The One Dollar Premise

“When stock can be bought below a business’s value, it is probably the best use of cash.”

Every year, a new strategy appears, claiming to be the secret to stock market success. Some are profitable for a time, even spectacularly so. However, trends eventually lose their momentum, reality intervenes, and yesterday’s win leads to failure tomorrow. Cycles of booms, bubbles, and busts repeat in all markets, from Dutch tulips and Florida real estate to companies and collateralized mortgage obligations (CMOs).

The most successful long-term investors avoid the temptations of fads, esoteric formulae, and schemes, preferring the simple for the sizzle. They rely on common sense to make investment decisions rather than following the crowd. Warren Buffett started investing in 1956 with $100, became a millionaire in 1962, and a billionaire in 1985. In 2020, he was acknowledged as the world’s sixth-wealthiest person with a net worth of $81 billion (after giving $37 billion to charity the previous fourteen years. For his success, he earned the sobriquet, “Oracle of Omaha.

Buffett’s investment philosophy is surprisingly simple and based on a few basic tenets:

  1. The best returns are achieved by companies producing the same product or service for several years.
  2. A company must produce a product or service that is (1) needed or desired, (2) has no close substitute, and (2) is not regulated. Buffett believes these characteristics enable a company to maintain or increase prices without losing market share or unit volume.
  3. Companies without the ability to reinvest excess cash at above-average rates should return that money in dividends or share buy-backs to the shareholders.
  4. Every dollar of retained earnings should create at least one dollar of market value (The One Dollar Premise).
  5. Buy the stocks of companies that earn above-average returns at prices far below their intrinsic value.

Calculation of the One Dollar Premise

 Anyone with access to historical results and the time to spend in the exercise can make a quick calculation of the return on retained earnings:

MVi = (MCe – MCb)/(REe – REb)

 = market value increase (decrease) per $1 retained earnings
MCe = market cap at the end of the period
MCb = market cap at the beginning of the period
REe   = retained earnings at the end of the period
REb   = retained earnings at the beginning of the period

  1. Subtract the retained earnings balance from 3, 5, or 10 years past. For example, Alphabet (Google) had retained earnings in 2014 of $75.06 billion and $152.12 billion in 2019. In the 5-year, the company kept $77.06 billion of profits in the company.
  2. Compare the market value today with the market corresponding to the beginning year of the retained earnings above. Alphabet’s market cap was $357.55 billion at the beginning of 2015, with $920.32 billion in 2019. Market value increased $562.76 billion during the five years.
  3. Compare the increase in market value with the increase in retained earnings. In this case, Google produced $7.30 in increased market value for each $1.00 in retained earnings.

While knowing that Google does make excellent use of its retained earnings, a comparison with other companies – in and outside its industry – is a more reliable indicator of management’s prowess. A similar calculation for Coca Cola and Deere & Co provides additional insight:

Coca Cola

A comparison of different periods highlights the difference in management’s ability to create value in various industries:

COKE DE GOOG Comparision

While the above figures suggest that all three companies are adept at reinvesting their retained earnings, Coca-Cola would seem to be the best investment. However, when looking at the compound average increase in stock value of the last five years, COKE provided its owners with the least market appreciation with a CAGR of 9.25%. Looking at stock appreciation alone, Deere would appear to be the best buy based on their average of 17.43% over the five-years. In comparison, Google was second at 11.9% during the same period.

The Importance of Intrinsic Value of a Company

The objective of fundamental analysis is to determine the intrinsic value of a company. A ratio of the intrinsic value with the market price is an indicator to buy or sell. Buffett recommends buying a company only when its intrinsic value is higher than its market price. While Buffett’s One Dollar Premise is one indicator of value, relying on a single indicator is not recommended.

Sample Ratio comparison

The table above compares three ratios for Coca-Cola, Deere & Co, and Alphabet (Google). Deere & Co produced the highest 10-year return on equity (ROE) but has the lowest price/earnings multiple (PE), a sign that investors believe the company’s future earning potential is less than Coca-Cola or Google. Coca Cola produced a higher 10-year ROE than Google but has a lower PE. Since each company’s use of leverage is different, investors need to understand how debt affects future earnings.

Fundamental investors rely on hundreds of financial statement calculations to identify candidates for purchase, akin to looking for the “needle in the haystack” since there are more than 6,000 publicly traded companies. The process is arduous because market prices continuously change, and each price change can affect the result.

Final Thoughts

Professional investors rely on massive databases and sophisticated computers to perform the heavy lifting of data collection and analysis. Many supplement their experience with complex logarithms to make comparisons and suggestions. Fortunately, non-professionals today have access to many of the same tools used in the big investment houses.

An investment adviser like wealthX, using Artificial Intelligence (AI), continuously updates and recalculates hundreds of financial ratios and relationships – including Buffett’s One Dollar Premise – to make investment recommendations to their clients. A low monthly membership fee allows investors to benefit from the same strategies employed by the Oracle of Omaha.

Using Leverage for Business Success

Leverage, to most people, is the use of borrowed money in combination with one’s capital to maximize an investment’s volatility. While an example of “financial” leverage, the meaning of the term is more succinct and inclusive.  Leverage, in its many forms, is the ability to affect a decision, action, or outcome to one’s advantage.

Movie-goers will recall the famous line in the 1972 film,  The Godfather, where Don Corleone (played by Marlon Brando) tells his godson about dealing with a Hollywood mogul: “I’m gonna [sic] make him an offer he can’t refuse.” Discounting the implied threat, the remark illustrates the use of influence to one’s advantage. The Don understands the various “levers” available to him to get his desired outcome.

Examples of leverage are present in most aspects of human relations, from the so-so student accepted into a prestigious college due to the father’s position to the business getting the highest price for its products as the only supplier. Whether the influence is overt or packaged in allusion and innuendo, the impact is equally effective.

Entrepreneurs sometimes fail to appreciate their leverage potential with customers, competitors, and potential funding sources. Consequently, they accept less favorable terms than might be possible in a more balanced arrangement.  Successful entrepreneurs use leverage to accomplish their organization’s internal and external goals. They understand that a point of leverage is present in most business transactions in one guise or another. To be successful, they need to identify its nature and determine when and how to best deploy or counter it.

Sources of Potential Leverage

Leverage is applicable to individuals and organizations in varying degrees and relationships. Managing leverage requires understanding and responding to organizational vulnerabilities to external influence. The following sources of potential advantage are not exclusive since managers, companies, market conditions, and relationships constantly change.

For example, employees are subject to the employer’s power of the purse – the ability to hire, set compensation levels,  and terminate. At the same time, a company’s success depends on the skills, commitment, and institutional knowledge of its employees, qualities that are not easy to replace. In most cases, the leverage possible to either party is offset by the other’s party’s advantage.

Using Leverage to Your Advantage

Potential sources of leverage are present in every transaction, some more applicable in certain situations than others. The following are examples of areas that might be exploited by entrepreneurs:

  • Customer Knowledge. The ability to identify customer needs and create products that anticipate and fill those needs drives revenues and stifles competition. The ability to understanding your customers’ needs faster and more completely is a highly sought-after skill easily leverageable to one’s advantage.
  • Complexity. The advantage of complexity – the use of unique materials, processes, and skills – enables organizations to deliver superior customer solutions (lower costs, higher quality, greater choice, expanded availability).
  • Technology. Technology allowed mankind to unlink physical effort and production outcomes as well as time from income. Individuals and organizations with  the skill to design, use, and adapt mechanical and electrical machines in the workplace can upend whole industries by their influence on customer and competitor actions.
  • Leadership. The ability tomultiply one’s effort and output through directing other people is the key to deliver more products of higher quality for less costs in shorter periods. Those with the ability to lead others are highly valued in every organization.
  • Individuality. Each person is unique with a varying set of experiences, skills, aptitudes, education, and goals.  Each of us take a different path in life to reach different objectives. Find a niche/model/arena that aligns with your path, and no one can compete with you, in being you.
  • Patience.  The personal ability to defer instant gratification encourages fuller investigation and reflections about the consequences of an action before implementation, reducing or eliminating mistakes of haste and carelessness. Leveraging patience to forcefully overcome the urge for immediacy and  focus on long-term results.
  • Brand. Effectively, each person and organization have their own “brand,” or reputation, that signals who we are and what we offer others in a relationship. Branding typically affects a consumer’s choice between two similar products or the willingness to accept a celebrity’s endorsement over that  of a man-on-the-street. Entrepreneurs should work to enhance and preserve their reputations as they are often a big factor in other’s decisions.
  • Equity. The position that some call “skin in the game” is a powerful influence, especially when dealing with those who have no ownership or consequence from a decision. Equity shows commitment and persistence, two qualities essential for a successful relationship.
  • Capital. The presence or lack of available capital is mistakenly believed to be the most valuable source of influence, especially by those who have it. Most entrepreneurs are familiar the Business Golden Rule: “He who has the gold makes the rule.”  While a factor in most relationships, those with money ( and those who need it) frequently overstate its value and enter into alliances that are disappointing for both parties and cannot be sustained.

Entrepreneurs should understand that influence cannot be universally applied since the nature of the relationship is a determining factor. The effectiveness of influence typically depends on who needs who the most. Understanding the balance is critical in exerting influence or responding to it. Negotiation is the parries and thrusts between parties to achieve the desired result, though not necessarily to the detriment of the opposite party. Win-win outcomes are most likely to endure as both parties achieve a benefit.

While a Fortune 500 company generally has more clout in the general market than a startup organization, the outcome of the former’s applied pressure depends on each company’s relative influence with the specific subject of the influence. For example, if your supplier’s success depends on your company’s success, a rival’s efforts to shut off supply are apt to work.

Final Thoughts

Entrepreneurs voluntarily accept one of the greatest challenges in business: the creation and maintenance of a growing, vibrant company. Statistics indicate that most startups are not successful.  Even so, a few not only survive but thrive. Many of today’s largest, most profitable companies were startups a few decades before. Their founders understood leverage and applied their influence adroitly to capture customers, attract employees, and engage their communities.

Does Gold Belong In Your Investment Portfolio?

Humankind’s fascination with gold can be dated back as far as 4000 B.C., and for much of our collective history, possession of gold was a sign of wealth and status restricted solely to governments and nobility. Eventually, the first gold coins are believed to have initially financed long-distance trading around the world – around 500 B.C., Darius the Great of the Persian Empire is thought to have minted the first coin, the “daric,” to facilitate the expansion of his empire and the needs of his army as it moved into foreign territories.
Many countries came to use gold and silver coins as currencies for centuries. However, during the worldwide depression of the 1930s, every industrialized nation ceased using the gold standard, subsequently severing the close link between the value (and quantity) of gold and the value of money.
Despite this, gold continues to be a sought-after commodity due to its scarcity and reputation as a hedge against monetary or societal collapse. But does it deserve a place in your portfolio?

Gold in Modern Civilization

Today, gold is available in several forms, including the following:

Historic Collectors’ Coins

Minted as currency by many countries, these coins are now collected as much for their numismatic value as their gold content. Like other collector’s items, such as stamps and fine art, only experts, or those who have access to experts, should consider this investment.

Collector Gold Coins

Issued by countries and commercial businesses, these coins are priced according to their weight and purity. The more popular coins are the Canadian Maple Leaf, the South African Krugerrand, and the American Eagle.

Gold Bars

Available by weight of one gram, one ounce, ten ounces, and one kilo (32.15 ounces) generally with 99.99% purity, bars are also referred to as “gold bullion.” A standard gold ingot like that found in the U.S. Fort Knox Depository, and commonly depicted in movies, is seven inches long, three and five-eighths inches wide, and one and three-quarters inches high, and weighs 27.5 pounds. At current market prices, an ingot would have a value in excess of $500,000, much too expensive to support an active investor market.

Common Stock of a Gold Mining Company

Ownership in a company whose sole business is the search and discovery of gold, and the potential value of the element in the resources not yet produced is a common type of gold investment.

Gold Exchange Traded Fund (ETF)

A gold ETF does not typically hold gold as a commodity, but tracks its price with a combination of financial derivatives.

Gold Exchange Traded Notes (ETN)

A gold ETN is a debt security that’s value fluctuates based upon the price of the underlying index – in this case, the price of gold. While this investment includes credit risk, the benefit of being taxed as a long-term capital gain rather than paying ordinary interest exists with this vehicle.
Gold is not money or currency, but an investment which must be converted into money before it can be used to purchase other assets. Of course, individuals and businesses can agree to exchange an amount of gold for a service or product – as was done for centuries – but it would require negotiation about the relative value of each, a timely and potentially risky process for both parties.
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Day Trading for a Living – Benefits and Risks

Trader Using Multiple Computer Screens While Communicating ThrouIn the days before personal computers, instantaneous communications, and sophisticated software, many Wall Street brokerage firms employed veteran traders to sit and interpret the paper tapes of stock transactions that spewed from mechanical tickers across the city. These traders, known as tape readers, would note the price and volume pattern of individual trades in the hopes that they could identify opportunities for quick profits. For example, if the latest trade of a stock differed significantly from previous trades in either price or volume, this might be interpreted as the work of insiders acting before news that could affect the company is announced. The tape readers would then act similarly, hoping their intuition was correct.

Since that time, the stock ticker has been replaced by a massive electronic network capable of analyzing and reporting trade data throughout the world. That technology has led to changes in the way the investment industry functions. One of the more unique positions in today’s landscape is that of the day trader.

Definition of Day Trading

By definition, day trading is the regular practice of buying and selling one or more security positions within a single trading day. No position, long or short, is held overnight. Day traders frequently deal in thousands of shares, often with leverage, and look for small-percentage profits on each trade – often less than $1 or $2 per share. They take positions based upon their analysis of a stock’s probable price direction within the trading period.

Popular day trading strategies include the following:

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