Money and Finance
Graham & Doddsville's Fall 2014 Issue (LINK)
Tracy Britt Cool named CEO of Berkshire Hathaway owned Pampered Chef (LINK)
Edward Snowden Explains Why He Blew the Whistle on the NSA in Video Interview with Lawrence Lessig (LINK)
The Great Philosophers: Michel de Montaigne (LINK)
Warren Buffett on EBITDA from the 2002 Berkshire Meeting (Source):
- Seth Klarman Ebitda Example
From Margin of Safety:EBITDA Analysis Obscures the Difference between Good and Bad BusinessesEBITDA, in addition to being a flawed measure of cash flow, also masks the relative importance of the several components of corporate cash flow. Pretax earnings...
- The Most Important Metric For Dividend Investors
While researching a dividend paying stock should be a holistic process and buying decisions shouldn't be based on any single metric, if there's one metric that every dividend investor should know, it's free cash flow cover. After all, an income...
- 10 Point Checklist For Dividend Ideas
The number of free stock screening tools has increased significantly in recent years. And while some screens are certainly better than others, investors often remain overwhelmed by the number of stocks these screens spit out, requiring yet further sorting...
- Markel Brunch Notes
I spend most of my time in investing looking for excellent dividend growth opportunities. However, there are two exceptions to this. One is Berkshire Hathaway, why should investors want a dividend from a company that has Warren and Charlie reinvesting...
- Dividend Compass - Royal Dutch Shell
Todd Wenning's Dividend Compass is a diagnostic tool that covers the parts of fundamental analysis most useful to dividend investors. This is a pretty broad set of metrics, Todd describes them here: "Sales growth: Sales are the life-blood of a company....
Money and Finance
Links
Graham & Doddsville's Fall 2014 Issue (LINK)
The new issue features Wally Weitz of Weitz Investment Management, Guy Gottfried of Rational Investment Group and the team at Development Capital Partners. Additionally, you will find pictures from the 2014 “From Graham to Buffett and Beyond” Dinner in Omaha, news about the recently launched 5x5x5 Student Value Investing Fund and two investment ideas from CBS students.Steven Romick's Q3 Commentary (LINK)
Expeditors' latest investor Q&A (LINK) [Which includes a great Steve Jobs quote: "People think focus means saying yes to the thing you've got to focus on. But that's not what it means at all. It means saying no to the hundred other good ideas that there are. You have to pick carefully. I'm actually as proud of the things we haven't done as the things I have done. Innovation is saying no to 1,000 things."]
Tracy Britt Cool named CEO of Berkshire Hathaway owned Pampered Chef (LINK)
Edward Snowden Explains Why He Blew the Whistle on the NSA in Video Interview with Lawrence Lessig (LINK)
The Great Philosophers: Michel de Montaigne (LINK)
Investing quotes of the day:Related book: The Complete Essays of Montaigne [Also available as an audiobook via MP3 CD or on Audible, which is one of the things I started listening to while on vacation last week.]
Warren Buffett on EBITDA from the 2002 Berkshire Meeting (Source):
It amazes me how widespread the use of EBITDA has become. People try to dress up financial statements with it.
We won’t buy into companies where someone’s talking about EBITDA. If you look at all companies, and split them into companies that use EBITDA as a metric and those that don’t, I suspect you’ll find a lot more fraud in the former group. Look at companies like Wal-Mart, GE and Microsoft — they’ll never use EBITDA in their annual report.
People who use EBITDA are either trying to con you or they’re conning themselves.Charlie Munger on EBITDA:
I think that, every time you see the word EBITDA, you should substitute the words “bullshit earnings.”Seth Klarman on EBITDA (from Margin of Safety, and previously posted HERE):
It is not clear why investors suddenly came to accept EBITDA as a measure of corporate cash flow. EBIT did not accurately measure the cash flow from a company’s ongoing income stream. Adding back 100% of depreciation and amortization to arrive at EBITDA rendered it even less meaningful. Those who used EBITDA as a cash-flow proxy, for example, either ignored capital expenditures or assumed that businesses would not make any, perhaps believing that plant and equipment do not wear out. In fact, many leveraged takeovers of the 1980s forecast steadily rising cash flows resulting partly from anticipated sharp reductions in capital expenditures. Yet the reality is that if adequate capital expenditures are not made, a corporation is extremely unlikely to enjoy a steadily increasing cash flow and will instead almost certainly face declining results.
It is not easy to determine the required level of capital expenditures for a given business. Businesses invest in physical plant and equipment for many reasons: to remain in business, to compete, to grow, and to diversify. Expenditures to stay in business and to compete are absolutely necessary. Capital expenditures required for growth are important but not usually essential, while expenditures made for diversification are often not necessary at all. Identifying the necessary expenditures requires intimate knowledge of a company, information typically available only to insiders. Since detailed capital-spending information was not readily available to investors, perhaps they simply chose to disregard it.
Some analysts and investors adopted the view that it was not necessary to subtract capital expenditures from EBITDA because all the capital expenditures of a business could be financed externally (through lease financing, equipment trusts, nonrecourse debt, etc.). One hundred percent of EBITDA would thus be free pretax cash flow available to service debt; no money would be required for reinvestment in the business. This view was flawed, of course. Leasehold improvements and parts of a machine are not typically financeable for any company. Companies experiencing financial distress, moreover, will have limited access to external financing for any purpose. An over-leveraged company that has spent its depreciation allowances on debt service may be unable to replace worn-out plant and equipment and eventually be forced into bankruptcy or liquidation.
EBITDA may have been used as a valuation tool because no other valuation method could have justified the high takeover prices prevalent at the time. This would be a clear case of circular reasoning. Without high-priced takeovers there were no upfront investment banking fees, no underwriting fees on new junk-bond issues, and no management fees on junk-bond portfolios. This would not be the first time on Wall Street that the means were adapted to justify an end. If a historically accepted investment yardstick proves to be overly restrictive, the path of least resistance is to invent a new standard.
- Seth Klarman Ebitda Example
From Margin of Safety:EBITDA Analysis Obscures the Difference between Good and Bad BusinessesEBITDA, in addition to being a flawed measure of cash flow, also masks the relative importance of the several components of corporate cash flow. Pretax earnings...
- The Most Important Metric For Dividend Investors
While researching a dividend paying stock should be a holistic process and buying decisions shouldn't be based on any single metric, if there's one metric that every dividend investor should know, it's free cash flow cover. After all, an income...
- 10 Point Checklist For Dividend Ideas
The number of free stock screening tools has increased significantly in recent years. And while some screens are certainly better than others, investors often remain overwhelmed by the number of stocks these screens spit out, requiring yet further sorting...
- Markel Brunch Notes
I spend most of my time in investing looking for excellent dividend growth opportunities. However, there are two exceptions to this. One is Berkshire Hathaway, why should investors want a dividend from a company that has Warren and Charlie reinvesting...
- Dividend Compass - Royal Dutch Shell
Todd Wenning's Dividend Compass is a diagnostic tool that covers the parts of fundamental analysis most useful to dividend investors. This is a pretty broad set of metrics, Todd describes them here: "Sales growth: Sales are the life-blood of a company....