ordinary rose, and appeared in 1974 will continue to increase the signal, we LIFO inventory selection. The inventory valuation method will now cost and income now more matching, including the reduction in reporting profits in the inventory "profit" to a minimum."

Provision for the loss on inventory is enough

In the balance sheet, inventory should be valued at the lower of cost and net realisable value measurement. When the inventory cost is lower than the net realizable value of inventories, measured at cost; when the inventory cost is higher than the net realizable value of inventories, net realizable value measurement, at the same time according to the cost is higher than the difference between the net realizable value of the stock plummeted and preparation, included in the current profits and losses.

If the value of the stock is very big, so stock market prices may bring great loss to enterprises. Berkshire's subordinate aviation Service Corporation NetJets has many aircraft inventory, the 2003 decline in huge loss: "NetJets, we subordinate enterprises aviation business part of the property division, a pre tax loss of $41000000 in 2003, the company obtained the certain operating profit in the American area, but the profit is far unable to offset the $32000000 aircraft loss on inventory and continued losses in europe....... We put $32000000 loss on inventory in 2003, the reason for this is that this year prices of second-hand aircraft. Specifically, we generally on the market price from some exit customer repurchase time-sharing aircraft part of property, and we will be able to sell the property again, its value fell."

Enterprise inventory level is reasonable

More and more enterprise customers to choose the type of inventory, the greater the scope; enterprise inventory quantity are more, more can quickly meet customer delivery needs.

A wave of Xian Buffett's Berkshire's (Borsheim "s) jewelry store, although is opened in Omaha that only 600000 of the population of central city, 1990 was a record rise 18% sales miracle. In addition to low cost, the company stock varieties, customer choice, fast delivery is also an important reason:

"Because the price is low, so the quantity of sales is quite large, so we can have every kind of product inventory, compared to other stores, scale and even more than ten times as much. In addition to full range, low prices, and our considerate service, which is why Ike and his family can create jewelry legend causes the famous Omaha in this small place."

But more inventory, cost is high, once the sales decline, the inventory will keep long in stock, inventory valuation loss will be greater.

Buffett acquisition Berkshire textile company encountered such a dilemma in 1970 1970: "men's clothing lining and home textile sales have slumped, we are forced to continuously reduce production plan, in order to avoid the backlog of inventory. This cut production practices for the enterprise cost, will have a devastating effect on the lives of employees. Market prices continue to maintain the pitifully low levels, market demand has not been any improvement. Despite the great efforts made by the inventory level is less than a year before, but the stock level relative to the current sales level is still high. We will continue to work hard, to reform in the production and sales."

The inventory level is too low, is not conducive to the expansion of sales. But the stock level is too high, it will take a lot of capital, increase investment, and if the market prices will go down in price loss. Therefore, enterprises must continuously adjusted according to the market situation, to maintain a reasonable inventory level.

The inventory level is generally used to measure the rate of inventory turnover. Ratio of inventory turnover, sales and inventory. Enterprise strong sales, goods turnover more quickly, using less inventory can be achieved great sales, inventory turnover rate will be very high; on the contrary, the company sales downturn, cargo turnover is slow, will be a huge backlog of inventory, inventory turnover ratio will be low.

Buffett business investment partnership, acquired in 1961 dempster. His partner in the 1962 letter described the company: "the company over the past 10 years of operation can be summarized: revenues remain stagnant, inventory turnover rate is low, relative to the investment capital almost did not produce any return."

 

Buffett financial analysis code 32: accounts receivable turnover rate as high as possible

(2011-09-15 07:35:15)

AnalysisBuffettThe past years of letter to shareholders, I found Buffett analysis of accounts receivable paid particular attention to two points, namely the accounts receivable level is reasonable, whether the provision for bad debts loss enough.
Buffett financial analysis code 32: accounts receivable turnover rate as high as possible

In 2011 09 months 15 days 00:54  Source:Chinese Securities Daily  Author:Liu Jianwei

Http://opinion.hexun.com/2011-09-15/133377093.html

AnalysisBuffettThe past years of letter to shareholders, I found Buffett analysis of accounts receivable paid particular attention to two points, namely the accounts receivable level is reasonable, whether the provision for bad debts loss enough.

　　Accounts receivable levels

We usually use accounts receivable turnover or turnover days to measure the level of accounts receivable.

Accounts receivable turnover rate calculation formula is sales income divided by accounts receivable. Since most bills receivable by the sales should be formed, which belongs to another form of accounts receivable, and therefore more accurate calculation with sales income divided by accounts receivable and notes receivable. In addition, different time points should change accounts receivable levels will be great, so at the beginning and end by year average or by the end of the four quarter average value as the denominator is more reliable.

Accounts receivable turnover days to 365 days divided by the number of accounts receivable turnover rate.

In general, accounts receivable turnover rate as high as possible, show that the company's accounts receivable speed, average collection period is short, bad debt loss, liquidity, solvency strong. With this correspondence, accounts receivable turnover days is the shorter the better. If the number of days the actual accounts back more than the normal number of accounts receivable, the debtor's debts for long time, the credit degree is low, the risk of bad debt losses increase occurred. However, accounts receivable turnover rate is very high, turnover is very short, often indicates that the executive is tight credit policy, credit payment conditions too harsh, expand it may restrict the enterprise sales, if in order to maintain high accounts receivable turnover, and the profitability of enterprises, he.

Accounts receivable and the level of sales is directly related to the way the cash sales, accounts receivable less more more more, credit accounts receivable. On the premise of not affecting the growth in sales, accounts receivable and the lower the better.

Berkshire's candy is the main cash sales, so very few accounts receivable. Buffett in the 2007 letter to shareholders said: "Hi PS product sales by cash settlement, so there are no what accounts receivable."

In contrast to Buffett's original purchase textile factory mainly is the selling on credit, most revenue is not cash but the increase in accounts receivable. Buffett in the 1978 letter to shareholders said: "although the fixed asset investment cost is very low, but Berkshire textile business capital turnover rate is still quite low, because the sales income must occur a large number of accounts receivable and inventory, need to consume a large amount of investment capital. Textile industry, low turnover rate of capital and low profit rate, will inevitably cause a return on invested capital is unable to achieve the necessary level of."

Another account receivable is of high level case is Brown shoes Buffett acquisition. Buffett in the 1991 letter to shareholders said: "in the shoe industry the most USA business performance is very bad. Because the shoe styles and sizes of shoe-making enterprises are in production, inventory, and a large number of capital accounts receivable occupation".

Enterprises to expand sales, accounts receivable must also increase. Buffett in the 1983 letter to shareholders said: "it is essential, in order to achieve this goal to double income, the two companies are likely to put them into physical assets nominal investment has doubled, it is because it is usually strong inflation a on enterprise economic requirements, whether it is good or bad company. Sales revenue doubled means corresponding to accounts receivable and inventory of the occupation of funds will be a substantial increase in. For the slow response to inflation fixed assets capital occupied, but almost can say will definitely increase."

Of course, the sales income of the ideal situation is the enterprise growth, profit growth and accounts receivable decline. Management can be highly praised Mr. Harry Buffett in the 1987 letter to shareholders: "Mr. Munger directly find already 68 year old Mr Harry, so he served as CEO, then go back and wait for the inevitable. In fact Mr Harry did not let him wait for a long time. Just one year later, in 1987, K&W company's profit to a record high, grew 3 than 1986 times, but also in the profit increase at the same time, companies use capital is reduced to: K&W, a 20% reduction in the amount of investment in accounts receivable and inventories should be."

Accounts receivable is very important, even determine the survival of enterprises. Just as you have worked hard all year, if the boss is not money, you earn is not money, but on your debts. You can't spend when money. Similarly, if an enterprise income growth we only should increase in accounts receivable, the company carrying on earnings cannot be converted into cash. Buffett in the 1979 letter to shareholders said: " in a sales almost no growth and the population has no growth market, combined with the retail store Ben Rosner can create with respect to the use of capital scale is very large profit, but the profit is cash, not like other retail enterprises just accounts receivable and inventory increase."

　　Provision for bad debts

To an any companies, accounts receivable small part of bad debts is inevitable, so the company will adopt certain methods to (at least at the end of each year) to estimate the loss of bad debts, bad debts from, and turned as expenses of the current period. The actual bad debt, directly offset has provision for bad debts, at the same time reseller accounts receivable. The provision for bad debt reserve determined by the enterprise itself. The proportion of enterprises. In determining the bad debt reserve plan, should be the actual financial position and cash flow according to past experience, the debt unit, and other relevant information reasonably estimate.

Buffett in the 1999 letter to shareholders, the provision for bad debts may not accurately reflect the loss of bad debts, but is an absolute must: "most accounting costs associated with actual expense, although they do not accurately reflect the actual cost....... Provision for inventory, accounts receivable bad debt provision and customer service warranty costs, belong to reflect the true cost. These costs can not be accurately measured the amount each year, but estimates of these costs is obviously very necessary."

Even if the company in accordance with the conventional extraction appropriate the provision for bad debts, but sometimes because of a sudden deterioration business environment, accounts receivable bad account rate could rise sharply, investors can be especially vigilant. In 2001, Buffett proposed to buy FINOVA's recommendations to the bankruptcy court. Buffett in the 2001 letter to shareholders especially points out that the "9 · 11" incident should be great influence of accounts receivable value to this company: "many of the loans granted to FINOVA company aircraft assets, but after" 9 · 11 incident "caused the plane to the value of the assets is greatly reduced, the company holds the other receivables. Also due to the impact of the terrorist attacks that day and in danger. Therefore, the prospect of FINOVA company is no longer as we had put forward the proposal to the creditor's rights in bankruptcy court as well."

Life if someone owes you money, you will be particularly concerned about, investment in others owe you investment company's accounts receivable, you also must pay special attention to: owe more than you, repay grasp? (the author is Tianfu Health Fund chief investment division, this paper only personal views, not to persuade or investment advice.)

 

Buffett financial analysis code 33: prefer light asset company

(2011-09-29 13:16:16)

Buffett financial analysis code 33: prefer light asset company

In 2011 09 months 29 days 00:14Chinese Securities Daily

Http://finance.qq.com/a/20110929/000011.htm

Liu Jianwei

Fixed assets refer to held for production of goods, providing labor services, for rental or business management, and the service life of more than one accounting year assets, including buildings, machinery and equipment etc.. Fixed assets are value for the original value of fixed assets, accumulated depreciation is the net value of fixed assets. ReviewBuffettOver the past 40 years to the shareholders of letters can be found, Buffett attached great importance to the following three questions: the company's fixed assets turnover rate? How the company newly increased fixed assets investment rate of return? Company to expand business scale must rely on large-scale purchase of fixed assets?

Fixed asset turnover level?

Company of all its assets utilization efficiency with asset turnover ratio to measure, fixed assets turnover ratio is the ratio of enterprise sales income and net value of fixed assets.

Most of the company's fixed assets in the total assets accounted for is relatively high, so the fixed asset turnover ratio has great influence on the total assets turnover rate. But in some cases, although the fixed asset turnover rate is higher, if the stock of liquid assets, accounts receivable turnover rate is very low, will also cause the company total assets turnover rate is not high.

In 1978, said Buffett analysis of Berkshire's textile business in a letter to shareholders, the textile plant and book value of equipment, the cost of a small part of future reset only. Although these equipment have been quite old, but most of the old equipment and new equipment is installed in the current industry in function difference. In spite of the fixed assets investment cost is very low, but the capital turnover rate is still quite low, because the sales income must occur a large number of accounts receivable and inventory, so need to invest a lot of money. Textile industry, low turnover rate of capital and low profit rate of double low coexist, will inevitably cause a capital gains rate cannot achieve the necessary level of.

A new fixed asset investment income rate?

Major investment companies often and additions to fixed assets, whether the purchase of fixed assets new, analysis the past similar investment rate of return is high.

Buffett's acquisition of Berkshire, rejected the company's core business -- textile, new machinery and equipment and other fixed assets to expand the scale of production, because to do investment rate of return is low.

In 1975, Buffett's letter to shareholders in the said very clearly: "we strongly believe that Ken Chase and his management team, has the ability to maximize the textile business competitive advantage. Therefore, will continue to look for ways to increase the scale of production, while avoiding invest large amounts of capital additions of new fixed assets. Because from the historical experience, the new textile equipment, large-scale investment, can only be achieved with relatively low investment rate of return."

Buffett constantly shrinking business, reduce the investment in fixed assets, accumulated for cash and profits, in 1967 to buy more profitable, cash flow betterThe insurance industryWu. The Berkshire's transition to the insurance business as the core of the group company, this is a decisive step in Berkshire's continuous development and expansion of the. In his 1985 review said, at the beginning of 1967, produced by the textile business cash acquisition of nationalInsuranceThe company, then entered the insurance industry. Some of the money from the textile business profits, another part of the funds from the reduction in the textile inventory, accounts receivable and investment in fixed assets. In fact, this is wise, although Ken Chase's management that have greatly improved the textile business, but the textile business cannot become a good money making machines, even in the industry cycle.

Expand business scale

Need a lot of new investment in fixed assets?

Some companies if they want to expand the scale of business to increase the profits, we must invest heavily in new additions to fixed assets. In the scale of investment to expand, although new profits absolute amount is larger, but according to the calculation of the scale of investment rate of return on investment is not high. These companies are usually called heavy asset company, and is light asset company. In the same premise increase profits, investment in fixed assets less the more cost-effective, so Buffett favors those who light asset company, rather than the asset company.

In 1983, Buffett in a letter to shareholders, the traditional idea that deal with the best means of inflation, is rich in natural resources, plant and machinery, or other tangible assets, but this method is not effective. Enterprise asset size usually can only achieve a lower rate of return on investment, can only provide enough capital so that enterprises need to maintain the existing production levels unchanged in inflation conditions. In addition, it cannot produce more capital, to support the enterprise profit (net of inflation after the actual growth), or to pay a dividend to investors, or the acquisition of new enterprises.

In 1992, Buffett praised his purchase of light asset company Scott Fitz. He said, now in the business of the company, in the inventory and fixed assets investment, much less than in 1986 when the company was acquired by. This means that in total holdings during the past 7 years, the company controlling shareholder dividends distributed to more than 100% of the profits, at the same time, also had very good profitability improve.

If you want some company profit, you need a lot of investment in fixed assets. Buffett thinks, this kind of company is not outstanding company. (for Tianfu Health Fund (Micro-blog) chiefInvestment & FinancingDivision, this paper only personal views, not to persuade or investment advice.)

 

Buffett financial analysis code 36: intangible assets bring the excess proceeds

(2011-10-13 10:17:47)

Buffett financial analysis code 36: intangible assets bring the excess proceeds

In October 12, 2011 23:31  Source:Chinese Securities Daily  Author:Liu Jianwei

Http://opinion.hexun.com/2011-10-12/134156710.html

In broad terms, no real state assets, are intangible assets, including management, brand, trademark, patent and other.BuffettThink, intangible assets are more important than tangible assets. But he considered particularly important intangible assets, is not reflected in the financial statements, and the financial accounting is the narrow identifiable intangible assets. Also of note, in China, land use right is considered as intangible assets, and in the America, land is included in the fixed assets. At the same time, in the valuation of enterprises should also pay attention to, often carrying value of intangible assets and there is a big gap between the market value.

The intangible asset can bring excess returns

Buffett thought that the most important ideas from U Graham, Graham attaches great importance to the tangible assets. In 1956, Graham retired after the dissolution of his own investment company, Buffett returned home to Omaha founded his own investment partnership. He completely imitate the teacher practice, finding relative to net tangible assets cheap stocks. Although 10 years before the performance is outstanding, but Buffett found, more and more people are learning and imitation of Graham, but the valuation based on tangible assets, can find a cheap stock less. In his partnerMungerUnder the influence of absorption, BuffettFei XueInvest in good companies thought: the more excellent companies, the excess profit ability mainly comes from good management, good reputation and other intangible assets.

Buffett is not a theoretical understanding of this idea, but from what he bought candy company body gradually recognized. In 1983, Buffett wrote in a letter to shareholders: in 1972, only a few companies can like candy company, maintained 25% of net tangible assets after tax rate of return, but also in the conservative accounting policy and no financial leverage. Able to produce such a high rate of return, is the effective combination of the intangible assets, especially brought countless happy experience based company and employees to consumers, the formation of common good reputation.

In 1985, investment ideas changed completely after Buffett said, he must be more than 20 years ago to good business and good management to pay higher prices now. Graham tends to value the statistical data, while Buffett pays more attention to intangible things.

Financial statements do not reflect

Important intangible assets

Excellent management, high visibility of the brand, the years of the formation of good reputation, is the enterprise get beyond the industry average profit level of intangible assets is the most important, but these important intangible assets is not reflected in the financial statements.

First of all, in most cases, intangible assets, reputation and internally generated internally generated, cannot be confirmed as intangible assets, such as internally generated brand, newspaper etc.; secondly, brand reputation management etc. these important intangible assets, often can not be distinguished from other assets are identified separately. However, the accounting policy for intangible assets must be identifiable, should meet the following two conditions: 1, to separate or divide from the enterprise, and can be used alone to sell or transfer; 2, arising from the right of contract or other legal rights, whether these rights are not available from the enterprise or other rights and obligations in the transfer or separation. Therefore, the financial accounting of intangible assets is in a narrow sense, it must be owned or controlled enterprises, not the physical form, identifiable non monetary assets.

In Chinese, intangible assets are usually include patents, non patented technology, trademark, copyright, franchise, the right to the use of land. One of the most has the China characteristics of intangible assets is the land use right, and in the world, the land is generally fixed assets.

Outstanding intangible assets value

Often there is a big gap between the intangible assets book value and market value, there are two main reasons: the first is formed in the intangible assets accounted for. Accounting basically adopts the principle of historical cost, and actual cost and fair value differences often. Enterprise research and development project of the intangible assets can be accounted for. Stages of research expenditure are included in the current profits and losses, (management fees); development expenditures, in line with the conditions of the capital, does not meet the capitalization criteria included in the current profits and losses (overhead). To achieve the intended use, the capital expenditures to intangible assets accounting. The outsourcing of the patented technology, trademark rights in accordance with the acquisition cost, but made by investors, the exchange of non monetary assets, debt restructuring, government subsidies and other ways of intangible assets, must be in accordance with the fair value. The second reason is the follow-up measurement at. The explicit use of intangible assets should be amortized year period, but in fact they never wear, excellent intangible assets will value added, such as the right to use the trademark, lots better land use right.

　　

Buffett financial analysis password: economic Goodwill is more important than accounting Goodwill

(2011-10-20 11:38:11)

Economic Goodwill is more important than accounting Goodwill

Liu Jianwei

Buffett attached great importance to economic Goodwill, rather than accounting goodwill. As an example to buy candy company in his letter to shareholders in 1983 letter, explain the significant difference between the two.

Buffett said, he got 35 years ago to teach is to attach importance to the tangible assets, while avoiding the enterprise value most from economic Goodwill of enterprises, but now the idea has had the huge change. He thinks, before the bias causes many missed opportunities of the major commercial failure, although only a few times belongs to practical action error. Direct and indirect business experience, so he is inclined to possess long-term sustained economic Goodwill and only uses the least amount of enterprise needs tangible assets.

The accounting standards based on accounting Goodwill

If a firm is acquired, then according to the accounting standards, purchase price is first transferred to the acquisition of the fair value of the identifiable assets. Typically, these assets (after deduction of debt) fair value is less than the sum total of enterprises acquisition. In this case, the gap will turn into a "acquisition costs beyond the assets acquired rights value" asset account, this is Buffett's goodwill.

Buffett said, the goodwill does not belong to the intangible assets in the accounting. Goodwill is the difference of the cost of the business combination is greater than the identifiable assets, liabilities, the fair value of the future cash flow, representatives of enterprises, greater than that of each single asset will generate future cash flow of the total amount of the enterprise itself, cannot distinguish, therefore not identifiable. So, although the goodwill is not the physical form of non monetary assets, but do not constitute the intangible assets.

Based on the economic reality of economic Goodwill

"If we can expect the company in net tangible assets basis, earning rate significantly more than the market rate of return, so logically speaking, the value of these companies is much higher than its net tangible assets, capitalized value of this excess return is economic goodwill." Buffett said.

He said, in 1972, only a few companies can and candy companies, is expected to continue to maintain 25% of net tangible assets tax returns, and in conservative accounting policy and no financial leverage. Such a high return, not inventory, accounts receivable or fixed asset's fair market value, but by combining various intangible assets, especially the products of the company and employees to consumers based on several pleasant experience, the formation of universally accepted good reputation.

This reputation to create a consumer franchise, making the product value to consumers rather than the production cost of the product, become the main factor decide selling price. Consumer franchise is a major source of economic Goodwill, other sources include no profit control effects of government concessions, such as television and in an industry continued to maintain a low cost producer status of enterprises.

Comparison of goodwill and goodwill accounting economic

Buffett tells us, really create the excess profit ability is the company's economic Goodwill, goodwill and accounting only for companies to pay too high price, find a highfalutin accounting statement.

In the inflationary years, accumulated investment is much higher than the original enterprise wealth, from the lasting value of intangible assets and relative requirements into tangible assets less number of combination of business. In this case, nominal dollars profit will be increased considerably, and most of the profit can be used to acquire other companies. This phenomenon is particularly evident in the media business, they only need less tangible assets, but its franchises can still remain. During the period of inflation, economic goodwill to give business owners more return, but this only applied to the true economic goodwill.

The accounting standards have been modified, amortization of goodwill is not, at least should be tested for impairment at the end of each year. Due to generate goodwill independent cash flow, therefore it should be combined with the group of assets related to the impairment test. Accounting goodwill impairment of goodwill only, but the economy may be impaired, may also be added. Excellent enterprise with true economic Goodwill, its nominal value will increase with inflation, the long-term value and appreciation. The company also is Buffett looking for super star company.

 

Buffett financial analysis password: super star enterprise must have four standard

(2011-10-28 12:58:05)

Tianfu health fund Liu Jianwei: super star enterprise must have four standard
In October 27, 2011 00:15Source: China Securities DailyAuthors: Liu Jianwei
Http://funds.hexun.com/2011-10-27/134602781.html

Buffett in determining the investment company, he asked the company's business is clear and easy to understand, the company has a long-term good development prospects, the company, by the honesty and integrity of management at the same time, the company's sale price is very attractive.

In general, investment in the subject of investment can be divided into equity investment, equity investment, financial derivatives investment, the investment form enterprise financial assets. Enterprises should be combined with the characteristics of its business, investment strategy and risk management requirements, will achieve financial assets at initial recognition, divided into the following categories: 1, measured at fair value through profit or loss of financial assets; 2, the held to maturity investment; 3, loans and receivables; 4, for the sale of financial assets, long-term equity investment; 5.

Buffett thinks highly of the management of the enterprise. According to the above investment related report data, combined with the investment profit statement of income, can be roughly analysis management's investment ability, which Buffett referred to the capital allocation ability. For the long-term performance of the company, critical management investment capacity. But Buffett was able to become the richest man in the world, the key lies in the remarkable ability of investment.

Buffett in 1965 with the acquisition and holding company is Boxill Hathaway, Boxill Hathaway is just one in a highly competitive textile industry performance mediocre enterprises. Buffett holdings immediately after the stop of dividends, not to expand production, but gradually shrink, the textile business generated cash for investment. He is the most important investment acquired an insurance company, and gradually the Berkshire's transformation into a new money making machine: on the one hand, with a core insurance business continues to generate funds; on the other hand, the investment stock or the purchase of enterprises to create higher profits. With the company's capital strength continuously, then can develop more insurance business, get more money, and then more equity investments and acquisitions. Such a virtuous circle of development, the scale American Berkshire has become the biggest company net assets. In the past 45 years, Berkshire's net assets per share growth 4900 times, the share price of the highest growth 8000 times, Buffett has also become the richest man in the world in 2008.

In all of Buffett's investment, the most important is the long-term equity investment, including two from the market to buy listing Corporation stock and the acquisition of the holding company. After 1982, Buffett in the annual report has publicly stated that he acquired the basic standard of enterprise: the larger the company scale (at least $5000000 after tax profits); show sustained profitability; a small amount of debt or not company debt situation, with rate interest income level good; good corporate management; easy to understand business; clear the sale price.

In 1992, Buffett again in the annual report, he elaborated 15 years ago the stock investment strategy of stock investment strategy: "we compared with the past doesn't change, selection of negotiable securities and evaluation of a to be completely acquiring company are very similar, which requires the company's business is clear and easy to understand; the company has a long-term good development prospect; business by honesty and integrity management; very attractive purchase price."

The author thinks, Buffett investment stock and purchase enterprise selection criteria are the same, are looking for with first-class service, first-class management, first-class performance star company. Therefore, in the analysis of the company's long-term equity investment, the most important is to determine the investment company, is consistent with the basic standard of Buffett acquiring company.

 

Liu Jianwei: judging the strength of enterprises by using the rate of total assets turnover

Traditional idea thinks, the total assets of the enterprise scale is huge, means that the enterprise strength is strong.BuffettQuestioned by shareholders in 1983, he said in a letter: "according to the traditional concept of years handed down, everybody thinks that deal with inflation is the best means of enterprise has a lot of natural resources, plant and machinery and equipment or other tangible assets. But the traditional history is long, the wisdom of less, this means it is not effective. Enterprise asset size usually can only achieve very low rate of return on investment, in the case of inflation, the general can only provide the maintenance of existing enterprise level of production capital. In addition, it cannot produce more capital to support the real growth, inflation adjusted earnings, or dividends to investors, the acquisition of new enterprises."

Buffett for the company's total assets, mainly carries on the analysis from two aspects: one is the efficiency of total asset management; two is the total asset management efficiency. Look at the asset management efficiency, Buffett efficiency analysis of total assets in total assets turnover ratio, total asset turnover rate is high, indicates that the asset management more efficient.

First, the worse it is enterprise, is the need to invest more capital in the inventories, fixed assets. Total assets turnover rate is low, rate of return on net assets is lower.

Buffett in the 1978 letter to shareholders of this phenomenon Berkshire textile factory: "1978 earnings of $1300000, compared with 1977 is improved considerably. But in accordance with the $17000000 invested in capital calculations, the rate of return on investment is very low. At present, the book value of the textile plant and equipment, but its now reset required a small fraction of the cost of. But, although these devices have been used for many years, but most of the old equipment and the new equipment in the industry has little difference in function. Although investment in fixed assets cost very "cheap", but the capital turnover rate is still relatively low, reflecting the requirements to achieve sales revenue, must in accounts receivable and inventory to maintain a high level of investment. Textile industry, low turnover rate of capital and low profit rate, will inevitably cause a return on invested capital is unable to achieve the necessary level of." Buffett referred to here as the capital turnover rate, can be understood as the total assets turnover.

Second, the more excellent enterprise, inventory turnover rate is high, is the need to expand the production and sales, in addition to the inventory investment is less, the higher the rate of return on net assets. For the commercial retail enterprises, the total assets turnover rate is particularly important.

Buffett in the 1989 letter to shareholders said:"FreedmanTake the family in the jewellery retail business, take with Mrs. B at the family in the furniture retail industry mode of operation is almost exactly the same. The basic principles of enterprise management both is Mrs. B's Creed: cheap price, fair trade. The basic principle of operation of common two enterprises include: 1, the single store operation, is characterized by massive inventory, can provide different styles, prices of mass consumer choice; 2 senior management, the company every day very focused on details of each operation; 3, goods fast turnover; 4, shrewd purchasing; 5, low expenses almost to be hardly worthy of belief. Three factors behind makes two shopping centres can provide USA all other shopping malls can not be compared to the daily sales price."

Third, to more systematic and in-depth analysis of the turnover rate of total asset, it needs to total assets turnover analysis of decomposition, respectively the main assets, and identify the main factors influencing the. At this point should be unified in terms of sales turnover rate, the general should first according to the liquidity into the turnover of current assets and non current assets turnover, the turnover of current assets into the accounts receivable turnover, inventory turnover, net working capital turnover rate.

Buffett pointed out in 1977 May "fortune" magazine published the article "how inflation fraud stock investors", in order to improve the rate of return on equity is the rate of return on net assets, the enterprise at least need to do the following five points: one of the 1, improve the total asset turnover ratio, total asset turnover ratio is the ratio of sales revenue and operating the use of total assets the financial leverage; 2, lower cost; 3, financial leverage is higher; 4, lower income tax rates; 5, higher sales profit rate (operating profits divided by sales revenue). This is all can improve the rate of return on net assets of. As for how to use these methods, Buffett said, should first from the analysis of turnover, and must consider the three main categories of assets: accounts receivable, inventory and fixed assets include plant. (the author is Tianfu Health Fund chief investment division, this paper only personal views, not to persuade or investment advice.)

Liu Jianwei: a comparison of risk of short-term and long-term bank borrowings

Buffett financial analysis password: comparative risk of short-term and long-term bank borrowings

Generally speaking, enterprises especially the small and medium-sized enterprises, more like "borrow short and long": one is the short-term borrowing than the long-term loan interest rate lower; two is short-term borrowing easier to apply than long-term loans; three is short-term borrowing more flexible than the long term loan, loan amount can be adjusted in time according to the need; four are short-term loans as long as the timely repayment interest, can generally be year rolling renew, essentially equivalent to long-term loans.

ButBuffettBut very doesn't like short-term borrowings. He to the shareholders in the 1992 letter said: "overall, we still try to avoid debt, especially short-term debt. However, if planning and reasonable arrangement and can bring considerable benefit shareholders, we are willing to assume a reasonable amount of debt."

The reason why Buffett avoid short-term borrowing?

Under normal circumstances, the rolling mode for long-term use of large amounts of no problem borrowing short. But once the face of financial crisis, banks to withdraw the loan ahead of schedule, management crisis suddenly happened or enterprises, banks are unwilling to loan, enterprise funds chain will suddenly interrupted, facing the risk of collapse. During the financial crisis, many small and medium-sized enterprises Chinese fail because of unable to borrow short-term borrowings. Recently a lot of small and medium-sized enterprises operating difficulties, from bank loans of less than 1, but through usury to keep funds chain is not broken. But for a long time, operation fails to improve, coupled with high interest, finally failed.

This is Buffett with extreme care to avoid the main reason for short-term borrowing. After the financial crisis, Buffett at the 2010 annual letter to shareholders, especially on short-term borrowing brings huge risk:

"The financial leverage of enterprises can be fatal. Bear huge debt enterprise often imagine: debt maturity, he would be able to refinance without full repayment of principal and interest. These assumptions often is reasonable, but, in some special circumstances, or because of their own special problems, or the global credit shortage, debts must repay principal and interest. And then, only cash."

"The debtor until then will understand, credit as oxygen. Credit and oxygen is very rich, you do not feel its existence. But the credit and oxygen once gone, you will be faced with the risk of survival. Even for a short time and lack of credit, will destroy a business. In fact, in 2008 September, in many industries America operation because of lack of credit and almost destroyed the whole America."

"Even if it is only a little threat very tiny to Berkshire's survival, and IMungerFor such behavior does not have any interest in."

The well-known fund manager Peter Lynch in "investment" Peter Lynch said more understand:

"In a company in crisis, the actual amount of species and liabilities in the corporate decision success or failure, has the same influence. Liability can be divided into short-term bank borrowings and long-term borrowings."

"Short term loan (a kind of debt is the worst) at the request of creditors must repay the loan. This debt does not necessarily have to borrow from banks, it can also use commercial bill form, one company to another company short-term borrowings. The most important feature is the short-term borrowing period is very short, sometimes even informed soon repayment. This means that the short-term loan creditors once found the borrowing firm is difficult, we can immediately demanded the return of the loan. If the borrower is not able to return in time in accordance with the requirements, must be in accordance with the provisions of the "bankruptcy law" chapter eleventh bankruptcy protection. Creditors will put the company's assets are sold, they complete the bankruptcy liquidation, Penny money also would be left for the shareholders."

"Long term loans (from the point of view, this is a kind of liability best) creditors cannot immediately recover the loan, no matter how bad business situation of the borrower, as long as continue to pay interest, not to return. Loan period can be as long as 15 years, 20 years or 30 years. Long term borrowing a form of common is the use of regular distribution firm long-term bonds, creditGradeMechanism according to the company's financial situation is bad for the company's bonds to raise or lower the rating, but no matter how ratings, bond holders are not like banks require bonds distribution firm immediately repay the principal. Sometimes even interest payment can also be delayed, long-term debt provides out of the plight of the time to the company."