레이블이 Acceptable Debt to Worth Ratio인 게시물을 표시합니다. 모든 게시물 표시
레이블이 Acceptable Debt to Worth Ratio인 게시물을 표시합니다. 모든 게시물 표시

2013년 11월 25일 월요일

About 'debt to worth ratio calculation'|Debt Rattle, May 31 2008: I used to be Snow White, but I drifted







About 'debt to worth ratio calculation'|Debt Rattle, May 31 2008: I used to be Snow White, but I drifted








Investors               try               and               always               have               tried               to               achieve               great               returns               on               their               investments.

Some               of               the               investors               have               better               results               than               others               and               only               a               few               manage               to               beat               the               market               at               least               once               in               their               career.

However,               there               are               a               few               investors               among               them               that               have               managed               to               continuously               show               great               returns               on               their               investment               decisions.

This               select               elite               of               investors               has               continuously               managed               to               beat               the               market,               which               has               made               them               the               center               of               attention               in               the               investment               world.

Other               investors,               who               try               to               find               out               the               secret               to               their               success,               admire               them.

Some               even               glorify               this               select               elite               of               investors.

They               call               them               for               example               'superior'               or               'money               gurus'.

The               purpose               of               this               article               is               to               determine               whether               Warren               E.

Buffett               really               deserves               the               title               of               a               'superior               investor'.

For               this               purpose               the               study               focuses               on               his               investment               strategies               and               investment               performances.

The               investigation               of               the               investment               strategy               aims               to               reveal               the               key               to               the               individual               investors               success               and               to               determine               whether               the               investors               indeed               have               a               special               'superior'               investment               method.

The               investigation               of               the               investment               performance               aims               to               show               whether               an               investor               has               a               continuous               extremely               successful               investment               record               or               if               he               only               had               a               handful               of               investment               decisions               that               showed               great               returns               and               made               him               famous.
               Warren               E.

Buffett               was               born               on               August               30th,               1930,               in               Omaha,               Nebraska.

Already               as               a               child               Buffett               developed               a               mathematical               talent               and               an               interest               in               the               stock               market,               because               his               father               was               a               stockbroker.

At               age               eleven               he               bought               his               first               shares               of               stock,               Cities               Service               Preferred.

After               Buffett               graduated               from               the               Columbia               Graduate               Business               School               in               New               York               with               a               master's               degree               in               economics,               he               worked               with               Harris               Upham               in               Omaha.

Invited               by               Graham               himself,               Buffett               joined               the               Graham-Newman               Corporation               in               1954,               but               returned               in               1956               to               Omaha,               where               he               opened               up               a               limited               investment               partnership.

Buffett               also               formed               more               partnerships,               but               in               1962               he               combined               all               of               them               to               one               partnership.
               The               office               of               this               partnership               was               at               Kiewit               Plaza               in               Omaha               Nebraska,               which               today               is               still               Buffett's               office.

In               1962               Buffett               obtained               shares               of               Berkshire               Hathaway               in               New               Bedford,               Massachusetts               (at               that               time               a               textile               company               in               difficulties).

In               1969,               Buffet               dissolved               the               investment               partnership               and               invested               his               share               into               Berkshire               Hathaway.

This               investment               gave               him               control               of               the               company.

Today,               Berkshire               Hathaway               is               successfully               operating               in               different               areas               of               business.

Berkshire               Hathaway               owns               businesses               such               as               insurance               companies,               a               newspaper,               a               candy               company,               a               furniture               store               and               a               jewelry               store,               to               name               a               few.

(Hagstrom,               Robert               G.,               Jr.,               The               Warren               Buffett               way:               investment               strategies               of               the               world's               greatest               investor,               John               Wiley               &               Sons,               Inc.,               New               York               1994)
               Warren               Buffett's               investment               strategy               is               mainly               influenced               by               the               investment               philosophies               of               two               people,               Benjamin               Graham               and               Philip               Fisher.

Buffett               says               of               himself               to               be               15%               Fisher               and               85%               Graham.

Graham               and               Fisher               differ               in               their               approach               to               investment.

Graham               uses               a               quantitative               approach,               emphasizing               factors               that               can               be               measured:               fixed               assets,               current               earnings,               dividends,               and               annual               reports.

Fisher               is               a               qualitative               analyst.

He               emphasizes               factors               that               increase               the               value               of               a               company:               future               prospects               and               management               capability.

Buffett               combined               the               investment               philosophies               of               Fisher               and               Graham.

He               uses               Fisher's               approach               in               qualitatively               understanding               a               business               and               its               management               and               Graham's               teachings               for               a               quantative               understanding               of               price               and               value.

(Hagstrom,               Robert               G.,               Jr.,               The               Warren               Buffett               way:               investment               strategies               of               the               world's               greatest               investor,               John               Wiley               &               Sons,               Inc.,               New               York               1994)
               Buffett               became               interest               in               Benjamin               Graham's               investment               theories               after               he               read               Graham's               book               "The               Intelligent               Investor."               Buffett               was               so               impressed               that               after               his               college               graduation               he               decided               to               study               at               the               Columbia               Graduate               Business               School               in               New               York,               where               Ben               Graham               was               a               professor.

Graham               became               Buffett's               mentor.

Buffett               learned               from               Graham               the               importance               of               understanding               a               company's               intrinsic               value,               which               is               determined               after               a               thorough               analysis               of               the               company.

According               to               Graham,               an               investor               should               buy               a               company's               share               below               its               intrinsic               value               and               then               take               advantage               of               the               corrective               forces               of               an               inefficient               market.

Graham's               three-step               analysis               of               a               company               entails               the               gathering               of               information               (descriptive               phase),               separation               of               biased               from               unbiased               information               to               obtain               a               fair               perspective               (critical               phase)               and               deciding               whether               to               purchase               the               security               (selective               phase).

Important               is               a               company's               future               earnings               power,               which               is               an               estimation               of               the               earnings               multiplied               by               an               appropriate               capitalization               factor.
               This               factor               includes               the               stability               of               earnings,               assets,               dividend               policy,               and               financial               strength.

Management               capability               and               the               nature               of               the               business               are               also               important               for               the               analysis.

Graham's               approach               to               investment               also               includes               diversification               to               reduce               risk               and               a               'margin               of               safety'.

The               margin               of               safety               accounts               for               a               large               enough               spread               between               the               price               of               a               company               and               its               intrinsic               value.

According               to               Graham,               an               investor               should               purchase               a               company               for               less               than               two-thirds               of               its               net               asset               value               and               focus               on               low               price-to-earning               ratio               stocks               ("don't               lose"               philosophy).

Graham               also               pointed               out               the               importance               to               follow               stock               market               fluctuations,               because               stocks               have               investment               and               speculative               characteristics.

Thus,               an               investor               needs               to               stay               away               from               speculation               and               stock               purchases               based               on               emotions.

Speculators               try               to               profit               by               anticipating               price               changes,               while               investors               want               to               purchase               companies               at               a               reasonable               price.

Graham               believed               that               a               logical               investor               could               benefit               from               the               emotion-investors               irrational               behavior,               because               the               rational               investor               thinks               independently               and               does               not               blindly               follow               the               crowd.

(Hagstrom,               Robert               G.,               Jr.,               The               Warren               Buffett               way:               investment               strategies               of               the               world's               greatest               investor,               John               Wiley               &               Sons,               Inc.,               New               York               1994)
               Around               1965,               Buffett               learned               that               Graham's               investment               approach               was               not               perfect.

Some               companies               he               invested               in               and               that               met               Graham's               qualifications,               did               not               turn               into               profitable               investments.

In               order               to               increase               the               price               of               the               share,               another               investor               needed               to               buy               shares               of               the               company,               just               to               get               the               last               profit               out               of               the               company               ("cigar               butt"               approach               to               investing).

This               does               not               work               in               all               cases.

Buffett               learned               from               these               mistakes               and               started               to               alter               his               investment               approach.

He               still               treasures               Graham's               teachings,               but               around               1969               he               began               to               implement               Fisher's               investment               philosophy               into               his               approach               to               investment.
               Buffet               became               interested               in               Fisher's               investment               philosophy               after               reading               Fisher's               book               "Common               Stocks               and               Uncommon               Profits."               Additionally,               Buffett's               friend               Charles               T.

Munger               was               most               fond               of               the               Fisher               approach               to               investment.

Fisher's               investment               philosophy               entails               the               investment               in               companies               with               above               average               potential               and               most               capable               management.

He               used               a               "point               system"               to               identify               companies               that               live               up               to               his               standards.

This               system               ranked               companies               by               business               characteristics               like               continuous               above-average               growth               of               sales               and               profits               and               management               characteristics               like               honesty,               integrity,               and               the               determination               to               develop               new               products               as               well               as               the               ability               to               expertly               market               the               company's               products.
               To               qualify               as               an               investment               the               company               needed               a               potential               of               future               growth               without               the               need               for               equity               financing.

According               to               Fisher               it               is               important               to               find               out               as               much               as               possible               about               a               company.

Thus,               Fisher               interviewed               employees,               customers,               and               suppliers               of               a               company               to               find               out               its               strength               and               weaknesses.

Fisher               also               believed               that               an               investor               should               only               invest               in               companies               which               business               he               can               understand.

Otherwise               the               lack               of               experience               with               the               business               might               lead               to               mistakes.

Buffett               learned               from               Fisher               that               the               type               of               business               invested               in               is               important.

Fisher               also               taught               him               not               to               overdiversify,               because               this               causes               loss               of               control               over               the               investments.

In               implementing               Fisher's               philosophy,               Buffett               was               able               to               make               good               long-term               investments.

(Hagstrom,               Robert               G.,               Jr.,               The               Warren               Buffett               way:               investment               strategies               of               the               world's               greatest               investor,               John               Wiley               &               Sons,               Inc.,               New               York               1994)
               Warren               E.

Buffett               is               a               value               investor.

His               investment               strategy               evolved               over               time,               helping               him               to               make               better               investment               decisions.

In               the               beginning,               following               Graham's               investment               theories,               Buffett's               limited               investment               partnership               (formed               in               1956)               chose               its               investments               on               the               basis               of               value               and               not               popularity               with               an               attempt               to               minimize               permanent               capital               loss.

The               goal               was               to               outperform               the               Dow               by               about               ten               percentage               points               annually.

Buffett               also               began               to               buy               controlling               interests               in               public               and               private               companies.

This               lead               in               1965               to               the               control               of               Berkshire               Hathaway               by               Buffett's               investment               partnership.

In               1969,               Buffet               considered               the               market               to               be               too               speculative               and               the               values               he               was               looking               for,               hard               to               find,               but               he               did               not               deviate               from               his               investment               beliefs.

The               elimination               of               the               partnership               in               the               same               year               enabled               him               to               gain               control               of               Berkshire               Hathaway               with               the               proceeds.
               In               his               attempt               over               the               next               twenty               years               to               make               profits               in               the               textile               business               with               the               company,               Buffett               learned               that               corporate               turnarounds               are               rarely               successful.

However,               Berkshire               Hathaway               had               purchased               two               insurance               companies               in               1967.

These               two               investment               vehicles               helped               Buffett               to               start               the               enormous               success               of               the               company.

Buffett               invested               heavily               into               the               insurance               area               in               the               1970s.

The               company               also               acquired               noninsurance               business.

When               the               insurance               business               became               less               profitable               and               insurance               rates               started               to               drop,               Buffett               decided               to               concentrate               on               the               financial               side               and               the               portfolio               of               Berkshire               Hathaway.

The               financial               integrity               that               Berkshire               Hathaway               represents               has               created               great               trust               among               the               company's               shareholders,               even               though               over               the               years               even               Buffett               made               insurance               mistakes.
               In               his               investment               approach               Buffett               follows               a               few               but               essential               rules               and               steps.

These               rules               and               steps               describe               clearly               the               way               Buffett               thinks               and               invests.

Buffett               does               not               practice               portfolio               management               in               the               traditional               way.

His               approach               begins               with               the               determination               of               long-term               characteristics               of               several               businesses               and               the               quality               of               their               management.

Then               Buffett               attempts               to               purchase               a               few               of               the               very               best               businesses               at               reasonable               prices.

Buffett               takes               the               perspective               of               a               businessperson               in               his               investment               approach.
               He               does               not               think               in               terms               of               market               theories,               macroeconomic               concepts,               or               sectortrends.

He               is               interested               in               how               a               business               operates.

Important               is               whether               the               business               is               simple               and               understandable,               does               have               a               consistent               operating               history               and               favorable               long-term               prospects.

Berkshire               Hathaway               reflects               Buffett's               "down-to-earth               way               of               looking               at               business."               The               company               is               organized               according               to               Buffett's               philosophies.

Buffett               understands               that               by               owning               shares               of               stock,               he               owns               businesses.

His               mentality               is               reflected               in               the               attitude               of               a               business               owner               as               opposed               to               a               stockowner.

(Hagstrom,               Robert               G.,               Jr.,               The               Warren               Buffett               way:               investment               strategies               of               the               world's               greatest               investor,               John               Wiley               &               Sons,               Inc.,               New               York               1994)
               Buffett               feels               that               it               is               important               to               determine               a               company's               intrinsic               value               and               then               to               purchase               the               company's               share               for               less               than               this               intrinsic               value.

To               be               able               to               determine               this               intrinsic               value,               Buffett               analyses               a               company               completely.

For               this               purpose               he               focuses               on               a               few               key               factors               that               are               important               to               determine               the               companies               value.
               When               Buffett               considers               an               investment               into               a               company               he               focuses               on               its               sales,               earnings,               profit               margins               and               capital               reinvestment               requirements.

His               focus               is               also               on               business               fundamentals,               management,               and               prices.

The               stock               quotes               for               the               company               do               not               interest               him.

Buffett               also               is               not               concerned               with               General               Accepted               Accounting               Principles               (GAAP)               reported               earnings.

Berkshire               Hathaway's               value               for               example               does               not               depend               on               the               reported               retained               earnings               of               those               companies               that               it               has               partial               ownership               of,               but               on               how               the               retained               earnings               are               reinvested               and               what               that               reinvestment               produces               in               future               earnings               (Hagstrom,               Robert               G.,               Jr.,               The               Warren               Buffett               way:               investment               strategies               of               the               world's               greatest               investor,               John               Wiley               &               Sons,               Inc.,               New               York               1994).

Additionally,               Buffett               is               generally               not               interested               in               politics,               monetary               policy,               unemployment               figures,               interest               rates,               or               currency               exchange               rates               as               a               basis               for               his               investment               decisions.

But               Buffett               can               get               worried               about               inflation               and               how               it               could               affect               business               returns.
               He               believes               that               since               there               is               no               limit               set               for               the               government               spending,               the               printing               of               money               to               support               this               spending               will               sooner               or               later               increase               inflation.

Thus,               Buffett               considers               budget               deficit               and               trade               deficit               in               his               investment               decision               to               determine               the               possible               real               return               of               the               investment               in               question.

He               does               not               invest               into               companies               that               in               the               case               of               a               high               inflation               might               have               problems.

According               to               Buffett               the               companies               that               will               have               the               lowest               impact               from               inflation               are               those               that               have               a               great               amount               of               economic               goodwill.

Economic               goodwill               is               usually               understood               as               the               good               reputation               that               a               company               has               for               its               products.

Thus,               due               to               the               economic               goodwill               a               company               can               be               worth               more               than               value               of               its               tangible               and               identifiable               assets.
               The               company               can               ask               for               premium               prices               and               will               produce               high               returns.

Additionally,               the               value               of               economic               goodwill               seems               to               increase               with               inflation,               because               it               is               easier               for               a               company               with               a               good               reputation               for               its               product               to               raise               its               prices               than               for               other               companies               (Hagstrom,               Robert               G.,               Jr.,               The               Warren               Buffett               way:               investment               strategies               of               the               world's               greatest               investor,               John               Wiley               &               Sons,               Inc.,               New               York               1994.)               Buffett               does               not               invest               in               companies               that               have               difficult               business               problems               or               fundamentally               change               the               direction               of               the               company               because               of               difficulties.

He               prefers               companies               that               have               been               producing               the               same               product               or               service               for               several               years.

After               Buffett               has               determined               a               company's               economic               characteristics,               he               will               investigate               its               competitive               strengths               and               weaknesses               (Hagstrom,               Robert               G.,               Jr.,               The               Warren               Buffett               way:               investment               strategies               of               the               world's               greatest               investor,               John               Wiley               &               Sons,               Inc.,               New               York               1994.)
               Buffett               is               skeptical               of               companies               that               need               to               buy               growth,               because               growth               often               comes               at               an               overvalued               price.

Buffett               believes               that               money               should               be               reinvested               in               the               company.

This               is               the               reason               why               Berkshire               Hathaway               does               not               pay               dividends               (Hagstrom,               Robert               G.,               Jr.,               The               Warren               Buffett               way:               investment               strategies               of               the               world's               greatest               investor,               John               Wiley               &               Sons,               Inc.,               New               York               1994)               In               Berkshire               Hathaway's               annual               reports               Buffett               includes               earnings               reports               of               each               of               Berkshire's               businesses.

He               also               includes               additional               information               he               finds               important               to               demonstrate               the               company's               economic               performance               (Hagstrom,               Robert               G.,               Jr.,               The               Warren               Buffett               way:               investment               strategies               of               the               world's               greatest               investor,               John               Wiley               &               Sons,               Inc.,               New               York               1994)               Buffett               is               not               interested               in               yearly               results.

He               prefers               four-               or               five-year               averages.

He               believes               that               yearly               results               do               not               accurately               reflect               profitable               business               returns.

Buffett               focuses               on               return               on               equity,               not               earnings               per               share,               'owner               earnings'               to               get               a               true               reflection               of               value               and               high               profit               margins.

For               every               dollar               retained               he               requires               that               the               company               has               created               at               least               one               dollar               of               market               value.
               For               the               return               on               equity               ratio               Buffett               excludes               all               capital               gains               and               losses               as               well               as               any               extraordinary               items               that               may               increase               or               decrease               operating               earnings.

Under               'owner               earnings'               Buffett               understands               a               company's               net               income               plus               depreciation,               depletion,               and               amortization,               less               the               amount               of               capital               expenditures               and               amortization,               less               the               amount               of               capital               expenditures               and               any               additional               working               capital               that               might               be               needed.

Buffett               knows               owner               earnings               are               not               very               precise,               but               he               also               thinks               that               accounting               earnings               are               only               useful               to               the               analyst               if               they               approximate               the               expected               cash               flow               of               the               company.

But               even               cash               flow               often               misleads               investors.

Buffett               is               very               sensitive               about               Berkshire's               profit               margins,               because               he               wants               to               avoid               costs               and               unnecessary               expenses.

He               believes               that               for               every               dollar               of               sales,               there               is               an               appropriate               level               of               expenses.
               Buffett               believes               that               a               company's               business               success               will               be               reflected               in               an               increased               stock               price.

The               increase               should,               at               the               very               least,               match               the               amount               of               retained               earnings,               dollar               for               dollar.

(Buffett's               quick               test;               Hagstrom,               Robert               G.,               Jr.,               The               Warren               Buffett               way:               investment               strategies               of               the               world's               greatest               investor,               John               Wiley               &               Sons,               Inc.,               New               York               1994)               Buffett               borrows               money               in               anticipation               of               using               it               farther               down               the               road,               rather               than               borrowing               the               money               after               a               need               is               announced.

However,               Buffett               acts               only               when               he               is               reasonably               confident               the               return               of               a               future               business               will               more               than               offset               the               expense               of               the               debt.

On               the               other               hand,               Buffett               does               not               like               business               that               achieves               good               returns               on               equity               while               employing               debt               to               finance               their               operations.

According               to               Buffet               the               value               of               a               business               is               determined               by               the               net               cash               flows               expected               to               occur               over               the               life               of               the               business               discounted               at               an               appropriate               interest               rate.

As               the               discount               rate               Buffett               uses               the               rate               of               the               long-term               U.S.

government               bond.
               Buffett               will               not               value               a               company,               if               he               cannot               project               the               future               cash               flows               of               a               business               with               confidence.

According               to               Buffett,               value               is               the               discounted               present               value               of               an               investment's               future               cash               flow:               growth               is               simply               a               calculation               used               to               determine               value               (Hagstrom,               Robert               G.,               Jr.,               The               Warren               Buffett               way:               investment               strategies               of               the               world's               greatest               investor,               John               Wiley               &               Sons,               Inc.,               New               York               1994.)               The               margin-of-safety               principle               is               important               for               Buffett,               because               it               protects               him               from               downside               price               risk.

Thus,               if               the               calculated               value               of               a               business               is               only               a               little               bit               higher               than               its               per               share               price,               Buffett               will               buy               the               stock,               because               a               wrong               appraisal               of               the               company               could               lead               to               a               loss               if               the               company's               intrinsic               value               would               drop               below               his               purchasing               price.

Therefore,               if               the               margin               between               the               purchase               price               and               the               intrinsic               value               of               the               company               is               large               enough,               there               is               less               risk               of               declining               intrinsic               value.

The               margin               of               safety               also               provides               opportunities               for               extraordinary               stock               returns,               because               a               correct               appraisal               of               a               company's               intrinsic               value               will               increase               the               values               of               the               shares               of               stock               in               the               long               run,               because               they               reflect               the               returns               of               the               business               (Hagstrom,               Robert               G.,               Jr.,               The               Warren               Buffett               way:               investment               strategies               of               the               world's               greatest               investor,               John               Wiley               &               Sons,               Inc.,               New               York               1994.)               Invest               in               companies               that               have               an               international               franchise               and               strong               growth               prospects.
               Buffett               uses               a               relationship               investing               style.

This               means               he               provides               a               company               with               the               capital,               but               then               only               monitors               the               company.

Thus,               the               management               can               continue               its               corporate               policies               and               does               not               have               to               worry               about               potential               takeovers.

Buffett               does               not               want               the               company               to               change.

In               most               cases,               Buffett               will               assign               voting               rights               of               his               shares               to               management,               which               sometimes               earns               him               a               place               on               a               company's               board               of               directors.

Buffett               looks               for               companies               he               understands,               with               favorable               long-term               prospects               that               are               operated               by               honest,               competent               people               and               are               available               at               attractive               prices.

Buffett               likes               managers               who               give               honest               reports               on               their               company's               financial               performance.

He               likes               people               who               are               able               to               admit               mistakes.

Once               Buffett               has               purchased               a               business,               he               wants               the               prior               management               to               keep               managing               the               company,               except               for               the               areas               of               capital               allocation               and               compensation               of               top               management,               which               he               takes               care               off.

The               owners               also               can               keep               a               small               stake               in               the               company,               while               Berkshire               Hathaway               obtains               the               majority               to               be               able               to               consolidate               earnings               for               tax               purposes.

Buffett               prefers               to               own               a               company,               because               it               allows               him               to               influence               capital               allocation.

There               are               advantages               to               not               owning               a               company.

The               stock               market               provides               more               opportunities               for               finding               bargains               and               there               is               a               large               selection               of               noncontrolled               businesses               available.
               He               invests               in               companies               that               have               an               honest               and               competent               management.

He               wants               to               be               able               to               trust               these               people.

Thus,               the               management               in               question               needs               to               be               rational,               candid               with               the               shareholders               and               be               able               to               resist               the               institutional               imperative.

Buffett               likes               executives               that               buy               their               company's               stocks,               because               this               demonstrates               interest               in               the               company               for               the               benefit               of               its               owners.

He               resents               managers,               who               follow               the               decisions               of               other               managers,               because               they               do               not               want               to               be               embarrassed               by               the               others               ability               to               still               produce               quarterly               gains,               even               though               they               are               going               downhill               (institutional               imperative).

In               evaluating               a               management's               abilities               measures               like               return               on               equity,               cash               flow,               and               operating               margins               can               be               used               to               judge               economic               performance               (Hagstrom,               Robert               G.,               Jr.,               The               Warren               Buffett               way:               investment               strategies               of               the               world's               greatest               investor,               John               Wiley               &               Sons,               Inc.,               New               York               1994.)
               Buffett               does               not               invest               in               a               company,               which               business               he               does               not               understand.

He               admits               he               would               be               unable               to               understand               the               company               well               enough               to               make               an               informed               judgment.

Thus,               Buffett               has               never               owned               a               technology               company.

He               also               has               not               owned               utility               companies.

He               was               never               attracted               to               an               industry               where               the               profits               were               regulated.

Buffett               also               does               not               purchase               a               business,               when               the               decision               to               purchase               it               is               not               easy.

He               believes               that               only               good               businesses               enable               the               investor               to               make               an               easy               decision.

Buffett               believes               that               the               more               an               investor               understands               his               investment               the               greater               will               be               his               success.

Buffett               understands               the               revenues,               expenses,               cash               flows,               labor               relations,               pricing               flexibility               and               capital-allocation               needs               of               each               of               Berkshire's               holdings.
               Buffett               has               the               ability               to               buy               a               good               business               when               everybody               else               does               not               think               about               buying               it.

This               pessimism               in               the               investment               world               causes               low               prices.

Buffett               likes               to               purchase               these               businesses,               because               of               these               low               prices.

According               to               Buffett,               as               long               as               an               investor               feels               comfortable               with               the               businesses               he               owns,               he               should               use               lower               prices               to               add               stocks               more               cheaply               to               his               portfolio.

Thus,               when               Buffett               bought               stock               in               General               Foods               and               Coca-Cola               in               the               1980s,               people               found               General               Foods               to               be               an               uninteresting               food               company               and               Coca-Cola               safe,               conservative,               but               unappealing.

But               after               Buffett's               investment               earnings               exploded.
               Buffett               found               out               early               on               that               daily               stock               market               quotes               do               not               influence               the               long-term               value               of               his               stock               holdings.

Important               is               the               economic               progress               of               the               businesses.

Thus,               over               time               the               price               of               the               shares               of               a               company               will               reflect,               whether               a               company's               business               is               successful               or               not.

However,               over               shorter               periods,               the               price               of               stock               will               fluctuate               around               the               business               value               of               a               company,               which               depends               on               investors'               emotions               not               economics.

Thus,               Buffett               does               not               predict               short-term               market               movements.

He               believes               that               such               a               prediction               is               not               possible.

He               believes               that               only               the               thorough               evaluation               of               a               company's               economic               fundamentals               can               lead               to               superior               profits.

He               is               a               long-term               investor               who               seeks               out               long-term               prospects               and               invests               accordingly.

In               his               opinion,               an               investor               should               expect               fluctuations               in               the               stock               market               and               learn               to               live               with               it.

Buffett               also               does               not               believe               that               following               the               newest               investment               theories               will               give               an               investor               a               guarantee               for               success.

Investors               should               stick               with               the               basic               fundamentals               and               forget               about               strategies               like               portfolio               insurance               (Hagstrom,               Robert               G.,               Jr.,               The               Warren               Buffett               way:               investment               strategies               of               the               world's               greatest               investor,               John               Wiley               &               Sons,               Inc.,               New               York               1994.)
               Buffett               is               a               very               inactive               investor.

He               does               not               constantly               buy               or               sell               stocks.

He               believes               that               it               is               not               wise               to               change               a               portfolio               every               day.

He               prefers               to               hold               his               outstanding               businesses.

Buffett               believes               that               it               is               better               for               and               investor               to               concentrate               on               finding               a               few               spectacular               investments               rather               than               switching               from               one               mediocre               investment               to               another.

Buffett's               strategy               to               hold               his               investments               on               a               long-time               basis               also               has               a               financial               advantage               over               short-term               approaches.

He               does               not               have               to               pay               tax               on               capital               gains               that               often               (Hagstrom,               Robert               G.,               Jr.,               The               Warren               Buffett               way:               investment               strategies               of               the               world's               greatest               investor,               John               Wiley               &               Sons,               Inc.,               New               York               1994.)
               Buffett               will               hold               on               to               a               security               as               long               as               he               perceives               the               prospective               return               on               equity               capital               of               the               underlying               business               as               satisfactory,               the               management               as               competent               and               honest,               and               the               market               does               not               overvalue               the               business.

On               the               other               hand,               Buffett               will               sell               such               a               security               to               use               the               proceeds               for               the               purchase               of               an               even               more               or               equally               undervalued               security               with               an               underlying               business               that               he               understands               better.

However,               there               are               common-stock               positions               that               Buffett               will               not               sell,               even               if               the               market               will               overvalue               their               stock.

To               be               considered               as               a               permanent               holding               by               Buffett,               a               company               must               possess               good               economics               and               a               good               and               trustworthy               management,               with               which               Buffett               enjoys               associating               (Hagstrom,               Robert               G.,               Jr.,               The               Warren               Buffett               way:               investment               strategies               of               the               world's               greatest               investor,               John               Wiley               &               Sons,               Inc.,               New               York               1994.)
               Buffett               not               only               buys               common               stocks,               he               also               buys               fixed-income               securities               for               Berkshire's               insurance               companies.

As               fixed               income               securities,               Buffett               will               consider               short-term               cash               equivalents,               medium-term               fixed-income               securities,               long-term               fixed-income               securities               and               arbitrage               positions.

Buffett               does               not               have               a               strong               preference               when               it               comes               to               investing               in               these               different               categories.

He               considers               bonds               to               be               a               mediocre               investment.

Buffett               chooses               those               investments               that               provide               the               highest               after-tax               return.

Thus,               Buffett               has               limited               Berkshire's               fixed-income               securities               to               convertible               bonds,               convertible               preferred               stocks,               and               short-and               intermediate-term               bonds               with               sinking               funds.

Buffett               has               great               financial               requirements               for               bonds               like               a               current               interest               rate               return               that               approximates               a               business               return               and               the               possibility               that               the               bond               will               post               a               capital               gain.
               If               Buffett               has               more               cash               than               investable               ideas,               he               sometimes               turns               to               arbitrage.

The               requirements               for               such               a               situation               are               the               likelihood               that               the               arbitrage               situation               will               occur,               the               length               that               the               money               will               be               tied               up,               the               probability               that               there               will               be               a               better               opportunity               somewhere               else               and               what               will               happen               if               the               event               does               not               take               place.

He               limits               his               arbitrage               strategies               to               announced               and               friendly               deals.

Regarding               convertible               preferred               stocks               Buffett               thinks               of               them               as               fixed-income               securities               and               as               vehicles               for               appreciation.

Buffett               expects               that               the               least               Berkshire               will               receive               from               its               convertible               preferred               stock               investments               is               its               money               back               plus               dividends,               but               he               also               expect               that               the               returns               will               outperform               the               results               of               most               fixed-income               portfolios.

(Hagstrom,               Robert               G.,               Jr.,               The               Warren               Buffett               way:               investment               strategies               of               the               world's               greatest               investor,               John               Wiley               &               Sons,               Inc.,               New               York               1994)
               That               Buffett               completely               commits               to               his               investment               strategy               and               still               has               success               with               it,               can               be               seen               in               one               of               his               latest               coups,               when               he               acquired               4,000               tons               of               silver               for               $650million               between               July               25,               1997               and               January               12,               1998.

Buffett               saw               an               opportunity               in               the               low               silver               price               last               summer               and               took               advantage               of               it.

Buffett               knew               that               silver               is               used               for               things               like               jewelry,               photographic               supplies,               batteries,               and               so               on.

Thus               he               saw               an               imbalance               in               demand               and               supply               for               silver,               which               led               him               to               the               conclusion,               that               the               price               of               the               silver               is               too               low.

Thus,               the               prospective               of               a               future               price               increase               made               this               an               ideal               investment               situation               for               Buffett.

And               he               was               right.

Since               Buffett               purchased               it               the               price               for               silver               increased               dramatically               (in               March               by               70%).

Buffett's               investment               strategy               still               works               today,               even               though               it               gets               harder               for               him               to               find               the               really               good               investment               opportunities               in               today's               market.

(Kadlec,               Dan,               Buffett's               silver               streak,               Time,               Feb.

16.

1998,               pp.

63f)
               Buffett               started               a               limited               investment               partnership               in               1956               together               with               seven               limited               partners.

These               partners               contributed               $105,000               to               the               partnership,               while               Buffett               as               the               general               partner               started               with               $100.

This               partnership               never               had               a               down               year               in               the               following               thirteen               years,               even               though               the               Dow               Jones               Industrial               Average               had               a               decline               in               five               different               years               of               the               thirteen               years.

In               fact,               Buffett               was               able               to               compound               money               at               an               annual               rate               of               29.5%               during               these               thirteen               years.

In               1965,               the               partnership               had               $26               million               in               assets.

Buffett               also               did               beat               the               Dow               by               twenty-tow               percentage               point               in               the               years               from               1957               to               1969               (Exhibit               AI).

Thus,               by               1969               Buffett's               share               in               the               partnership               amounted               to               $25               million.

At               the               time               that               Buffett's               partnership               took               control               of               Berkshire               Hathaway               in               1965,               Berkshire               Hathaway               had               $2.9               million               in               marketable               securities,               which               Buffett               managed               to               increase               to               $5.4               million               after               one               year.

The               investment               of               $25               million               gave               him               control               of               the               company.
               Over               the               following               twenty               years,               Buffett               and               Ken               Chace               tried               fruitlessly               to               make               the               company               profitable.

Finally,               in               1985,               Buffett               shut               down               the               textile               business               of               the               company.

Fortunately,               in               1967,               Berkshire               Hathaway               had               obtained               the               outstanding               stocks               of               the               National               Indemnity               Company               and               the               National               Fire               &               Marine               Insurance               Company               (two               insurance               companies).

This               transaction               turned               out               to               be               the               foundation               for               Berkshire               Hathaway's               future               success.

In               the               1970s,               Buffett               purchased               another               three               insurance               companies.

Additionally               he               coordinated               five               other               insurance               companies.

Berkshire               Hathaway               also               owns               other               lines               of               businesses.

In               all               of               these               areas               Berkshire               Hathaway               managed               to               be               successful               and               prosper.
               In               1967,               Berkshire               Hathaway's               experienced               a               return               on               investments               that               was               three               times               as               much               as               the               return               of               its               textile               division.

Additionally,               the               two               insurance               companies               that               Berkshire               Hathaway               obtained               in               1967               had               a               portfolio               of               $31.9               million.

Buffett               managed               to               increase               this               amount               to               $42               million               within               two               years.

Today,               Berkshire               Hathaway               has               the               second               largest               net               worth               in               the               property               casualty               industry,               and               its               investment               portfolio               is               three               times               the               average               in               the               industry               compared               to               premium               volume.

Berkshire               Hathaway's               noninsurance               business               had               combined               sales               of               $2               billion               in               1993,               of               which               Berkshire               itself               received               net               after               tax               earnings               in               the               amount               of               $176               million.
               This               was               37%               of               the               company's               total               operating               earnings               in               that               year.

In               1965,               Berkshire               Hathaway's               net               worth               was               $22               million;               in               1993               it               was               $10.4               billion.

Buffett               also               managed               to               increase               the               company's               book               value               per               share               from               $19               in               1964               to               $8,854               in               1993,               a               compounded               annual               rate               of               23.3%.

This               is               more               than               the               15%               goal,               that               Buffett               set               himself               and               he               did               most               often               better               than               the               S&P               500               (Exhibit               AII).

In               fact,               from               1965               to               1997               except               for               the               years               1967,               1975               and               1980,               Berkshire's               per-share               book               value               was               better               than               the               S&P               500               (Exhibit               AIII).

In               the               last               ten               years,               even               though               there               were               declines               and               inclines,               Berkshire's               returns               were               increasingly               better               than               those               of               the               S&P               500               (Exhibit               AIV).

Compared               to               the               DJIA,               Berkshire               also               had               better               results               (Exhibit               AV).

From               a               slight               difference               in               the               year               1988               compared               to               the               S&P               500               and               the               DJIA,               Berkshire               managed               to               work               its               way               up               to               a               to               a               1000               to               1500               %               difference               in               1997/98               in               both               cases.
               Buffett's               investment               strategy               might               be               time-consuming,               but               the               great               deal               of               analysis               he               pursues               allows               him               to               make               good               investment               decisions.

His               strong               personality               and               the               ability               to               make               independent               decisions               as               well               as               the               ability               to               patiently               wait               on               the               results               of               his               long-term               investments               are               very               important               for               his               success.

The               performance               of               Buffett's               early               limited               partnerships               and               later               the               performance               of               Berkshire               Hathaway               since               1965               are               the               manifestation               of               Buffett's               success.

He               continuously               increased               Berkshire's               wealth               and               value.
               Simultaneously               he               continuously               managed               to               beat               the               market               (S&P               500               and               DJIA),               with               a               steady               increase               in               the               difference               of               the               returns.

In               fact,               Berkshire's               returns               are               much               higher               than               those               of               the               market.

On               a               year-by-year               basis,               Berkshire's               returns               have               at               times               been               volatile.

These               swings               in               per-share               value               are               due               to               changes               in               the               stock               market.

The               underlying               stocks               that               Berkshire               owns               create               these               swings.

Buffett               might               have               made               some               wrong               investment               decisions               in               his               career,               but               he               always               found               a               way               out               of               his               dilemma.

The               financial               integrity               that               Berkshire               Hathaway               represents               has               created               great               trust               in               Buffett               among               the               company's               shareholders.

Warren               E.

Buffett               indeed               is               a               'superior               investor'.

(Hagstrom,               Robert               G.,               Jr.,               The               Warren               Buffett               way:               investment               strategies               of               the               world's               greatest               investor,               John               Wiley               &               Sons,               Inc.,               New               York               1994)
               The               results               of               the               study               confirm               that               Warren               E.

Buffett               indeed               deserves               the               title               of               being               a               'superior               investor'.

He               has               a               successful               investment               record               and               managed               to               beat               the               market               most               of               the               time               during               his               career.

However,               strategy               alone               is               not               the               key               to               his               success.

In               fact,               every               investor               could               try               to               imitate               his               strategy,               but               might               not               be               as               successful.

The               study               revealed,               that               the               key               to               his               success               could               be               found               in               a               rare               but               successful               combination               of               personality               characteristics               and               investment               strategy.

Without               these               personality               features               his               individual               investment               approach               would               probably               turn               out               to               just               be               mediocre.

He               has               key               characteristics,               which               seem               to               be               very               important               to               become               a               'superior'               investor.
               The               most               important               one               of               these               characteristics               is               a               very               strong               personality.

He               believes               in               himself               and               is               very               self-confident.

In               this               manner               he               makes               his               investment               decisions               independently               from               everybody               else's               opinion.

He               knows               it               is               not               wise               to               follow               blindly               the               rest               of               the               investment               world.

Investors               that               make               the               same               investment               decisions               end               up               with               the               same               investment               record.

Thus,               to               distinguish               himself               and               to               be               able               to               get               better               results               than               the               others,               an               investor               will               have               to               take               another               path,               make               other               decisions.

This               ability               to               make               an               own               independent               judgment               is               one               of               the               key               features               that               distinguish               a               superior               investor               from               the               rest               of               the               investment               world.
               Buffet's               strong               personality               also               allows               him               to               stand               by               his               investment               decisions               until               the               desired               outcome               is               reached               or               it               is               clear               that               a               mistake               was               made.

He               does               not               get               nervous               just               because               an               investment               does               not               show               the               desired               results               right               away               and               nobody               else               seems               to               think               the               decision               was               a               good               idea.

He               is               able               to               patiently               wait               on               results.

This               patience               is               another               ability               that               distinguishes               a               superior               investor               from               others.






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