12 Basic Immutable Tenets
As we all know Warren Buffett may be the most successful investor in the world. Some people try to dismiss Buffetts’ prowess of picking successful securities on the basis of a certain degree of luck or inside information that the regular small investor could never hope to have. However what many people do not understand is that, according to Robert G. Hagstrom, Buffett does not invest in stocks but in companies and their underlying businesses. and instead of luck Buffett uses his twelve immutable tenets. These twelve tenets are broken into four sections of the companies: 1) Business, 2) Management 3) Financial and 4) Market. By analyzing 3Ms’ annual report, its financial statements, and by examining all aspects of the company and its’ industry we can come to a conclusion of whether or not 3M would make an attractive investment to Buffett.
The first group of Buffetts’ tenets is the Business tenets. The business tenets are broken into three areas of concentration. The first business tenet is the business must be simple and understandable. 3M has thousands of different products, a few of which are simple (and thus interesting to Buffett) such as Post-It Notes, Scotch Tape, adhesives, and cleaning agents. But some of 3Ms’ other products are not as simple such as flexible circuits, and electronic and liquid crystal displays. These highly technical products would be out of Buffetts’ “circle of confidence”, products that Buffett does not know very much about and therefore Buffett would not be able to interpret and react to developments with as much confidence. The second business tenet is that the business must have a consistent operating history. Companies with a consistent operating history are firms that are in a stable industry, have spent years producing the same product, and that are not currently involved in changing directions. 3M could easily be categorized as having a consistent operating history as shown by its strong core products (Post-It notes, Scotch tape, Scotch guard etc…) which have dominated their market for years. Also 3Ms’ consistency can be measured by its’ longevity in the fact that 3M was established over 100 years ago in 1902. The last of the business tenets is favorable long term prospects. Favorable long term prospects ca...
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...he last group of tenets, the market tenets, helps the investor decide if the price of the shares is acceptable. The first market tenet is deciding the value of the business. To value a business Buffett estimates a companies total future cash earnings and discounts the owners’ earnings by a risk free rate (30 year T-bond). 3M had total owner earnings of $2,690,000,000 in 2003. If we assume that owners’ earnings will grow by 12% per year for the next ten years (which is what analysts predict as the industry as a whole is expected to grow 11% per year) we can calculate that 3Ms’ intrinsic value in 2003 would be $35,085,216,000. Even if 3M grows at 5% per year the company would still be worth $25,780,818,000. The final market tenet, buying at attractive prices, is buying at a sensible price that will give your investment a “margin of safety”, and also buying at prices that are below their indicated value. 3Ms’ value is calculated at $63,480,000,000. This value is almost double our calculated intrinsic value, which would indicate to us that the stock price is too high and that 3M would not represent a good investment until the price falls to a level that would give a margin of safety.
The purpose of this paper is to provide a summary of the article called “Can We Keep Our Promises?” by Robert D. Arnott, and to help better understand the three key risks facing each investor.
Grand Metropolitan PLC is the world’s largest wine and spirits seller. It mainly operated in London, USA. In 1991, it beats market expectation with a 4.8% increase in pretax profits, and the company Chairman stated that company’s goal “to constantly improve on”. Despite the great performance in the world recession in 1991, the price of GrandMet shares was 10% below the average price/earnings ratio of the companies in the Standard & Poor’s 500 index. And more important, rumors had that GrandMet, valued at more than $14 billion in the stock market, maybe a takeover target. The management dilemma is to understand why the company’s stock is traded below of what considered being the right price and whether the company is truly being undervalued by the market or there are consistent issues with negative NPV projects and lines of businesses.
In May 1830, Congress passed the Indian Removal Act which forced Native American tribes to move west. Some Indians left swiftly, while others were forced to to leave by the United States Army. Some were even taken away in chains. Andrew Jackson, the seventh president of the United States, strongly reinforced this act. In the Second State of the Union Address, Jackson advocated his Indian Policy. There was controversy as to whether the removal of the Native Americans was justified under the administration of President Andrew Jackson. In my personal opinion, as a Native American, the removal of the tribes was not in any way justified.
"Our Core Principles - Edward Jones: Making Sense of Investing." Edward Jones. Web. 12 Apr.
The Cherokee Trail of Tears resulted from the execution of the Treaty of New Echota (1835), an “agreement” signed under the Indian Removal Act of 1830 (The Cherokee and the Trail of Tears). With the expansion of the American population, the discovery of gold in Georgia, and the need for even more land for American results in the push to move the Natives who were “in the way”. So with the Indian Removal Act of 1830, Congress acted to remove Natives on the east coast of the United States to land west of the Mississippi River, something in which was never embraced or approved by them (The Cherokee and the Trail of Tears). Many state governments, such as Georgia, did not want Native-owned land within their boundaries, while the Natives did not want to move. However, under the Removal Act, the United States Congress gave then-President Andrew Jackson the authority to negotiate removal treaties.
There were several motives for the removal of the Indians from their lands, to include racism and land lust. Since they first arrived, the white Americans hadn’t been too fond of the Native Americans. They were thought to be highly uncivilized and they had to go. In his letter to Congress addressing the removal of the Indian tribes, President Jackson states the following:
3M Corporation's each division is treated as a profit center with no interdivisional business between the six divisions. The business unit strategy is to "hold" as the company wants to maintain and increase profitability and market share. In terms of corporate strategy, 3M functions as an unrelated diversified corporation with the prime goal to innovate consistently, thereby offering a...
Janice Corporation UK is a corporate company that manufactures technology, and the changes like introducing a new product line and redesigning the package will not directly appear on the company’s financial statement, but these changes can improve the company’s competitive advantages in the market. Therefore, the investors look into the company’s future cash flow and assume that will be higher going forward by calculating the fair value. Calculating the fair value, the company and investors estimate future growth rates, profit margins and other risk factors that can influence the company’s cash flow. This paper will address about the economic consequences, the advantages and disadvantages of fair value, and
Is The Tyranny Of Shareholder Value Finally Ending? N.p., n.d. Web. The Web.
Noda, Tomo. “Sharp Corporation: Technology Strategy.” Harvard Business School Boston: Harvard Business School Publishing, 1993. Print.
William Sharpe, Gordon J. Alexander, Jeffrey W Bailey. Investments. Prentice Hall; 6 edition, October 20, 1998
You would not buy a home, car or other large purchases without researching what product offered you the most for your money. The same is true when investing in a company. Investors do avid research on multiple companies to find what company matches the investors' criteria. In this paper Team C will research both AT&T and Verizon's financial documents. Team C will compare selected ratios, cash flow and make recommendations how both companies can manage cash flow for the future.
Berk, J., & DeMarzo, P. (2011). Corporate finance: The core, second edition. (2nd ed.). Boston, MA: Prentice Hall.
There is a sense of complexity today that has led many to believe the individual investor has little chance of competing with professional brokers and investment firms. However, Malkiel states this is a major misconception as he explains in his book “A Random Walk Down Wall Street”. What does a random walk mean? The random walk means in terms of the stock market that, “short term changes in stock prices cannot be predicted”. So how does a rational investor determine which stocks to purchase to maximize returns? Chapter 1 begins by defining and determining the difference in investing and speculating. Investing defined by Malkiel is the method of “purchasing assets to gain profit in the form of reasonably predictable income or appreciation over the long term”. Speculating in a sense is predicting, but without sufficient data to support any kind of conclusion. What is investing? Investing in its simplest form is the expectation to receive greater value in the future than you have today by saving income rather than spending. For example a savings account will earn a particular interest rate as will a corporate bond. Investment returns therefore depend on the allocation of funds and future events. Traditionally there have been two approaches used by the investment community to determine asset valuation: “the firm-foundation theory” and the “castle in the air theory”. The firm foundation theory argues that each investment instrument has something called intrinsic value, which can be determined analyzing securities present conditions and future growth. The basis of this theory is to buy securities when they are temporarily undervalued and sell them when they are temporarily overvalued in comparison to there intrinsic value One of the main variables used in this theory is dividend income. A stocks intrinsic value is said to be “equal to the present value of all its future dividends”. This is done using a method called discounting. Another variable to consider is the growth rate of the dividends. The greater the growth rate the more valuable the stock. However it is difficult to determine how long growth rates will last. Other factors are risk and interest rates, which will be discussed later. Warren Buffet, the great investor of our time, used this technique in making his fortune.
Accounting profit can serve as an alternative to intrinsic value. But Buffett states that “...we do not measure the economic significance or performance of Berkshire by its size; we measure by per-share progress.” Accounting reality was conservative, backward looking, and governed by GAAP (measures in terms of net profit), therefore Buffett rejects this alternative. According to the world’s most famous investor, investment decisions should be based on economic reality, not on accounting