Estratégia de Investimento de longo prazo: O jeito de Warren Buffett

Espero que os acompanhantes de meu blog possam ler e entender inglês. O conhecimento aqui exposto pode ajudar muitos a multiplicar seu capital.

The Buffett Way:

- Buffett Strategy: He looks for companies he understands, with consistent earnings history and favorable long term prospects, showing good return on equity with little debt, that are operated by honest and competent people an, importantly, are available at attractive prices.
- Buffett avoids commodity business (Go to Franchises – product is needed or desired, has no close substitute and is unregulated) and managers with little confidence in. He has three touchstones: It must be the type of company he understands, possessing good economics and run by trustworthy managers.
- Best business to own: it is the one that overtime can employ large amounts of capital at very high rates of return.
- Buffett´s Way: Business Tenets (Is the business simple and understandable?; Does the business have a consistent operating history?; Does the business have a favorable long-term prospect?) Management Tenets (Is management rational?; Is management candid with its shareholders?; Does the management resist the institutional imperative?) Financial Tenets (What is the return on equity?; What are the company´s “owner earnings”?; What are the profit margins?; Has the company created at least one dollar of market value for every dollar retained?) Value Tenets (What is the value of the company?; Can it be purchased at a significant discount to its value?)
- “When investing, we view ourselves as business analysts and not as market analysts, macroeconomic analysts or even security analysts”
- Buffett makes investment decisions based only on how business operates. He believes that if people choose an investment for superficial reasons instead of business fundamentals, they are more likely to be scared away at the first sign of trouble and losing money in the process.
- A SIMPLE AND UNDERSTANDABLE BUSINESS: investors must feel convinced that the business they are buying into will perform well over time. They must have some confidence in their estimate of its future earnings and that has a great deal to do with how well they understand its business fundamentals (revenues, expenses, cash flow, labor relations, pricing flexibility and capital allocation needs) – Circle of Competence (investing in an industry that you do not understand makes it impossible to accurately interpret developments and therefore to make wise decisions). “Investment success is not a matter of how much you know but how realistically you define what you don´t know”
- CONSISTENCY: no attraction for stocks that are “hot” at any given moment. It has to be successful and profitable for the long term. And while predicting the future success is certainly not foolproof, a steady track record is a relatively reliable indicator. When a company has demonstrated consistent results with the same type of products year after year, it is not unreasonable to assume that those results will continue. Buffett avoids purchasing companies that are fundamentally changing direction because their previous plan were unsuccessful because it increases the likelihood of committing major business errors. Also avoids businesses that are solving difficult problems because turnarounds seldom turn. Better to expend energy purchasing good companies at reasonable prices than difficult businesses at cheaper prices .
- FAVORABLE LONG-TERM PROSPECTS: high return on invested capital where there is a strong likelihood that it will continue to do so (long term competitive advantage which is = long term franchises – MOAT = gives a company a clear advantage over the others and protects it against incursions from the competition). “The key to investing is determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have a wide, sustainable moats around them are the ones that deliver rewards to investors”. A franchise that is the only source of a product people want can regularly increase prices without fear of losing market share or unit volume. Often a franchise can raise its price when demand is flat and capacity not fully utilized. Through price flexible, franchises can earn above average returns on invested capital. It possesses also a greater amount of economic goodwill, which enables them to better withstand the effects of inflation and has the ability to survive economic mishaps and still endure.
- QUALITY OF MANAGEMENT: honest and competent managers whom he admires and trust. “ we do not wish to join with managers who lack admirable qualities no matter how attractive the prospects of their business”. Managers must behave as the owners of the company the the ones who act like that tend not to lose sight of the company´s prime objective – increasing shareholder value – and tend to make rational decisions that further that goal. They must report fully and genuinely to shareholders and courage to resist the institutional imperative (blindly following industry peers)
- RATIONALITY: The most important management act is the allocation of capital. It is the most important because allocation of capital overtime determines the shareholder value. Deciding what to do with the company´s earnings – reinvest in the business or return money to shareholders – is an exercise in logic and rationality. If the extra cash reinvested internally can produce an above average return on equity – a return that is higher than the cost of capital – then the company should retain all its earnings and reinvest them. That is the only logical course. Retaining earnings to reinvest in the company at less that the average cost of capital is completely irrational. A company that reinvest in below average rates will have the stock price to decline because cash will become an idle resource. A company with poor economic returns, a lot of cash and low stock price will attract corporate raiders and management will try purchase growth by acquiring another company because it excites shareholders and dissuades corporate raiders but BUFFETT is skeptical of companies that need to buy growth. It often comes to an overvalued price and the integration and management of a new business can lead to mistakes that could be costly to shareholders. The cash that can not reinvested at above average rates has to be returned to investors which is a good deal for the company because many people view increased dividends as sign of good performance.
- CANDOR: Managers who report their companies´ financial performance fully and genuinely, who admit mistakes as well as share successes and who are in all ways candid with shareholders, communicating the performance of the company without hiding behind the Generally Accepted Accounting Principles (GAAP) because the standards required in the financial accounting makes it difficult for owners to understand the dynamics of their separate business interests. “What needs to be reported is the data that helps the financially literate readers answer three questions: (1) Approximately how much is this company worth? (2) What is the likelihood that it can meet its future obligations? (3) how good a job are its managers doing given the hand they have been dealt?” Buffett also admires those with the courage to discuss failure openly because the ones who confess mistakes publicly are more likely to correct them.
- By increasing profit margins and return on equity, companies can increase dividends while simultaneously reducing the dividend payout ratio.
- THE INSTITUTIONAL IMPERATIVE: Capital allocation is poorly made because corporate management tends to imitate the behavior of other managers, no matter how silly or irrational that behavior may be. Buffett believes that the institutional imperative is responsible for several serious, but distressingly common, conditions: (1) the organization resists any change in its current direction; (2) just as work expands o fill available time, corporate projects or acquisitions will materialize to soak up available funds; (3) any business craving of the leader, however foolish, will quickly be supported by detailed rate of return and strategic studies prepared by his troops; and (4) the behavior of peer companies, whether they are expanding, acquiring, setting executive compensation or whatever, will be mindlessly imitated. As most managers are unwilling to look foolish and expose their company to an embarrassing quarter loss as other companies are still able to produce quarter gains, they follow the other companies down the same path toward failure because shifting the direction of the company is never easy and may be a long term process. Many succumb to the temptation of buying a new business instead of facing the financial facts of the current problem. Reasons: Most managers can not control their lust for activity. Such hyperactivity often finds its outlet in business takeovers. Second, most managers are constantly comparing the sales, earnings and executive compensation of their business with other companies in and beyond their industry. These comparisons invariably invite corporate hyperactivity. Lastly, most managers have an exaggerated sense of their own management capabilities.
- ACCOUNTING REPORTS: good place to look for signs of trouble. There is room for make up in its numbers, statements and tabulations.
- Rationality, Candor and Institutional Imperative is more difficult than measuring financial performance for the simple reason that human beings are more complex than numbers. Many analysts believe that because measuring human activities is vague and imprecise, we simply cannot value management with a degree of confidence and therefore, this exercise is futile. Others hold the view that the value of the management is fully reflected in the company´s performance statistics, including sales, profit margins and return on equity and no other measuring stick is necessary. But the reason the reason for taking the time to evaluate management is that it gives you early warning signs of eventual financial performance. If you look closely at the words and actions of the management team, you will find clues that can help you measure the value of their work long before it shows up in the company´s financial reports. How to gather the necessary information? Reviewing ANNUAL REPORTS from few years back, paying attention to what management said then about strategies for the future and compare those plans to today´s results: How fully were they realized? Also compare strategies of few years ago to this year´s strategies and ideas: How has the thinking changed? And compare the annual reports with reports from similar companies in the same industry. Besides, expand your reading horizons to financial magazines, newspapers, what the company´s executives have to say and what others say about them. Stay alert for information.
- ALERT: beware of companies displaying weak accounting; unintelligible footnotes (If you can not understand them probably the management is hiding something that it does not want you to know); be suspicious of companies that trumpet earnings projections and growth expectations because no one can know the future and any CEO who claims to do so is not worthy of your trust.
- FINANCIAL TENETS: Do not take yearly results too seriously. Focus on 04 – 05 years average. Focus on return on equity and not earnings per share; Calculate owner earnings to get a true reflection of value; Look for companies with high profit margins; For every dollar retained, has the company created at least a dollar of market?
- RETURN ON EQUITY: Since most companies retain a portion of their previous year´s earnings to increase their equity base, there is no reason to get excited about record earnings per share. There is nothing spectacular about a company that increases earnings per share by 10% if at the same time it is growing its equity base by 10%. The test to economic performance is high earnings rate on equity capital (the ratio of operating earnings to shareholders´ equity). To use this ratio, it is necessary some adjustments. First, all marketable securities should be valued at cost and not at market value because values in the stock market as a whole can greatly influence the returns on shareholders´ equity in a particular company. Second, we must control the effects that unusual items may have on the numerator of this ratio. Buffett excludes all capital gains and losses as well as any extraordinary items that may increase or decrease operating earnings. He seeks to isolate the specific annual performance of a business. He wants to know how well management accomplishes its task of generating a return on the operations of the business given the capital it employs. Furthermore, Buffett believes that a business should achieve good returns on equity while employing little or no debt. Companies can increase their return on equity by increasing the debt-to-equity ratio but it makes companies vulnerable during economic slowdowns. Good business should be able to earn good return on equity without the aid of leverage by employing significant debt.
- OWNER EARNINGS: Accounting earnings per share represent the only start point for determining the economic value of a business. They are useful only if they approximate the expected cash flow of the company. But even cash flow is not a perfect tool for measuring value because it often misleads investors. Cash flow is an appropriate way to measure business that have large investments in the beginning and smaller outlays later on such as real state, gas field, etc. Companies that require ongoing capital expenditures such as manufactures, are not accurately valued using only cash flow. A company cash flow is customarily defined as net income after taxes plus depreciation, depletion, amortization and other non cash charges and the problem it that it leaves out the capital expenditure (a critical economic fact). And it is as much an expense as are labor and utility costs. So, instead of using cash flow, you should use the Owner Earnings = a company´s net income plus depreciation, depletion and amortization less the amount of capital expenditures and any additional working capital that might be needed. It is not precise because calculating future capital expenditures requires rough estimates but according buffet, “I would rather be vaguely right than precisely wrong”.
- PROFIT MARGINS: Businesses make lousy investments if management can not convert sales into profits. Companies that allow escalating cost have to bring the costs down in line with sale and investors should be careful with these companies. A good company attack costs as vigorously as profits are at record levels as when they are under pressure.
- THE ONE DOLLAR PREMISE: Select companies in which each dollar of retained earnings is translated into at least one dollar of market value. This test can quickly identify companies whose managers, over time, have been able to optimally invest their company´s capital. If retained earnings are invested in the company and produce above average return, the proof will be a proportionally greater rise in the company´s market value. If companies use the retained earnings unproductively over an extended period of time, eventually the market will price their shares disappointingly. Conversely, if a company has been able to achieve above average returns on augmented capital, the increased stock price will reflect that success. So, the increased market value should at the very least match the amount of retained earnings, dollar for dollar.
- VALUE TENETS: The stock market establishes price. The investor determines values after weighting all the known information about the company´s business, management and financial traits. Price and value are not necessarily equal. “Price is what you pay. Value is what you get”. Investors make their decisions based on the differences between price and value. If the price is lower than its per share value, a rational investor will decide to buy and if the price is higher than value, any reasonable investor will pass. In sum then, rational investing has two components: (1) determine the value of the business and (2) buy only when the price is right – when the business is selling at a significant discount to its value.
- CALCULATE WHAT THE BUSINESS IS WORTH: some are fond of various shorthand methods: low price to earnings ratios, low price to book values and high dividend yields but the best is the Theory of investment value (discounted cash flow). The value of a business is the total net cash flows (owner earnings) expected to occur over the life of a business discounted by an appropriate interest rate to today. To estimate the total future earnings, we would apply all the knowledge about the company´s business characteristics, its financial health and the quality of its managers using the analysis principles described so far. Buffett looks for companies whose future earnings are predictable, as certain as the earnings of bonds. If the business has operated with consistent earnings power and if the business is simple and understandable, Buffett believes he can determine its future earnings with a high degree of certainty otherwise, he will simply pass. What is the appropriate interest rate? The rate that would be considered risk-free (long term government bonds). When interest rates are too low, use 10%. It is possible to use the risk free plus the equity risk premium, added to reflect the uncertainty of the company´s future cash flow but Buffett disconsider this hypothesis because he focus on predictable companies.(Ex. Of calculating in pg. 125 and 230 from Coca Cola)
- BUY AT ATTRACTIVE PRICE: Focusing in business that are understandable, with enduring economics, run by shareholder-oriented managers – all those characteristics are important but by themselves will not guarantee investment success. For that, the investor has to buy at sensible prices and then the company has to perform to his business expectations. The second is not easy to control but the first is. The basic goal is to identify businesses that earn above average returns and then purchase these businesses at prices below their indicated value, when the difference between its price and its value represent a margin of safety because it protects the investor from downside price risk since the margin is large enough. If the value of a business is only slightly higher than its price per share, there is the risk of the company´s intrinsic value to drop and the stock price also decline, below of what the investor paid.
- TAKE A LOOK ON PG 139 for a good summary!!!
- CHAPTER 9: Fixed Income Securities (141)
- MANAGING THE PORTFOLIO:
- Deciding which stock to buy is only half of the story. The other half is the ongoing process of managing the portfolio and learning how to cope with the emotional ups and downs that inevitably accompanies such decisions.
- STATUS QUO: The Choice! There are three possibilities of how to manage a portfolio:
- Active portfolio – managers are constantly at work buying and selling a great number of common stocks. Their job is to try to keep their clients satisfied which means constantly outperforming the market. To keep on top, active managers try to predict what will happen with stocks in the coming six months and continually make movements on the portfolio, hoping to take advantage of their predictions. But active portfolio management as commonly practiced today stands a very small chance of outperforming the index (90% of them). It is grounded in a very shaky premise: Buy today whatever we predict can be sold soon at a profit, regardless of what it is. The fatal flaw in that logic is that given the complexity of the financial universe, predictions are impossible. Second, this high level of activity comes with transaction costs that diminish the net returns to investors.
- Index Investing – is a buy-and-hold passive approach. It involves assembling and then holding a broadly diversified portfolio of common stocks deliberately designed to mimic the behavior of a specific benchmark index and the simplest and by far the most common way to achieve this is through an index mutual fund. Indexing, because it does not trigger equivalent expenses, is better than actively managed portfolio in many aspects. But even the best index fund, operating at its peak, will only return the investors the returns of overall market. Index investors co do no worse and no better than the market. If you are an investor with very low tolerance for risk and who knows very little about economics of a business and still want to participate on the stock market, that is the best option but if you are not satisfied with average and want to do better, maybe the options is the third way of managing portfolio
- Focus Investing – Choose few stocks that are likely to produce above-average returns over long term, concentrate the bulk of your investments in those stocks and have the strength and psychological condition to hold steady during any short term market gyrations. The rules for managing Focus portfolio are: 1. Find and concentrate in outstanding companies (The stock price will reflect its inherent value if company performs well and is run by strong management so tracking share prices is not relevant but analyzing the economics of the underlying business and assessing its management) 2. Limit yourself to the number of companies that you can truly understand (Ten to twenty is a good number. More than twenty is asking for trouble). 3- Pick the very best of your good companies and put the bulk of your investment there. If the probabilities of success are very high, make a big bet (it is advisable to place at least 10% of the net money in a company which the investor has courage and conviction of good business but some companies are better than others and it is worth higher capital allocation) 4. Be patient. Think long term: 5 to 10 years (focus investing is the antithesis of a broadly diversified high turnover approach. It stands the best chance among all the active strategies for outperforming an index return over time but requires investors to patiently hold their portfolio even when it appears that other strategies are winning). 5. Do not panic over price changes. Volatility happens. Carry on (Focus investing pursues above average results and there strong evidence, both in academic research and actual case histories, that the pursuit is successful but bumpiness on the market will occur and the investors have to tolerate it because in the long run the underlying economics of the companies will more than compensate for any short-term price fluctuations.
- MANAGING CHANGES IN THE PORTFOLIO: Despite the long term perspective that focus portfolio demands, you should always be acutely aware of all economic stirrings of the companies in your portfolio. There will be times when buying something, selling something else, is exactly the right thing to do. When considering adding an investment, you should look at what you already own to see whether the new purchase is any better. Measuring your own stick will tell you if you should add a new investment. As long as the company continues to generate above-average economics and management allocates the earnings in a rational manner, the investor should keep the company on his portfolio. If the investor owns a lousy company, it requires turnover because otherwise he will end up the economics of a underperformance company for a long time. But if e owns a superior company, the last thing to do is selling it. Acting in this way has two important economic benefits in addition to growing capital at an above average rate: 1- It works to reduce transaction costs, which is commonly overlooked in active management and; 2- It increases after tax returns because when you sell a stock at a profit, you will be hit with capital gain taxes, eating into your portfolio. If you leave the gain keeping the stock, your money compounds more forcefully and lot of investors have too often underestimated the enormous value of this unrealized gain. The best strategy for achieving high after tax returns is to keep your average portfolio turnover ratio somewhere between 0 and 20 percent.
- THE CHALLENGE OF FOCUS INVESTING: When your portfolio is focused on just few companies, a price change in any one of them is all the more noticeable and has greater overall impact. It heightens the price volatility. The ability to withstand that volatility is crucial for your peace of mind and financial success. You should keep your emotions in appropriate perspective and understand something of the basic psychology involved.