I first heard of the book “The Outsiders” in Berkshire Hathaway’s 2012 letter to shareholders. And who is going to ignore a book that Buffett calls “outstanding!”?

The book goes in detail on 8 different CEOs who excelled at creating exceptional long term returns for shareholders. In fact, the average returns of these companies’ shares outperformed the S&P 500 by a factor of 20 – every $10,000 invested in these companies was worth $1.5 million 25 years later.

What’s their secret? And how can we use those lessons to find today’s great CEOs?

Warren Buffett’s 2014 letter to shareholders tells the amazing story of Buffett buying Berkshire Hathaway.

At the time Warren’s investing style, taught by Ben Graham, was to look for “cigar butt” stocks – stocks that were dirt cheap, but provided a “free puff” to investors willing to make the investment. Berkshire certainly could have filled that criteria, here is how Buffett tells the tale:

Every once in a while, I like to take a closer look at an event that comes up in our “This Day in History” archive, which gets posted daily on Facebook, Twitter, and is now available as an Amazon Flash Briefing.

Today we look into the life of Peter Lynch, whose birthday is this week, and who is one of the most successful mutual fund managers in history.

What did Peter Lynch look for in an investment, and what stocks would Peter Lynch buy today?

Lynch looked for 5 key criteria when selecting an investment:

1. Buy What You Know

2. Growth At A Reasonable Price

3. Avoid The Hot Stocks

4. Stay Small

5. Strong Balance Sheet

We’ll look at these in more detail below, and a list of companies that meet all of these criteria –  but first a quick look at Lynch’s historic run as a mutual fund manager:

Peter Lynch – One of the Investing Greats

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Generally, increasing assets are a sign that the company is growing, but everyone can relate to the fact that there is much more behind the scenes than just looking at the assets. The goal is to determine how the asset growth of a company is financed.

To do so all we need is the last few years of a company’s balance sheet and the most basic financial statement equation:

Assets = Liabilities + Equity

The assets of a company are what the company owns. Typical examples of assets are; equipment to make a product, buildings owned, raw materials to create a product, inventory of the product to sell and cash in the bank.

Think of your household. Your car, your home, your furniture, TVs, Computers, bank accounts etc.

Generally, increasing assets are a sign that the company is growing, but everyone can relate to the fact that there is much more behind the scenes than just looking at the assets. Back to our household example:

Imagine watching a neighbor pull a sparkling brand new BMW into their driveway, getting out dressed in his fancy Italian suit, talking on the latest smartphone, and coming over to ask if you can watch his house for 2 weeks while he travels to sail in the Caribbean. You may think he is making it big, right? Maybe he got a big bonus from work, or a promotion…

That may very well be the case, or he may be racking up debt (liabilities) to finance these assets.

You may never find out which option applies to your neighbor, but thankfully the SEC requires publicly traded companies to be a little more transparent with their financials than your neighbors. [continue reading…]

Mr. O’Glove is the author of one of my favorite fundamental analysis investing books: Quality of Earnings

This talk only begins to touch on the topics covered in his book. If you find any of his talking points interesting, read the book for much more details and insights.

He is known for is in depth analysis of company financial statements. He was the author of the ‘Quality of Earnings Report’, a newsletter focused on identifying financial discrepancies, primarily for institutional investors. He published the Quality of Earnings book in the mid 80s. It may be old, but it is still one of the most useful for education investors on reading a company’s financial statement.

I can’t say I agree with everything he says in this talk (specifically that Buffett should break up Berkshire Hathaway, inflation comments, deficit speak, etc.), but that doesn’t mean he doesn’t provide a ton of value in his talk. [continue reading…]

A New Year for the stock markets – That means it is time to run our Ben Graham Value Screens again and see what companies have made the cut this quarter! [continue reading…]

Regional bank stocks have been hit hardest by the flattening of the yield curve lately. As a result of traders fear that bank earnings may fall, the KBW Regional Bank Index has underperformed the S&P 500 by more than 18% so far this year.

At what seems like the worst possible time to invest in small banks, why look now?

Here’s were I think there is some value, and one bank in particular that is set up to weather the storm:

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The basic operation of a business is centered around 2 steps:

• Build a Product
• Sell that product

And I would argue that step #2 is the most important. Of course quality of your product is important, but if your product isn’t selling – the business is not making money. Period.

Today we are going to look at a few ways to analyze the inventory on a company’s balance sheet to help us measure how well the company is doing selling its product.

Inventory is usually the largest current asset on a company’s balance sheet, and is therefore the company’s primary use of cash. We have all seen the new companies on Shark Tank who desperately need money for inventory (Or who have used up all their capital buying inventory). So learning a few basics on what a company’s inventory is telling you is very important.

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It’s a new year, and a new quarter! That means it is time to run our Ben Graham Value Screens again and see what companies have made the cut. [continue reading…]

It’s earnings season again, which means you are probably staring at a company or two in your portfolio that have seen their share price take a dive after reporting “disappointing” earnings.

You are not alone.

Here was the news the other morning after Warren Buffett’s Berkshire Hathaway reported earnings:

Sounds bad right? Profit (Net Income) is down by a sizeable margin year over year for Berkshire.

Does this mean it is time to say goodbye to the all-star investor?

From those headlines it may seem so. But there is a lot more to a company’s financials than that headline earnings number. (Read to the end and find out how Buffett really measures the success of his businesses.) [continue reading…]

Looking for potential investments? With thousands of stocks to research, getting started can seem a bit overwhelming. Here are a couple screens (and the companies that made it through) using sets of criteria utilized by the “Dean of Wall Street” and “Godfather of Value Investing”, Ben Graham.

The significance of Ben Graham’s Wall Street career cannot be overstated. His investment partnership averaged 17% annual returns over its existence. He created and mentored some of the most successful investors ever to live and has been responsible for the education of more investors than almost anyone with his 2 best-selling investment books, The Intelligent Investor and Security Analysis. He had a very disciplined, rule-based approach to investing that focused on only one thing: A company’s intrinsic value.

The following comes from the book, “Einstein of Money”, a great biography of Ben Graham that is also focused on his investment work. Every other chapter breaks from the life story of Graham to detail a main concept in his investment philosophy. Whether it is his concept of Margin of Safety, Fundamental Analysis or advice on dealing with “Mr. Market”, the author does a great job mixing in the life of Benjamin Graham and the ideas behind his work. [continue reading…]

One of the more famous investment quotes, which represents a mindset that has created one of America’s most valuable companies, from one of the most successful investors of all time:

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” – Warren Buffett

And that got me thinking…At what price did Buffett purchase some of his “wonderful” businesses and how does that compare to some “wonderful” stocks today? And what is considered a “fair” price?     [continue reading…]

Buffett began purchasing Coca-Cola (Ticker: KO) shares in 1988. Today, Buffett has over $13 billion in gains from his investments in Coca-Cola alone.

With hindsight, it is always easy to say Buffett’s investment in Coca-Cola was anything short of genius, but at the time Coca-Cola was facing concerns over maintaining market share and its ability to grow.

However, Buffett recognized that Coca-Cola had a strong brand name, very consistent history of earnings, shareholder return and low debt. It has been a wild 26 year ride for Buffett, but the returns have been staggering!

At the time of Buffett’s initial purchase of Coca-Cola shares, its market cap was about $18.5 billion. Coca-Cola then had Revenues of $8.3 billion, a cash pile of $1.2 billion, a net income of about $1 billion and about $4.4 billion in retained earnings.

Buffett purchased about $1.3 billion in Coca-Cola initially, or about 7% of the company. Today his total Coca-Cola stake is worth over $15 billion, and pays him about $490 million in dividends each year! Incredible returns off of a $1.3 billion initial investment!

But its always easy to quickly glance over the last 26 years. The truth is that it took some major cahones to hold anything over the last 26 years.

Would you have been able to overlook the short term negative outlook for Coca-Cola in 1988?

Would you have had the confidence to hold through a 50%+ drop from its 1998 highs to 2004 lows? Or weather the 2008 decline?

Here are some of the numbers from their late 70’s and 80’s annual reports: [continue reading…]

When a company’s earnings are so solid and so predictable, investors are able to think of their stock like a variable fixed income security, like a bond with flexible rates. Here is how investors like Buffett evaluate these special companies. [continue reading…]