Rule #1: Phil Town on Investing

Is HANS a Buy Now?

HANS (Hansen's Natural sodas) has great numbers.  But it's not enough to have great numbers.  Remember the 4Ms? 

The numbers tell us there must be a moat, but "Is it going to last?" is a question that is only answered by the first M -- the Meaning of the business.  Do you know this business?  If you do, you should be able to handle this question well:  Is HANS going to definitely be here and still growing in 20 years?  That is the key question.

Buffett and BNI

A few weeks ago, Ven left the following comment:

Phil,

I just read Michael Brush's article "How Buffet is Playing This Market" on MSN. He says that Buffet is investing in BNSF Railway, but according to Investools, the BNI stock is not a bargain. In fact at the present it is at 77.00, with a valuation of 73.77. Of course I know Buffet knows what he is doing, but is this a good investment for me because Warren says it is?

Thanks,
Ven

Ven asks how it is that Buffett could buy BNI in spite of its price being higher than its value. 

Well, we have to ask, what is the value of BNI?  Buffett has been buying it in the high $70s and low $80s.  Is the value really less than the price? 

Setting Up Your Own Berky

This post is the Part II of a two-part series. Click here to read Part I.

Mr. Buffett’s BERKY (Berkshire Hathaway is Mr. Buffett’s Berky, for those of you who are just tuning in) gets its cash flow from businesses Mr. Buffett owns.

[I know that the cash comes from businesses that Berkshire Hathaway owns, but I’m setting this up as an analogy, so bear with me.] 

The guys who run those businesses are well compensated for passing up the excess cash to Mr. Buffett’s Berky.  In order to set the game up so that they will send him the cash, Mr. Buffett put his CEO’s on a compensation system that rewards high return on equity (ROE). 

[NOTE: Or high return on Capital, which is a bit different.  For the purposes of this post, it works better that we stick with ROE rather than ROIC, even though ROIC is better in the real business world.]

Because of the way Mr. Buffett set up compensation and rewards, the more cash his CEO’s get off their books (by sending it on up to the Berky), the lower the denominator that they are using to divide into their earnings to get ROE... thus the higher the ROE. 

Good system.  Keeps everyone working toward the same goal -- well run businesses and lots of cash to the Berky. 

You can do this, too. 

Mr. Buffett's Berky

Last post I wrote about the necessity to trade if the big guys are getting out, and waiting until they get back in to come back in ourselves.  And I also said there is another way to go.  You can create a BERKY.

A BERKY is a kind of Berkshire Hathaway -- the investment account/company that Warren Buffett uses to hold cash while he’s thinking up something to invest in. 

Mr. Buffett’s Berky is an incredibly important part of his investing strategy.  It's what allows him to accept the downs of the market.  With his Berky, he has the luxury to take a long view.  He can buy into a business even while the news is horrible and the stock is going down like a brick, because he knows that if it keeps going down, his Berky will provide him with more cash to use to buy in at the lower prices -- and he can keep on buying as long the price keeps on going down.

Retail Getting Hammered. What to Do Now?

There have been some questions from blog readers about what is causing the huge drop in Garmin (GRMN) and Coach (COH).  Here is a quote from a front page article titled "Retailing Chains Caught in a Wave of Bankruptcies" in the New York Times:

“The surging cost of necessities has led to a national belt-tightening among consumers. Figures released on Monday showed that spending on food and gasoline is crowding out other purchases, leaving people with less to spend on furniture, clothing and electronics. Consequently, chains specializing in those goods are proving vulnerable.”

Coach and Garmin both sell stuff that people don’t need.  Coach even more so than Garmin...  Well, my daughter would argue that a new Coach purse is a necessity while a GPS device can be replaced by a map and a compass, so there. 

Still, neither makes food, water or air... so in down turns Mr. Market acts like the whole world of retail is ending, and he wants to sell all retail stuff so badly that he begins to dump even the really good ones at lower and lower prices...

Time to Back up the Truck on ACF?

You pay a hefty premium for a cheery consensus.  And you get a hefty discount for a gloomy one.  We’re a long way from a depression-era stock market, or even a recession-era market (like 1973, 1983), but in one industry we’re tapping along at the bottom and that’s where you want to be looking for a great business that is on sale.

Here’s an example for you to consider: Americredit Corporation (ACF).

Meaning

It's a pretty simple business.  They lend you the money to buy your car, particularly if GMAC isn’t interested because your credit kind of sucks.  You put a pile down and Americredit puts up the rest.  They do about 400,000 a month.  You pay, everything is good.  You don’t pay, they come get your car and resell it.  Simple business.