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How to Find the Big Firms Buffett
The letter 2007 Warrens Baffetta to Shareholders contains the named Firms of interesting section – Great, Advantage and Awful. In this section Buffett takes out features of that it considers the big firms, just as signs which define not so the big business. As Buffett certainly knows good business from bad, we should look at its wisdom to choose stocks. That is remarkable, – that, agree Buffett, the mechanisms used by the Magic Formula to show on the screen stocks automatically, choose good firms for us (and hide bad)! However, it is necessary to make the small work demanding bustle to find really big. Let’s look.
Buffett offers an example of that it considers the big business: Berkshire (BRK.B) posesses Ledentsy Si. What does it by the big business? When Berkshire has bought Sugar candies of Si in 1972, the company has paid $25 million when the income made approximately $5 million a year. In 2007, Si put $82 million in profit to a deduction of taxes, good increase in $77 million more than 25 years. However, this increase precisely does not reflect the cash made for Berkshire. To calculate that, we should subtract the capital investments necessary to support business growth. In 1972, See, has demanded, that approximately $8 million capital worked. In 2007 the number was $40 million. So, in 25 years, See, has increased, it is profit, 17.5 times finished, demanding only approximately in 4 times bol’shego quantity of the capital. For those 25 years the income to a deduction of taxes totaled more than 1.3 billion while capital investments totaled only 32 million. The others (it – approximately 1.27 billion, with ‘ b ‘) it could be used by Berkshire to buy other attractive firms… As Coca-Cola (KO), American Express (AXP), and Gillette (PG). Everything that cash from one tiny manufacturer of a sugar candy placed in a box!
Contrast that a situation with an example of Baffetta of bad business: airlines. This business demands massive capital investments in new planes, service, restoration, etc. And after all those expenses are made, profit low or nonexistent because of intensive competition. Expenses it is a lot of to make the small or any income for owners are clearly bad business.
Baffett summarises it with the unique offer: “it is much better to have constantly increasing stream of the income with actually any main capital requirements.”. And it, in a nutshell, how the Magic Formula defines “good business” the requirement. Investigating returning to the capital, the Magic Formula finds that they like the companies which demand that very small investments have made income growth, throwing the companies with the small income and high capital requirements in a scrap metal heap. Regularly, to us give the list of high acquisition, the effective companies.
If we have left it, on which, we would have many “good” companies to look on. But how we can transform a jump into detection, “that great” the companies invest the capital in? Again, Baffett places corresponding words in one offer: “really big business should have steady” a ditch “which protects excellent returnings to the invested capital.” Ditches – the central theme of Standard Dorsi, excellent the Small Book Which Builds Riches. This short and easily clear book – the big place for the investor to start to learn how to find “the great” companies.
Unfortunately, the Magic Formula cannot help to find to us firm with really long ditches. Only through the analysis can find we these signs. But at use of the Magic Formula and performance of some analysis of a ditch, we follow the project of the greatest investor in the world of a long building of riches of the term.