Category Archives: Investing

Value vs Growth Stocks

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Value investors want to buy stocks for less than they’re worth. If you could buy $100 bills for $80, wouldn’t you do so? ~ Motley Fool

Most public equity stocks are classified as either value stocks or growth stocks. Generally speaking:

  • A value stock trades for a cheaper price than its financial performance and fundamentals suggest it’s worth.
  • A growth stock is a stock in a company expected to deliver above-average returns compared to its industry peers or the overall stock market.

Value stocks generally have the following characteristics:

  • They typically are mature businesses.
  • They have steady (but not spectacular) growth rates.
  • They report relatively stable revenues and earnings.
  • Most value stocks pay dividends, although this isn’t a set-in-stone rule.

Growth stocks generally have the following characteristics:

  • They increase their revenue and earnings at a faster rate than the average business in their industry or the market as a whole.
  • They developed an innovative product or service that is gaining share in existing markets, entering new markets, or even creating entirely new industries.
  • They grow faster than average for long periods tend to be rewarded by the market, delivering handsome returns to shareholders in the process.

Regardless of the category of a stock, economic downturns present an opportunity for a value investor. The goal of value investing is to scoop up shares at a discount, and the best time to do so is when the entire stock market is on sale.

References:

  1. https://www.fool.com/investing/stock-market/types-of-stocks/value-stocks/
  2. https://www.fool.com/investing/stock-market/types-of-stocks/growth-stocks/

Berkshire-Hathaway Stock

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  • Berkshire Hathaway has beaten the S&P 500 going back 20 years.
  • The company is built to endure the most challenging market environments.

The “Oracle of Omaha” Warren Buffett is a legendary billionaire investor and one of the world’s wealthiest people. While his start at a very early age helped him build a fortune, Buffett hasn’t lost his investing touch.

Since becoming CEO in 1965, the Oracle of Omaha has overseen a greater than 4,400,000% return in his company’s Class A shares (BRK.A). This works out to a nearly 20% annualized return over 58 years.

Additionally, Berkshire Hathaway has outperformed the S&P 500 index over the past 20 years. Had you invested $10,000 in Berkshire Hathaway in 2003, you would have more than $71,000 today to the S&P 500’s $62,200.

Buffett, and his investing lieutenants, Ted Weschler and Todd Combs, are huge fans of businesses that regularly buy back their stock and increase Berkshire Hathaway’s ownership stake without him or his investment team having to lift a finger.

Stock buybacks can have a positive fundamental impact on a company. For a company with steady or growing net income, buybacks have the ability to increase earnings per share over time. This should help a company’s stock look even more attractive to fundamentally focused value seekers.

References:

  1. https://www.fool.com/premium/coverage/investing/2023/09/27/if-you-invested-10000-in-berkshire-hathaway-in-200/
  2. https://www.msn.com/en-us/money/topstocks/warren-buffett-is-selling-shares-of-this-high-yield-dividend-stock-and-likely-buying-shares-of-his-favorite-stock-no-not-apple/ar-AA1hkkk9

Long-term Investing Perspective

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Warren Buffett once said, “Someone is sitting in the shade today because someone planted a tree a long time ago.”

One tried and true investment philosophy is investing with a long-term perspective. In essence, the time-arbitrage approach gives long-term investors an edge. Most investors are focused on the short term, basing trading decisions on factors that may have little to do with business fundamentals, such as quarterly earnings beat or miss or overall market volatility.

Long-term investors often adopt a long-term perspective while taking advantage of the shortsightedness and noise of the market. They tend to conduct extensive research and conduct a deep dive into the fundamentals of every company in which they are considering an investment.

Their extensive research allows them to develop an informed and thorough understanding of the longer-term secular advantages of these companies. Ultimately, they are more interested in the duration of a company’s growth opportunity rather than being overly focused on its timing.

They like to invest early before a company is on the market’s radar because they believe it’s impossible to pinpoint precisely when the market will notice and start trading the stock up to reflect its growth opportunity properly. This is a vital part of the engine that drives alpha for us.

Low turnover is an outgrowth of this investment process rather than a goal in and of itself. If they find and invest in the right companies, they believe that it makes little sense to replace these companies with new and relatively untested ones. Wsupported remain invested throughout the duration of the growth trajectory of our highest conviction companies. We also believe this is a more tax efficient approach to managing a portfolio and one that is often attractive to company management who are aware of our reputation as long-term holders of stock.

Your primary goal must be capital appreciation, and you should stay involved as companies grow and flourish as long as your investment thesis holds true.

The best risk management starts with knowing the companies in which you invest. By conducting extensive research prior to initiating a position in a company and continuing to conduct due diligence will keep you apprised of the company’s growth story.

Tesla – Electric Vehicles

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Tesla is planning to build another factory overseas, There is a demand across the globe by several nations wanting the plant to built.

Tayyip Erdogan, the president of Turkey, would like the next Tesla factory to be built in his country. Erdogan asked the Tesla CEO to put the eighth factory for its electric vehicles in Turkey.

Musk mentioned India as a possible place to make a low-cost electric vehicle. Tesla is currently building a factory in Mexico.

Saudi Arabia is also vying for the new plant. Attracting Tesla would be part of a push by Saudi Arabia to secure metals needed for EVs in Africa as the country tries to diversify its economy away from oil, reports Barron’s.

Return on Invested Capital (ROIC)

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  • The ROIC is the operating profit divided by the invested capital. It tells us how much money the company can generate with new capital by investing in profitable projects.
  • The ROIC basically explains how much shareholder wealth could be generated in the future and is oftentimes highly correlated with a high P/E.

Return on invested capital, or ROIC, is a valuable financial ratio  A high ROIC rewards companies that are able to produce the most net operating profit with the least amount of invested capital.

The basics of ROIC are very simple: it basically tells us how much profits are generated (financials statement) compared to how much capital is invested in the company (balance sheet), provided as a percentage. If the ROIC is 10%, it tells us that the company is generating $10 of profits with each $100 that it invested in the company.

ROIC is net operating profit minus taxes minus dividends divided by invested capital:

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ROIC is net operating profit minus taxes minus dividends divided by invested capital:

ROIC is a measure of how much cash a company gets back for each dollar it invests in its business.

ROIC is a much better predictor of company performance than either return on assets or return on equity. In ROA and ROE, the key metric is net income. Net income often has nothing to do with the profitability of a company. Significant expenses are not included in net income such as interest income, discontinued operations, minority interest, etc. which can make a company look profitable when it is not. Also, ROA measures how much net income a company generates for each dollar of assets on its balance sheet. The problem with using this metric is that companies can carry a lot of assets that have nothing to do with their operations, so ROA isn’t always an accurate measure of profitability.

ROE has similar limitations as ROA. ROE is a measure of company profit compared to shareholder equity. Although this might seem a reasonable metric, many companies use financial leverage to raise ROE. Companies often increase debt levels to repurchase shares, thereby increasing ROE. Using this financial leverage to affect ROE does not accurately reflect a company’s profitability, returns or long-term prospects.

Companies with higher-than-median ROIC (when viewed in conjunction with their overall capital-expenditure and operating-expenditure strategy) will deliver better returns.

Valuation biasedness is one of the most common investing errors.

Some investors prefer picking a stock which is “undervalued” rather than buying a more expensive stock with strong long-term fundamentals. As a consequence, they oftentimes end up with “value traps” which actually destroy shareholder value over time. One of the reasons for this is that they know how to “value” a company (via multiples etc.), but lack the ability to determine the quality of a company and its potential to drive long-term value for shareholders.

The most important metric will tell you whether you are buying a good company that is able to generate strong future shareholder wealth: the return on invested capital (“ROIC”).

Basically, investors should look for a high (+10%) and consistent ROIC. In the long run, the ROIC can be a leading indicator of what an investor may expect from longer term stock returns.

References:

  1. https://www.thestreet.com/opinion/10-stocks-with-high-return-on-invested-capital-and-why-you-should-care-13279076

Small Cap Stock Investing

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Small Cap Stocks

The Real Value of Wealth

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Invest first before living like a King and Queen

Asset vs Liability

Son: Dad, may I speak with you?
Dad: Go ahead.
Son: Among all my classmates, I am the only one without a car. It is embarrassing.
Dad: What do you want me to do?
Son: I need a car. I don’t want to feel odd.
Dad: Do you have a particular car in mind?
Son: Yes dad (smiling)
Dad: How much?
Son: $15K
Dad: I will give you the money on one condition.
Son: What is the condition?
Dad: You will not use the money to buy a car but invest it. If you make enough profit from the investment, you can go ahead and buy the car.
Son: Deal.

Then, the father gave him a check of $15K. The son cashed the check and invested it in obedience to the verbal agreement that he had with his father.

Some months later, the father asked the son how he was faring. The son responded that his business was improving. The father left him.

After some months again, the father asked him about his business again and the son told him that he is making a lot of profit from the business.

When it was exactly a year after he gave him the money, the father asked him to show him how far the business has gone. The son readily agreed and the following discussion took place:

Dad: From this I can see that you have made a lot of money.
Son: Yes dad.
Dad: Do you still remember our agreement?
Son: Yes
Dad: What is it?
Son: We agreed that I should invest the money and buy the car from the profit.
Dad: Why have you not bought the car?
Son: I don’t need the car. I want to invest more.
Dad: Good. You have learned the lessons that I wanted to teach you.
– You didn’t really need the car, you just wanted to feel apart of the crowd. That would have placed extra financial obligations on you. It wasn’t an asset then; but a liability.
– Two, it is very important for you to invest in your future before living like a king.
Son: Thanks dad.

Then the father gave him the keys of the latest model of that car.

MORALS:
1. Always invest first before you start living the way you want.

2. What you see as a need now may become a want if you can take a little time to get over your feelings.

3. Try to be able to distinguish between an asset and a liability so that what you see as an asset today will not become a liability to you tomorrow.