One of the most quoted investment advice from Warren Buffett is
“Investment is most intelligent when it is most businesslike.”
"We select our marketable equity securities in much the way we would evaluate a business for acquisition in its entirety. We want the business to be one
- 1. that we can understand;
- 2. with favorable long-term prospects;
- 3. operated by honest and competent people;
- 4. and available at a very attractive price."
Do note that all 4 must exist and that there are simply no exemptions.
A couple of years ago, there was very interesting article,
In that article, there are many valuable advice given for the investor.
Regarding cash per share.
- 'Of course, if the company has no intention to return the cash to shareholders and its operations are bleeding cash, then the share price may well have reason to be trading below the cash net of liabilities per share,' I wrote. 'Unless there is a turnaround in the business, the cash will eventually be depleted.
Very important issue, eh?
What can the minority shareholder or speculator do if the management has NO INTENTION to return cash or unlock its assets?
Think about it. I have seen it way too often that the cash per share is rather meaningless if the management has no itention to share their wealth with the minority shareholders.
There is this one lesson from legendary investor, Philip Fisher.
- The management of a company is always for closer to its assets than its shareholders. And without even breaking any laws, there are number of ways that the management can benefit themselves and their families at the expense of the minority shareholders, for example employing their relatives, buy-and-selling of properties between relatives at above market rates or the issuing common stock options.
Look at the issue with Lion Diversified Acquisition of Subsidiary at RM61.55 million!
This company BOLDY announced their acquisition of their subsidiary at a whopper rm61.55 million without even attempting to provide their minority shareholders without any detailed information on why should their subsidiary is worth so much.
Continuing on the article.
- 'But if a company's share price is significantly lower than its cash net of liabilities, and there is no shareholder with a more than 50 per cent stake, then there is a possibility that a corporate raider may come in to scoop up the bulk of the shares, gain control, strip the assets and take hold of the cash.
'Yet another possibility is for the controlling shareholder to take the company private, paying a premium to the market price.
'Even if none of these corporate manoeuvres takes place, a company flush with cash and with operations that are profitable and generating cash will have no reason to trade below its net cash value per share for long. Thus a look at a company's cash position, coupled with an analysis of its operations, is a rather clear-cut way to ascertain the extent of under-valuation of a stock.'
I would add two more issues for consideration.
- 1. The time-frame - how long does one have to wait before an offer materialise?
- 2/ Will the offer price being a fair and just offer to the minority investor/speculator?
- 'So if you decide to buy into its shares now, you are, in fact, putting your trust in the management to invest the money wisely and in projects that will yield attractive returns.
- But again, it boils down to one's assessment of the management, whether one believes it will make a wise choice of business to buy into, and at a reasonable price, and subsequently how it can add value to the business.
At the moment, all of this is unknown. And it seems the market currently prefers the certainty of an existing thriving business to the uncertainty of an unknown one.
She then elaborates on what happened to the three Singapore stock examples she gave back in 2003 and she concludes from her examples by saying...
- The above examples underscore the fact that ultimately it is the business that drives the share price. That conclusion is further reinforced by the price movements of a few companies that have sold their operations for cash.