In this post, I will explain one of the methods of Buffet to analyze companies.
The post was based on the book “Warren Buffet and Balance Sheets” that I just read.
First, let’s take a look at Berkshire Hathaway’s performance:
First, from 1965 to 2015, the only negative years were 2001 and 2008, both after systemic crises such as that of the bubble.com and also the subprime crisis of 2008. In most of the remaining years, Berkshire Hathaway hit the SP500 very easily. One of the factors that made it grow so much was the strict policy of NOT PAYING dividends, so the company reinvested the profits, repurchased shares and always had cash to buy other companies and did not give money to the state gang, because when the dividends are paid, The gang gets 30% of the profits.
This is the cover of the book. I strongly suggest to anyone who wants to know a little more about the method used by Buffet to buy their companies. It’s a great book for every stock investor in the Buy and Holds style of reading.
For those who have read Siegel’s book and already know that stocks hit fixed income in the long run (including the SP500 that was what he used to do the study), this is nothing new. If the index that tends to an aggregate bad company is also better than fixed income, imagine a good and well-managed company.
The thing I liked most was learning the concept of EQUITY BONDS with Buffet.
What are Equity Bonds?
In a simple translation, this means “equity securities”.
Equity can be understood as equity when dealing with stocks. Bonds are the debt securities of the American government.
For Buffet, a share may be comparable to a bond in the long run and with greater potential for appreciation. Abroad is called BOND any debt securities (municipal, federal, debentures of private companies).
At the heart of Buffet’s idea is that a stock of a company with a durable competitive advantage (that is, the company will not go bankrupt or depreciate its value over time) has an intrinsic rate of return that may be comparable to the bond rate.
How to calculate the share rate?
Calculate as follows: EBITDA * 100 / Market Value = x%
Where “market value” = stock price * a number of shares (the market value of the company changes EVERY DAY (according to the quotes, if the quote goes up 3% the market value also rises 3%).
Remember to leave in the calculation the values in the same base (BILLIONS / BILLIONS) or to small caps (MILHOES OVER MILHOES). Do not divide (MILLIONS / BILLIONS) or (BILLIONS / MILLIONS) otherwise the account will go wrong.
Ex. Company XYZZ3:
EBITDA = 150 million.
Market value = 3 billion
Equity Bond = 0.15 billion * 100/3 = 15/3 = 5%
(see what became 150 million in 0.15 billion).
This 5 % are the internal rate of return of the equity bond of the company, is almost tied with the current rate of the TD in the long term, but it is MUCH MORE RISK than the TD.
Do the exercise a few times with some of your companies, you will see how amazing it is easy and quiet to do this.
Of course, in theory, this will only work with BOA company, with consistent profits, competitive advantage, good products, few important competitors, does not spend a lot of money on research and development, sells products that the public constantly needs.
When the Equity Bond is higher than the bond rate, purchase the ACTION if the Equity Bond is less than the bond rate buys the Bond.
Since I was on a quiet day yesterday, I made calculations of all my companies’ return rates. Remember that companies also protect you from inflation because they are real assets (in the long run inflation is not important to consider the stock price). Let’s see the rate of return of the companies in my portfolio with the prices of yesterday’s prices (08/08/2016) [I had never done this, yesterday was the first time.]
Alpargatas ALPA3 (10.8%) – Good rate. Almost twice as big as the TD rate.
Ambev ABEV3 (7.18%) – Good rate. More advantage to buying the stock.
Banco does Brasil (18.55%) – Excellent rate. As a bank it does not have EBITDA I took the net profit and multiplied by 125% and considered this amount as EBITDA, considering that this 25 % would be the taxes that the bank paid in total before the net profit.
Bank of Brazil BBSE3 security (8.14%) – Good.
BR FOODS (BRFS3) (10,58%) – Good.
BM & F BOVESPA BVMF3 (7.2%) – Good.
Graziottin CGRA3 (14.8%) – VERY good.
CIEL CIEL3 (7.3%) – Good.
CEMIG CMIG3 (20.35%) – Very good. Maybe there was some distortion somewhere …
CETIP CTIP3 (7.31%) – Good.
Engie [Tractebel] (12,55%) – Excellent.
Equatorial EQTL3 (12.55%) – Excellent.
Eztec EZTC3 (9.74%) – Good.
Grendene GRND3 (8%) – Good.
Hering HGTX3 (8.1%) – Good
Itaú ITUB3 (16.10%) – PQP PQP PQP
Kroton KROT3 (8.77%) – Good
Mahle Metal Leve LEVE3 (11,68%) – Mahle has more than 30 years in bovespa.
Moinho Dias Branco MDIA3 (4.68%) – In this case here, better buy TD.
Odontoprev ODPV3 (4.14%) – ditto above.
Porto Seguro PSSA3 (3.4%) – idem above.
Qualicorp QUAL3 (10.7%) – Good.
Raia Drogasil RADL3 (4.12%) – Best to buy TD.
São Carlos SCAR3 (15.66%) – Excellent.
Being Educational SEER3 (13,77%) – Excellent.
Totvs TOTS3 (6.23%) – Drawn, but the risk is much higher.
Tarpon TRPN3 (7.02%) – Little better, I left it in quarantine.
Ultrapar UGPA3 (10.16%) – Good.
Weg WEGE3 (5.22%) – Drawn.
Well, those are the companies I have in my portfolio. By the numbers, only Porto Seguro, Odontoprev and Moinho Dias Branco are that they are bonds that pay less than the Direct Treasury [at the moment, by the quotations of yesterday]. The TD currently paying 5.5% per annum with virtually zero risks.
OBVIOUS that this account is just another ISOLATED GIFT to compose ALL YOUR ANALYSIS of the companies. And given alone is no good. You have to see the big picture, the product and the future of the company. Notice that there are companies paying 2 to 3 times the direct treasury rate and they are VERY GOOD companies, such as Itaú. So do you prefer a bond that pays you 5.5% pa or a bond that pays you 15% a year?
Buffet considers essential in high gross profit margin (> 40%), he gives it more COMPETITIVE ADVANTAGE for the company. A gross profit lower than 20% is a sign of much competition, indicates inconsistency. Erratic earnings per share over the years is also bad, the profit has to be increasing and consistent, the LPA.
If these RULES are not respected, even with a low price (P / L), you buy it as a bargain, but the results will be mediocre. And if the company spends a lot on R & D this is not a good sign either. He speaks of other indicators such as indebtedness less than 80% of total assets, capacity to pay all debts in up to 4 years, also speaks of the valuation of “when to buy” but that in case he was going to enter with huge volume makes sense, not In ours we bought very little. He bought 10, 20, 50% of a company in one click.
And when to sell the business?
Never. According to Buffet, hardly ever. Except if the company loses its intrinsic value and competitiveness and/or P / E> 40. This P / L thing has to be carefully analyzed not to sell only for an isolated die.
Why did the Buffet move away from the method of its master Benjamin Graham?
Graham was a great investor and wrote books that are classics, true bibles, essential for everyone to read. Only Graham’s style was more for TRADE OF VALUE, buy a good company, expect it to value and sell to take its profit, and restart the process. Warren Buffet realized that his master sold very good companies and that over the years were delivering results EVERY TIME BETTER, and he asked himself “Why to sell this?” That’s where he perfected his method and combining with Philip Fischer’s method Created the true Buy and Hold method which is what I follow, of buying good companies and waiting for the long term to do their job.
The central issue is not trying to imitate the Buffet, but rather learn a little with it, and have more data to make their decisions. He thinks of the company as a piece of the consumer mind, a company that is not in his mind should not be that good. The essence of Buy and Hold is to buy a good company, always sell, have a product with a lot of output (preferably daily), have a consolidated and profitable market.
There is a famous company that sells the tractor, if it is called Johnny Deere, a life cycle of a tractor lasts for almost 17 years or more. Do you think you would be better positioned to buy Johnny Deere or Johnson & Johnson who sells toothpaste and toothbrush all the time? That’s Buffet’s kind of thinking. It’s not complicated. Just think a little, do not fret, buy a good company and wait for the time and compound interest to do their job.
It’s obvious that Berkshire Hathaway will get into my wallet.
Big hug and good investments,