For 99% of human history, you needed to already be rich in order to buy an ownership interest in a prosperous business. Even in old timey England, individual property could not be divided into more than a dozen ownership pieces. If you wanted to make money from a business, you had to possess enough capital to purchase it outright.
The United States did its part to break to break ownership positions into smaller increments by making “share trading” and liquid exchanges a major part of its economic activity. These smaller share increments also had the reciprocal benefit of making it easier for companies to cast a wide net when raising capital that could be used to advance growth at a much faster rate than would be possible if only select financiers could provide the capital.
But still, even with the United States advancing the notion of a highly liquid stock … Read the rest of this article!
An underrated advantage of Berkshire Hathaway is that Warren Buffett is able to buy family-owned companies at a discount to the maximum value that an open bidding for the company would yield. Buffett is able to secure 5% to 20% discounts on fair market value because he is able to guarantee that the legacy and special cultural factors of the business will remain intact after he takes over. Given that founders often infuse part of their identity into their businesses, this maintenance of tradition makes Berkshire more attractive than a cost-cutting private equity fund that will immediately try to wring out more profits to pay down the leverage that is often used to make the acquisition.
When Buffett was in Toronto back in 2008, he explained this advantage as follows: “You can sell your business to Berkshire, and we’ll put it in the Metropolitan Museum. It’ll have a wing all … Read the rest of this article!
In 2011, Sears Holdings (SHLD) reported a loss of $500 million. It was the first time in at least thirty years that Sears had reported a loss. At the time, management and investment analysts reported the problem as “short term” and “fixable.” The analyst consensus called for a return to $200 million in annual profitability by 2014.
Then 2012 came and Sears reported a smaller $200 loss. This news encouraged analysts, and they raised 2014 guidance for a $275 million profit.
By the end of 2013, Sears reported its worst year ever at the time with a $700 million loss. Analysts pushed back their profitability projections to 2016, and tempered them back down to $200 million.
When 2014 arrived? Sears lost $830 million.
2015? Sears lost $950 million.
This year? Sears is going to lose somewhere between $800 and $850 million.
And guess what? Analysts are … Read the rest of this article!
You know how everyone in the investment community loves to rag on IBM stock? Well, there’s nothing new about that. In fact, this lament might be something you have in common with your grandfather.
When part of President Roosevelt’s New Deal legislation included the Social Security Act of 1935, Wall Street got excited by the lucrative contract that IBM secured to process social security checks upon the program’s inception in January 1937.
Unfortunately for IBM shareholders, the contract contained a provision that demanded IBM perform the government services at cost if more than 3% of social security payments were made in error during the first year. By January of 1938, the independent congressional inquiry found that 4.7% of social security payments were not processed correctly.
As a result, IBM stock fell almost 20%. This wasn’t merely the result of IBM’s lack of profit regarding social security check processing, but rather, … Read the rest of this article!
Warren Buffett did the investor community a great favor by introducing the concept of an “economic moat” when explaining what types of businesses are so superior that they can be purchased and held passively for long periods of time and riches will subsequently abound. In his annual letters, Buffett has defined a moat as “the ability to maintain competitive advantages over its competitors in order to protect its long-term profits and market share from competing firms.”
Often times, a strong brand name is the source of what gives a corporation an economic moat. But a laziness, or at least a false equivalency, has arisen in recent years in which the terms “commonly known brand name” has become interchangeable with the concept of an “economic moat.” An economic moat only exists when a business has a competitive advantage over it competitors which is usually either pricing power or an economy of … Read the rest of this article!