Questions from the Fam

Hey Fam - as you know, I had some questions that I thought I should address or not yet address here.

First, there was a good point about me not really explaining the whole Warren Buffett thing - fair enough. But I also got a question about P/E ratio - which I did chat about on a previous post but will expand a bit on this one. Finally - how to read stock charts for dummies - well that sounds like a god book idea that I will never write. I might tackle that one in a different post.

Warren Buffett

Mr B is indeed quite old as was mentioned in the question from Issy - and he has actually copped a bit of flak about that - but given he is one of the richest people on the planet, I think he gave zero f*%#s abut that

In addition to being very clever and savvy from a time before he wore pants, he has made his fortune and his reputation through investing - and his style is based on a few fundamental principles.

He invests in companies he can find out about and understand well - he wants to uncover the fundamentals of a business - and fundamental is a term used in this area - looking at the fundamentals is all about the company balance sheet and annual reports etc - their assets, liabilities, sales revenue, etc. This is a little counter to the current view about building companies that lose enormous amounts of money now in order to make money later.

He invests in companies that he believes have a positive future - because he invests to hold those companies for years and possibly decades. This is counter to some of the current views re day trading where you use technical analysis (as opposed to fundamental analysis) to buy and sell stocks within minutes or hours or over a couple of days - including short selling which is when you use a function to make money when a stock drops in price versus when it goes up. Can talk about that in another post. And I mentioned technical analysis - that where you use charting software to determine trends that can be used to indicate a good buying or selling position. Statistically, almost all day traders using technical analysis lose money (newbs).

He invests in companies that don’t tend to have enormous debt, and that put their assets to good use and make good profit from those assets. So when you look at finance reports - where you see P/E, you can also look at ROE or Return on Equity - so company has $1B in assets and $500M in revenue, they have a 50% ROE.

Apple in years ‘18, ‘19, ‘20 ROE 49%, 56% and 73%

Tesla in years ‘18, ‘19, ‘20 ROE -23%, -15% and 5% - and that +ve turnaround for Telsa has ***

Finally, He invests in companies that he feels has good management in place.

THEREFORE, although some feel that the above is a bit old fashioned, I and a whole bunch of people think his strategies are still the way to go for the long haul. He writes a letter to shareholders every year (as part of his role in Berkshire Hathaway, his investment business) and lots of people hang on every word in those letters - to get a sense of what is on his mind and where to from here. You can google the letters - they are all available - from 1965 through to now.

Key takeaway for us - is that we also should try to look for good companies that will continue to be good over the longer term - and we should wherever possible, hold onto those companies for the longer term. Warren B is fundamentally in a different league to me - and he doesn’t try to time the market to get in and out quickly to make money - so we should do the same. That said, with a small % of our money, we can have a few punts AND if we really choose a dog, we need to cut our losses. Hope that all makes sense and sing out if not.

P/E Ratio

As per my comments in “Our Second Investment”, P/E is one of the financial metrics you can use to look at a stock BUT it gets complicated really really quickly because of all the people and computers in the market that don’t follow Mr Buffett’s line of thinking above.

It used to be that you would look at the specific industry and you could compare companies in that area - like miners - and then compare Price (of the stock) over Earnings (the company revenue) so Fortescue FMG (iron ore miner) is at the time of writing 8.5 versus Rio and Newcrest who are 15 - 17 as a P/E. Then you would say - OK - the stock price for FMG appears to be a bit low compared to the others, as a ratio of their revenue - so does that mean FMG is good buying or are there other reasons for the difference. But there are also stacks of these indicators and measures so you can’t just focus on one thing.

AND……………….

I believe Amazon is a ripper stock and I have had it in my super account for years - its P/E is 66! Apple is a corker and PE is 29. We own Microsoft with a current PE of 34.

What about General Motors in God Bless America - PE is 13. Ford is 11. Toyota is 15. So big auto industry appears to have a share price that is around 15 times the companies earnings.

TESLA has crashed from close to 1,000 down to a still ludicrous 710.

And remember from above how I mentioned that the ROE was a bit *** - well if you consider Tesla revenue - they actually pretty well always lose money - however more recently, they appear to have turned a corner - but in a most recent announcement - they indicated they did make extra money selling Bitcoin AND selling the tax credits they get for EV vehicles to other care companies who don’t get the credits - so they are a car company that loses money selling cars and they do financial shenanigans to ‘look’ like things are rosy - and yet their share price is through the roof.

Therefore

1 - you have to be careful with the ratios these days as things are getting weird.

2 - I didn’t jump on Tesla shares (neither did Warren) and I still think they are over priced - BUT the products are pretty special and the impact the company has had on the planet has already been phenomenal as Tesla has forced the other players to follow.

3 - Warren Buffett has given away $37 Billion to charities so far and his plan is to give away 99% of his wealth before he passes away. He and Bill & Melinda Gates created givingpledge.org where the rich commit to giving away the majority of their wealth. Pretty cool.

I still owe you more info on what to look at in a stock chart. But that will be for another day.