With the exception of a brief position in silver that constituted less than 0.1% of 1% of Berkshire Hathaway’s overall assets, Warren Buffett has stayed far away from making purchases of outright commodities or collectibles during his fifty-one year stewardship of Berkshire Hathaway. Although a lot of people assume that Buffett came to his reluctance of collectible ownership rationally through historical studies of the collectibles markets, he actually learned this lesson through experience like the rest of us.
When people talk about the book value for a company, what do they mean? It’s a term that usually comes up when discussing when trying to figure out the true worth of the company. It’s particularly used in the context of pinning a fair value on insurance companies and bank stocks.
The reason why I rarely use it in my own writings is my because it is a technique that measures “the accounting value” of a company rather than the intrinsic value of the company. Book value attempts to measure the liquidated value of a company if you add up all the assets and subtract all the liabilities.
In order to figure out what fair value you ought to pay for a stock, you need to know four things: the current profits, the number of shares outstanding, the capitalization rate, and the expected growth rate. You already know two of those things: the current profits and the number of shares outstanding. In other words, the value of any security comes down to figuring out the relationship between the capitalization rate and the expected growth rate.
Let’s imagine then, if you are familiar with Coca-Cola’s history of dividend growth dating back to 1963, know that it sells over 10,000 products per second in over 200 countries, and derive some solace from the fact that the most famous investor in the world has made a lot of money owning Coca-Cola for the long term. But even though overpaying for great assets can eventually work itself out over an extremely long holding period, you still want to follow Benjamin Graham’s advice to go through life without overpaying for an asset.
Insider Trading occurs when actual insiders, constructive insiders, certain outsiders, and tippers/tippees trade on the basis of material, non-public information. Below, I discuss the definition of each category of trader that can be implicated with a 10b-5 violation of insider trading.
Actual Insider: This is the most basic and straightforward category of insiders–this refers to members of the Board of Directors, the officers and members of management positions, controlling shareholders, and even employees that are privy to material non-public information resulting from their position as a corporate insider.
The benefits of a sole proprietorship are well documented elsewhere–it is the default business characterization assumption that is made when a business springs into existence without filing any paperwork (though the transactions of the business may be subject to paperwork, such as the California business license requirement). The advantages of a sole proprietorship are the limited paperwork that makes it easier for a businessman to get started while lacking the expertise regarding structural formalities.