One Day Until Next Press On Research Issue

One Day Until Next Press On Research Issue

Tomorrow I’ll release the next Press On Research monthly issue.  And below is an unfinished excerpt from the 27 page issue.

The Biggest Investment Secret In The World

How Warren Buffett Got So Rich And How You Can Too

Warren Buffett’s admired around the world for his philanthropy as he’s going to donate 99% of his $70 billion plus net worth to charity when he dies.

He can donate so much money because of how great an investor he is.  But almost no one knows how Warren Buffett made his fortune.

Yes, most investors know about his investments in Coke (K), Johnson & Johnson (JNJ), and Wells Fargo (WFC).  But this isn’t how he built his fortune.

Investor’s who’ve studied Buffet know he built his partnership, and then Berkshire Hathaway, buying small companies.

But this still isn’t the true secret to Warren Buffett’s success.

Today I’m going to tell you how he grew $100,000 into more than $70 billion.  And tell you how we can start doing the same.

But before we explain the exact companies Buffett built his fortune on.  We need to talk about why Press On Research concentrates on small caps.

A University of Kansas student asked Buffett about this in 2005:

“Question: According to a business week report published in 1999, you were quoted as saying: “It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.”…would you say the same thing today?” 

Here’s Buffett’s answer:

“Yes, I would still say the same thing today. In fact, we are still earning those types of returns on some of our smaller investments. The best decade was the 1950s; I was earning 50% plus returns with small amounts of capital. I could do the same thing today with smaller amounts. It would perhaps even be easier to make that much money in today’s environment because information is easier to access.

Yes, I’ve said this before many times.  But it’s an important concept to understand.

Small ultra safe investments that produce a ton of cash.  Have little to no debt.  Pay dividends and buy back shares.  And are cheap are my favorite investments.

These kinds of businesses are what Value Investing Journey and Press On Research is all about.

Today’s recommendation has no debt.  Owns more cash, cash equivalents, and short-term debt equivalents than its entire market cap.

And just its net cash, cash equivalents, and short-term debt equivalents make up 77% of its market cap.

This doesn’t count any of its property, plant, and equipment, future premiums earned, or cost-free float.  And this company is undervalued by 29% to 70%.

But this still isn’t all…  It’s also much more profitable than competition.

Today’s pick isn’t just a great company with all the above traits.  It’s also in Buffett’s favorite industry to invest.

Investing In Insurance

Most people won’t research insurance companies.  I wouldn’t early in my investing journey.  And many professional analysts stay away too.

This is because insurance companies are hard to understand at first.  Have new and confusing terminology to learn.  And normal profit metrics don’t matter much for them.

But if you learn how to evaluate them not only will you learn they’re easy to evaluate once you know what you’re doing.  But you can use the same repeatable process on every insurance company.

And Buffett has continued to buy into insurance – his favorite industry – constantly over the decades.  And it’s why he’s so successful.

In reality insurance companies are easy to understand.

Insurance companies take money – premiums, the insurance version of revenue – as payment for insuring things like businesses, equipment, health, life, etc.

The insurance company doesn’t have to pay you a dime of the money it earns over the years.  Until there’s some kind of damage or theft of whatever’s insured.  When this happens they pay the agreed upon insurance rate out to the policyholder.

While the company continues to earn money – premiums again – it invests some of it so it can pay back your policy in the future.  And also make a profit in excess of the amount earned, invested, and paid out.

If the company writes its policies and invests well over time it will earn underwriting profits.  And grow the assets it can use to write more policies and invest more money.

If it doesn’t, the company will go out of business when a major disaster strikes.

Think of insurance companies like investment management companies.  But instead of only earning management fees.  Insurance companies earn premiums on top of investment earnings.  These effects can double profits over time…  If management is great at what they do.

The insurance business while easy to understand is one of the hardest businesses to be great at.

Other than being a low-cost operator like GEICO.  Owned by Berkshire Hathaway.  There are no competitive advantages in this industry.  And it also experiences wild swings of huge profitability than massive losses.

But if the company writes policies and invests money well over a long period they can grow to great sizes at almost no extra costs.  The only new costs may be to hire more staff.

Insurance companies also hold the greatest secret in the investment world…  Float.  This is how Buffett built his fortune.  And how we’ll start to build ours.

But before we get to this we need to know why float is so important.

Brief Berkshire Hathaway History

Buffett began buying Berkshire Hathaway stock in 1962 when it was still a textile manufacturer.  And when he still ran his investment partnership.

He bought Berkshire stock because it was cheap compared to the assets it had.  Even though the company was losing money.

He continued to pour millions of dollars into Berkshire to keep up with foreign and non union competition.  But none of this worked.

In time Buffett realized he was never going to make a profit again in the textile industry.  So whatever excess funds Berkshire did produce he started buying other companies.

The first insurance company Berkshire Hathaway bought was National Indemnity Company in 1967.

Since then Berkshire’s float has grown from $39 million in 1970 to $84 billion in 2014.

Float compounds like interest does.  But not only does float compound, if you use it right it also compounds the value of the company that owns the float.

Since 1967 when Berkshire bought National Indemnity, Berkshire’s stock price has risen from $20.50 a share to today’s price of $210,500.  Or a total gain of 10,268%.

This is the power of insurance companies when operated well.  And today’s recommendation is an insurance company that operates the right way too.

But before we get to that I need to explain how float makes this possible.

The Biggest Investment Secret Revealed

‘Float is money that doesn’t belong to us, but that we temporarily hold.”  Warren Buffett

Float is things like prepaid expenses.  Billings in excess of expected earnings.  Deferred taxes.  Accounts payable.  Unearned premiums.   And other liabilities that don’t require interest payments.

But they are the farthest thing from liabilities.

Instead of paying this money out now like normal liabilities.  Companies can use these “liabilities” to fund current operations.

Float is positive leverage instead of negative leverage like debt and interest payments.

Think of float as the opposite of paying interest on a loan.  Instead of paying the bank for the cash you’ve borrowed.  The bank pays you interest to use the money you loaned.  And you can use this money to invest.

Using cost-free float to fund operations can improve margins by up to a few percentage points.

The best way to explain why float is so important is with the following quote:

“Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of free – other peoples money – in highly productive assets so that return on owners capital becomes exceptional.”  Professor Sanjay Bakshi adding to something Warren Buffett said about great businesses.

I said in last month’s issue: “When a company’s float/operating assets ratio is above 100% it means the company is operating with “free” or cost-free money.”

But this isn’t true with insurance companies.

For an insurance company to operate on a cost-free basis it has to produce underwriting profits for a sustained period.

I look for underwriting profits of at least five years straight to consider its float cost-free.

And the company I’m going to tell you about today has earned an underwriting profit every one of the last 10 years.

When you come across companies that are able to do this on a consistent basis you should expect exceptional returns in the future.

This is because when a company operates its entire business on a cost-free basis it means several things. 1)  It’s a great business.  2.)  It’s an efficient business.  And 3.) float magnifies profit margins.

So what is this great company?

To find out Subscribe here.

And remember Value Investing Journey subscribers get a 50% discount on a Press On Research subscription.  To get this discount subscribe to Value Investing Journey here.

Six Days Until Release Of Next Press On Research Issue

Six Days Until Release Of Next Press On Research Issue

Below is a three page unedited and unfinished excerpt from the next Press On Research issue.  To release July 21 2015.

The Biggest Investment Secret In The World

How Warren Buffett Got So Rich And How You Can Too

Warren Buffett is admired around the world for his philanthropy.  He plans to donate 99% of his $70 billion plus net worth to charity when he dies.

And he can donate so much money because of how great an investor he is.

But almost no one knows how Warren Buffett made his fortune.

Yes, most investors know about his investments in Coke (K), Johnson & Johnson (JNJ), and Wells Fargo (WFC).  But this isn’t how he built his fortune and Berkshire Hathaway.

Investor’s who’ve studied Buffet know he built his partnership, and then Berkshire Hathaway, buying small companies.

But this still isn’t the true secret to Warren Buffett’s success.

Today I’m going to tell you how he built an initial $100,000 of investable money into more than $70 billion.  And tell you how we can start doing the same things Buffett did.

So we can start building our own fortunes by owning a safe, small, investment he would buy if he were starting to invest today.

But before we explain the exact companies Buffett built his fortune on.  We need to talk about why Press On Research concentrates on small caps.

A University of Kansas student asked Buffett about this in 2005:
“Question: According to a business week report published in 1999, you were quoted as saying: “It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.”…would you say the same thing today?” 

Here’s Buffett’s answer:

“Yes, I would still say the same thing today. In fact, we are still earning those types of returns on some of our smaller investments. The best decade was the 1950s; I was earning 50% plus returns with small amounts of capital. I could do the same thing today with smaller amounts. It would perhaps even be easier to make that much money in today’s environment because information is easier to access.

Yes, I’ve said this before many times.  But it’s an important concept to understand.

Small ultra safe investments that produce a ton of cash.  Have little to no debt.  Pay dividends and buy back shares.  And are cheap are my favorite investments.

These kinds of businesses are what Value Investing Journey and Press On Research is all about.

Today’s recommendation has no debt.   Is undervalued by every one of my conservative valuations.  Owns more cash, cash equivalents, and short term debt equivalents than its entire market cap.

Just its net cash, cash equivalents, short term debt equivalents make up 77% of the companies market cap.  And its more profitable than its competition.

This doesn’t count any of its property, plant, and equipment, future premiums earned, or cost free float.  And this company is undervalued by 29% to 70%.

Today’s pick isn’t just a great company with all the above traits.  It’s also in Buffett’s favorite industry to invest.

To see the rest of this 27 page issue.  What the company is.  And the three other Press On Research picks up to this point.  Subscribe here.

And remember Value Investing Journey subscribers get a 50% discount on a Press On Research subscription.  To get this discount subscribe to Value Investing Journey here.

King Digital Entertainment (KING) Case Study Part 2 – Digging Into Financials

King Digital Entertainment (KING) Case Study Part 2 – Digging Into Financials

This test post is a continuation of King Digital Entertainment (KING) ongoing case study.  In Part 1 I found that KING passed what I require for a preliminary analysis to consider a company for potential investment.

Today we will begin the real meat of the analysis and dig into the companies financials to see if it’s still worth looking at.

Starting The Real Analysis

The financials I use at this point are the most recent quarterly report.  Most recent annual report, if different from the most recent quarter report.  And the most recent proxy if available.

In this case I’ll also be using its most recent annual and quarterly investor presentations as well.

You can find this info at either Morningstar or the company’s website.

If you’re following along the first thing you’re likely to notice is that KING doesn’t have a 10K and instead only has a 20-F annual report.  The 20-F report is what foreign companies file as their annual report instead of the 10K.

The 20-F contains all proxy related info as well so this is why KING doesn’t report a separate proxy form.

This is true of all foreign companies listing in the US as far as I know so make sure you’re aware of these slight differences when research foreign companies.

Instead of releasing the notes I copied from the financials and telling you what I found first.  I want you to tell me what you think about KING first.

What stood out to you from KING’s financial reports?  Do you still consider them a possible investment after reading its most recent financials?  Did you come across some red flags?  Let me know in the comments below.

In the next few days I will release my notes and tell you what I think about KING.

***

This is your last chance to enter for a chance to win more than $100 in prizes for the giveaway that will happen when we reach 200 total subscribers between Press On Research and Value Investing Journey.

And we’re about to hit this number so if you want your chance to these prizes make sure to Sign up for the Value Investing Journey newsletter here.

Armanino Foods (AMNF) Case Study Part 2 – Digging Into Financials

Armanino Foods (AMNF) Case Study Part 2 – Digging Into Financials

It’s been a bit of a winding road since part one of this case study was posted on May 5th…

Since then we’ve talked about: Why the P/E Ratio Is Useless and How to Calculate EV.  Explained Earnings Yield and why it’s important.   Answered the important question How Do You Find Stock Opportunities.   Showed How To Value And Evaluate Insurance Companies.  And showed How Not To Be A One-Legged Person In An Asskicking Contest.

I did this because we don’t just need to know what everything means.  We need to know why everything is important too.

Knowing why gives us a deeper understanding of the concepts used to value and evaluate companies.  And lets us start forming our investment philosophy.  So if you missed anything above make sure to check them out.

And now that we understand all the concepts talked about in the first part of this case study, it’s time to continue.  And this time we start to dig into the financials.

Starting The Real Analysis

Since Armanino passed my preliminary test and looks like it may be a good company to invest in.  It’s time to get into the real meat of the analysis and dig into the financials.

The financials I use at this point are the most recent quarterly report.  Most recent annual report, if different from the most recent quarter report.  And the most recent proxy if available.

You can find this info at either Morningstar or the company’s website.

If you’re following along you’ll notice Armanino Foods most “recent” proxy report is from 2004.  This is useless information 11 years later.

Sometimes OTC companies like AMNF won’t have up to date info available.  If you can’t find the information you want you’ll need to contact the company to see if they will send it to you. But in this case AMNF’s proxy is in its annual report so we don’t have to dig for it.

To get AMNF’s most recent annual and quarterly report you need to go to the company website page linked to above.

For some reason Morningstar doesn’t have Armanino’s updated financials.  This is something else you need to watch out for too when dealing with OTC companies.

For example,  I started reading AMNF’s 2013 annual earlier today because I thought it was updated on Morningstar.  Double check you have the most recent information.

Below is a link to the unedited notes I took while reading Armanino Foods most recent financial reports.

AMNF Financial Notes

What stood out to you from Armanino’s financial reports?  Do you still consider them a possible investment after reading its most recent financials?  Let me know in the comments below.

In the next few days I will add my notes to the ones above and tell you what I think of the financials.  But I will release these exclusively to Press On Research and Value Investing Journey subscribers.

To subscribe to both you can do so at the links above or below.

***

Don’t forget, if you want to receive two free gifts that will help you evaluate companies faster.  Get all future blog posts. Get future case study information first.  And be entered to win a hard copy of: The Snowball – Warren Buffett and the Business of Life and a $50 AMEX gift card. Sign up for the Value Investing Journey newsletter here.

 

Why Is Valuation Important?

Why Is Valuation Important?

Over the past few weeks I’ve seen a ton of people asking “why valuation is important?”

I’ve seen others answers, but I want to hear from you…  Do you think valuation is important?  Why or why not?

In the short  57 second video below I start a conversation about valuation.  Next week I’ll post my thoughts on this.  And then get back into the case study.

Let me know what you think in the comments below.