Three principles for stock selection::
1. We select companies with high return on equity, high dividends payout, and a stable business model.
2. We buy at a cheap price and hold until the stock becomes expensive.
3. Maintaining a diverse portfolio of more than 100 stocks eliminates the need for constant monitoring and loss cutting.
Do not predict the highs and lows of the index.
Instead, adjust your holdings based on the GDP.
1. Reduce your holdings at the peak of GDP growth rate, but sell at most one-third.
If your holding proportion is 60%, you can reduce it to 40%.
2. Wait to buy most stocks when GDP is at its lowest point.
3. We will allocate 15% of our portfolio to index ETFs, allowing for quick adjustments during GDP highs and lows.
My method promises a stable 15% annual return rate, and the demonstration provides the best evidence.
By achieving an average annual return of 20% over 50 years, you have the potential to attain a level of wealth comparable to that of Warren Buffett.
Building a portfolio that steadily aims for a 15% annual return is the most important step to becoming wealthy,
because having confidence in this portfolio means:
You’re willing to bet your entire capital — the principal will grow substantially over time.
You’re willing to hold it long-term without constantly moving in and out, allowing the power of compounding to work.
Large principal × long-term compounding = becoming wealthy.
請每天來討論區
跟單
Participate in daily discussion forums and follow what we do.
If you cannot find 100 long-term companies in Taiwan’s stocks, please come to invest globally.
Diversifying your property to world-class companies is the safest and growing, more secure than real estate.
By carrying on Warren Buffett's remarkable investment skills, your future generations will be liberated from concerns about their job or academic performance. This will empower them to wholeheartedly pursue their interests and embrace a lifetime of peace and contentment.
The largest hindrance in studying Buddhism is dispelling entrenched misconceptions and ensuring strict adherence to the teachings of Buddha. Some individuals mistakenly believe that their modified approach is quicker or that blending different ideologies is more effective. They have a careless attitude towards learning and only visit the temple sporadically. These actions will prevent one from reaching enlightenment and will not lead to wealth.
Engage in daily forum discussions and follow our lead to gain insights and strategies. If you encounter obstacles, refer back to these lecture notes frequently for guidance.
Welcome to the Buffett Lecture Series! Founded by Michael On in 2003, it is the premier and highly acclaimed investment course in Taiwan, with a long-standing reputation.
In 2003, while starting the Buffett Lecture Series, I was looking for a name that would appeal to the audience. I stumbled upon an eBay auction for a lunch with Warren Buffett that sold for $250,000, equivalent to over NT$8 million. This inspired me to name the series "An Investment Course Worth NT$8 Million." Although I believed the name was striking, its effectiveness was still to be seen.
Every year, eBay holds an auction for a "Lunch with Warren Buffett," which set new records in 2012 and 2016 with winning bids of $3,456,789, equivalent to roughly NT$100 million.
This has elevated the perceived value of the course to over NT$100 million, making it an opportune time to enroll and receive even greater returns on your investment.
Since its inception in 2003, the tuition for this course was established at NT$5,000. In 2008, the tuition was increased to NT$6,000 due to the rise in oil prices.
I had aspired for the course tuition to grow in line with the winning bid amount of the annual "Lunch with Warren Buffett" auction, but increasing the fee proved to be a difficult task.
After the classes, students would approach me and tell me that my class fees were actually the cheapest among all the other investment courses. Other courses often cost more than ten thousand dollars, with some even costing twenty-four thousand dollars per class. I thought the fees for my class were just a reasonable price, in the middle range. When people say "cheap," it's not really that cheap. Because investment is a simple subject, if people have to pay more than ten thousand dollars, then wouldn't subjects like physics, chemistry, or calculus, which are more difficult, cost millions of dollars? If someone has taken a course that's more expensive than mine, they were ripped off!
"Why do we still attend this class even though we've read the book beforehand?" asked some classmates. "Some things in the book may not be fully understood and there are also many questions that come up during the investment process, so that's why we need to attend this class."
Investing is similar to learning how to drive.
Reading a book on investing is like reading a driving manual; just as reading a manual alone won't make you a proficient driver, reading a book on investing won't make you an expert.
This class acts as a driving lesson, with the instructor clearly explaining all the principles of investing.
With a thorough understanding of the class material, you will be prepared to navigate various situations in the stock market.
Feel free to ask questions at any time during the class!
After finishing class, we'll hit the road, which is becoming increasingly complex. Nevertheless, we hope to stay connected with our classmates. If you have any questions regarding investments, don't hesitate to give me a call, or join us in the discussion forum for a group discussion. This course comes with a permanent, free guarantee, and you're welcome to revisit as long as you send an email to register in advance.
The term "free" only applies to tuition fees and not to lunch. Former students who want to order lunch must pay for it, at a cost of approximately NT$200 per day. Otherwise, if they only come back for the free lunch, I may run into financial difficulties.
舊生要一本新的講義，70元，
超過一年以上來回鍋才需要新的講義。
The lecture materials are periodically updated, and a new copy can be purchased for NT$70. It is recommended to purchase updated materials if your current edition is at least one year old.
現在改為線上教學之後回鍋更方便了，
自己到討論區看講稿，隨時隨地複習。
With the course now being offered through online learning, reviewing and discussing the material has become more convenient. You can access the discussion forum to read the lecture text and review it anytime and anywhere.
In the past, the class would organize yearly reunion parties during September or October, inviting accomplished alumni to share their experiences. These events were hosted in various regions of Taiwan, including the north, central, and south, and were attended by over 15,000 alumni annually. The Taipei party was held at the Miramar Hotel in Neihu District, which boasts a Ferris wheel, and attendees were asked to contribute a fee of NT$300 per person to cover the venue costs. The Taichung gathering took place in a classroom at the China Youth Corps, while the Kaohsiung reunion was held in a hall generously provided by Ms. Hueiwen.
I have written two books, the first is "Warren Buffett’s Magic Book of Stock Selection" published in 2004, and the second book, "Warren Buffett's Skills of Stock Selection" was published in 2008. This is a comic book.
These two books are different, with 70% different content.
Buying a book from me is the cheapest, because the author can get a 40% discount from the publisher. I am providing the books to you at cost price.From now on, please purchase books directly from bookstores or publishers.
也就是上這堂課我這一輩子只會賺同學一次學費，
以後跟我買書、參加同學會、來回鍋，都賺不到一毛錢！
This means that I will only earn tuition from you once. I won't make any money from selling books, hosting reunion gatherings, or having you return to class.
The only way to teach someone how to invest is by combining reading books, taking courses, participating in forums, and attending class when necessary. Investing is a process of practice that requires an understanding of the principles that govern the stock market and prices. This usually takes two bull and bear market cycles to fully comprehend. During the first encounter with a bull market, rising prices every day can make it seem easy to make money. But during the first encounter with a bear market, when prices are falling every day, it can feel like life is worse than death. It's only after the second encounter that one realizes that both bull and bear markets are just part of the process.
股市多空跟總體經濟循環是一致的，
景氣循環大概3到5年一個循環，一個循環指一上一下。
The bull market and bear market are synchronized with the economic cycle, which lasts approximately 3 to 5 years and encompasses one cycle of fluctuation, including a rise and fall.
經過2次循環亦即至少5年的時間才能夠體會，
過程中一群志同道合的人共同研究比較容易進入狀況。
It takes at least 2 cycles, or 5 years, for one to fully understand the stock market. In this process, it's easier for a group of people with shared beliefs to learn and understand the market together.
In recent years, I have observed significant differences in my students' investment behavior. One standout student is Kaiyuen, who started as a beginner investor. He previously worked in a steel factory and had limited funds. In 2008, he took my course when the stock market index was at 5,000 points, and he saw it as a low point to invest. He held onto his stocks for a long time, and when the index reached its peak at 9,800 points, he reduced his position, thereby doubling his investment. In early 2012, he once again recognized a low point and invested in stocks such as Merida Bikes (9914.TW) and Feng Tay (9910.TW), which turned out to perform well.
When Kaiyuen came to see me in 2008, he didn't have much money. He told me, For someone with a net worth of ten million dollars, they are considered wealthy, a far-off aspiration for him. However, he recently informed me that he is nearing the ten million mark. To put it in contemporary terms, ten million dollars was once a speck on the GPS map, but now it is within reach, visible like a set of taillights.
When asked how to determine if someone has learned the magic of Buffett, I use two criteria: first, whether the stocks they have acquired align with my personal watch list, and second, if they consistently follow the strategy of buying stocks at a cheap price and selling when the price is expensive. Adhering to these methods is a clear indication of a successful application of Buffett's teachings.
A colleague of Kaiyuen, another student, came to class at more than 9,000 points in 2011. I advised him that the market was approaching its peak and it was time to sell. However, he ignored my warning and invested in video game and solar energy stocks instead. Unfortunately, this resulted in financial loss and eroded his confidence in investing. When the market declined to 7,000 points in 2012, he became too apprehensive to invest in stocks again.
Kaiyuen was eager to encourage his colleague to invest in stocks and even provided five specific stock tips, but his colleague was too scared to make the investment. Kaiyuen sought my advice several times. I advised that during a period of low GDP, it was a good time to invest in stocks, but the colleague was still wary. I recommended showing the colleague a stock price chart and explaining that many stocks hadn't risen yet, but the colleague remained hesitant. I encouraged the colleague to invest a third of their funds, emphasizing that the outcome of the first third doesn't matter, but the colleague was still uninterested. In the end, I told Kaiyuen to "Press his head to the desk and tell him to buy, to buy." and the colleague eventually invested, but sold the stocks after just three days. Kaiyuen asked me for advice on how to help his colleague overcome their fear and hold the stocks for a longer period. I shrugged my hands in frustration and said, "Forget about it, it's clear that the colleague has missed his chance with Buddha and missed the opportunity to learn from Mr. Buffett."
Why did his colleague fail to learn the Buffett method? The reason is that he didn't follow my instructions after the class. I called to sell at 9,000, but he didn't, thus he was unable to fully comprehend the stock price concepts. My suggestion is that after the class, one should allocate at least half of their available funds towards investing with me, regardless of their personal preferences. The index currently stands at around 10,000 points, making the stock even more costly. It's not advisable to hold more than half of one's funds in stock. By following my lead just once, they will easily understand the principles of stock pricing.
This course starts from the basics, so don't be concerned if you are a newcomer. If you have any questions during class, simply raise your hand and I will clarify until you fully understand. In just two days, I will transform you into a Buffett by imparting Mr. Buffett's investment strategies and approaches. Even individuals with no prior knowledge can learn to invest globally. Just give me two days.
Before discussing Buffett's theory, it's crucial to keep in mind that the stock market is associated with significant risks, with the majority of investors (80%) incurring losses. Despite the index reaching 10,000 points recently, only a few investors benefited as the majority of gains were focused in TSMC (2330.TW) and Largan (3008.TW), which are not widely held by retail investors.
This is regarding equity investment. How many investors make a profit through futures and options trading?
The cover story of Business Today magazine features Taiwanese futures expert Yisiong Huang.
According to Huang, only 2 out of 100 players make money when trading futures.
This highlights the difficulty and risk involved in futures trading.
Interestingly, despite being a futures expert, Huang has declared bankruptcy 8 times in his life.
A futures broker once revealed to me that some of his clients lose all their money every three months.
His main responsibility is to acquire new clients.
This information was surprising and highlights the reality of the volatile nature of futures trading.
I once asked a broker about the success rate of day traders. Day trading involves buying and selling securities within the same day, or selling first and then buying. If a trader accurately predicts market trends, they can make a profit. Theoretically, the chance of success is 50%. The broker informed me that, unfortunately, 95% of day traders incur losses. I responded optimistically, "At least 5% of traders make money," but the broker retorted, "Those 5% of profitable traders change every time." This emphasizes the volatile and ever-changing nature of day trading and the difficulties associated with it.
This is the bitter truth about the stock market: 80% of investors fail to make a profit. Some investors might be surprised by this statistic, as they may have thought that stock prices only fluctuate, providing them with a 50-50 chance of making a successful investment. However, the reality is that one must accurately predict both the right time to purchase and the right time to sell, which decreases the probability of success to only 25%.
The likelihood of success in the stock market is approximately 25%, which is why a majority of players, 80%, lose money. This statement that investing in the stock market is simply a matter of guesswork may be disputed by some. Many investors put in substantial effort, such as rising early to follow the close of the US market, reading well-known financial publications like the Commercial Times and Economics Daily, and even attending classes on weekends. However, the fact remains that they are analyzing uncertain variables and making predictions about unknowable events, making it plausible to argue that stock market investing is essentially a guessing game.作者: mikeon88 時間: 2018-11-17 15:06
What are investors researching? They are interested in finding out which stocks will likely have the largest gains in the coming week and are seeking stock tips. The primary objective for everyone in the classroom is to seek advice from Michael. Who has the answer? If anyone thinks they know, please write down their response and check it after the end of next Friday. However, keep in mind that this is an unknowable issue, and it is possible that your guess will be incorrect.
Secondly, everyone is examining the company's projections for its profits this year and next year, as stock prices reflect fundamental factors. The company's profit forecasts are made by analysts. I used to work as a foreign electronics analyst, frequently visiting companies and inquiring about their current capacity utilization rate, product gross margins, cost structure, and future expansion plans. I would then make profit projections based on the company's responses.
European and American fund managers require profit projections for the next three years, while Japanese managers require forecasts for five years. The longer the forecast period, the easier it is to estimate. A Japanese manager once approached me for a five-year earnings forecast for Phoenix Electronics (2411.TW). I finished the estimate in under five minutes and initially planned to send it by fax on the same day, but decided it was too early and sent it the next day. I informed the manager over the phone that I had worked overtime the previous day to complete the estimate. Quick checks only produce rough estimates. How can one predict Phoenix Electronics's profits in the next five years? I don't even know where I'll be in the next five years.
As an analyst, I frequently look back at past predictions. I have discovered that the error rate is substantial, not only in terms of magnitude (30-40%) but also in direction. I often predict growth, but it frequently turns out to be a decline. Some people attribute the lack of accuracy in predictions to the fact that analysts are outsiders and companies do not disclose all the relevant information. But what do the company insiders know? Even the CEO can only control deliveries up to the next 3 to 6 months. Customer orders are confirmed three months before they are placed, and if market conditions are unfavorable, orders can be cancelled. Despite this, we still focus on predicting profits for the next three years, often relying on conjecture.
As a researcher, I used to inquire about the visibility of orders for the company for the next few months. Now that I run my own class, I find it a funny question to ask. When asked about the visibility of orders for the Buffett class, I can only estimate the current month's enrollment status as good or not. Beyond that, I have no idea as enrollment is unpredictable. Even estimating the number of attendees for today's class remains uncertain. However, I need to conduct a headcount only at 10:00, as this is the time when lunch orders must be placed and there should be no concerns regarding inventory.
第三、投資人還會問股價多少錢可以買？將漲到多少錢？
這才是大家最想問的問題。
Third, investors frequently inquire about the purchase price and the expected stock appreciation. This is the most popular question among investors.
In recent years, foreign investors have been observing the stock price of HTC (2498.TW). In 2010, when the stock price fell to NT$300, the company announced, "We will launch an aggressive strategy to seize market share, even at the cost of sacrificing gross profit margin." Upon hearing about the sacrifice of gross profit margin, foreign investors started selling, but later the stock price rose to NT$1,300. Foreign investors revised their target price to NT$1,500, but later it fell to NT$40. It's evident that even foreign institutional investors don't have a clear understanding of where the stock price will go, making this an unknowable issue.
Fourthly, individuals are curious about the extent of market growth, particularly given the market's current level of over 10,000 points. In June 2016, during the UK's vote to leave the EU, prominent experts held pessimistic views. Soros proclaimed "Financial crisis 2.0 is arriving!" while Rogers said "I won't be buying stocks in the next one or two years," and Greenspan stated "Brexit is even worse than the 1987 Dow Jones crash." Despite these predictions, the market defied expectations and hit new highs, causing these experts to be humbled. This emphasizes that the market's future is an unknowable matter.
In the stock market, the questions on everyone's mind are typically limited to the above four. At their core, these questions concern the fluctuation of stock prices, which is unforeseeable. TThe funds invested in stocks are earned through hard work and it's perilous to gamble them on uncertain factors. Stock investment should not be approached as a game of luck.
I don't advocate that everyone should invest for the long-term, but avoid speculating. The etymology of "speculation" in English refers to making guesses. It's not that short-term is speculation, long-term is investment, but guessing is speculation, not guessing is investment. 作者: mikeon88 時間: 2018-11-17 15:06
The first step in learning to invest is to distinguish between knowing and not knowing, which is extremely important. The world of investment is full of variables, so how can we find the answer? The answer can be found by making decisions based on known facts.
What is knowable and what is unknowable? The fluctuation of stock prices is uncertain, but it can be assessed if a stock is cheap or expensive. Michael On's table calculates the fair value for each stock. By buying when stocks are underpriced and selling when they are overpriced, and repeating this strategy, one can enhance their wealth. This minimizes the reliance on guesswork as decisions are made based on verifiable data, thereby increasing the odds of making profits.
Li Ka-shing, a prominent figure in Hong Kong, started selling off his Chinese real estate in 2013 and redirected his attention towards European investments, acquiring multiple firms in the UK. In recent years, real estate prices in China have skyrocketed while infrastructure in Europe still remains relatively cheap-priced. Even Superman Li's core holding companies Hong Kong Electric (0006.HK), a Power Company, are expensive.
He split it up and sold half of his shares.
What Mr. Li is doing is just the basic strategy of buying cheap and selling expensive. As long as the stock price continues to rise, many investors consider it not overpriced. This distinguishes successful investors from unsuccessful ones.
"The rise and fall of stock prices cannot be known" is one of the most difficult concepts in the world to grasp. Despite this emphasis in the first class, students kept asking about stock prices, even through indirect means. The question they are most concerned about is "Can I buy this stock now?" they are asking about the stock's immediate rise after purchase. If the stock price falls after buying, it is no longer a good time to buy. I tried to explain to them, "The rise and fall of the stock price is unknowable, but we can calculate whether a stock is cheap or expensive." However, the students quickly followed suit: "Is it cheap enough?" It shows that they are concerned about the rise and fall of stock prices.
Berkshire Hathaway 2004 Annual Report
We are eager to hear from principals or their representatives about businesses that meet all of the following criteria:
(1) Large purchases (at least $75 million of pre-tax earnings unless the business will fit into one of our existing units),
(2) Demonstrated consistent earning power (future projections are of no interest to us, nor are “turnaround” situations),
(3) Businesses earning good returns on equity while employing little or no debt,
(4) Management in place (we can’t supply it),
(5) Simple businesses (if there’s lots of technology, we won’t understand it),
(6) An offering price (we don’t want to waste our time or that of the seller by talking, even preliminarily,
about a transaction when price is unknown).
We can promise complete confidentiality and a very fast answer — customarily within five minutes — as to whether we’re interested.
In exploring Mr. Buffett's method for selecting stocks, it is clear that he relies on a set of six criteria. Adhering to these principles can lead to substantial financial gains similar to those achieved by Mr. Buffett. The 'Buffett Six Criteria' is regarded as a highly valuable tool for choosing stocks.
The first criteria: Large purchases, at least $75 million of pre-tax earnings
This is different from our usual thinking. As retail investors, we do not favor buying large cap stocks because of their steady price fluctuations. We prefer small-cap stocks because we think they have less capital and are easier to speculate. While it is true that small-cap stocks are easier to speculate, the question is who is being taken advantage of? Who knows which stocks will surge before they actually do? When the stocks surge and we want to follow but dare not, it's itching. Determined to catch up, prices often fall and we get trapped after a few days of excitement. We live a life full of fear every day. Small-cap stocks are easy to speculate, but it is we who are being speculated.
Here when referring to large stocks, Mr. Buffett focuses on the company's profitability, while the distinction between large and small stocks is typically based on market capitalization. Which of these two criteria is more meaningful? As investors, we buy stocks with the aim of generating profit and only those that can generate substantial profits can be considered big companies. If a company is not profitable, then having a large market capitalization is of no value. Checking for profitability is therefore the logical thing to do.
The second criteria: Demonstrated consistent earning power
People recommend acquisition targets to Buffett, who then asks to see the financial reports of the company for the past five years. For a company to catch his attention, it must demonstrate not only strong earnings this year, but also a steady performance over the past five years. Claims of future turnarounds and explosive growth potential for companies such as Wintek (2384.TW), E Ink (8069.TW) and VIA Technologies (2388.TW), which have shown poor profits in the past, are unlikely to persuade him.
Mr. Buffett stated that "future projections are of no interest to us" These future projections refer to the profit projections made for the company. Analysts estimate the company's profits based on its expansion plans. It can be discouraging to realize that Mr. Buffett does not have any interest in these projections. As a former analyst, I put in a significant amount of time creating these projections, only to find that Mr. Buffett does not consider them relevant.
The third criteria: Businesses earning good returns on equity while employing little or no debt
What is ROE ? I will explain later.
An ROE higher than 15% is considered high. The one-year time deposit interest rate, which serves as a benchmark for evaluation, is set at 6.7% in normal economic times. However, due to the prolonged recession, current interest rates are lower than 1%. It is expected that interest rates will rise to 6.7% once the economy recovers.
A company's good profitability can be indicated by an ROE that is two times higher than the normal deposit rate of 6.7%. When this occurs, the ROE is considered high if it exceeds 15%.
The fourth criteria: Management in place (we can’t supply it)
Mr. Buffett oversees several trillion Taiwanese dollars worth of assets. In 2017, Berkshire Hathaway had a total cash of NT$3 trillion (equivalent to US$100 billion), which was significantly more than the Taiwanese government's annual expenditure of NT$2 trillion, earning Mr. Buffett the title of being "richer than the country."
Of Mr. Buffett's funds, around 70% are allocated for mergers and acquisitions, while the remaining 30% are invested in stocks. While many companies send their own personnel to reorganize target companies during a merger, Mr. Buffett adopts a unique approach by allowing the companies he acquires to manage themselves.
I recently read a book named "Warren Buffett's CEO" in which the author interviewed the CEOs of companies that had been acquired by Mr. Buffett. The author sought to understand the questions Mr. Buffett posed during the acquisition process. The CEOs reported that Mr. Buffett's inquiries were straightforward and mainly centered on financial reports, including the company's annual earnings, inventory, and accounts receivable. Lastly, Mr. Buffett always asked the CEO if they were willing to continue working for him, and if the answer was yes, he would complete the acquisition. After the purchase, Mr. Buffett infrequently visited the company and mainly monitored its quarterly earnings reports.named "Warren Buffett's CEO" in which the author interviewed the CEOs of companies that had been acquired by Mr. Buffett. The author sought to understand the questions Mr. Buffett posed during the acquisition process. The CEOs reported that Mr. Buffett's inquiries were straightforward and mainly centered on financial reports, including the company's annual earnings, inventory, and accounts receivable. Lastly, Mr. Buffett always asked the CEO if they were willing to continue working for him, and if the answer was yes, he would complete the acquisition. After the purchase, Mr. Buffett infrequently visited the company and mainly monitored its quarterly earnings reports.
Concerning this, I have taken a similar approach. I acquired a share of TSMC and allowed it to operate autonomously, without summoning CEO Morris Chang to inquire, "What are you doing now?"
The fifth criteria: Simple businesses (if there’s lots of technology, we won’t understand it)
Buffett invests less in high-tech stocks, not because he lacks understanding of the industry, but because they do not align with his principles for stock selection. The constant changes in the technology industry often result in fluctuations in company profits. For example, companies like CMC (2323.TW) and Riteck (2349.TW) were profitable during the CD-R era, but suffered significant losses after the introduction of DVD technology.
Taiwan's financial media have sent reporters to Berkshire's shareholder meetings in recent years. In 2008, a reporter interviewed Buffett and asked about his interest in investing in Taiwan. Buffett stated that the size of Taiwanese companies was too small for him. The reporter then asked if there was a promising company, to which Buffett replied that Taiwan's semiconductor manufacturing companies are excellent. When asked for a specific company, it is evident that he was referring to TSMC, not UMC (2303.TW). If we were to choose the most internationally competitive company in Taiwan, our choice would also be TSMC. This demonstrates that Mr. Buffett has thoroughly researched the Taiwan market and possesses a strong understanding of high-tech stocks. He is concise and to the point!
If a high-tech company has a strong, long-lasting presence, Mr. Buffett may invest in it. This is demonstrated by his ownership of over 8% of IBM's shares since 2011, making him the largest shareholder. In recent years, IBM has transformed from a computer hardware manufacturer to a system integrator, providing both hardware and software solutions. When a company outsources its computer systems, such as personnel, salaries, and storage systems, to IBM, it becomes locked into using IBM's systems due to the complexity of the systems. This gives IBM a durable advantage and was a factor in Mr. Buffett's decision to invest. IBM has a high ROE and stable profits, and Mr. Buffett bought its shares for $180 with an expected return of 29%, which he considered a great value.
Since 2017, Mr. Buffett has sold his IBM shares due to the underperformance of the company's cloud computing business. The company's stock price has been weak and its performance has not significantly improved in recent years, leading to pressure from investment performance, and ultimately resulting in Mr. Buffett's decision to sell.
The sixth criteria: an offering price (we don’t want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown)
Mr. Buffett established this clause to prevent high bidding during M&A negotiations, which can take a long time. When the seller senses the buyer's increased interest in the transaction, they often raise the price. To avoid this, he wants the seller to initiate the offer and engage in bargaining作者: mikeon88 時間: 2018-11-17 15:15
以上6點原則就是巴菲特的選股原則，
看了以上6點，請問同學哪一點的印象最深刻？
The above six criteria are Buffett's principles for selecting stocks. Which of these criteria do you find most impressive?
What caught my attention the most was the following statement under the sixth criterion: “We can promise complete confidentiality and a very fast answer — customarily within five minutes — as to whether we’re interested.” This was one of the most remarkable things I came across while reading about Buffett. Being an analyst, researching a new company can be a tedious task that requires going through financial reports, industry reports, and making multiple visits to the company. But according to Mr. Buffett, he can make a decision on whether he's interested in investing in a company within five minutes. It's truly remarkable.
He stated that the five minutes refer to the time it takes for him to reply on his interest in delving deeper. The process goes like this: if someone recommends a company to him, he will ask for the last five years of the company's financial reports. If he's interested, he'll respond within five minutes. However, the act of purchasing may not be as swift as it requires time for negotiation.
I am amazed that Mr. Buffett doesn't have any analysts working for him. He personally evaluates all investment opportunities, while many other fund managers rely on a team of analysts to help them research. In 1994, while I was working at Jardine Fleming Securities, I had the chance to have a working breakfast at the Mandarin Hotel in Hong Kong with Soro's analyst and presented information about Taiwan's integrated circuit industry. Unlike other fund managers, Mr. Buffett does not have an analyst. He does his own research and doesn't need five minutes to make a decision.
And Buffett's investments are also very significant. The railway company he acquired cost US$440 million, or NT$1.3 trillion. If we were given such a large amount for investment, how long would we take to decide? It wouldn't be as quick as five minutes, it would take us a year and a half to make a final decision.
What puzzles me now is why it takes so long to 5 minutes. With the help of On's table, the process of determining interest in a company takes only 15 seconds, not five minutes. The table is called On's table. To use it, simply enter the stock code into cell 1723 in the top left corner, press enter to retrieve the data, and the whole process will be completed within 15 seconds. A stock is considered qualified if "OK" appears in the top right corner.
The On’s table download is pinned at the top of the discussion forum. There are both Excel and web versions available.
The Excel version of the On’s table can only run on a computer with the Windows 11 system. Please upgrade Office to 2010 or later; Office 365 is supported, but Open Office is not!
When you open the Excel version of the On’s table, click on 'Enable Content' at the top to use it."
Upon obtaining On's table, you will no longer question the high tuition fee. Some students have stated that the value of On's table is worth more than the tuition. Initially, I interpreted this as a compliment, but upon further thought, I realized it was intended as a joke. If the value of On's table surpasses the tuition fee, does this imply that my lectures have no value?
A reporter asked Mr. Buffett what the most important criteria was for his investments, to which he replied that sustainability and a strong management team were the key factors. The reporter then asked how he evaluated the management team, and Mr. Buffett said he focused on their past performance, adding that investing was different from playing baseball and that older managers were typically better. (Quoted from Business Wire, February 2006). Mr. Buffett's ideal company is one whose founder is close to retirement and looking to cash in their stock and enjoy their later years. It is suggested that Morris Chang reach out to Mr. Buffett and consider selling TSMC to him.
Mr. Buffett has a preference for buying well-established companies, which is different from the common perception. Retail investors often purchase newly-listed stocks with the hope that the stock prices will rise during the initial excitement period. However, the results are not always positive once the initial excitement phase ends.
In fact, the situation is similar in Taiwan's stock market. Companies that are established and have a proven track record are usually more likely to instill confidence in investors. This applies not just to traditional industries like Uni-President (1216.TW), Formosa Plastics (1301.TW), and Giant (9921.TW), but also to electronics companies such as Delta Electrics (2308.TW) and TSMC. The ability to withstand the test of time can bring reassurance to investors.
Our stock selection methodology contrasts greatly with Mr. Buffett's approach. As retail investors, we tend to invest in smaller stocks, whereas Mr. Buffett primarily focuses on larger stocks. We determine a company's worth based on its market capitalization, while Mr. Buffett considers its net profit. We look at a company's predicted profits, while Mr. Buffett assesses its historical performance. We are drawn to turnarounds, while Mr. Buffett prioritizes consistent profits. This difference in stock picking philosophy contributes to our underperformance in the market. To improve our success in the stock market, it's important to learn from experienced investors such as Mr. Buffett.
The six criteria mentioned by Mr. Buffett highlight the characteristics of a company that can maintain a high return on equity over a prolonged period. However, his language may be somewhat ambiguous, so I have rephrased it as Michael On's five criteria for stock selection:
1. Check if the return on equity (ROE) has been stable and above 15% over the past 5 years.
2. Look for high dividends, with a profit reinvestment rate below 80% and a dividend payout ratio above 40%.
3. Durable business model
4. Large purchase, including at least NT$500 million in net earnings and a minimum of two years of public listing or over-the-counter trading.
5. Integrity management, specifically by checking if the board of directors holds a minimum of 10% of the company's shares.
1、2、3點是主要條件，一定要遵守。
4、5是次要條件，不遵守沒關係，不過後果要自行負責。
Criteria 1, 2, and 3 are the primary considerations and must be strictly adhered to. Criteria 4 and 5 are secondary and may be taken into account at the discretion of the individual, but one must be aware of the potential consequences of such considerations.
You don't have to memorize these five criteria, as they are already recorded in On's table. If all the conditions are met, an "OK" will appear. If there is no "OK", it indicates that some of the conditions are not met and will be highlighted in red.
Taiwantaxi (2640.TW) has not met the "OK" criteria in the form, indicating that certain standards have not been achieved. These unmet standards include:
The expected return of 2% is lower than the minimum requirement of 15%.
The payout ratio in the last three years was less than 40% in one year.
The recurring net profit was less than NT$500 million in one year.
It has been less than 2 years since its listing or over-the-counter trading.
Due to these four unsatisfied criteria, the "OK" designation does not appear.
To make it easier for those with weaker color perception, an underline can be added below the red number to clearly indicate that the condition has not been met. This underline is equivalent to the red number, representing a non-compliant condition.
Let's examine the fourth and fifth criteria. The fourth principle states that the company must be of significant size, which aligns with the first criterion of the six proposed by Buffett for large purchases. To meet this requirement, the company must meet the following conditions:
It must have been listed or traded OTC for a minimum of 2 years.
It must have a net profit exceeding NT$500 million.
Many IPOs experience a drop in profits two years after going public for several reasons. Some companies may go public during a period of high profits, while others may employ accounting techniques such as window-dressing to meet listing criteria, only to revert to their previous state afterwards. Grand Hall (8941.TW) and E-Ton (3452.TW) are among the companies that fall into this category.
When it first listed, E-Ton was a stock market leader with a high stock price. Now, its stock price has fallen to less than a tenth of what it was then. Investing in this stock is similar to taking a gamble on a potentially hazardous security.
These types of companies are not easily recognizable from their financial reports, as the profit records are authentic, not false. To prevent this, the solution is simple: wait for two years after its listing before evaluating it as a potential investment.
The second criterion for investing is to only purchase companies with net profits exceeding NT$500 million. Small companies are often not stable and have a higher risk of failure. It's advised to wait until the company "matures" before investing. Mr. Buffett requires a pre-tax net profit of $75 million as a condition for investing in US stocks. For Taiwanese stocks, I suggest a minimum net profit after tax of NT$500 million.
The fifth investment criterion is the integrity of the company's leadership. Buffett attaches great importance to honesty. However, assessing integrity can be difficult, as it is a vague term. In my experience, I have not seen company executives admit to their company's weaknesses. Despite poor performance, they may still assert that they will turn things around in the second half of the year. Given that all executives may inflate their company's success, I require board members to own a minimum of 10% of the company's shares as evidence of their honesty and dedication.
The requirement for board members to hold a minimum of 10% of the company's shares is not considered a strict standard, as many companies have 7-8 directors on their board. Significant shareholders generally hold more than 1% of the company's shares in their own name. This low standard leaves room for interpretation. Some companies may argue that their leaders have established a trust to avoid estate taxes, and the shares are registered in the trust's name. While this is a valid justification, it's not guaranteed that all shares will be transferred to the trust. For example, Terry Guo, CEO of Hon Hai Group, has a trust, but still holds at least 12% of the shares in his own name, which is seen as a display of honesty.
You will observe the following patterns after analyzing On's table: Board members of high-quality companies tend to hold a larger share of the company's stock, such as the 35% held by the board members of China Steel Chemical (1723.TW) or the 66% held by the board members of TTET Union (1232.TW). On the other hand, board members of lower quality companies typically hold less than 10% of the shares. However, there are exceptions to this pattern. For instance, some well-regarded companies have board members who own only 10% or less of the shares, such as TSMC and Delta Electronics. These companies, however, are not considered Taiwanese companies as the majority of their shares are owned by foreign investors. In this case, Morris Chang is just a manager. Furthermore, most IC design companies have board members who own less than 10% of the shares. This is because the IC design industry is constantly changing and even the CEO may not want to register too many shares in their name, making it easier to sell their shares if the company's profits decline.
With regards to integrity, we will focus on one specific aspect. Spin-offs, which involve the separation of a department into a separate company, have become popular in recent years. However, the parent company's stake in the spin-off is frequently less than 60%, indicating a dilution of integrity.
English:The company U spun off several subsidiary companies M, N, and F, which are all successful but U only holds 20% of the shares. Despite a prolonged decline in U's stock price for over 20 years, causing substantial losses for shareholders, Mr. C's wealth remains intact. He is renowned for having the largest collection of antiques among the top ten collectors in China and recently sold a Song Dynasty dish at auction for a value of NT$1 billion. Is it really confusing ?
There are numerous bosses engaging in unethical behavior. Among them, Aunt W of V company stands out as particularly absurd. She was once the wealthiest individual in Taiwan as the primary shareholder of Company H. However, Company H is a subsidiary of the struggling and loss-making V company. Despite this, Aunt W has managed to maintain her status as the richest person.
另外像華O是O寶獨立出去的，長O是華O分出去的，
母公司持股都只有20-30%。
Furthermore, CC company was spun off from C company, and CW company was spun off from WL company. In these spin-off events, the parent company only retains 20-30% of the shares.
On the other hand, which company boss is considered to be honest? Hon Hai holds 73% of Foxconn's shares. When Foxconn was listed on the Hong Kong stock exchange, its stock price saw a substantial increase. During this time, Hon Hai's stock price also rose due to its ownership of 73% of Foxconn's shares.
In conclusion, to assess the integrity of company executives, two factors are considered:
1. Board members must have a minimum ownership of 10% of the company's shares.
2. After a spin-off, the parent company's shareholding ratio must not be below 60%.作者: mikeon88 時間: 2018-11-17 15:24
講稿 4/21 物美價廉
Lecture 4/21 Good quality and low price
進一步講解巴菲特理論之前，先來複習基本的會計觀念，
因選股主要從財報看出來。
Before delving deeper into the Buffett theory, let's first review the basic accounting concepts. Stock selection is primarily based on financial reports.
Financial reports have two statements, with the first being the balance sheet. This document records a company's assets, such as desks, projectors, and computers. The funds used to acquire these assets come from two sources: borrowed money, which is listed as a liability, and the company's own funds, recorded as equity. The balance sheet follows a basic formula where assets are equal to liabilities plus equity.
Current assets are part of a company's assets and are the easiest to convert to cash. Cash itself is the first of these assets, followed by short-term investments such as stocks and bonds that are expected to be sold within a year. The company's cash balance often includes these short-term investments as they can be easily converted to cash. The third type is accounts receivable, which becomes cash once payment is received from customers. Lastly, there is inventory, which transforms into cash when sold.
There are two other types of assets that are less liquid. The first is long-term investments, like stocks and bonds, which are typically held for more than a year, with subsidiary stocks being a common example. The second, which is the most difficult to convert to cash, is fixed assets, such as machinery, equipment, factories, and land. Capital expenditures refer to the funds used for expanding production and comprise both fixed assets and long-term investments. For companies like Hon Hai, which have established overseas factories through subsidiaries, the calculation of their capital expenditures involves the sum of both fixed assets and long-term investments.
The equity on the right side of the balance sheet represents a company's own funds, which are divided into two accounts: capital and reserves. Capital is calculated by multiplying the number of shares by a set par value, such as NT$10. The number of shares represents the company's ownership divided into smaller portions.
The reserves account in equity includes two sub-accounts. The first is retained earnings, which represents money that the company has kept from its profits. The second is capital surplus, which encompasses additional paid-in capital, increases in the value of assets, and goodwill generated from mergers. For example, if a company raises funds through the issuance of new shares, selling each stock for NT$60, NT$10 would be recorded as capital and NT$50 as capital surplus.
Equity is also referred to as net assets, net worth, book value, or own capital, and all these terms mean the same thing. ROE, or return on equity, is the return that a company earns on the equity it holds.
The second report referred to as the income statement records the company's sources of income. The sources of income come from both operating and non-operating businesses. Operating profit is calculated by subtracting costs and expenses from sales. In manufacturing, sales are recorded, while in service industries, revenue is recorded. Costs refer to expenses directly related to the product, while expenses are indirect expenses such as marketing and R&D expenses. For example, if a pen is sold for $10, the sales are recorded as $10. The cost of materials used in the production of the pen is recorded as a cost, while expenses such as the annual depreciation on machinery and equipment and the salaries of employees on the production line are also recorded as costs. Expenses are those that are indirectly related to the product and include costs such as marketing and R&D expenses.
Non-operating income encompasses a variety of sources, including interest income, investment income, gains from disposals, and gains from foreign exchange. Investment income can come from both long-term and short-term investments. Disposal gains refer to the sale of assets such as land and stocks.
There are a few important technical terms to discuss. EPS, or Earnings Per Share, is calculated by dividing net profit by the number of shares. Net profit is the bottom line shown on the income statement. Another term is NAV, which stands for Net Asset Value per Share and is calculated by dividing net assets by the number of shares.
To use a goose-raising analogy, EPS can be compared to the eggs laid by a goose. Just as eggs come in different sizes, EPS can vary in size as well. For example, a company like Largan with an EPS of NT$180 can be compared to a goose laying a large dinosaur egg, while a company like UMC with only a few cents of EPS can be compared to a goose laying a small ant egg. On the other hand, NAV can be compared to the weight of the goose, with a 10 kg goose representing a higher NAV compared to a 5 kg goose.
When evaluating the productivity of a goose, it's not enough to just look at the number of eggs laid. For example, a 10 kg goose may lay 3 eggs, while a 5 kg goose may lay 2 eggs, but this doesn't necessarily mean the 10 kg goose is more productive. To determine productivity, it's important to compare the egg with the goose, that is, the EPS with the NAV, which is represented by the formula EPS ÷ NAV = ROE. ROE is used to evaluate the profitability of a company and determine which goose is more productive in terms of generating profits.
To determine if a goose is overpriced, there are two evaluation methods. One is to compare the price with the eggs, which is the price-earnings ratio, stock price ÷ EPS. For example, if you spend 100 dollars to buy a goose that lays 3 eggs, and another goose lays 2 eggs, which one is cheaper?
The comparison of the purchase price to the goose is the price-to-book ratio (PBR), stock price ÷ net asset value. If you spend $100 to buy a goose that weighs 10 kilograms, and another weighs 5 kilograms, which one is cheaper?
Financial reports often use units of one million for numbers such as sales and net profit. The abbreviation for one million is "m", for thousand is "k", and for one billion is "b". Negative numbers are indicated by parentheses, for example, (100) represents -100.
看財報會算成長率，成長率有三種：
年增率就是YOY(year on year)；
季增率QOQ(quarter on quarter)；
月增率MOM(month on month)。
In financial reports, we calculate growth rates. There are three types of growth rates:
YOY (year-over-year),
QOQ (quarter-over-quarter),
MOM (month-over-month).
YOY跟去年同期比較；
QOQ跟上一季比；
MOM跟上月比。
YOY compared with the same period last year;
QOQ compared with the previous quarter;
MOM compared with last month.
Growth rate cannot be calculated if a negative number is encountered.
60 / -30 = na
-60 / 30 = na
-60 / -30 = na
na=not available作者: mikeon88 時間: 2018-11-17 15:24
People often ask me how Buffett's approach differs from traditional fundamental analysis. In essence, traditional fundamental analysis focuses on evaluating EPS and seeking out growth stocks, while Buffett emphasizes the importance of considering ROE instead.
選股為何看ROE？
因為維持住ROE，股價才會漲！
Why do stock pickers value ROE? Because as ROE is sustained, stock prices will increase!
股價 = EPS x PER，
影響本益比的因素很多，ROE是其中之一。
ROE上升本益比會跟著上升，
公司的獲利能力上升，股票可以賣得比較貴。
Stock price = EPS x PER
There are numerous factors that influence PER, and ROE is one of them. If the ROE rises, the PER will also increase. This means that the profitability of the company has improved, and its stock can be sold at a higher price.
One of the most basic questions is why stock prices rise. While it is true that an increase in a company's profits can result in a rising stock price, it's not always the case. If profit growth cannot sustain a high ROE, the stock price may still fall. Conversely, even if profits decline, as long as the ROE improves, the stock price can still increase. In summary, maintaining a high ROE is crucial for a rising stock price.
TPK (3673.TW) saw an increase in sales and profits, leading to a rise in EPS from NT$20 to NT$48. However, the ROE dropped from 89% to 35%, causing a sharp decline in stock price. To select stocks, it's important to focus on the ROE, rather than just sales and EPS. Remember, indicators are only useful if they are accurate, and having more indicators is not necessarily better.
弘塑是另一例，獲利成長，卻不能維持住ROE，股價下跌。
Take Grand Process (3131.TW) for instance, despite its increasing profits, the inability to maintain a high ROE led to a drop in its share price.
On the other hand, even if profits decrease and ROE improves, stock prices can still rise. For example, Regent Hotel (2707.TW) saw a drop in its net profit from NT$898 million in 2000 to over NT$600 million, yet the stock price still increased due to the improvement in ROE.
可口可樂最近4年獲利持平，可是維持住ROE，股價仍然上漲。
Despite a lack of growth in profits over the past four years, Coca-Cola (KO) has still managed to see a rise in its share price by maintaining a high ROE.
3M獲利持平，ROE越來越高，股價一直漲。
Despite flat profits, MMM's rising ROE has resulted in an upward trend in its stock price.
Stock selection should not be based on EPS, but rather on ROE. Investors may expect a company's sales to continuously reach new monthly highs and for profits to increase year over year, but this is an unrealistic expectation as even the best performing companies will experience fluctuations and may have declining profits at times. For example, I bought shares in China Steel Chemical and earned a return of 6 times over 8 years, even though its profits decreased at certain points during that time. Nevertheless, by holding the stock for 8 years, I still realized a return of 6 times my investment.
In reality, a company's profits cannot continuously grow without limit. There are limits to growth. Does this mean that a lack of profit growth will result in the failure of a company? No, that's not necessarily the case. Do your salaries break new records every month? No, but you still earn a income. Therefore, profit growth is not a requirement for earning money.
After starting the Buffett class, I realized that reaching a new high in monthly sales is challenging. Now, I just aim to keep my sales stable, rather than breaking a new record. The class attracts at least 80 new students every month. So long as I maintain 80 new enrollees, I can barely make a living.
ROE stands for the growth rate of net assets. A ROE of 20% indicates that the net assets increase by 20% annually. If the net assets grow at the rate of the ROE, it will drive up stock prices.
Someone wants to have the best of both worlds and combine the ROE and EPS factions. This is known as the value growth school, where both ROE and EPS growth are high. They believed that this would result in better performance, but the opposite happened. Investment performance was the worst. They hesitated to buy TSMC at a price of NT$40 in 2008 because its profits were declining. In 2014, they invested in China Steel Chemical at a price of NT$200, because its profits were rising at the time.
When it comes to value investing, someone selects stocks based on the price-to-book ratio (PBR). They consider a stock price below its net assets to indicate an undervalued stock, believing that the net assets represent the company's value. However, this is not necessarily accurate.
In 2013, Largan's stock price was over NT$1,000, but its net assets value (NAV) was only NT$186, explaining the disparity between the two. Meanwhile, Yageo's NAV was NT$16 but its stock price was only NT$10. This difference in stock prices can be attributed to the quality of the companies. Largan had a ROE of 28%, while Yageo's was only 3%. If a company's ROE is lower than the 6.7% one-year time deposit rate, it suggests that its net assets are of little value. In such a case, it is better to save money than to invest in the stock. Therefore, a company's value is not determined by its net assets but by its ROE.
During the 2008 financial crisis, Formosa Plastics (1301.TW) stock price stayed above its net assets value (NAV), while Formosa Chemicals & Fibre (1326.TW) fell below its NAV. The reason for this difference can be attributed to the ROE of the companies. Formosa had an ROE of 8%, while Taiwan Chemical had an ROE of only 2%, which was less than the 6.7% one-year time deposit rate. As a result, Taiwan Chemical's stock price fell below its NAV.
Choosing a stock based on a price-to-book ratio (PBR) less than 1 is incorrect. This approach may lead to choosing poor quality companies. If a company is poor, its stock price may be lower than its net assets value (NAV), but this does not necessarily mean that the stock price is undervalued.
The company's worth is calculated based on its ROE. Growth and net assets are merely two contributing elements. Many other factors also influence its value, such as technology, management competency, market opportunity, brand recognition, and others.
價值(ROE) = f (成長，淨值，技術，管理能力，市場潛力，品牌知名度，。。。）
Value(ROE) = f (growth, net assets, technology, management capabilities, market potential, brand name, ...)
Many institutional investors divide stocks into two groups: growth and value. This division confounds me, as growth and value are interconnected. China Steel Chemical is categorized as a value stock, indicating that its earnings haven't risen and its stock price is considered undervalued. Despite this, the company's profits have increased; in 2003, it earned NT$500 million, and later it made NT$2.2 billion. Is it value or growth type ? It is both value and growth.
I disagree with some of the statements made by institutional investors regarding stocks. When purchasing funds, financial advisors frequently ask whether you are a conservative or an active investor. This question frequently causes me confusion and contemplation. Despite my desire to avoid losses when investing in stocks, I consider myself to be a conservative investor. However, as I am also motivated to earn substantial profits, I am often viewed as an active investor. This seemingly conflicting approach is common among investors who seek to maximize returns while minimizing risks. We can be labeled as "must-win" investors.
The advisor will also tell you that older people should adopt a more conservative approach to finance, while younger people can be more active. I also disagree with this statement. Why should older people, who have limited time left, be conservative? Young people, who have a long future ahead of them, can take it slow. Just joking, classmates, don't invest all your money when you get back. Whether men, women, the elderly, or children, we all face the same problem in finance, i.e. can I buy this stock now and what is the expected return after purchase? If the expected return is 30%, then it's definitely a good choice. If the expected return is only 1%, then wait and watch. This is not a question of being active or conservative, but a question of expected returns.作者: mikeon88 時間: 2018-11-17 15:31
There are numerous factors that influence a company's value, such as a low cost of capital, as is the case with Berkshire Hathaway (BRK). The current stock price of BRK.A shares is $300,000, equivalent to over NT$9 million, but it's important to note that this is for one share, not one lot (1,000 shares). When placing an order, it's important not to confuse buying one lot of BRK.A shares with buying Taiwan stocks, as it would cost NT$9 billion. Unlike Taiwan stocks, US stock trading units do not have the concept of a lot. The high stock price of BRK.A is not due to Warren Buffett's reputation, but rather its low cost of float.
Berkshire is an investment firm that owns several insurance companies and operates as an insurance group. According to Mr. Buffett, his insurance companies have a lower cost of float than other companies, which gives them a competitive advantage. The cost of float refers to the amount of money collected as premiums that can be used freely before claims are settled. In Berkshire's insurance companies, the cost of float is -3%, which means that they receive more money in claims than they collect in premiums. This occurs because they specialize in providing insurance to customers with good driving records and only underwrite catastrophe insurance, which requires compensation only during natural disasters and not on a regular basis. Thus, the low cost of float is a result of their underwriting strategy.
The cost of float for most insurance companies is between 5-6%. Insurance companies may also go bankrupt, such as Kuohua Life owned by Weng Daming, who went bankrupt due to poor investment, or Singfor Life owned by the Kuomintang, which was sold due to heavy losses. Rueitai Life Insurance in Taiwan, owned by Swiss Life, was also sold at a loss. Regardless, companies named Rueitai or Tairuei are likely to go bankrupt.
Float is similar to financing for retail investors, who borrow money to purchase stocks. The financing rate is 6%, giving Warren Buffett a 9% advantage prior to buying. He has achieved an average annual compounded growth rate of 19% over the past 50 years, a remarkable achievement unlikely to be surpassed due to his low-cost float advantage. A student wrote in their blog about their aspirations for a 50% annual investment return, but they would be better off keeping that as a dream.
A student asked about the potential performance improvement after taking the Buffett class. If a 15% return per year is considered good, then 15% may not sound impressive, but it will result in substantial gains in the long run. Outstanding alumnus Anzhen Deng, in an interview with Business Today magazine, said that since taking the class, his average compound return has been 17% annually over the past 10 years. He used to be a small salesman with an annual salary of less than NT$500,000, but his net worth has grown from NT$5 million to over NT$30 million, starting with a capital of NT$5 million.
The above individuals are exceptional alumni who have made significant wealth using my method. Students in the future have the potential to accumulate wealth exceeding NT$30 million. If you are one such student, please send me an email with a photo attached, and I will post it here.
我的觀念很簡單，股價不是亂漲的，
沿著ROE所定義的價值線在上下擺動，要等便宜再買。
My approach is straightforward. Stock prices don't rise arbitrarily, they fluctuate along the value line defined by ROE. The key is to wait for a cheap price before making a purchase.
這堂課從頭到尾在講ROE這個觀念，為何ROE這麼重要呢？
因為高ROE+便宜買，報酬率就會最大！
This lecture will revolve around the concept of ROE. Why is ROE so important? Because the higher the ROE and the cheaper the purchase price, the greater the return on investment will be.
I will demonstrate why this is true. When investing in stocks, there are two types of rewards - dividends and capital gains. The highest dividends come from the highest dividend payout ratio. The largest capital gains come from buying low and selling high. It has already been shown that maintaining a high ROE leads to an increase in stock prices. Therefore, a combination of high dividends, high return on equity, and purchasing at a cheap price will maximize return on investment and bring quicker profits.
This is a crucial conclusion that highlights the two key things that one needs to do while investing:
Choose stocks with a high ROE, purchase them at a cheap price, and the return on investment will be maximum. It is preferable to select a company that offers a high dividend yield.
All other factors can be disregarded: technical analysis, foreign investor and large player net trading, chip analysis, political issues, election rallies. Disregard them completely as they will have no impact on the final return on investment outcome.
買股票跟買東西是一樣的道理，都是要物美價廉，
什麼是物美的股票？就是高ROE。
Investing in stocks is similar to shopping.
The objective is to find the best value, just like looking for high-quality items at a good price.
What are the high-quality stocks? Those with a high Return on Equity (ROE).作者: mikeon88 時間: 2018-11-19 16:31
How much profit was earned from long-term stock holdings? I purchased China Steel Chemical at NT$35 in 2003 and its price reached NT$83 in 2007. What is the total return? Is it calculated as (83/35) - 1, subtracting 1 to exclude the principal? No, this is not correct.
To calculate the total income from stocks, one must consider both dividends and stock splits received each year. The current stock price plus the annual dividends and stock splits forms the adjusted stock price. Comparing this adjusted price with the cost of purchasing the stocks in the past gives the total earnings. This is the most efficient method for calculating the rate of return.
When investing in stocks, people often only recall the year and the amount invested, but tend to forget the number of stocks and dividends received annually. To calculate the rate of return, the simplest approach is to adjust the stock price. This adjusted price takes into account the ex-dividend and ex-rights. Let's review what ex-dividends and ex-rights are.
除權除息之後股價會掉下來，
股價100元，配息2元，除息後股價是多少？
100 - 2 = 98。
The stock price will decrease after ex-dividends and ex-rights. If the stock price is NT$100 and the dividend is NT$2, what will the stock price be after ex-dividend?
100-2 = 98.
The stock price is NT$100 and the stock dividend is NT$2.5. What will the stock price be after ex-rights? The allocation of NT$2.5 per share refers to a distribution of NT$2.5 per share. The stock denomination is NT$10, meaning that every NT$10 is allotted with NT$2.5 worth of stock, resulting in a 25% increase. After ex-rights, 1,000 shares of a stock will increase to 1,250 shares.
Stock price after ex-rights is 100/1.25 = 80.
Why do we calculate it this way? Why subtract for cash dividends and divide for stock dividends? This is to maintain the shareholders' wealth unchanged before and after ex-dividends and ex-rights. Why keep it unchanged? Because dividends only represent the distribution of earnings and do not result in an increase in wealth.
除息前股數 1 股，股價100元，
除息之後分到2元股息，股數還是 1 股，股價P是多少？
1股 x 100 = 2息 + 1股 x P
Before ex-dividend, there was 1 share and the stock price was NT$100. After ex-dividend, a dividend of NT$2 was distributed, and the number of shares remained at 1. What is the new stock price (P)?
1 share x 100 = NT$2 dividend + 1 share x P
除權前 1 股，股價100元，
除權後變成1.25股，股價多少？
1股 x 100 = 1.25股 x P
Before ex-rights, there was 1 share and the stock price was NT$100. After ex-rights, the number of shares increased to 1.25. What is the new stock price (P)?
1 share x 100 = 1.25 shares x P
若同一天除權又除息，請問答案是？
1. (100-2)/1.25
2. 100/1.25 -2
答是 1.
因為除權除息前 1 股，股價100元，
除息後分到2元股息，除權股數變成1.25股，所以股價多少？
1股 x 100 = 2息 + 1.25股 x P
If ex-rights and ex-dividends are on the same day, what is the answer ?
1. (100-2)/1.25
2. 100/1.25 -2
The answer is 1.
Because 1 share before ex-dividend, stock price is NT$100,
After ex-dividend, a dividend of NT$2 is distributed, and number of ex-rights shares becomes 1.25 shares, so what is stock price P ?
1 share x 100 = 2 dividend + 1.25 shares x P
What is the change in shareholder wealth after a rights issue of NT$2 if it was originally NT$100 before ex-rights?
Answer: No change. Shareholder wealth will remain the same before and after the ex-rights and ex-dividends.
If wealth has not increased, why do we have to ex-rights and ex-dividend? Isn't it meaningless?
The purpose of ex-rights and ex-dividends is to identify who is eligible to receive dividends. Since stocks are traded on the market every day, the company cannot always keep track of who owns the stock and who should receive the dividends. Therefore, a specific day, known as the ex-rights and ex-dividend trading day, is established. Only those who hold the stock on or before this day are eligible to receive the dividends.
The increase in stock prices is not attributed to ex-dividends. Rather, stock prices are gradually reflected every day as a result of the company's financial performance. The rise in Largan's stock price to NT$6,000 is not due to ex-dividend, but rather it is a response to better performance of the company.
再來，
請問EPS10元，配息2元、股票股利2.5元之後
有多少錢留在公司裡？
One more question.
EPS NT$10, after ex-dividends of NT$2 and ex-rights of NT$2.5.
How much money is left in the company ?
Ex-dividend means distributing retained earnings, while ex-rights convert retained earnings into equity. In the ex-dividend table, you will see the terms earnings transfer and capital transfer. Earnings transfer refers to the transfer of retained earnings to capital increase, while capital transfer refers to the transfer of capital surplus to capital increase. This is just an accounting transfer and does not actually distribute the money, it remains in the possession of the company. Only ex-dividends actually distribute the money, so NT$8 remains in the company.
美股沒有除權，而是拆股，
1 股拆成2股寫成2：1，唸成two for one。
1：1是未拆。
Stock divide is referred to as a split in the US stock market. A 2:1 split means that one share is divided into two shares. On the other hand, a 1:1 split indicates that there is no division of shares.
Why is stock splitting done? When a stock's price is too high and becomes unaffordable, leading to poor liquidity and low price-to-earnings ratio (PER), the company may choose to split its shares. Shareholders generally prefer a higher PER for their stocks. For example, when Apple's stock price rose above $700, a 1:7 split was done. This helps to increase the relative stock price if it drops to $100.作者: mikeon88 時間: 2018-11-19 16:37
請問除息之後本益比將上升或下降？
除權之後本益比上升或下降？
Will the PER increase or decrease after the ex-dividend date?
What will be the change in the PER after the ex-rights date?
PER = stock price ÷ EPS
After the ex-dividend date, the stock price will decrease by NT$2. However, the EPS will not be affected by this decrease as it represents the estimated profit for the current year, whereas the dividend represents the profit earned from the previous year that is being distributed in the current year. These are two different types of money. Therefore, the EPS will not need to be reduced by NT$2 and the PER will decrease.
除權之後股價÷1.25，EPS÷1.25呢？
要！因為股數增加，所以除權之後本益比不變。
Stock price ÷ 1.25 after ex-rights, and what about is EPS ÷ 1.25 ?
Yes! Due to an increase in the number of shares, the PER will remain unchanged after the ex-rights date.
除息之後本益比會下降，正因如此
每年在5-6月除權息旺季時市場流行高現金殖利率股。
After the payment of dividends, the PER will decrease. This is the main reason why stocks with high cash dividends are highly sought after in the market during the ex-dividend season, which occurs from May to June each year.
Cash yield is dividend ÷ stock price.
A high cash yield means a higher dividend or a lower stock price. I purchased TTET Union at a price of NT$24 in 2008 because of its dividend of at least NT$2.4 and a cash yield of 10%, which was significantly higher than the market's expected yield of 4%. TTET Union was in the business of producing salad oil, which is a staple food item that is consumed regardless of economic conditions. Since purchasing TTET Union in 2008, I have received a 22% annual compound return, which has been a great investment.
像大統益這種不受景氣影響，
賺了錢大半配息的股票稱為定存股。
超商和電信股也是。
Similar to TTET Union, stocks that are not affected by economic downturns and pay high dividends are commonly referred to as "defensive stocks." Examples of these types of stocks include supermarkets and telecommunications companies. These are often referred to as "fixed deposit stocks" stocks, as they provide a consistent source of income through their dividends.
Fixed deposit stocks have a clear definition: they must be profitable without being impacted by economic conditions and have a high dividend payout ratio. Some individuals may consider cyclical stocks such as raw materials and shipping stocks to be fixed deposit stocks, but this is a misunderstanding as these types of stocks are often impacted by economic cycles. It is important to have a thorough understanding of these investments before making a decision.
Question 6: Which is better for shareholders, stock dividends or cash dividends?
It depends on the company's ability to maintain a high ROE (return on equity). If the company can maintain a high return on equity, it may be better to distribute stock dividends instead of cash dividends. This way, the company can continue to help its shareholders make money, and the compound interest effect will be high.
若無法維持高ROE則當把現金配出來，
讓股東再去找其它投資標的。
If the company is unable to maintain a high ROE, it is recommended to pay dividends so that shareholders can explore other investment opportunities.
一直都配不出現金的公司不容易長期維持高ROE，
因淨值越吃越胖，除非能一直成長，但成長有其極限。
A company that can't pay cash dividends will have difficulty maintaining a high ROE in the long run. The net worth will get bigger as it eats more, unless it can keep growing, but growth has its limits.
Question 7 deals with the calculation of stock price after a rights issue.
Question 8 is about the return of capital.
Question 9 involves the purchase of treasury stocks.
These three questions share the same underlying principle, which is that the wealth of shareholders remains unchanged before and after.
Please research on your own.
問7：股價100元，現增溢價80元，新股10%，
現增後股價為何 ?
答：1 x 100 + 0.1 x 80 = 1.1 x P
Question 7: Stock price is NT$100, rights issue premium is NT$80, and the proportion of new shares is 10%.
What is stock price P after price increase ?
Answer: 1 x 100 + 0.1 x 80 = 1.1 x P
問8：晶華減資72%後股價如何計算 ?
答：減資前1股 x 減資前股價108元 =
退還股本7.2元 + 減資後只剩0.28股 x 減資後股價362元
Question 8: How will the share price of Regeant Hotel be calculated after a 72% return of capital?
Answer: 1 share prior to return of capital x stock price before return of capital at NT$108 = returned capital of NT$7.2 + 0.28 remaining shares after return of capital x stock price after return of capital at NT$362.
問9：買回庫藏股前股價100元，註銷後股價為何 ?
答：註銷後後仍是100元，1股 x 100 = 1股 x 100
Question 9: What is the stock price after cancellation, when the stock price was NT$100 before the repurchase?
Answer: The stock price remains at NT$100 after cancellation, as 1 share x 100 = 1 share x 100.
問題10是要不要參加除權除息？
Question 10 Is it worth participating in ex-dividend ?
During the ex-dividend season from May to June, students frequently raise the question of whether participation is worthwhile. The tax burden is not as significant as it may appear. With a 6% cash yield on the purchased stock and a 20% income tax rate, only a 1.2% tax is required. The addition of a 2% dividend for health insurance supplementary premium brings the total tax amount to less than 1.4%, which is lower than the typical 2-3% fund management fee. The 6% multiplied by 2% equates to 0.12%, a figure that is less than the 0.1425% commission.
Can you earn a profit by holding stocks for the long term? Don't solely depend on the candlestick chart, as it can be misleading. For example, examine Hon Hai's chart. In 2000, its stock price reached its highest point at NT$375, but later dropped to NT$204 in 2006. Although it might seem like a loss, the adjusted price of NT$204 is actually NT$622.4, resulting in substantial gains. To accurately evaluate your profits, examine the adjusted stock price instead of relying solely on the candlestick chart.
When you download the On's table, please verify that my information is correct. My strategy is straightforward: a high ROE, cheap prices, and long-term holding can secure profits.
As proof, I bought Nienmade (8464.TW) in 2001 and held it until it was acquired by foreign investors in 2007, resulting in a 3x profit.
In 2002, I bought Ambit Microsystems (2386.TW) and held it until its acquisition by Hon Hai in 2010, yielding another 3x profit.
In 2003, I invested in China Steel Chemical and made 6x over 8 years.
In 2008, I bought shares in TSMC, TTET Union, and Giant (9921.TW), earning 4x over 8 years.
I acquired Hotai Motor (2207.TW) in 2011 and Merid (9914.TW) in 2012, resulting in a 2x profit.
In 2011, I bought NAK (9942.TW) and made 1x in two years.
In 2013, I invested in General Dynamics (GD), Standard & Poor's (MHFI), and UnitedHealth Group Incorporated (UNH) within two years, earning 1x.
The graph below shows my multibaggers.
Just listen to what I have bought in the past few years and earning several times the money may seem like bragging. It's important to verify it for yourself. On's table on the right displays a historical stock price table with annual compound return. What is the average annual compound return, purchased at the lowest price, from 8 years ago to the present?
I purchased TTET Union at its lowest price of NT$23.8 in 2009 and have achieved an average compound return of 22% over the past 8 years. Often overlooked stocks can deliver annual returns as high as 22%.
波克夏也一樣，
買在第一年2009年最低價抱到現在8年平均複利17%。
The same holds true for Berkshire. If you bought at the lowest price in 2009, and the average return has remained at 17% over the past 8 years.
Examining historical stock prices, it becomes evident that a combination of high ROE, cheap stock prices, and a prolonged holding period can lead to substantial profits. If no money was made despite choosing high ROE stocks and purchasing them at a low price, the problem likely lies in a short holding duration. As analysts, we tend to deflect responsibility, but if you don't make money from the stocks I recommend, it is not my fault. The crucial factor is the length of the holding period.
Reflecting on adjusted stock prices marked the beginning of my learning about Buffett. I was inspired to learn about Buffett from an electronics analyst at a foreign securities company. I used to regularly calculate the adjusted stock prices of the stocks I purchased and was confident in my market timing skills. However, now, upon reviewing those adjusted stock prices, I feel remorseful. I have come to understand that it would have been more advantageous to hold onto the stocks from start to finish for greater returns. The challenge remains, how can I maintain a long-term hold on my stocks? This is a significant challenge.
I recommend purchasing TSMC. My students say it's not a big deal and everyone in Taiwan knows it's a good company. However, you need to hold onto TSMC for a long time to make substantial profits. I bought it at 43 TWD in 2008 and held onto it until it reached 240 TWD, that's the real challenge.
同學對我的方法產生質疑時，
請去看一下歷史股價那張表，
保證這絕對是真理。
When you question my approach, please review historical stock prices. I can assure you that this is a proven fact.
Two crucial steps for investing: choose stocks with a high ROE and then buy them when the price is cheap. The simplest way to select stocks is by analyzing financial reports. Despite the claims that financial reports are outdated and do not provide an accurate picture of future stock performance, reviewing financial reports remains the most trustworthy method for predicting future stock performance. For instance, TSMC is recognized as a strong company while "U company" is considered weak. The gap between their past performance is expanding, making it likely that TSMC will continue to perform better in the future, as we can make predictions based on historical records.
When it comes to choosing stocks, some stress the importance of visiting the company and conducting in-person evaluations. During my time as an analyst, I regularly visited companies and accompanied foreign visitors on tours. I conducted numerous interviews with senior managers of publicly traded companies. One notable instance was when I teamed up with a reporter from Dow Jones & Company to secure the first comprehensive interview with Morris Chang, a month prior to TSMC's initial public offering.
A key disadvantage of visiting a company is that it may only showcase favorable information and hide negative information.
Why did Dongjing Wu, CEO of Shin Kong Life, buy HTC at a high cost of NT$1,000?
It could be due to his strong relationship with HTC CEO, Cher Wang.
He may have spoken with her before making the purchase, as she consistently showed confidence in her company.
Identifying the students who attend National Taiwan University (NTU) among a group of over 100 unknown individuals is similar to selecting stocks. How can one determine which students attend NTU? Visiting the company is like asking each individual questions, such as "Did you study hard in high school?" If the individual answers yes, but does not appear to be a diligent student, it may not be a reliable indicator. Asking another student, "Did you perform well in high school math?" and if they reply "I excelled in mathematics and even won championships in physics and chemistry," it is still difficult to verify their claims. Determining which individuals are admitted to NTU is challenging.
The simplest method is to request that each individual show their high school transcripts. If someone studied at a highly ranked school like Taipei Municipal Jianguo High School or Taipei First Girls High School and was in the top 10, their chances of being admitted to NTU are higher. Stock selection operates similarly; if a company maintains a high ROE record, there is a higher likelihood of continued high ROE in the future.
Some people say that many company financial reports are fake.
This is indeed true, not only for Taiwanese stocks but also for stocks in the US, Hong Kong, and China.
As an investor, you need to be able to identify false financial reports.
A student said, "I have never studied accounting before, I only learned about it today."
That's okay, this course is specifically designed to teach those who have no understanding of accounting how to easily identify fake financial reports.
Financial reports consist of annual and quarterly reports. The general accounting year ends on December 31st for the annual report and on March 31st, June 30th, and September 30th for the quarterly report, respectively. Financial reports are announced after the deadline. The annual report has a three-month deadline and must be announced before the end of March. The quarterly report has a one and a half month deadline and must be announced before May 15th, August 15th, and November 15th. After the announcement, On’s Table will retrieve the latest financial report from the broker’s database, which will be updated at that time.
Don't get too excited when you first receive On's table.
A freshman told me that when he first received On's table, he kept checking it from stock code 11 to 99. I asked him how long he looked up.
He said he stayed up all night for two days. I encouraged him to continue to check US stocks.
You don't have to keep clicking like this. How do you choose stocks?
You can refer to the class watchlist and classmates' suggestions in the discussion forum.
In the discussion forum, students are sharing their stock holdings. Our class is the most international investment club; we are actually investing globally.
Friends, let's come together and invest globally! In the internet age, it's easy to invest globally. All you need is a US stock account and you can purchase stocks from all over the world. The world's top companies issue American Depository Receipts (ADRs) in the US market, for instance, TSMC has an ADR. I only opened two accounts, one in Taiwan and one in the US, and I have invested in stocks from 14 countries through the US market, including the United States, Japan, Hong Kong, Singapore, United Kingdom, Germany, Netherlands, Switzerland, Australia, Brazil, Canada, and Norway.
One of the advantages of investing in U.S. stocks is that you can minimize exchange rate risk. In addition to splitting your investment between Taiwanese dollars and U.S. dollars to reduce risk, investing 100% in American Depository Receipts (ADRs) from various countries can also diversify exchange rate risk. For example, I own ADRs from over 10 countries, which means the fluctuations of more than 10 currencies are reflected in the ADR's share price, thereby diversifying the exchange rate risk. The share price of an ADR equals the original share price plus the exchange rate difference.
In recent years, currency depreciation has been severe, with the Russian ruble, Brazilian real, and even the British pound depreciating by over 50%. The hard-earned wealth of a lifetime can be wiped out in just one night. It's crucial to minimize exchange rate risk.
You don't need to be fluent in English to invest in US stocks, as long as you can interpret the numbers presented on On's table. The format of this information is the same across all global markets. We are more familiar with American companies. We drank Coca-Cola and ate McDonald's.
But, do you drink Chain Steel Chemical ? Of course not !
投資美股眼界將大開，談論的都是世界級的公司。
當賓士汽車的股東比較好呢還是裕隆汽車？
Investing in the US stock market offers broad prospects and the opportunity to understand world-class companies. Which is a better investment: Benz or Yulon Motors (2201.tw)?
If you feel uncertain about the future, investing in US stocks is the most immediate and feasible way out. If you can make money in stock markets of different countries, you won't be trapped in one place. From then on, you will be free and at ease.
I recommend spending daily time on discussion forums, where you can gain valuable knowledge from a diverse group of students with various majors and experiences. By relying on the wisdom of respected figures like Mr. Buffett, we can engage in meaningful and comprehensive discussions about investing, ranging from Taiwan stocks to global markets. This achievement is a testament to the power of teamwork and the sharing of information.
In addition to attending classes to learn about investing, there will be many doubts that arise during actual practical operations. Discussions with like-minded individuals are an important method, as it's only by raising questions that I can determine how much you have understood.
AlexWu桑幫我們開發出網頁版盈再表，
可抓台美日港中英澳等國盈再表，
Alex Wu helped us develop the web version of the On's table, which can collect financial statements from Taiwan, the United States, Japan, Hong Kong, China, United Kingdom, Australia and other countries.
My process for selecting stocks is as follows: I look for stocks with an expected return rate of over 12%, and among those, I choose stocks with a recurring net profit of more than $500 million and stocks that I can understand within 3 seconds. These selected stocks are then added to my watch list.
I categorize and save the complete list (holdings and watchlist) in the web version of the On's table.
The built-in Stocks app on the iPhone only stores the holdings list and is used for market monitoring.
These two apps are enough for me.
Every morning during breakfast, I go through the news related to my holdings.
On the right side of the On's table, there are individual stock news updates.
我平常只用手機瀏覽財經新聞，
主要來源包括
經濟日報
工商時報 聚亨網
Finviz
Threads
X
I usually read financial news only on my phone,
and my main sources include:
Economic Daily News
Commercial Times cnyes.com
Finviz
Threads
X (formerly Twitter)
I don’t read financial magazines, influencer opinions, or research reports.
I only trust my own methods.
Taiwan’s financial media and magazines often feature unqualified people posing as experts, spreading misguided ideas, and 90% of their claimed performance results are fabricated.
I also don’t follow influencer blogs or online forums.
It’s mostly people who don’t understand asking questions to others who don’t understand—people who don’t know teaching others who don’t know.
It’s completely meaningless.
Basically, I rely solely on a smartphone to invest globally, and my net worth exceeds NT$70 million.作者: mikeon88 時間: 2018-11-19 17:39
How to find stocks with high ROE?
The first step is to observe the ROE trend over the past 5 years. We are interested in stocks with a consistent or upward trend in ROE over the past 5 years, or those with an average ROE above 15% for cyclical stocks.
We are not interested in stocks with fluctuating ROE or a downward trend.
The emphasis when assessing ROE should be on stability, not on the level of ROE. For instance, Chunghwa Telecom (2412.TW) may have a relatively low ROE of 11%, but it demonstrates consistent stability. If the stock price is cheap, this may be a good investment opportunity.
1.34 x 1.33 x 1.31 x 1.33 x 1.41 x 1.32 = 5.7793 (億豐)
1.05 x 1.08 x 0.71 x 1.14 x 1.20 x 1.30 = 1.4319 (友達)
...ROE 1999-2004
Maintaining a high ROE is crucial because it allows for the compound interest effect to be realized over a long period of time. High ROE stability is preferable to high volatility. For example, a company with an ROE of 30% per year (like Nienmade) is better than one like AUO (2409.TW) whose ROE fluctuates and leads to inconsistent profits. Over time, the latter type of ROE is likely to result in worse outcomes.
1.34 x 1.33 x 1.31 x 1.33 x 1.41 x 1.32 = 5.7793 (Nienmade)
1.05 x 1.08 x 0.71 x 1.14 x 1.20 x 1.30 = 1.4319 (AUO)
...ROE 1999-2004
看這2條式子請問會買哪一家？
連三歲小孩都知要買億豐，
可是市場上大部份人卻在追友達。
When comparing these two formulas, which would you choose to invest in? A three-year-old child would likely choose Nienmade, but most investors opt for AUO.
The compound interest effect is the quickest method to earn significant amounts of money. To achieve this, one must utilize two effects: compound interest and multiple effects. The PER buying low and selling high, or leveraging finance are examples of multiple effects. However, finding something with a compound interest effect is more important before utilizing multiple effects. In the stock market, a high ROE provides compound interest. Dividends offer simple interest, but compounding only occurs when re-invested. When stock prices are cheap, the compounding effect will be greater. This is the quickest way to make big money, and Warren Buffett's method is the fastest method. Despite some people perceiving Warren Buffett as having a slow rate of making money, he is actually one of the top ten richest people in the world and the foremost individual to attain wealth through investing. His performance is significantly superior to other methods.
The most dependable form of compound interest is achieved by focusing on a high ROE. Is it trustworthy that China Steel Chemical can maintain a high ROE? Some argue that relying solely on one company is not dependable. But buying a few more companies, such as TSMC, Delta, Formosa Plastics, Giant, etc., that have a consistent high ROE will diversify the portfolio and increase reliability. If investing only in Taiwanese stocks is not enough, adding stocks from US companies such as Coca-Cola, 3M, American Express, etc., can also enhance the portfolio's reliability. By purchasing stocks when their prices are cheap, a reliable investment portfolio with a high ROE can be established.
This strategy is replicable. Buffett became wealthy by using this method, and we can do the same by following in his footsteps. We can then pass it on to our children and they too can attain wealth. However, before passing it on to them, it's important to ensure they receive proper education. Enrolling them in classes and avoiding inaccurate teachings is key to ensure that they receive the correct knowledge.
Some people say that swing trading isn't a faster way to make money, buying here and selling there, it's theoretically correct but no one has ever done it. The top ten richest people in Forbes are wealthy because of stocks and they are wealthy because they held stocks long-term, no one has ever become a billionaire through swing trading.
The same goes for Taiwan stocks. What was the stock that rose the most in the past 30 years? Hon Hai! Bought at an underwriting price of NT$44.9 in 1991, maintained at NT$122 in 2017, a total of 27 years has increased by 436 times. We all bought Hon Hai and swing traded, so we expected to make more. Can anyone here raise their hand if they made more than 436 times profit from buying stocks in the past to present? No one! Those who made more than 436 times profit wouldn't be sitting here.
Hon Hai was the first new listed stock I encountered when I entered the securities industry. I am an electronics stock analyst. Hon Hai held a company briefing during its initial public offering, and I took the bus provided by the company to visit its factory in Tucheng. I knew at the time that Hon Hai was a good company, but I didn't know it would be this successful. If I had sold my ancestral property to buy Hon Hai back then, there would be no need to mention Warren Buffett here!
Revised English: Hon Hai's stock has increased 436 times over the course of 27 years, with an annual compound interest rate of just 25%. In recent years, financial magazines in Taiwan have reported on amateur investors who outperform Warren Buffett and even Hon Hai, which has seen the biggest increase. One fraudster, Wei, even claimed to have made 36 times their investment in just 10 years! This performance was remarkable enough to be featured in Forbes magazine, but instead was reported in Business Today. Taiwan is known for producing many Warren Buffetts. Every financial magazine seems to have a new one, but most of their performance records are exaggerated. The media doesn't verify these claims, and may even be complicit in these fraudulent activities, which is a true disgrace.
This act of exaggeration in performance is referred to as selling counterfeit drugs. In social news, it is referred to as a scam. However, in financial magazines, they are referred to as "investment experts." This is a significant issue that everyone seems to be disregarding.
Warren Buffett's performance has had an annual compound interest rate of nearly 20% over 50 years, which is an impressive accomplishment. While it may be possible for an investment to see returns exceeding 20% in the short term of 2-3 years, surpassing a 20% return over a period of 50 years is significantly more difficult. So, if someone claims to consistently have annual returns above 20%, they are likely exaggerating. Financial products that guarantee returns above 20% per year are likely to be scams. Even if they promise a return of 15%, it is likely that they are engaging in deceptive practices.
There is a abundance of fraudulent products available. Recently, a claim has been circulating that investing in a casino in the Philippines can provide a return within one year, however, this is easily proven false without investigation. Additionally, the M coins that guarantee a return on investment in half a year are also fraudulent.
One key factor to consider when choosing stocks based on ROE is crucial. Firms that surpass their competitors during economic downturns are often deemed strong. Both Formosa Plastics and China Steel Chemical are involved in the plastic industry. In 2001, China Steel Chemical's ROE declined to 22% while Formosa Plastics' was at 8%. This was a tough year for companies in the raw materials sector. When comparing the two, China Steel Chemical appears to be the better option as it is a smaller company that sells niche products such as creosote, and therefore is less impacted by economic fluctuations. On the other hand, Formosa Plastics, as a large company, is more susceptible to changes in the industry as a whole. Hence, based on this comparison, China Steel Chemical appears to be the better choice.
Finding stocks with high ROE can be accomplished by following these steps:
Observe the trend of ROE over the past 5 years.
Look for companies that can afford to pay cash in order to maintain a high ROE.
Maintaining a high ROE when profits decline can be achieved by reducing the net assets in the denominator of the ROE calculation. Net assets include retained earnings and capital. Allocating retained earnings as dividends and returning capital can both decrease the net assets, resulting in a higher ROE.
Maintaining a high ROE is crucial because a decrease in ROE can lead to a significant drop in the stock price. If ROE cannot be sustained, the PER will decrease, leading to a negative multiple effect and causing the stock price to plummet.
If a company's EPS decreases from $3 to $2, it could lead to a drop in ROE from 20% to 13%. This decrease in ROE would cause the PER to fall from 10 times to 7 times, resulting in a 54% decrease in stock price. Despite the profits only declining by a third, the decrease in ROE causes the PER to decrease, leading to a 54% drop in stock price.
This is a critical issue, as profit declines are a common occurrence. The problem lies in the decrease in the PER due to a decrease in ROE. To prevent the PER from declining, it is essential to maintain a high ROE. If profits decline, the ROE can be sustained by reducing the net assets in the denominator of the ROE calculation. Both returning capital and paying dividends can help decrease the net assets. For example, if the net assets decrease from $15 to $10, even if the profits remain at $2, the ROE will increase to 20%. This will cause the PER to rise from 7 times to 10 times, leading to a much smaller 17% decrease in stock price compared to the original 54% drop.
獲利衰退沒有關係，把多餘的現金配出來維持住ROE，
股價就不會跌得那麼慘！
Even if profits decrease, allocating excess cash to maintain a high ROE can prevent a significant drop in stock price. By doing so, the impact of a profit decline can be mitigated.
The above is a hypothetical example, but in reality, it was the Regeant Hotel that carried out this action. In 2000, the net profit declined from NT$8.98 billion to more than NT$6 billion, causing the ROE to drop from 18% to 13%. In 2002, Regeant reduced its capital from NT$43.13 billion to NT$21.56 billion, effectively halving its capital. Over the next three years, a substantial amount of dividends were distributed. The aim of reducing capital and distributing dividends was to bring the ROE back up from 13% to 27%. What was the stock price reaction?
The exchange raises the stock price when the market opens on the first day of return of capital because despite the reduction of capital, shareholder wealth stays unchanged. The decrease in the number of shares leads to an increase in stock price. Over the next three years, substantial dividends were distributed and the ROE increased from 19% to 27%. The improvement in ROE and a rise in the PER sustained the upward trend of the stock price. Regeant Hotel has undergone three capital reductions in total and was once known as the king of stocks, having the highest stock price among all stocks.
國巨為第二例，多次減資和大幅配息之後，
ROE由3%上升到14%，股價大漲。
Yageo is the second example. Following several reductions in capital and significant distributions of dividends, ROE increased from 3% to 14% and the stock price rose dramatically.
晶華酒店和國巨是賺錢的公司辦減資，
稱為現金減資。
Regent Hotel and Yageo are profitable companies that practice reduction of capital, also known as reduction of cash capital.作者: mikeon88 時間: 2018-11-19 18:03
It was a common occurrence for companies that were making losses to decrease their capital. The listing regulations specify that if the NAV drops below NT$5, the company must be taken off the stock market and traded as fully delivered shares. For example, if a company has a capital of NT$100 and a loss of NT$60, and its NAV falls to NT$4, it will need to be delisted. How can the company ensure its stock remains listed?
The loss cannot be altered, but what actions can be taken? By reducing the capital by 60%, the number of shares will decrease from 10 to 4. If the NAV rebounds to NT$10, the stock can continue to be listed. Although the company is still making losses, the stock can remain listed.
The loss-making company reduces its capital and writes off its capital. No cash is returned to shareholders as it has been lost. Will this decrease the wealth of the shareholders? No! The wealth of shareholders remains unchanged before and after the return of capital. Reducing capital, whether the company is profitable or loss-making, does not decrease the wealth of the shareholders.
VIA first decreases and then increases its capital. The reason for this is because as a loss-making company, VIA requires additional funds from its shareholders. However, with the threat of delisting, there may be few willing participants in its rights issue. Therefore, the company must first reduce its capital to maintain its listing status, and then it can ask its shareholders for money through a rights issue.
The rules for delisting of US stocks are based on stock prices. If a stock's price falls below $1 for a specified period, it may be delisted. On the other hand, this requirement is not applicable in the OTC market. In 2011, Citibank's (C) stock price fell to $1 and was in danger of being delisted. To maintain its listing status, the company conducted a reverse stock split, merging 10 shares into 1 share, which resulted in a stock price increase to $10.
In terms of stock splits, US stocks are expressed differently from Taiwanese stocks after an ex-rights issue. In Taiwan, capital only increases after ex-rights, whereas in the US, a stock split affects all shares, including those from previous years. It is not possible to determine in which year a split occurred based solely on the number of shares column. As shown in the picture below, after 1 share of Coca-Cola stock was split into 2 shares in 2012, the number of shares from previous years was also divided at the same time.
Only companies that can pay dividends can maintain their ROE, which is an important characteristic of a good company. TSMC, China Steel, and Formosa Plastics are all recognized as excellent companies in the market, even though they are all capital-intensive industries. Despite needing to buy more machinery and equipment to expand their factories, they still manage to pay dividends and rarely raise funds through rights issues. This is because their higher operational efficiency allows them to make more money to pay dividends. The ability to pay dividends is a crucial aspect of being a good company. If you're unsure of how to choose stocks in the vast stock market, choosing high-dividend stocks is a good place to start.
On the contrary, companies that continually ask shareholders for money, often through rights issues or convertible bonds (CBs), are considered red flags. Take Auto Tech (6234.TW) as an example, which specializes in automation equipment for warehouses. A student recommended the company to me in 2006 and it appeared to be performing well with its growing earnings and high ROE. However, when I read a news article announcing the company's plan to raise 1.4 billion dollars through a rights issue at a high stock price, I advised my student that this was a negative sign as the company's net worth was only 1.3 billion dollars and expected to double.
Subsequently, Auto Tech's profits declined, its ROE plummeted, and its price-to-earnings ratio (PER) also decreased. Its stock price dropped dramatically, from a high of NT$140 to NT$10. This happened because 2006 was a peak year for the company. Auto Tech had reached full production capacity and decided to issue rights to raise funds for expanding its production. Unfortunately, after the expansion was completed, the boom did not return as expected. As a result, the company's profits fell, but its net assets doubled and its ROE plummeted. It would have been better for Auto Tech to not raise funds through a rights issue during the peak of the business cycle.
大額的現增是利空，
所謂大額，我規定指超過淨值1/2以上，
是淨值，不是股本。
A large rights issue is negative. By large, I mean an amount greater than half of the company's net assets, not capital.
You have to calculate the amount of money raised by the rights issue yourself, as the news won't always provide the answer. For instance, Auto Tech's news only stated that they will issue rights worth NT$120 million at a premium of NT$118. This means the capital increase will be NT$120 million, or 1.2 million shares at a face value of NT$10 each. The premium of NT$118 refers to a price higher than the face value of NT$10 per share, so each share will be sold for NT$118, not NT$128. Hence, the total amount raised would be (NT$120 million / NT$10) x NT$118 = NT$1.4 billion.
A large amount of rights issue is defined as being more than half of the net assets of the parent company. For example, when Ruentex Industries (2915.TW) raised NT$6.5 billion through a rights issue, it is necessary to determine if this amount exceeds half of the company's net assets.
The financial report obtained from On's table is a consolidated statement, which will be explained in Lecture 8/21. These net assets refer to consolidated net assets, and the net assets of the parent company can be calculated as the consolidated net assets minus the minority net assets. The NT$6.5 billion raised through a rights issue by Ruentexind (2915.TW) is slightly more than half of the parent company's net assets, which is viewed as negative news. The stock price dropped immediately upon the announcement of this news.
荷蘭皇家電信也辦了一個現金增資募40億歐元，
原先淨值才21億歐元，增加近2倍，股價大跌41%。
Koninklijke KPN N.V. (KKPNY) also raised 4 billion euros through a share issuance. Its original net assets were only 2.1 billion euros, meaning the increase was nearly double. As a result, the stock price dropped by 41%.
作者: mikeon88 時間: 2018-11-19 18:14
這裡值得一提的，賺錢的公司淨值一定是正的，對不對？
應當無庸置疑，
有無可能賺錢的公司淨值突然變成負的？
沒發生火災，未被掏空，
有可能，買回庫藏股就是。
假設有一家公司股數2股，EPS 5元，淨值30元，
2股 x 10 + 5EPS x 2 = 30淨值
買回 1 股庫藏股，股價50元，淨值變成 -20元，
30 -1庫 x 50 = -20
賺錢的公司會因為買回庫藏股買到淨值為負。
It's important to note that the net assets of a profitable company should always be positive. This is correct. However, if a profitable company buys back its own stock, its net assets may become negative.
For example, if a company has 2 shares with $5 EPS and $30 net assets,
$30.2 shares x $10 + $5 EPS x 2 = $30 net assets
after buying back one treasury stock at $50 per share, the net assets would become negative at -$20.
$30 -1 share x $50 =-$20
The buyback of treasury stocks by profitable companies can result in negative net assets.
The repurchase of treasury shares is a type of capital reduction, but how does it differ from capital reduction? Capital reduction uniformly reduces the shares of all shareholders, while the buyback of treasury shares involves the company purchasing its own stocks from the market. This results in a higher ownership ratio for those who have not sold their shares.
US stocks experience a sharp rise as soon as the company announces its plan to buy back its treasury shares. This is due to an increase in earnings per share (EPS), which causes a corresponding rise in stock price. As previously mentioned, the ROE also increases and so does the price to PER, although the degree of change may vary. When the company buys back and cancels its treasury shares, the number of shares decreases, causing an increase in EPS and a definite rise in stock price.
In the US, all buybacks of treasury stock are cancelled. In Taiwan, besides cancellation, they can also be distributed as employee bonuses, which keeps the number of shares unchanged and has no effect on EPS or stock prices. Taiwan has a tendency to adopt systems from other countries, but with modifications, such as the addition of two more powers to the three-power political system, making it more complicated. The outcome of the buyback of Taiwanese treasury stock combined with employee bonuses is uncertain. Check the news release for further information.
A few years ago, Faraday Technology (3035.TW) announced a plan to repurchase treasury stock, however, no repurchases have taken place since the announcement. When I asked my accountant, he said "Because there's no fine, the authority will only give a slap on the wrist at most." The company's announcement to repurchase treasury stock may have been a feint, similar to OBI Pharma (4174.TW) and XPEC Entertainment (3662.TW).
Repurchasing of treasury shares is a common practice among US stocks. Companies engage in this when they have an excess of cash, lack of other investment opportunities, and the stock price is low. The repurchasing process doesn't have any tax implications, however, shareholders will be taxed when they receive dividends.
盈再表上的配息率是股息加上買回庫藏股。
美股配息不只一年配一次，也可以半年配或季配都可以。
The payout ratio in On's table includes both dividends and repurchased treasury shares. In the US, dividends are not limited to once-a-year distributions, they can also be distributed on a semi-annual or quarterly basis.
The company must decide when to buy back treasury shares and when to reduce capital or distribute dividends. If the stock price is cheap, it is a good idea to buy back treasury shares. However, if the stock price is expensive, reducing capital or distributing dividends may be a better option. In 2011, it was not a wise decision for HTC to buy back treasury shares at a price of NT$900 as it was considered expensive at that time.作者: mikeon88 時間: 2018-11-19 19:06
The repurchasing of treasury stocks will result in a decrease in net asset value.
Debt ratio = debt ÷ total assets
Assets are $100, net assets are -$20, and the debt ratio is 120%.
This can be represented as:
A ($100) = L (120%) + E (-$20)
A debt ratio greater than 100% signifies that the company is operating without any personal investment and solely relying on debt. Starting a company does not necessitate shareholder's funding and the company still generates profits each year. This type of company is considered exceptional and there is nothing better. Such a business model is referred to as a cash cow company, similar to the Buffett Lecture Series.
The Buffett Lecture Series is a business model that yields cash flow. The primary cost of starting this course is the rental fee for the classroom, which is NT$32,000 for two days. If I can secure enrollment from at least six new students, I can obtain a loan to pay for the rental fee. After receiving tuition, I can pay off the debt and retain all the profits. This means I won't have to contribute any personal funds for this course. This course does not accept accounts receivable and anyone who tries to extend credit will not be allowed to participate.
In the US stock market, there are several companies with negative net assets, such as Campbell Soup (CPB), McDonald's (MCD), Clorox (CLX), Moody's (MCO), and Yum! Brands (YUM), the parent company of Pizza Hut and KFC. These companies are easily recognizable as cash cows. However, this type of company is not allowed in the Taiwanese stock market due to company laws which prohibit the purchase of treasury stocks that exceed a certain percentage of net assets.
A dentist introduced me to Clorox during a lecture at their home. Dentists across the US use its disinfectant products. Its water purifier brand, Brita, is advertised on television and is a German company. Despite making a profit every year, Clorox has had a negative net asset value for two years due to its repurchase of treasury stocks.
賺錢的公司淨值為負，ROE不能算，
改用EPS算貴淑價。
便宜價=EPS x 本益比12倍，
貴價=EPS x 本益比30倍。
When a profitable company has a negative net asset value, the traditional ROE calculation cannot be used. In such cases, EPS is a more appropriate method.
A stock is considered cheap when its price is equal to the EPS multiplied by 12 times the PER.
A stock is considered expensive when its price is equal to the EPS multiplied by 30 times the PER.
Companies with negative net assets cannot accurately assess their operating performance using ROE and should switch to ROA instead.
Parent ROA = parent net profit/parent assets
In a consolidated statement, assets include the total of both parent and subsidiary assets. To calculate ROA, it is necessary to roughly allocate parent assets based on the proportion of parent net assets and subsidiary net assets.作者: mikeon88 時間: 2018-11-19 19:06
A high ROE can be maintained by companies that are capable of paying high dividends. The next consideration is how the dividends are distributed, which is not done randomly. Some profitable companies may choose not to pay dividends as they need to retain the funds for expanding production capacity.
Companies that have a low profit reinvestment rate (PR%) can offer high dividends.
The numerator of the PR% formula is calculated as follows:
(Fixed Assets in Year 4 + Long-Term Investment) - (Fixed Assets in Year 0 + Long-Term Investment).
This reflects the increase in fixed assets and long-term investments as a proportion of profit over a 4-year period, representing the proportion of capital expenditures in relation to profit.
Why is the PR% calculated every four years? The calculation is based on an average of the business cycle, which is three years in the electronics industry and five and a half years in traditional industries. PR% represents the amount of money a company must invest in machinery and equipment for every $100 in profits. Companies with a lower PR% are more likely to pay higher dividends.
Using a car as a metaphor, the ROE can be compared to the speed at which the car is traveling, and the PR% represents the fuel consumption rate. When choosing stocks, it's ideal to look for a combination of "high ROE and low PR%", similar to buying a car that runs fast and efficiently. This distinction highlights the difference between profit and cash, as they are not synonymous concepts.
In 2008, Powerchip (5346.TW) suffered a loss of NT$57.5 billion, but only NT$16.8 billion in cash was lost. Powerchip is a DRAM company and its largest expense is on equipment. During the 2008 financial crisis, work was temporarily suspended due to a shortage of orders and employees took unpaid leave. The loss was primarily due to depreciation of machinery and equipment, which did not consume a large amount of cash.
A company that experiences losses may not go bankrupt, but if it lacks sufficient cash flow, it can become insolvent. Taiwan Railway, despite its prolonged losses, continues to operate because it can obtain funds from outside sources through methods like raising capital from shareholders, receiving government subsidies, or disposing of land to replenish its cash reserves.
Therefore, evaluating a company requires considering two different perspectives:
The value of a company lies in its ability to earn profits, and the more money it makes, the better its value.
The measure used to assess this is ROE.
Profit = Value (ROE)
In addition, the evaluation also depends on the company's cash flow stability.
The key warning sign is the Profit Reinvestment Rate (PR%), which reflects the proportion of profit being reinvested.
Cash = Cash Flow (PR%)作者: mikeon88 時間: 2018-11-19 19:07
How to evaluate cash?
The first item on the balance sheet is cash, which only indicates the amount of cash the company possesses. It doesn't provide information on the movement of cash, including incoming and outgoing. The distinction between strong and weak companies can greatly depend on the flow of cash. If the cash is generated internally, that is the optimal scenario. Borrowing money is not preferable, and selling assets, such as land, is also not ideal. To gain insight into cash inflows and outflows, you must review the third financial statement, the statement of cash flows.
It reclassifies all accounting accounts into three categories: cash flow from operating activities, cash flow from investing activities, and cash flow from financing activities. The final ending cash balance is equal to the cash of assets, explaining the inflows and outflows of assets.
A "+" in front of an account indicates that an increase in the account will result in cash inflows, while a "-" indicates that an increase in the account will result in cash outflows. Why is depreciation shown as "+"? Why does an increase in depreciation result in cash inflows?
A machine was purchased for $5 million and is expected to be used for 5 years, with an annual depreciation set at $1 million. In the first year of purchasing the machine, $5 million in cash was paid. When calculating operating profit, the $1 million annual depreciation is also deducted as part of expenses. Although no cash was actually paid for depreciation, it is deducted from operating profit, so it must be added back when calculating cash.作者: mikeon88 時間: 2018-11-19 19:08
If you still don't understand the meaning, it's easier to think of it this way:
Cash flow from operating activities is equal to the monthly salary received,
Investment activities include buying stocks,
Financing activities involve borrowing money.
Assuming a monthly salary of $100,000,
Buying stocks for $120,000,
Borrowing $80,000,
Cash on hand is $60,000.
This is the cash flow statement!
Can this person have cash flow problems? It's unclear. This is the disadvantage of the cash flow statement, as it doesn't provide information on the sufficiency of cash flow. To address this limitation, I use the PR%. The numerator of the PR% is the increase in fixed assets and long-term investments (representing investment activities), and the denominator is net earnings, which is a crucial component of operating activities. The PR% is calculated as investment activities divided by operating activities. In this example, with a monthly salary of $10,000 and stocks purchased at a cost of $12,000, the PR% is 120%. This indicates that the cash flow is sufficient, as a $2,000 shortfall can easily be borrowed. An PR% of 100% means that the salary and stock purchases are equal, providing sufficient cash flow.
How much difference is considered dangerous?
Having a 200% PR% by investing $200,000 in stocks with a monthly salary of $100,000 is considered dangerous.
There are two potential outcomes:
One is embezzlement,
the other is investing in an industry with aggressive expansion,
such as DRAM and LCD, which have both suffered significant losses.
Investing with a PR% exceeding 200% is not advisable.
所以要保持安全邊距，盈再率大於80%就不太愛買。
不太愛買就去Costco買，因可以秒退。
Therefore, it is essential to maintain a margin of safety. A PR% greater than 80% is considered too high, and it is not advisable to make the purchase.
As long as the PR% is below 80%, it is fine,
there is no correlation between a lower PR% and being better, or a negative PR% being worse.
Cash flow should not exceed the established limit, regardless of how you manage your cash flow below that limit, it is not better or worse, there is no such thing as the lower the better in cash flow management.
公司虧損盈再率標為虧損。
盈再率為負則表示4年來沒有添加新的機器設備，
因為折舊價值越來越低。
If the company is loss-making, the PR% will be labeled as "LOSS".
A negative PR% means that no new equipment has been added in the last 4 years, and due to depreciation, the value of the machine is decreasing.作者: mikeon88 時間: 2018-11-19 19:09
Some students asked me: "Does it matter if PR% is negative?"
I replied: "As long as PR% is below 80%, it doesn't matter."
The students asked further: "What about negative PR%?"
I responded: "Is a negative number below 80%?"
The students were stunned and didn't know how to respond.
This course mainly covers basic arithmetic, with few challenging questions.
A dentist with the surname Li scolded my PR% for being incorrect and demanded that I change it to his own formula: (Fixed Assets 4 + Long-term Investments 4 - Fixed Assets 0 - Long-term Investments 0) / (Net Profit 4 - Net Profit 0).
I instantly recognized that his formula was incorrect. If net profit in year 4 is equal to net profit in year 0, then the denominator would be zero, resulting in infinity. Despite having the same profit in both years, Dentist Li feels that cash flow is a major problem for the company. It's absurd that a company that is still profitable could encounter financial difficulties.
A denominator of zero results in infinity, which is just a basic concept in elementary mathematics. It's astonishing that this person didn't know this and was ranting about it on his blog. He has lost face and yet refuses to acknowledge his mistake. It's been several years, but he still refuses to admit his error and apologize.
Refusing to admit one's mistakes is a sign of a lack of virtue and integrity.
Financial stocks do not apply PR% because they do not have assets such as machinery and equipment. Furthermore, long-term investments in financial stocks tend to be substantial, including loans with a term longer than one year and bonds with a maturity greater than one year. As a result, the calculated PR% can be very high, reaching thousands.
Financial stocks take into account dividend payout ratios above 40%, indicating that a sufficient amount of cash has been paid out. This 40% requirement is derived from two problematic stocks, Yahsin (2418.TW) and SAY, discussed in Lecture 10/21, which will be explained further later.
The financial report previously reviewed was a non-consolidated statement, with subsidiary investments being recognized as non-operating investment income. Investment income is categorized as one account, but includes many items such as long-term and short-term investments, regardless of the number of subsidiary companies involved. However, this is just a numerical representation and the actual appearance of the subsidiary companies is unclear.
The disadvantage of a non-consolidated statement is that it is easily susceptible to concealing financial improprieties. Unsold inventory and uncollectible accounts receivable can be hidden within the subsidiary companies, making the parent company's report look attractive with decreased inventory and reduced accounts receivable. Later, the exchange required listed companies to issue consolidated financial statements.
The consolidated statement refers to the combination of the accounts of both the parent company and subsidiary company, with the repeated parts subtracted directly, rather than recognized in proportion. Think of it like taking a picture. A non-consolidated statement is like a picture taken only of the parent company, while its subsidiary companies are not visible. In contrast, a consolidated statement is like a family portrait, where the parent company and its subsidiary companies are all captured in the same image. For example, even if a subsidiary company was created with the parent company's former spouse and only holds 50% of the shares, it is still captured in full in the consolidated statement. The redundant information is subtracted, and the consolidated statement is like a comprehensive family picture.
Which companies compile consolidated statements? Companies that hold 50% or more of the shares, or have control. BenQ only holds 10% of the shares in AUO. If the CEO of AUO is appointed by BenQ, a consolidated statement will be compiled.作者: mikeon88 時間: 2018-11-19 19:25
How to compile a consolidated statement? This example should provide clear insight.
The parent company holds assets worth $100, with no liabilities, resulting in net assets of $100.
Parent Company: Assets = Liabilities + Net Assets = $100 = $0 + $100
The parent company invested $10 in a subsidiary, representing 50% equity ownership.
Subsidiary: Assets = Liabilities + Net Assets = $40 = $20 + ($10 + $10)
The subsidiary's net assets stand at $20, with liabilities at $20 and assets worth $40.
Consolidating assets involves directly adding and subtracting duplicate parts.
For example, if you add $100 and $40 and then subtract $10,
the $10 was invested by the parent company and was counted twice.
Therefore, the consolidated assets amount to $130.
Consolidated liabilities equal $0 + $20 = $20, without duplication.
The consolidated net assets amount to $110.
Under the consolidated net assets, there is a minority interest account of $10,
which represents the portion contributed by a subsidiary that holds more than 50% equity ownership.
The same applies to the income statement. All accounting entries from both the parent company and subsidiary are directly added and duplicates are subtracted. The bottom line is consolidated net profit. As in the case of net assets, there is a minority interest account included in the consolidated income statement.
In both the consolidated net assets and consolidated net profit, there is an additional account for minority interests.
If you are unsure whether a statement is consolidated or non-consolidated, look for the presence of the minority interests account.
If it is included, the statement is a consolidated one.作者: mikeon88 時間: 2018-11-19 19:25
There are two forms of statements, and the outcome must be consistent. If ROE is computed using a non-consolidated statement, it is directly EPS÷NAV. On the other hand, if a consolidated statement is used for calculation, we need to subtract minority equity.
The calculation of PR% uses consolidated statements, which only distinguish minority interests in consolidated net assets and consolidated net profit. There is no such distinction in other accounts, such as consolidated fixed assets and long-term investments without minority interests. When using consolidated statements to calculate PR%, it is necessary to include all consolidated figures.
The calculation of PR% using consolidated statements and non-consolidated statements may result in different outcomes, but it is not certain which one is greater. Companies with more capital-intensive subsidiaries tend to have a higher PR% when calculated using consolidated statements.
IIn the 9/21 lecture, the criteria for severely hollowed-out landmine stocks was discussed as having a PR% greater than 200%. This criterion still applies when using consolidated statements. Currently, examples of foreign landmine stocks have been collected, including Jiangxi LDK Solar, Nine Dragons Paper, and China Yili, whose PR% have all exceeded 200%.
49國的盈再表抓的都是合併報表。
The tables of 49 countries in "On" now all use consolidated statements.作者: mikeon88 時間: 2018-11-19 19:26
On's table may need to be updated from time to time,
due to changes in the format of the broker's database.
When updates are made, a notice will be posted in the discussion forum.
Please be assured that our class and On's table are both covered by a permanent warranty.
You should be aware that you will never escape my influence for the rest of your life.
What is investment all about? Simply consult On's table.
When students ask for my opinion on certain stocks,
I always base my explanation on On's table.
The person who made investment simple is not Warren Buffett, it's me!
Investment only became this simple with the existence of On's table, which is a program written by me and is extremely complex.
If students have downloaded a new version of On's table,
it is recommended that they delete the old version and retain the new one.
Some students have saved previous versions of On's table.
Would they like to exchange them for toys?
同學還問我新版和舊版數字為何會不一樣？
就是不一樣才要更新啊！
Students also ask me why the numbers in the new version and the old version are different.
This is the reason for update !
In this class, I'm often asked some questions that leave me feeling powerless by students.
On the first day of class, a student mentioned that his wife was also interested in investing and offered to pay for her lunch. I replied, "Oh, how thoughtful! However, your wife still needs to pay the tuition fee."
Another student asked if he could transfer his chance for a free permanent warranty to his father, who is also interested in investing.
I responded by saying, "Even if two people dine together in an all-you-can-eat restaurant, each person still has to pay for their own meal."作者: mikeon88 時間: 2018-11-19 19:26
Investment accounting:
How does the company keep books when it invests in another company ?
There are some terminologies involved here, please try hard to remember.
You will know what it means when you see the relevant report later.
How to record investment in financial statements? A 20% shareholding is taken as a baseline. Investments above 20% but below 50% are accounted using the equity method, where profit and loss are recognized based on the proportion of shareholdings. Investments below 20% are accounted using the cost method, and any changes in stock price are recognized. Why the distinction? Investments exceeding 20% are considered part of the company, and the profit and loss are recognized directly based on the shareholding ratio, even if no dividends are distributed. In contrast, investments below 20% using the cost method are considered a pure stock investment, and fluctuations in stock price must be recognized.
Example of Equity Method: A subsidiary with 20% shareholding earns a profit of $25.
The parent company's non-operating investment income on the income statement increases by $5.
The long-term investments on the balance sheet also increase by $5, but cash does not change as this is a bookkeeping entry only.
When a subsidiary pays a dividend of $3, it is considered a return on investment. The parent company's cash increases by $3, and the long-term investment decreases by $3 as it is considered a return on the investment. This is similar to long-term investors, where the annual dividends minus the holding costs equal zero, resulting in a return on investment.
A question was raised if the reduction of long-term investment by $3 would result in a negative value. The answer is no, the long-term investment will only decrease to 0 at the most. This is because the subsidiary earned a profit of $5, and the long-term investment increased by $5. The dividend received can only be a maximum of $5, so the long-term investment will only decrease to 0, and it will not become negative.
The cost method recognizes changes in stock prices, which can be classified into two categories: transaction purposes and available for sale.
Transaction purposes refer to stocks held for short-term purposes, less than a year.
Available for sale refers to stocks held for long-term purposes.
交易目的股價漲跌在業外的金融資產評價科目認列，
賣掉股票則記為處分利得。
Stock price rises and falls of transaction purpose are recognized in non-operating financial asset evaluation account.
Sale of stocks is recorded as a disposal gain.
Yung Chi Paint (2726.TW) has been earning more than NT$100 million in profit every quarter in the past, but in the first quarter of 2012, it earned NT$310 million. Among them, more than NT$100 million was financial asset appraisal income, due to the surge in the stock market from 6,600 points to 8,200 points this quarter. Yung Chi is a painter and his main business is making money. However, dividends are not fully paid to shareholders, and some money is left for the manager to play stocks, which is a big play in the stock market.
作者: mikeon88 時間: 2018-11-19 19:27
備供出售的股價漲跌不認列損益，改在淨值調整。
The stock price changes for available-for-sale securities are not recognized as gains or losses and are instead adjusted in the net assets.
Shin Kong Financial Holding (2888.TW) reported a net profit of NT$5.5 billion in 2011 despite a decrease in its net assets by NT$17.4 billion. As a life insurance company, Shin Kong heavily invests in stocks. Although its life insurance business remained profitable in 2011, the stock market was in a bear market, declining from 9,200 to 6,600 points. The capital losses were recorded as available for sale, but they are not considered actual losses, but rather a reduction in net assets, which were NT$17.4 billion. It's like someone who has a salary of $100,000 and loses $3 million in stock trading. Does he make money or lose money?
Ruentex Industries (2915.TW) had an EPS of NT$8.1 in 2015, but the dividend for the following year was only NT$1.6. Why is the dividend payout ratio so low at only 20%? A loss in Nanshan Life was confirmed, resulting in a loss on available for sale, causing a decrease in Ruentex Industries' net assets in 2015 to NT$80.2, a decrease of 71%. If it weren't for the right issue in 2013, the net assets in 2015 would have become negative and the company would have gone bankrupt.
Fall in available-for-sale prices is not included in loss and exaggerates profits. However, after adjusting the net assets, the net assets decrease, which may result in an increase in ROE and perceived intrinsic value. But in reality, the intrinsic value decreases. The intrinsic value is calculated using the dividend discount model, which will be explained in more detail in lecture 15/21. The decrease in capital leads to a lack of dividends, a decrease in net assets, and a decrease in selling prices, resulting in a decrease in intrinsic value calculated by the formula, rather than an increase. There is no contradiction.
The cost method combines dividend income and investment income into a single account. The investment income account includes both the profit and loss of the equity method and the dividends of the cost method.
There is another term that everyone needs to understand, goodwill. It is not a company's reputation, but rather an accounting account created during mergers and acquisitions. Goodwill is generated when another company is acquired at a higher cost.
合併分為現金收購和換股合併。
Mergers are divided into cash acquisitions and stock-swap mergers.
Company A invested $7 to acquire Company B, which had net assets of $6. Following the acquisition, the cash balance on Company A's balance sheet decreased by $7. The intangible asset account for goodwill increased by $1.
The balance sheet for Company A (post acquisition of Company B) is represented as follows:
A(B) A[10 + 9-7 cash + intangible (+1 goodwill)] = L(2 + 3) + E(8 )
In a stock-swap merger between Companies A and B, each company will have half of the combined equity. The cost of the merger is $7 (calculated as (8+6)/2). The net assets of the merged Company B is $6.
After the merger, the intangible asset account for goodwill on the balance sheet of Company A will increase by $1. The capital surplus of net assets on the right-side of the balance sheet will also increase by $1 due to the issuance premium.
The balance sheet for Company A (post merger with Company B) is represented as follows:
A(B) A[10+9+intangible (+1 goodwill)] = L(2+3) + E[8+6+capital surplus(+1 issue premium)]
I would like to express my gratitude to Accountants Chaotong Wu, Sinyuen Chen, and Dongzhang Guo for their guidance.
Following the merger, the accountant performs an annual actuarial calculation. If the value of the subsidiary is determined to be lower than its net assets, an impairment of goodwill must be recognized. This write-off is a one-time event and cannot be reversed.
商譽減損：子公司的價值低於合併成本
資(-商譽)=債+值(-損益)
Goodwill Impairment: When the value of the subsidiary is lower than the combined cost, the goodwill must be reduced. This results in the decrease of assets (A) and increase of profit and loss (E) in the balance sheet.
A(-goodwill) = L + E(-profit and loss)
Shortly after I acquired shares of GD, the opening price plummeted by 7% and I felt anxious. The 4th quarter results showed a loss of $2.1 billion according to On's report, compared to a profit of over $600 million in the previous quarter. Upon investigating, I discovered that the subsidiary had recorded a goodwill impairment charge. This led to a decline in the stock price after the write-off.
2013年宏碁也提列Gateway商譽減損，
那幾天股價大跌。
In 2013, Acer also recognized a goodwill impairment of Gateway, causing the stock price to significantly decrease.
You will find that the stocks we invest in are often subject to mergers by other companies, because we have a positive opinion of the company and others share the same sentiment. We believe that it is as reasonably priced as the rest of the market. Whether the merged stock is sold or held onto depends on the valuation of the surviving company.
The DTV stock that I bought was merged by AT&T at a price of $95 per share. Although $95 for DTV may seem like a good deal, AT&T is overpriced. When the stock price of DTV approaches $95, the bullish response will have been exhausted, and it would be wise to sell DTV. Since converting to AT&T stock is also too costly, it would also need to be sold.作者: mikeon88 時間: 2018-11-19 20:06
The PR% formula is one that I developed after learning about the concept from reading Berkshire Hathaway's annual report in 2003. In the report, Mr. Buffett would occasionally highlight the outstanding qualities of some of the companies he invested in. He stated in the 2007 annual report that ‘‘It's far better to have an ever-increasing stream of earnings with virtually no major capital requirements."
‘‘Nevertheless, this business requires a significant reinvestment of earnings if it is to grow."
I was inspired by Mr. Buffett's words and transformed them into a formula. I applied the formula to companies invested by Mr. Buffett, such as Coca-Cola and Gillette, and was surprised to find that their PR% was indeed low. This finding was documented in my first book, "Buffett Stock Selection Magic Book".
After publishing the book and preparing for class, what would I want to teach when writing handouts? After analyzing some landmine stocks in the Taiwanese market, I discovered that they all have a common characteristic of PR% exceeding 200. After discovering this phenomenon, I then sought to understand the underlying reasoning behind it. The process is similar to Newton's discovery of gravity. He too was struck with the idea after being hit by an apple falling from a tree. The process of every great invention is the same, first discovering the phenomenon and then considering the cause.
I have found that by using PR% and dividend payout ratio indicators, it is possible to spot mine stocks early. It is important to emphasize that problems are detected before they become widespread in the market, not after the damage has already been done. This means that even if a company appears to be financially strong and highly profitable, we can spot potential problems before they become common knowledge.作者: mikeon88 時間: 2018-11-19 20:08
兩種地雷股可以從盈再表看出來：
作假帳跟掏空。
Two types of "landmine stocks" can be identified from On's table:
accounting fraud and embezzlement.
Why is the company's accounting fraudulent?
The goods cannot be sold due to poor business performance.
What is the solution? Sell them. To whom?
They are sold to a paper company established by the boss outside of the parent company to avoid related party transactions. These paper companies are usually not affiliated with the parent company.
When selling goods, we receive accounts receivable. Can we convert accounts receivable into cash? Yes, by selling it to a bank.The buying and selling of accounts receivable is a common banking activity. What does a bank consider when purchasing accounts receivable? The creditworthiness of the sales target is a critical factor. If the sales target is a reputable company such as Walmart, Intel, or TSMC, the bank is more likely to provide financing. However, if the sales target is an unknown paper company, the bank is less likely to buy the accounts receivable. This is because a company that has falsified its accounts may not have the financial means to pay in cash. The reason is simple: if the accounts are fraudulent, there will not be any real revenue to convert into cash.
However, there are exceptions. If the company is willing to keep up appearances and pretend, they may still be able to pay cash by obtaining funds from other sources, such as borrowing, cash capital increases, and stock speculation. A long time ago, there was a steel company called Tung Kuang that produced screws and nuts. They would sell the goods to Sri Lanka, dig a big pit and bury them. The company would then publicly announce that their revenue had reached a new high, their production capacity was full, and they had raised funds from shareholders for expansion. They would then ask shareholders for money and distribute it to them.
How to prevent this kind of company from bluffing. One simple solution is to increase the standard for the dividend payout ratio. For example, I propose a standard of 40% for the payout ratio over the past three years, based on the examples of two landmine stocks mentioned in lecture 10/21, Yahsin (2418.TW) and SAY.作者: mikeon88 時間: 2018-11-19 20:08
The second type of landmine stock involves the misappropriation of company assets, including current assets, long-term investments, and fixed assets, among others. The primary objective of this type of misappropriation is usually to obtain cash. Fixed assets, such as property or machinery, are unlikely to be targeted because they are too heavy to move.
Directly embezzling cash from a bank account is illegal and will quickly result in exposure. How to withdraw cash from bank legally without being notified? The most common channel is through long-term investment. Invest a sum of money in another company, then take it out after the funds have been transferred. After a few years, the company may claim a loss has occurred. In any case, investment losses are common.
Are there other methods to embezzle cash? One method is through fixed assets, where the company purchases land at an inflated price. For example, a few years ago, a land owned by the chairman of Axx was valued at only NT$100 million. He sold it to the company for NT$500 million, resulting in a significant profit from the price difference. (Not guilty in this case)
Purchasing stocks that are overvalued and not worth their price, i.e. through long-term investments, can lead to potential embezzlement of funds. Several years ago, beneficiaries of a fund suffered losses due to structured notes, leading the Financial Supervisory Commission to direct Polaris Financial Group, and Yuanta Financial Holdings (2885.TW) to repurchase the notes as an example of this.
The only two channels to embezzle cash without being noticed are through long-term investments and fixed assets. Apart from these, there are no other channels. If raw materials are purchased at inflated prices, the resulting increase in manufacturing costs and decrease in profits can be quickly detected. Furthermore, selling assets at low prices may lead to losses from non-operating asset disposals, which can also be uncovered.
Long-term investment and fixed assets are the numerators of the PR% calculation. If the calculated PR% is higher than 200%, it suggests that the company may have suffered from significant embezzlement, such as through these two channels. In such cases, the company's stocks may become worthless.作者: mikeon88 時間: 2018-11-19 20:09
從配息率和盈再率這兩個指標可以看出地雷股。
以上是理論，來看一些例子。
Landmine stocks can be detected from the two indicators of dividend payout ratio and PR%.
The above is the theory, let's look at some cases.
Let's take a look at the first example, Infodisc Technology (2491.TW), a company that produces CD-ROMs. By examining the cash, accounts receivables, and net profit, what insights can be gained from these three items? In 2000, Infodisc earned NT$1 billion, but it only accumulated a large amount of accounts receivables. Accounts receivables increased from NT$616 million to NT$1,769 million - an increase of exactly NT$1 billion - without a corresponding increase in cash. The increase in cash was due to a cash capital increase of NT$6.5 billion.
In hindsight, it is clear that Infodisc was a landmine stock, as the company only accumulated a large amount of accounts receivables without any corresponding increase in cash. It is easy to criticize this situation in retrospect, as it is akin to being a Monday morning quarterback. Its stock was once valued at over NT$200, but many investors were not aware of the company's underlying problems. However, a closer look at the company's financial statements reveals a clear picture of its financial health. In 2000, when the company was supposedly performing well, its PR% was 539%, exceeding 200%. Additionally, the company did not distribute any cash dividends in the previous few years.
In 2004, Infodisc was hit by a second scandal, and the company's owner promised that he was a responsible and honorable leader who would never abandon his duties. However, shortly after making these promises, he fled to the United States. When investing, one should not give too much weight to the words of a company's boss. Infodisc was later acquired by Fuzhu Luo and renamed Fortune Oriental. However, Luo has also fled, indicating that even the new owner could not improve the company's fortunes.
The increase in Infodisc's cash was a result of a rights issue and ECB, which stands for convertible corporate bonds issued in Europe. These bonds can be converted into stocks under certain conditions.
Preferred shares are closer in nature to corporate bonds. They stipulate that the company must distribute a certain dividend regardless of whether it makes money or not. In this respect, they are essentially corporate bonds. Although preferred shares are traded alongside common shares, like China Steel's preferred shares, the characteristics of the two are very different. Common shares are volatile, while preferred shares are more stable because they are essentially corporate bonds.
In addition, it seems that Buffett has a particular fondness for buying preferred stocks. He has purchased preferred stocks in both Goldman Sachs and Bank of America. As a major financier, other companies often seek his assistance when they encounter problems. Along with buying stocks, he can also negotiate favorable conditions and receive a specified dividend, which together constitute a preferred stock.作者: mikeon88 時間: 2018-11-19 20:10
The second case is Procomp Informatics (2398.TW), which is a significant example in the history of landmine stocks. Let's examine Procomp's original financial report in the first table, which includes three accounts: cash, accounts receivable, and inventory. Based on this report, one would assume that Procomp is a highly favorable company, with inventory and accounts receivable decreasing while cash increases. It may even garner a "like" from some readers.
How can Procomp reduce its inventory? By selling it. And to whom? To a paper company established by the boss, which generates a bunch of accounts receivable. How can Procomp reduce its accounts receivable? By selling them to a bank. In this case, Dutch Robobank purchased them. However, the bank cannot verify the validity of the accounts receivable. Although the money has been transferred to the account, it can only be used based on the amount collected in accounts receivable. Since the account is controlled by Robobank, they believe there is no risk. The NT$6.3 billion in cash is effectively unusable. Why is Procomp doing this? To deceive investors! Why hasn't the accountant discovered these audit results? Because Procomp and the bank have covered up this restriction.
This is a crucial case that demonstrates how inventory, accounts receivable, and cash can all be manipulated. Anyone who has studied accounting knows that if there are any issues with a financial report, they should check a few critical accounts. These include determining whether inventory and accounts receivable have increased, and whether the turnover rate is low. If that doesn't work, it depends on whether cash has increased. Cash is the most straightforward account, and even those who are not skilled at reading financial reports can determine whether cash has increased or not. However, Procomp's case teaches us that even cash can be falsified.
What cannot be falsified? The allocation of cash cannot be manipulated. Does the company generate profits? If it can pay dividends, then the profits are genuine. If it cannot pay dividends, then the profits are fake. It's that simple. If someone can falsify an account and still have the ability to pay dividends, I would hire them as the chairman of my company. This is why identifying false accounts is dependent on the dividend payout ratio.
Procomp's issue becomes apparent from On's table. In 2000-01, when the company's profits were at their highest, the PR% (payout ratio) was 536% and 438%, both of which exceeded 200%. However, no cash was allocated in previous years.
Procomp entered the motherboard market and went public at the end of 1999, receiving high recommendations from newspapers, magazines, and institutional investors. However, the real star product was not motherboards, but a new material called gallium arsenide used in mobile phone power amplifiers. This was during a time when Taiwan's mobile phone industry was about to take off, and Procomp's Chairman Sufei Ye was recognized as one of the ten outstanding young female entrepreneurs in Taiwan. Despite all this, Procomp turned out to be a major landmine!作者: mikeon88 時間: 2018-11-19 20:11
The third case involves Abit Computer (2407.TW), which is also a manufacturer of motherboards. This example is related to accounts receivable turnover rate and inventory turnover rate. According to accounting principles, the turnover rate is a clear indicator of a company's operational efficiency. The turnover rate of accounts receivable is calculated by dividing sales by accounts receivable, and the result is measured in time units. A turnover rate of 0.9 times means that it takes more than a year to collect the accounts receivable, which is considered very low. The normal age of accounts receivable is 3 to 6 months, resulting in a turnover rate of 4 to 2 times. However, the turnover rate should be compared within the same industry, as different industries may have significant variances.
The turnover rate of motherboards has always been low due to meager profits. Manufacturers mainly rely on the length of collection days for accounts receivable and accounts payable to earn interest income. For example, a motherboard manufacturer may receive an order for 100,000 pieces and purchase goods from raw material suppliers. However, if they do not have the money to pay, they must owe it first. A 70% debt ratio is very common. Can such a high debt ratio repay debt? Of course, they wait until the motherboards are sold and receive a bunch of accounts receivable. The motherboard company's receivables and payables are all piled up, and they earn interest income on the difference in the length of the two collection days. They pay the money they owe to others later and collect money that others owe them earlier in order to earn interest income. Abit's accounts receivable turnover rate is only 0.9 times, which is even low compared to its peers. However, it was only after the fact that the stock price had risen to more than NT$100 that year.
The formula for inventory turnover rate is cost of goods sold divided by inventory, not sales. To those who purchased my “Magic Book“, please make the correction as the formula on page 76 is incorrect. This mistake was not a typo but a result of unclear understanding when writing the book. Please forgive me, as I only passed my accounting course after failing and taking a makeup exam. Why did I fail accounting? It was because the left side and the right side of the balance sheet need to balance each other out. I could never get it to balance properly, but during the makeup exam, I suddenly figured it out and was able to balance the sheet and pass the exam.
However, failing accounting turned out to be beneficial for me. Instead of relying on useless turnover rates, I created a PR% that I find more valuable. It's evident from On's table that Abit had its best profit in 2000-01 with a PR% of 239% and 299%, both well above 200%. Additionally, there were no cash payouts before.
In 2004, Abit had its second scandal and its stock price plummeted to NT$1. The general manager guaranteed that the EPS would be NT$3, and many people bought the stock because it was considered the cheapest stock in history with a PER of only 0.3 times. Many of the buyers were employees. The general manager had also attended the EMBA program at National Taiwan University and invited two of his thesis advisors to serve as independent directors and supervisors at the company. These two professors were very famous. One of them was xxxen Ke, Dean of the School of Management at NTU, and the other was a well-known finance and management professor named xxxsiou Li. However, I suspect that these two professors may not have understood the financial reports. It is a common misconception that business school professors always understand financial reports. My university classmate works at the World Chinese Bank and called me when the stock market crashed to tell me that he saw a margin-call notice for our accounting professor. It is not true that accounting professors will not be forced to liquidate if they borrow margin loans! Why was he margin-called? Because he did not have my On's table. Why didn't he have it? Because he failed me! Every word of the above testimony is true.作者: mikeon88 時間: 2018-11-19 20:12
Companies involved in accounting fraud typically cannot afford to pay high dividends, but they may still pay out some dividends as a way to conceal their fraudulent activities. Three examples of such companies are Dbtel (5304.TW), Yaxin, and SAY.
In 2000, the mobile phone manufacturer Dbtel claimed to have received OEM orders for MOTO mobile phones, as 3G mobile phone licenses were about to be issued. Telecom companies around the world were bidding at high prices, and the market was optimistic that mobile phone OEM orders would flood into Taiwan. After a series of positive news announcements, the bullish trend continued. Initially, sales hit record highs for months, and the company invited fund managers to visit its factory in Songjiang, Shanghai, where they were impressed by its scale. The company also revealed that the Shanghai plant was preparing to be listed locally. Later, the company announced that it had obtained a license to sell mobile phones in China, of which only five were issued at that time. Everyone hoped that Dbtel could not only become a major OEM manufacturer, but also make more money from the more profitable own-brand business. Many institutional investors were quite optimistic about Dbtel. A fund manager told me he expected "Dbtel will become the Quanta of the mobile phone industry." Quanta was the king of stocks at the time, and its stock price rose by more than NT$800. Another investment manager told me privately that he obtained the information through very secret channels. A MOTO procurement official had jumped to work at Dbtel to get more bonuses. As research analysts, we often have access to insider information.
The stock price of Dbtel surged from NT$18 to NT$150 before suddenly dropping to NT$100. During that time, I accompanied a group of fund managers from the investment trust company, which happened to be the largest shareholder, to meet with the company's chairman. This was the most senior meeting, which offered the most extensive insider information. During the meeting, the chairman invited Zihzhih Mo to talk about the company's promising future. As the meeting was wrapping up, Mo made an unexpected remark, "If you buy my stocks now and hold them for 3 years, you can earn 10 times the current value." The chairman himself repeated the statement to the largest shareholder. Although we were intrigued by the offer, we didn't immediately lose our wits, and instead asked for clarification. "Is the 10-fold return based on the current price of NT$100 or the earliest price of NT$18?" We wondered. If the return was based on NT$18, it wouldn't be that profitable. I distinctly recall Mo's confident response, "The return starts at NT$100." I regret that we didn't record the conversation, but students today should note that recording is a valid form of evidence in court.
The stock price of Dbtel later plummeted from NT$100 to NT$1. Upon reflection, Mo's statement that you can earn 10 times in 3 years is correct, but only if you go short. If the stock price drops from NT$100 to NT$1, how much can you profit from going short? Short selling involves borrowing shares, selling them, and then buying them back. To go short, you must put up a 90% margin, which means you need to pay NT$90 to go short on a stock priced at NT$100. If the stock price drops to NT$1 and you buy it back, the most you can profit from short selling is just over 1 time. However, if the stock price rises from NT$1 to NT$100, buying the stock can earn you up to 99 times your investment. Therefore, it is more profitable to go long than to go short. Short selling will not make you rich. Instead, buy stocks when they are cheap and hold them until they become expensive. After selling, keep the cash or look for other undervalued stocks. Do not rush to go short.
However, some people suggest that after selling at a high point, you may have to wait a long time for the stock to drop again. Last time, one person waited two and a half years for the stock to reach its bottom. This is normal as the business cycle typically lasts from 3 to 5 years, with high to low being a half cycle. Waiting for a year or two and a half is not uncommon. Some may wonder if it's boring to wait so long. If you find it boring and want to have fun, the stock market doesn't have to be your only option. If you're as bored and wealthy as I am, why not buy a yacht and take a girl out for a date? Taking a yacht in Tamsui is easy and affordable, with a fare of only NT$60 from the ferry pier to Fisherman's Wharf.
Why did Dbtel's stock price react this way? Wasn't there a big order received? We checked the financial report at the time and found that although sales reached a record high, the operating profit was almost zero. The net profit of nearly NT$1.8 billion came from investment income. The company explained that Taiwan takes orders while Shanghai produces, and the profit is being poured into the Shanghai factory in preparation for local listing. This explanation seems quite reasonable.
After examining the prospectus, it was found that the contribution of the Shanghai factory was almost negligible. Two investment companies confirmed an investment of NT$1.8 billion, so we asked the spokesperson what these two investment companies were doing. He said that they were buying and selling the company's own shares. Suddenly, we discovered that Dbtel's core operations were not profitable, and the company was solely reliant on stock trading to make money. Despite competing for orders with low profit margins and achieving large sales, the company was not making any profits. The stock price skyrocketed from NT$18 to NT$150, which was merely an appearance and a bluff.
Judging from Dbtel's financial report, the previous ROE was not high. In 2000, it suddenly jumped to 34%, which some people thought was a big turning point, but it eventually fell again. The second time in 2003, the market's reaction was very cold. The PR% was low, which is correct because it had no embezzlement problem. Rather, the company engaged in accounting fraud in order to create an illusion of financial stability. The flaw is that it had never paid out any dividends before.
Yahsin, a manufacturer of printed circuit boards, enjoyed significant profits in its early years and was nicknamed the "Little Hon Hai" due to its similar business model that also involved some assembly work. However, when profits dwindled, the company resorted to inflating its earnings. This led to an increase in EPS from NT$1 to NT$3, where NT$1 represented the actual value and the remaining NT$2 were counterfeit earnings. In recent years, a trend has emerged where companies distribute dividends by including actual one-dollar bills. It was only after being reported for delayed payments to suppliers that this practice was uncovered.
The Yahsin case is peculiar in that the company experienced a sudden downfall despite improving indicators. Although Yahsin had consistently maintained an ROE of nearly 20%, its PR% had been high in the early years before dropping to a reasonable level. However, it suddenly spiked before the company's eventual downfall. Previously, Yahsin had not distributed cash dividends, and it was only in recent years when it began to do so that the sudden surge in cash allocation occurred. While the company had relatively little cash on hand in its early days, in the last year, it suddenly exploded to NT$3 billion. Prior to the scandal, Yahsin had positive cash from operating activities.
In 2006, rumors spread that Yahsin was facing problems, and the stock price plummeted to NT$20. The boss attempted to clarify the situation by stating that he was a believer in Buddhism and had built a chapel on the top floor of the factory. At the time, this explanation struck me as odd, and I wondered why the boss didn't buy shares for us to verify the company's financial stability.
Yahsin never had the word "OK" in On's table, as the directors and supervisors only accounted for 8% of the shares. It was required for the directors and supervisors to hold at least 10% of shares, which appeared to be an insignificant figure but played a crucial role in this situation.
The third case is SAY, an Indian software company that specializes in designing software for American automobile companies and was listed on the US stock market. In 2009, falsified accounts were reported, which had inflated SAY's cash by $1 billion. The chairman admitted that the company's profits over the past seven years had been exaggerated. Interestingly, SAY's fraudulent accounts went undetected in their financial reports. The company had maintained an ROE of 30%, a very low PR%, and paid dividends every year. Prior to this scandal, SAY had positive cash flow from operating activities. It seems that when it comes to accounting fraud, Indians are particularly adept at it!
Based on my calculations of the dividend payout ratios for Yaxin and SAY, I have established a criterion that the dividend payout ratio for the past three years must be at least 40% per year in order to be eligible for cash distribution. This standard is derived from the examples of Yaxin and SAY.
The dividend payout ratio is set at 40%. In response, someone asked if high-growth companies would be excluded as a result. It is possible that such companies may need to invest heavily in machinery and equipment during their growth stage, leaving them with limited cash on hand. While there may be some risk involved, investing under these conditions can still be a safe choice. This question can be likened to asking about the difference between buying Hon Hai and China Steel Chemical. One may keep you awake at night, while the other can help you sleep soundly.
We have all bought Hon Hai and engaged in short-term trading as we dare not hold it for the entire term. Its rapid growth does not correspond with cash distribution, which causes concerns about the limit of its growth, and we fear it may experience a sudden decline. On the other hand, I held China Steel Chemical from start to finish. I purchased it at a cheap price and sold it when the price was high. As 90% of its profits are paid out, even if the profit declines, the ROE will not be significantly affected.
可是有人說買鴻海27年漲了436倍，
所以會睡不著覺啊！
我買中碳8年賺6倍只好洗洗睡了。
Some people say that Hon Hai stock has increased by 436 times in 27 years, which causes sleepless nights for investors. On the other hand, I invested in China Steel Chemical for 8 years and earned 6 times my initial investment, which is satisfactory enough for me to take a restful sleep.作者: mikeon88 時間: 2018-11-19 20:13
Optimax (3051.TW) is a manufacturer of polarizers, a crucial component in the production of LCD screens. The company has previously been highly recommended by foreign investors due to its strong growth potential. However, the manufacturing process of polarizers is complex, and only Japan's Nitto has a high output. As a result of low output and high waste, the manufacturing costs have been on the rise. To tackle this challenge, Optimax has reclassified waste as part of its fixed asset machinery and equipment in bookkeeping, following a similar approach to equipment depreciation. This reclassification will be divided into either 5 or 7 years and is expected to reduce production costs, leading to a significant increase in profits.
Why can this be done? By exploiting a loophole in accounting regulations. Under accounting laws, waste generated during the trial production phase of newly purchased machinery can be categorized as part of the machinery and equipment. This process is referred to as scrap cost capitalization. The term "capitalization" means that it is treated as a capital expenditure that is amortized over a period of years. A similar term, "interest expense capitalization," is used in other instances to refer to the amortization of interest expenses over a period of years.
Optimax's actions resulted in a significant increase in fixed assets, which tripled from 4,199 to 16,941 in less than two years. The company justified this by stating that they were in a fast-growing industry and had purchased many machines and equipment. However, in reality, these assets were primarily waste products.
它這樣做剛好盈再率可以看得出來，
固定資產暴增，盈再率接近200%。
This scandal can be detected by the PR ratio. As fixed assets increased dramatically, the PR ratio rose to nearly 200%.
In 2004, I flagged this company as a potential landmine stock candidate. At the time, the stock was trading at around NT$70 with no apparent issues. However, the stock price then plummeted to NT$1, exposing the company's financial irregularities. A stock exchange audit uncovered irregularities that resulted in the company's financial reports being redacted. The tables in this document show financial data prior to restatement. Currently, On's tables have been renumbered. This shows that even with false financial reporting, potential problems can still be identified.
How can we detect falsified financial reports? One indicator is a company's low dividend payout ratio, which may occur when a company claims to have high profits but only distributes a small amount of dividends. To conceal cash misappropriation, a company may resort to long-term investments and fixed capital. A high PR% is also a sign of such actions.作者: mikeon88 時間: 2018-11-19 20:13
I came across the CMP (1532.TW) case on TV news in 2009. Prosecutors conducted a search of the company. As I watched the news, I checked the earnings report and was shocked to find that the prosecutors seemed to have the same earnings report. I wondered if the prosecutors were also using On’s table to handle the case. It seemed that anyone with a PR% of over 200% was being arrested.
勤美高價買不良債權，買環亞百貨，
請問高價買不良債權哪個科目會高？
長投，導致盈再率超過200%。
CMP has purchased bad debts at high prices because they acquired Asia Department Store. What will be the impact on the accounts when purchasing bad debts at a high price? This would likely result in a long-term investment, potentially leading to a PR% exceeding 200%.
I encourage students to cultivate the habit of checking On's table whenever they encounter a new case of landmine stocks, in order to detect them in advance. Any exceptions to this rule should be reported promptly.作者: mikeon88 時間: 2018-11-19 20:14
China has two landmine stocks, with Wuliangye (000858.TW) being the first one. In 2009, it was reported that false accounts had inflated the company's sales by RMB 1 billion. A student informed me of this news, and I confirmed it on On's table, which revealed that the stock has a low dividend payout ratio of less than 15%.
LDK Solar (LDK) is a Chinese solar power plant that encountered financial difficulties in 2009. It is listed as LDK in the US. Its PR% exceeds 200%, which is a red flag. There are two potential explanations for this: embezzlement or aggressive expansion. This is not only applicable to the solar power industry but also to other sectors, such as DRAM, LCD, and more. As a result, investing in solar energy may not be wise in the long run. This is not only evident in Chinese solar power plants but also in Taiwanese solar companies where the PR% exceeds 200%.
Only fraudulent accounting and embezzlement can be detected from financial reports; other types of stock minefields are difficult to spot. For instance, businesses with high operational risks, such as subprime mortgages or DRAM operations, pose a significant threat. Additionally, if the CEO indulges in gambling or speculative trading like futures and options, it can lead to the collapse of the entire company. Futures and options trading can wipe out the entire capital instantly due to sharp price fluctuations, making it too late to react when checking financial reports three months later. The only way to guard against such risks is through a passive approach like investing in a variety of assets to diversify risk, akin to planting multiple fruit trees.
Let's take a few examples. Bear Stearns (BSC) was a blue-chip investment bank in the US that specialized in underwriting business, helping companies raise funds, and mergers and acquisitions. However, in 2008, the company suddenly announced its sale to JP Morgan for $2 per share, resulting in a steep drop in stock price from $50 to $2. Despite having $35 billion in cash reserves, equivalent to over NT$1 trillion, the company went bankrupt overnight with no prior indication in the financial reports. Not only Bear Stearns, but also the other two blue-chip companies, Lehman Brothers and Merrill Lynch, went bankrupt without any prior warning during the subprime mortgage crisis.
What is a subprime mortgage? It is a type of loan intended for people with poor credit who want to buy a house. Because of their poor credit, the mortgage interest rates are high, making it a profitable business. The sudden rise of interest rates in the US in 2007 caused the real estate market to collapse, making it difficult for people to pay their mortgages. If they can't pay, their house will be auctioned off.
Why did the problem become so significant in 2008? The reason is the trouble caused by financial derivatives. When a person buys a house and applies for a loan from a bank, the bank will not take the risk of the mortgage on itself. Usually, the mortgage is re-lent to two companies, Freddie Mac and Fannie Mae, similar to a land bank in Taiwan. Similarly, insurance companies will not take all insurance risks on themselves. The insurance will be transferred to a reinsurance company for the purpose of early realization and risk diversification.
In 2008, interest rates dropped to a historically low level, with one-year time deposits yielding only 1%. Who would be interested in buying such a low-margin financial product? At that time, packaging these products through financial derivatives was popular. The leverage ratio of financial derivatives was very high, with a futures principal of $1 potentially yielding a profit of $20, and options up to $14. In other words, a 5% fluctuation in futures price could wipe out the entire principal, while a 7% fluctuation in options would lead to a total loss. In 2017, Taiwan's stock market futures plummeted and fell by 10% within seconds. It only takes a momentary lapse of attention to go bankrupt. It is truly a frightening prospect.作者: mikeon88 時間: 2018-11-19 20:15
Lehman Brothers' structured notes were financial derivatives that were bundled together and had a reputation for having high yield rates, which prompted many depositors to invest in them. Does anyone recall the exact yield rates of these notes during that period? Did anyone here experience losses due to investing in them? It's commonly said that the investors themselves did not make the purchase, but rather a friend did. These notes offered returns of 7% to 15%, while the interest rate on a one-year time deposit was only 1%. The reason behind the high yield on structured notes was due to their link to derivatives. Financial advisors encouraged individuals to invest in these linked bonds, stating that "placing money in a bank with an interest rate of only 1% is not as good as investing in linked bonds that offer a yield of 7% to 15%. Furthermore, these bonds are corporate bonds that can be redeemed upon maturity," making them an appealing investment opportunity for many. However, it was ultimately the derivatives that caused the problems.
Former Federal Reserve Chairman Bernanke testified at a hearing that the problem in 2008 was extremely severe. He stated that the 2008 financial crisis was the most severe in global history, surpassing even the Great Depression. Bernanke noted that 12 of the country's 13 largest financial institutions were on the brink of collapse before they received government assistance. Reflecting on his testimony, I am struck by the gravity of the situation. It is alarming to think that the world economy was on the brink of collapse in 2008. If the top 12 banks in the United States had gone bankrupt, it could have had catastrophic consequences. This is why the US government was willing to print money to address the economic crisis.
A student inquired about the severity of the Great Depression of 1929. This photograph from that time period shows the distressing reality of a 25% unemployment rate in the United States, where many people were jobless and lining up for food. One banner read, "Free coffee and doughnuts for the unemployed." Charlie Chaplin was a prominent figure of that era, and his pantomimes captured the essence of the times. I remember being impressed when I saw his pantomimes as a child more than 40 years ago, back when CTV had just started broadcasting and often aired his performances. In one skit, Chaplin's character desperately wanted to eat steak, but couldn't afford it. He resorted to baking his shoes and eating them, which was made more comical by his characteristically large leather shoes. If a similar situation were to occur in modern times, it would be even more dire, as most shoes are made of plastic instead of leather, which has a less appealing taste. That's why the US government would not hesitate to print money to address such economic crises.
Who was able to anticipate the 2008 crisis? Warren Buffett was one such person. In his 2003 report, he criticized derivatives as "financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal." As he had foreseen, the crisis unfolded in 2008. When Buffett acquires a financial company, he personally inspects its trading room to scrutinize its accounts. If they are found to be involved in financial derivatives, he promptly eliminates them from consideration. Unfortunately, retail investors are unable to perform such checks, as these types of financial activities are not always detectable in financial reports.作者: mikeon88 時間: 2018-11-19 20:18
DBK International (3079.TW), which is traded on the OTC market, specializes in selling DRAM. Those in the DRAM or IC business tend to keep low inventory levels due to the volatility of IC prices, which can easily eat into company profits. This is common knowledge. However, in 2008, DBK unexpectedly purchased a large amount of DRAM despite having net assets of only NT$1 billion and an inventory worth NT$1.3 billion, all of which consisted of DRAM. In the first half of 2008, oil prices hit a record high of $147 per barrel, causing raw material prices to rise correspondingly. However, DRAM prices did not follow suit. DBK believed that DRAM prices would increase and made a risky gamble to profit quickly. Unfortunately, DRAM prices not only failed to rise but continued to plummet, resulting in an overall loss for the company. It is surprising that the company, which specializes in DRAM, did not better understand the risks involved. Their negligence led to significant losses.
Macauto (9951.TW) specializes in producing automotive curtains, and its core business is performing very well. The company boasts a ROE of 30%, and its dividend payouts are stable. However, in 2008, Macauto engaged in foreign exchange derivatives trading, resulting in a significant loss of capital. Companies that export products often have foreign exchange positions and engage in foreign exchange trading to some degree. In an attempt to increase profits, Macauto took a larger bet, which ultimately resulted in a loss of equity. The treasurer responsible for these actions later stepped down. I believe that the responsibility for these decisions should lie with the company's leadership rather than the financial manager. Currently, the company has returned to a state of normalcy, and its stock price has risen to NT$200.
Solar Applied Materials Technology (1785.TW) specializes in recovering precious metals and is inevitably involved in commodity futures. In February 2016, oil prices dropped to as low as $26 per barrel, and iron ore prices hit a record low, resulting in significant losses for the company. Despite this, the company's financial reports do not indicate any speculative trading of financial derivatives.
作者: mikeon88 時間: 2018-11-19 20:18
還有一種地雷股也是無法事先從財報看出來，
即債務不能展延。
There is another type of landmine stock that cannot be identified in advance from financial reports, which means that the debt cannot be extended.
SDRL 挪威海上鑽油公司，
2018年因大股東不願再背龐大負債而倒閉
SDRL is a Norwegian offshore drilling company that went bankrupt in 2018 because its major shareholders were unwilling to take on significant debts.
GNC 營養藥品商，
2018年因跟銀行談判債務展延不順而倒閉
GNC is a retailer of nutritional supplements that went bankrupt in 2018 due to the failure of debt extension negotiations with banks.
Despite having made substantial profits in the past, with positive free cash flow and a normal quick ratio, these two companies went bankrupt because their debts could not be extended. This was not apparent in advance from their financial reports.
The premise of financial analysis is the assumption that a company's debt can be extended. Without this assumption, there would be little need for analysis, as 90% of companies would likely go bankrupt. There are only a few companies with more cash than debt.
According to my accountant Wu, there are very few cases where debts cannot be extended because banks are more afraid of company failures. If debts turn into bad debts, banks become the most direct victims. In most cases, debt can be extended. When it cannot be extended, there must be reasons unknown to the public, which only banks and companies are aware of.作者: mikeon88 時間: 2018-11-20 07:26
CLLN.UK, an engineering contracting company, closed down in 2018 after incurring losses on several projects. Despite generating positive free cash flow from 2014 to 2016, the company's financial situation deteriorated. It is difficult to detect the impact of suicide bidding on financial reports.
Kayee (2939.TW) is a trading company that may face NT$1 billion in liquidated damages due to internal control negligence in the procurement of medical gloves and lightweight circulating oil, failure to evaluate suppliers, and major deficiencies such as signing contracts after stamping. The stock has been downgraded to full delivery shares since November 30, 2020. While it is not related to false accounts or embezzlement of public funds, it cannot be detected from On's table.
Our current lecture may remind you that financial analysis is very important. From the outset, we have been selecting stocks based on financial statements. Some students have asked if it is necessary to read accounting books. My suggestion is that after completing the course, students should not discard their handouts. Instead, they can have them bound in hardcover, embossed with gold lettering, and read a few pages periodically. Once they have thoroughly studied the handouts, they can then decide whether to explore other accounting books.
During my early years, I used to read various investment books by authors such as Peter Lynch and Soros. However, once I comprehended Buffett's principles, I stopped reading those books. This is because the investment theories of those experts are somewhat flawed, whereas Buffett's ideas are the only exception.
Some people believe that my understanding of investment theory is a result of reading numerous books. However, that is not the case. I gained my understanding by grasping the fundamental concepts. For instance, I question why EPS is a critical factor for stock picking. While I was taught to estimate EPS from the first day of being an analyst, I have my doubts. Relying solely on EPS could lead to a focus on growth stocks, which is not always the case in actual company operations. In my own company, profits do not necessarily grow every year, yet it remains highly profitable. Therefore, I do not believe that stock selection should solely depend on EPS.
I used to think that ROA was the key factor for stock selection, but I later realized that ROE was more important. After discovering the significance of ROE in selecting stocks, I read Berkshire Hathaway's annual report and had a sudden realization. It was only after I developed the PR% indicator in 2003 that I fully grasped Buffett's investment theory.
Once you understand the fundamentals, you can understand everything else clearly. Later on, my students asked me questions about DuPont's formula and free cash flow, which were not familiar to me. However, I was able to identify the errors at a glance and pointed them out one by one without the need to consult books or other sources.
During my investment analysis, I find it valuable to consult with my trusted accountant friends, Chaotong Wu and Ronglin Jiang. From Accountant Wu, I learned about the concept that buying back treasury stocks could result in negative net asset value. As accounting is a highly technical subject, it is crucial to learn from experts like them. It's unwise to have wild imaginations about accounting without proper study and guidance.作者: mikeon88 時間: 2018-11-20 07:28
If you have any questions about other books, please reach out to the author directly instead of asking me. I don't appreciate when students ask me about content from other sources. This course is very open, and you are welcome to ask questions in the discussion forum. I will jump in to answer them. There is no limit to the length of your posts or the number of pictures you can use. This is different from other investment clubs that use Facebook as their forum. On Facebook, you can only "like" a post, but you can't ask new questions, and there is very limited space for discussion.
A dozen students came to me with a question, and I pointed out some of their mistakes. However, when they didn't understand, they wrongly accused me of being stubborn and only valuing my own ideas while disregarding others. They even went so far as to claim that our class was a one-man dictatorship. This left me speechless! Some students even prevented me from expressing my opinions and tarnished the class's reputation by falsely claiming a lack of freedom of speech.
這些都是過去同學看了別人的書來問我的題目：
杜邦公式、現金轉換循環 (註1)、自由現金流量、技術分析、
景氣對策訊號燈、現金殖利率、股債蹺蹺板、
covered call、naked put (註2)、ROA，
通通都是錯的。
These are some of the questions that students asked me after reading other books: DuPont formula, cash conversion cycle (Note 1), free cash flow, technical analysis, prosperity countermeasure signal light, cash yield, stock and debt seesaw, covered call, naked put (Note 2), and ROA. However, they are all incorrect.
1. For companies manipulating their books, the CCC may actually improve. They record shipments to shell companies without ever collecting the cash.
CCC = Fewer days to “sell” goods ↓ + Longer days to collect cash ↑ – Longer days to pay suppliers ↑ = Net decrease.
2. 博達正是一家CCC下降的公司
它的存貨下降、應收也降，現金增加，卻都是假的
2. Procomp (2398) was a classic example. Its inventory declined, receivables fell, and cash balances rose — but all of it was fabricated.
3. 不知循環天數長到多少才會出事 ?
4. 不給客戶賒帳，常常是做不到生意的
3. No one can predict at what point an extended cycle will trigger a collapse.
4. Extending credit is often unavoidable. In many industries, especially electronics, refusing to grant credit terms means losing business altogether.
註2：
選擇權策略
covered call ：持有現股+賣出call
naked put ：想買股票的同時賣出put
兩者在實用上有很大問題
Note2:
Option Strategies
Covered Call: Hold the stock + sell a call
Naked Put: Intend to buy the stock while selling a put
Both strategies face serious practical challenges:
一是covered call 用於回檔或橫盤；
naked put 用於上漲，
可是如何知道股價接下來會回檔或上漲 ?
1. Uncertainty about market direction.
A covered call is best suited for a pullback or sideways market.
A naked put works better in a rising market.
But in reality, no one can predict with confidence whether the stock will pull back or rally.
2. Small gains, big risks
Covered Call: HTC(2498) at NT$1,300 was clearly overpriced and should have been sold. Yet the investor, having written calls, hesitated to sell the shares for fear of being unable to deliver if assigned. The stock then collapsed and never recovered. For the sake of just NT$1 in premium, they missed the chance to exit at the peak.
Even with undervalued, high-quality stocks, selling calls for a small premium carries the risk of being forced to sell too early, sacrificing significant future upside.
Naked Put: China Steel Chemical Co.(1723) fell to NT$35, a rare bargain price. Selling a put at that level looked appealing. But since NT$35 was itself a great entry point, the investor held back, worried about lacking the cash to cover assignment. The stock then went on a strong rally. Once again, chasing a NT$1 premium cost them the opportunity to earn many times that amount.
I informed the student that all of their questions were incorrect, as I was trying to teach them. However, instead of understanding, the student verbally attacked me. It is ironic that when I was a student, teachers would scold us for our mistakes, but now that I have become a teacher, I am being bullied by my students. This year has been quite topsy-turvy!
Why is this the case? It's because the concept of investment cannot be unlearned once it's been contaminated. Who makes the best investment students? The further away they are from the world of investment, the better. Those who are the least knowledgeable and have the lowest academic qualifications are the best candidates because they will simply follow my teachings, leading to the best investment performance. Who are the most challenging to teach? Those who believe they are smart and already knowledgeable about investing are the least likely to learn the ways of Buffett.
To reiterate, thoroughly familiarizing oneself with the speech is sufficient to handle various situations in the stock market. Exam questions will only cover lecture content and nothing else. Students may notice that I often use cut and paste in discussion forums instead of typing lengthy replies. If a question has been answered before, I will immediately post the answer. It is not surprising that some students criticize me for "talking to a wall." However, repeating concepts is necessary to reinforce them and aid in better retention. In fact, talking to a wall is the right approach because it demonstrates that my theory can withstand scrutiny and is not easily dismantled. Regardless of the question, the answer remains the same.
If you have any questions, please come directly to the discussion forum where I can quickly solve them with just a few words. Instead of communicating privately on Line or Facebook, which may involve several students, it's best to seek help in the forum. Asking questions to someone who also does not know the answer is not helpful.
Despite all that has been discussed, some students are still asking whether there are more advanced courses or content available. If you are looking for more advanced material, I suggest revisiting the lecture text and thoroughly familiarizing yourself with the content again. The lecture content is already advanced.作者: mikeon88 時間: 2018-11-20 07:29
You no longer need to read financial analysis books. Most of the financial indicators presented in these books are useless. I make this assertion based on a simple fact: when reading financial reports, the only things you need to know boil down to three key points:
1. Is the company profitable?
2. Is there a potential issue with cash flow?
3. Is there a risk of accounting fraud or embezzlement?
第一、看公司的獲利能力好不好？
看EPS、ROA、ROIC、毛利率…
都不如看ROE。
To evaluate the company's profitability, you should look at metrics such as EPS, ROA, ROIC, and gross margin. However, it is even better to focus on the ROE.
Students asked whether it's advisable to choose stocks based on gross margin, operating margin, and net margin, as they believe that companies with high profit margins will yield better profits. However, this is not always the case since a high profit margin does not necessarily translate to high profits. For instance, VIA has a high gross profit margin of 28%, but it suffers significant losses. On the other hand, Hon Hai has a low gross profit margin of only 6%, but it generates substantial profits. It's worth noting that the gross margin is industry-specific, and Hon Hai's OEM gross profit rate cannot be high. If Hon Hai had a high gross profit margin and made significant profits, it would not be called Hon Hai, but rather, Apple.
Some people argue that comparing gross margins is not about comparing different industries, but rather comparing the company's performance against itself. For instance, Hon Hai had a high gross margin of 25% when it went public in 1991 from producing connectors but only earned a small profit. Later, its gross margin decreased to 6% per year from OEM, yet it made more money. Similarly, HTC sacrificed its gross margin to seize the market when it launched its machine-sea strategy, leading to a decline in gross margin each quarter, but with an increasing ROE due to rising mobile phone sales, its stock price rose from NT$300 to NT$1,300. Therefore, the decline in gross margin is irrelevant when selecting stocks.
I had a student who insisted that stock selection must be based on gross margin. When I asked him if he would sell stocks because of a decline in gross profit margin, he answered no. So why bother watching it then? It seems that students often argue with me about principles that they themselves do not follow. Before engaging in a debate, it is important to implement your principles consistently at least five times.作者: mikeon88 時間: 2018-11-20 07:30
Secondly, evaluate if the company has sufficient cash flow. This can be done by checking the cash flow statement, interest cover ratio, current ratio, debt ratio, among other factors. However, it is more effective to look at the PR% when assessing cash flow.
The students asked why we don't consider the debt ratio. Buffett's six criteria mention high ROE and low debt, and Mr. Buffett advocates for this, so why don't we pay attention to it? They believe that companies with high debt ratios are risky. Some people argue that banks have particularly high debt because most of their assets are customer deposits, which are liabilities. The debt ratio of banks can reach up to 90%. They also suggest that the indicator for monitoring bank stocks should be changed to ROA, which is net profit divided by assets. However, all of these ideas are incorrect.
1. Companies can generate income through high levels of debt.
For instance, motherboard manufacturers can earn interest income by relying on accounts payable and accounts receivable. If they were to pay for purchases and sales in cash, they would not be able to generate this income.
Similarly, companies such as President Chain Store (2912.TW) and Taiwan FamilyMart (5903.TW) have a debt ratio of 70%. Although they receive cash, their debt ratio is high because they issue promissory notes to suppliers that are payable in 3 months in order to earn interest.
2. Do companies with high debt ratios have greater risks?
Not necessarily! In fact, the opposite can be true. Only low business risk leads to high debt. For instance, MediaTek (2454.TW) has a debt ratio of 22%, while Hon Hai (2317.TW) has a debt ratio of 63%. Whose business risk is higher? MediaTek's integrated circuit design involves high risks, while Hon Hai's business risks are actually quite low. Hon Hai is the largest foundry with the lowest cost in the world. If Apple does not place orders with Hon Hai, who else could they turn to? Apple cannot easily replace Hon Hai. Hon Hai has taken on a significant amount of debt due to their low operating risks.
Companies that receive cash often have high levels of debt.
Who is eligible to borrow money from banks - the rich or the poor? Banks lent 99% of the mortgage to Ting Hsin International to buy Dibao Mansion because they could afford it. Why wouldn't they give me 99%? Because I can't afford it. The wealthy are often able to take on high levels of debt.
President Chain Store has a debt ratio of 70%, while Telefónica's (TEF) debt ratio is 79%. The net assets of buying treasury stocks are negative, and the debt ratio exceeds 100%. All of these are cash collection companies. If a cash-receiving company does not understand the risks associated with high levels of debt, the CFO may be considered negligent.
My favorite companies to invest in are those that collect cash and have a debt ratio exceeding 100%. However, the DuPont formula predicts that these companies will fail. The formula breaks down ROE into sales x gross margin x debt ratio, but it's ridiculous to think that a high debt ratio is always bad. In fact, as many know, the debt-to-assets ratio of a cash-receiving company can exceed 100%, which actually indicates a strong company.
Equity represents a form of debt that can be borrowed from shareholders without the obligation of repayment.
However, sometimes the money you don't have to pay back can be the most costly. Whether a company should increase its debt or equity should depend on which option has the lower cost. It's important to note that increasing debt doesn't necessarily come without benefits.
In 2003, TSMC's dividend was NT$3 and its net asset value was NT$30, which is equivalent to a 10% interest rate for borrowing money from shareholders. If TSMC borrows money from banks, the interest rate is only 3%. Therefore, TSMC should borrow money from the bank.
舉債來提高ROE、配息、減資、買回庫藏股可不可以？
當然可以！當利率低時有何不可。
Can a company increase its debt to boost ROE, distribute dividends, reduce capital, and buy back shares? Absolutely! It's a viable option when interest rates are low.
Some people stigmatize the use of increased debt to improve ROE as financial manipulation. This is clearly the result of not having studied financial management. Outsiders may misunderstand and make baseless claims.作者: mikeon88 時間: 2018-11-20 07:30
ROA may not be a dependable metric for selecting stocks due to the inability to make an apples-to-apples comparison of ROA values across different companies.
In 2015, Fubon Financial Holdings (2881.TW), the most profitable financial holding firm in Taiwan, recorded a ROA of 1.2%. Meanwhile, Compal (2024.TW), an electronics company, had a ROA of 2.2%, which falls below the industry average.
請問誰的獲利能力好？
仁寶ROE才9％，富邦金ROE16%。
Which company is more profitable?
Fubon has a ROE of 16%, while Compal's ROE stands at 9%.
Financial stocks cannot be compared in the same way. China Life Insurance (2823.TW) has an ROA of only 0.7%, while Taiwan Fire and Marine Insurance (2332.TW) have an ROA of 6%. No matter how well life insurance companies are managed, their ROA cannot surpass that of property and casualty insurance stocks.
The financial industry faces a significant challenge with a debt-to-assets ratio as high as 90%, making even minor setbacks potentially leading to bankruptcy. The stringent requirement for capital preservation in lending and investments hampers the ability to achieve high returns. In this context, a 1% ROA is considered satisfactory.
Conversely, the manufacturing industry must bear a minimum loan interest burden of 5%, and investments are only pursued if the return exceeds 10%. Essentially, the ROA varies across industries. The manufacturing industry typically exhibits a significantly higher ROA when compared to the financial industry. Furthermore, property and casualty insurance generally surpasses life insurance in terms of ROA performance.
Stock selection should not be based solely on ROIC, which is a metric used to assess the performance of CEOs. As shareholders, our primary concern is how our investment is performing, and therefore, we should focus on ROE, i.e., net profit divided by total equity. ROE is a more relevant measure of a company's profitability from a shareholder's perspective.作者: mikeon88 時間: 2018-11-20 07:30
5. 盈再表不看負債，同學問若公司大量舉債致無法負擔 ，
能否事先看出來 ?
5. The student asked whether we could determine in advance if a company has taken on too much debt, given that there was no information about debt on On's table.
When a company takes on a significant amount of debt, we need to consider whether it is short-term or long-term. If a large portion of the debt is short-term, it could lead to insufficient cash flow, particularly if the PR% is high, leading to a potential cash crunch. Conversely, if a company has taken on a lot of long-term debt, we may be concerned about the heavy interest burden it may incur and the potential impact on profitability, which could result in a decline in ROE. Therefore, we can assess the issue of excessive borrowing by analyzing the PR% and ROE.
選股，即便是金融股，也是看ROE，
不用看ROA跟負債比。
When selecting stocks, including financial stocks, it is important to prioritize ROE as a key metric. ROA and debt ratio are not as critical to monitor in the selection process.作者: mikeon88 時間: 2018-11-20 07:31
Third, is there a risk of accounting fraud or embezzlement?
Checking the accounts receivable turnover rate, inventory turnover rate, and cash flow (including operating cash flow or free cash flow) is not as useful as monitoring the dividend payout ratio and PR%.
After reading other books, a student challenged me and claimed that free cash flow could be utilized to verify risky stocks. He argued that if a company has negative free cash flow, it indicates that there could be issues with the company's cash flow.
What is free cash flow? Free cash flow is the sum of a company's operating activities and investment activities, which are reported in the cash flow statement. It excludes financing activities.
For instance, if a person earned a salary of $100,000 and invested $120,000 in stocks, the free cash flow would be calculated as $100,000 - $120,000 = -$20,000, indicating a cash shortage for the person.
Free cash flow and PR% are two formulas that are similar in nature. However, they differ in their approach. Free cash flow is the sum of two activities, whereas PR% is the ratio of investment activities to business activities.
Using the same example, if a person invests $120,000 in stocks and earns a salary of $100,000, the PR% would be calculated as $120,000 ÷ $100,000 = 120%.
When a company has insufficient free cash flow, it means that it has negative free cash flow, which could be greater than 100% PR%. A PR% of 100% indicates that a person has invested an amount equal to their salary in stocks. It's a balanced situation where the cash flow remains unchanged.
If an individual invests $200,000 in stocks with a salary of $100,000, and the resulting PR% is over 200%, it could lead to a cash shortage. This indicates that the conclusion of the free cash flow theory would be incorrect. In reality, free cash flow must be less than negative one times the salary to indicate a cash flow problem.
A classmate argued with me, "If free cash flow is less than zero, it doesn't mean there will be a problem in just one year, but it will take a long time." I asked him how long is long-term, and he said eight years. So I said, "Okay! Let's wait for eight years and see." In the previous example, a salary of $100,000 was used to purchase $120,000 worth of stocks. It can be represented on the balance sheet as: Assets ($120,000 in long-term investment) = Liabilities ($20,000) + Equity ($100,000). With an annual shortage of less than $20,000, my classmate said eight years, so I extended it to 100 years. The balance sheet would then look like this: Assets ($12,000,000 in long-term investment) = Liabilities ($2,000,000) + Equity ($10,000,000), with two additional zeroes added. The debt-to-equity ratio is only 17%. Would the company be in trouble? I don't think so! Even if free cash flow is insufficient for 100 years, the company should still be fine.
A negative free cash flow indicates an increase in liabilities, but it does not necessarily mean that the debt ratio will worsen. In the given example, although the debt increased from $20,000 to $2 million, the debt ratio was only 17%. This means that even if the free cash flow remained negative for 100 years, the company would still not face any issues.
Many great companies have experienced negative free cash flow for extended periods of time, including Berkshire Hathaway, TSMC, and Hon Hai, all of which have seen their stock prices increase tens of thousands of times. It is ridiculous to think that these three great companies would fall because of negative free cash flow. If you had the chance to have lunch with Mr. Buffett, you could ask him the question, "Will Berkshire fall?" Similarly, if you ask Morris Chang on a train, "Will TSMC have cash flow problems?" He will definitely roll his eyes at you.
相反的，TEF、GPS、TPR三家公司這幾年FCF皆正而穩定，
但股價大跌80%。
On the contrary, the three companies TEF, GPS, and TPR have all had positive and stable free cash flow in recent years. However, their stock prices have plummeted by 80%.
FCF為正股價仍可能大跌；
為負也不致負債比惡化，
顯見自由現金流量這個指標沒用。
A company can have a positive FCF, yet experience a sharp decline in its stock price. Conversely, a negative FCF may not necessarily lead to a deterioration in the company's debt ratio. Hence, the free cash flow indicator may not always be a reliable measure of a company's financial health.
The classmate continued to argue using three steps: making a loud statement, stubbornly arguing, and attacking others personally. Initially, the classmate had an immature idea and made a loud statement, and refused to admit their mistake even when proven wrong. Then, they persisted in arguing stubbornly, and when that didn't work, they resorted to personal attacks, such as saying "You don't understand anything" or "You are ignorant!"
The student argued, "We should not only focus on free cash flow but also consider the cash flow from operating activities." However, adding operational activities is pointless. As evidenced by lecture 9/21, companies like Yahsin and SAY had positive cash flow from operating activities before their scandals were exposed. Additionally, companies like Procom can manipulate their accounts receivables and inventory accounts. Therefore, operational activities are not a reliable indicator.
The three aforementioned points are inferior to monitoring ROE, dividend payout ratio, and PR%. A high dividend payout and low PR% guarantee no financial report issues! When asked if I select stocks only based on On's table, I confirmed that I typically only look at the table header. I rarely refer to the tables below and to the right. It may seem too simple, but that's all there is to it. Two of our classmates immigrated to Australia after using On's table. My method is so simple that it may be hard to believe, making it easy to learn but difficult to master. Why is it easy to learn but hard to master? Because you are too skeptical!
Why is it that a high dividend payout ratio and low PR% guarantee that there will be no issues with the financial report? A high dividend payout ratio is equivalent to the husband giving all his wages to his wife every month. A low PR% means that the channels for hiding private funds have been blocked. How did the husband engage in fraudulent activities?作者: mikeon88 時間: 2018-11-20 07:32
In 2012, it was reported that the authorities conducted a search of United Integrated Services (2404.TW), alleging that the chairman had embezzled NT$300 million. After the incident, many people on the internet criticized various aspects of the company's financial reports, but I had never heard them mention any issues prior to that. At that time, I was the first to come forward and state that although United Integrated Services had been embezzled, the problem was not severe enough to render the stock value worthless. Why was I able to make such a guarantee when everyone else was skeptical? Would I risk my reputation to come forward like this?
The PR% of United Integrated Services is only 20%, and its dividend payout ratio is as high as 90%. Therefore, it is unlikely that there would be a problem. Although the stock price dropped from NT$34 to NT$27, it is still close to the cheap price of NT$29 that I calculated.
2016年群聯也被查出作假帳，
我又第一個跳出來跟大家講問題不大！
In 2016, fraudulent accounts were discovered at Phison Electronics (8299.TW). Nonetheless, I was the first to reassure everyone that the problem was not significant.
很簡單，盈再率15%，配息率60%。
股價也僅從事發之前270元跌到204元，便宜價230元。
Simply put, the PR% is 15% and the dividend payout ratio is 60%. Despite the stock price falling from NT$270 to NT$204, my calculated cheap price was NT$230.作者: mikeon88 時間: 2018-11-20 07:33
Some individuals analyzing stocks prefer to list out numerous indicators, thinking that it makes them appear more professional. However, in my opinion, this approach indicates a lack of expertise, as they fail to recognize that many indicators are useless.
When selecting stocks, monitoring the gross margin and debt ratio is not necessary, as I advised my students. All of them nodded in agreement. However, upon analyzing stocks and writing blogs at home, some of them focused on high gross profit and low debt. These students seemed to have ignored my previous teachings. Thankfully, I am not obligated to refund their tuition fees. In fact, I noticed that many individuals who claimed to have earned significant profits in China Steel Chemicals were actually my former students. However, it is odd that they failed to mention PR%. Perhaps, it is because PR% is not commonly discussed in Taiwan. This has been the biggest frustration in teaching this class!
我的學生去外面開課自立門戶，不承認是我的學生，
還抄襲盈再率公式改為資本支出/營業現金流，
判斷式也是不可大於200%。
這等於把愛因斯坦的公式 e = mc^2 改成
X = YZ^2 然後說相對論是他發明的一樣，
這就是剽竊！
引用或改寫別人的觀念、公式和明牌而未註明出處者即為小偷。
One of my students, Wei, started teaching his own class outside and denied being my student. He even modified the PR% formula to "capital expenditures/operating cash flow," using the same criteria of not exceeding 200%. It's equivalent to altering Einstein's formula e = mc^2 to X = YZ^2 and claiming to have discovered relativity. This constitutes plagiarism!
Anyone who quotes or modifies someone else's ideas, formulas, or stock tips without acknowledging the source is a thief.
We have three main criteria for stock selection:
The first is that the ROE must be stable.
The second is that the company must have the ability to distribute cash dividends, with a PR% in the most recent year that is less than 80%, and a dividend payout ratio in the last three years that is greater than 40%.
The third condition is to purchase a company that will not change and can last for a long time. Investors hope to maintain a high ROE for the company they invest in, and to benefit from compound interest over the long term to maximize profits.
However, even if a stock appears promising at the time of purchase, it can deteriorate over time. Investors may wonder what type of company can remain successful for a prolonged period.
When analysts visit companies, the company may provide information about shipment status for the next 3 to 6 months at most. However, what we really need to know is not just the short-term outlook, but whether the company will perform as well as we anticipate in the next 3 to 5 years.
In addition to visiting companies, analysts also conduct industry research to identify the future star industries. If an industry has significant potential, the companies within that industry should experience rapid growth. However, I have often noticed that a bright future for an industry does not necessarily guarantee profitability for the companies within it.
In the past, industries such as solar, LCD panels, and DRAM were highly optimistic. While the industry trends aligned with expectations at the time, few companies were able to turn a profit. For instance, we believed that both TV and computer screens would be replaced by panels, which turned out to be true. Nevertheless, only a few companies could make a profit from this trend.
Mr. Buffett addressed this issue in his annual report. He mentioned how the Wright brothers flew across the Atlantic when he was a kid, and at that time, people believed that the output value of the aircraft industry would be enormous. While the industry followed the expected trend, few companies were able to achieve profitability.
In contrast, companies that have the potential to last a long time, such as Coca-Cola (KO), Johnson and Johnson (JNJ), China Steel Chemical, and TTET Union products, may not be as exciting.
For instance, the market for Coca-Cola may not experience significant growth, but the company can maintain a high ROE. Similarly, Johnson and Johnson's shampoo and talcum powder may not have significant growth, but the company can maintain a high ROE. TTET Union's salad oil may not experience a significant increase in demand, but the company can still maintain a high ROE.
In his 2007 annual report, the most insightful section of Berkshire Hathaway's annual reports, Mr. Buffett stated that "Our criterion of 'enduring' causes us to rule out companies in industries prone to rapid and continuous change." This idea completely changed the way I used to think.
As a former electronics analyst for a foreign securities company, I would have suggested investing in the most promising 3C (computers, communications, and consumer electronics) products. However, Mr. Buffett made me realize that this approach was flawed.
選股的重點不在看未來會如何，
而在確定現在會不會變。
The key to stock selection lies not in predicting the future, but in determining whether the current dominance will change.作者: mikeon88 時間: 2018-11-20 07:58
What is a durable company?
1. Products that are irreplaceable
2. An unshakable industry leader
3. Easily understandable in 3 seconds
不會變的公司等於巴菲特所說公司護城河，
和我的「魔法書」好學生特質都是同樣意思。
A company that won't change is equivalent to what Buffett called company's moat, and it shares the same meaning as the "Magic Book" good student traits I mentioned.
1. Irreplaceable products
This is a crucial characteristic for companies that can endure for a long time, particularly in the electronics industry.
For instance, CMC Magnetics (2323.TW) and Ritek (2349.TW) were highly profitable during the CD-R era, but suffered significant losses after the market shifted to DVDs.
This highlights the vulnerability of electronics stocks, where a shift in product can have a significant impact on a company's profitability.
What we are most concerned about now is whether HTC can turnaround?
...Sorry, I need to make a change: Can HTC become good again?
The changes are happening too fast to update the handouts.
How can we approach this issue? Does it depend on the type of product the company produces? For example, the cell phone industry is constantly changing. This makes it difficult for HTC to maintain a strong position in the long run. This is not only true for HTC, as even Nokia was a major player a few years ago but was eventually sold. Samsung is also not immune to challenges, as evidenced by the explosive Note 7 phone, which turned out to be a kind of "Kinder Surprise".
Apple's iPhone has been experiencing a decline in sales in the Chinese market, and its new features are lacking, making it less attractive to consumers. Companies such as Apple, Samsung, Nokia, and HTC are not our preferred stocks as their products are prone to changes.
Someone mentioned that Mr. Buffett recently purchased a large amount of Apple stock. Using the same method for selecting stocks, it is normal for 70% of the criteria to be the same and 30% to be different. This is because everyone has a different knowledge background and different opinions. While Buffett once thought that Apple would change, he now believes that it will remain durable. It is also common to change one's perception of the same company. Personally, I believe that Apple is a company that will continue to evolve.
Instead of just relying on the OK signal in On's table indicating a 26% expected return rate for HTC, it is important to consider the durability of the company before making a purchase decision. Despite the red reminder at the bottom of the table, it has been observed that students tend to ignore it. Given that the products of HTC and TPK Holding (3673.TW) are subject to change, these companies are not among our preferred choices.
If you are unfamiliar with a company's products, you can visit its official website for information. To access the website, simply drag the company name to the right of On's table. Once you arrive at the website, you can view product information, photos, and gain an understanding of the company's operations. For example, Shinzushing (3376.TW) manufactures notebook computer hinges. If you are unsure what a hinge is, you can simply view a photo on the website to get a clear idea.
2. Unshakable industry leader
Buffett referred to "consumer franchise" which can be granted by the government, such as in the sale of oil, tobacco, and alcohol, as well as in telecommunications and high-speed rail. However, the best franchise rights are given by consumers, which means a company with a higher market share.
Companies that demonstrate strong profitability and share price performance are often considered industry leaders that can maintain their position over the long term. The following companies serve as excellent examples:
Uni-President (1216.TW), TTET Union, Charoen Pokphand Taiwan (1215.TW), Formosa Plastics, China Steel, Fenghsin (2015.TW), Cheng Shin Rubber (2105.TW), TSMC, Delta Electronics, Chunghwa Telecom (2412.TW), Largan Precision, Hotai Motor (2207.TW), Taiwan Secom (9917.TW), Giant (9921.TW), President Chain Store
這些公司我們何時知道它們很好，從我們小時候就知道了，
直到現在都還很好，可以好很久。
When did we realize that these companies were good? We've known it since we were kids. And even now, they continue to perform well and are expected to last for a long time.
Well-known brands are often industry leaders, and their products are priced higher because consumers are willing to pay a premium for them. I once saw a Burberry umbrella in a department store priced at NT$7,000 and decided not to purchase it because it was too expensive. I thought to myself that I have never spent more than NT$7,000 on an umbrella in my entire life. However, when I looked at the prices of other items, such as long trench coats priced at NT$70,000, I began to think that the umbrella was actually quite cheap. Years later, one of my students corrected me and informed me that a Burberry umbrella now costs around NT$20,000, which is still a 2013 price.
Shopping in a department store can be painful for me, especially when I can't afford a famous brand. So, I decided to become a shareholder at least. I invested in Coach's stock, but unfortunately, I lost 40% of my investment at the worst. That could have bought me three wallets. Now, I realize that being a shareholder can be more expensive than buying a wallet. Due to Coach's poor profits, their stock price plummeted, and I had to save myself. But even as I was trying to cut my losses, I ended up buying another wallet for NT$10,000, and now I feel even more stuck.
Where can you check the market share of a company's products?
You can click on the "Introduction" button under Table 1 on On's website. This will take you to the MoneyDJ webpage, where there are articles about the company. By clicking on one of these articles, you can find information on the market share of the company's products.
現在較為偷懶少點進去看，反正買龍頭股就對了，
台塑的市場佔有率多高？
反正就是很高。
Nowadays, I am lazier and do not bother clicking. Nevertheless, buying industry leaders is always a good strategy. What is the market share of Formosa Plastics? It is undoubtedly very high.
Mr. Buffett once stated that if a company has a high enough market share to dominate, it can be run by an idiot and still be the best company. China Steel is the only steelmaking plant in Taiwan, and despite multiple changes in leadership over the past few years, its position as an industry leader remains unchallenged.
The Taipei EasyCard company is also one, a few years ago they hired someone even considered foolish as their chairman... I am praising this company. You can use the EasyCard to pay at convenience stores in Kaohsiung, and recently, you can use the Kaohsiung MRT card to pay in Taipei. The EasyCard has a monopoly position, but I didn't know the company was this good before. It wasn't until I saw that someone considered foolish could become their chairman that I realized how great they are!作者: mikeon88 時間: 2018-11-20 08:00
On the contrary, if the management team leaves the company, investors become concerned as the company may undergo changes. Terry Guo's position in Hon Hai is crucial. While Hon Hai is a good company, it may not be the best company from Mr. Buffett's perspective.
everal years ago, the general manager of AWEA Mechantronic (1530.TW), a machine tool manufacturer, left the company with a group of people.
At the time, there were concerns that they would come back to compete with the company. Although AWEA may be a good company, it is not the best company. In 2008, a student told me that he and his friends had purchased enough AWEA stocks to become directors and supervisors.
When he called the company to ask questions, he would confront the spokesperson with a sharp tone, who would then report the company's situation in detail to him.The student also established good relationships with industry participants both upstream and downstream of the machine tool industry and believed that he had a high level of understanding of the entire industry. During the 2008 global economic crisis, AWEA's profitability declined, and its stock price dropped to around NT$20. The student was very nervous and called me twice to ask for my opinion on AWEA. Since I had no expertise in this area, I replied, "You ask me, me ask who?", using a Taiwanese English expression. Later, the student informed me that he sold all of his AWEA shares when the stock price fell to its lowest point of NT$20. After he sold his shares, the stock price went up.
During the same period, China Steel's performance was poor, with a 25% loss, while AWEA's profits were only declining. When China Steel's stock price fell to NT$23, my students and I were delighted to buy China Steel shares. The reason for the big difference in performance is that China Steel is a first-tier company, while AWEA is a second-tier company.
Why did China Steel suffer the same profit decline? Business recession! On the other hand, it's unclear what went wrong with AWEA, possibly due to unknown individual factors. That's why I suggest investing in first-tier companies as much as possible. When a second-tier company encounters a problem, even if you are at a loss for ideas and don't know why, it's best not to hold onto that stock for a long time.
In the past, some investors avoided buying industry leaders because they believed their stock prices were stagnant. However, recent years have proven otherwise, as companies like TSMC and Largan have experienced significant growth. As long as a company's ROE is high and its stock price is undervalued, it is likely to rise.
Based on my 30 years of experience as an analyst, I have come to the realization that sometimes it only takes a brief study to recognize a good company with a promising future. This indicates that the role of an analyst may be overrated.
When buying stocks, it is inevitable that we will feel good about it at the time, but after a year and a half, we may find that the company is getting worse. At this point, we always ask whether the decline is temporary or permanent. What is the difference between the two?
Temporary decline refers to changes in the business cycle, while permanent deterioration refers to changes in the product or industry position.
In recent years, China Steel's earnings have been poor due to the economic downturn. Other companies in the steel industry such as Baosteel of China (600019.CN), Pohang Iron & Steel of South Korea (005490.KR), and Nucor (NUE) of the US have also experienced low ROE of only 5%. This downturn is reflective of a global slump in the steel industry.
What caused HTC to go from making profits to incurring losses?
There has been a shift in the industry landscape. Previously, HTC held the position of the third largest smartphone manufacturer, but now it has fallen to the 23rd spot.作者: mikeon88 時間: 2018-11-20 08:01
3. 想3秒鐘就了解的公司
巴菲特說「簡單的企業」，
何謂「簡單」？
想3秒鐘就懂。
3. Easy to understand in 3 seconds
What did Mr. Buffett mean by "simple business"?
Easy to explain in 3 seconds.
What did Buffett mean by "choose stocks according to everyone's scope of competence"? Simply put, it means investing in companies that you understand well. If you have questions about a company, it may be outside your area of competence.
Just think about it for 3 seconds, don't overthink it, don't spend three days and three nights on it.
What is Infortrend (2495.TW) doing? They manufacture disk array controllers.
One second, two seconds, three seconds...
If you can't figure it out, just ignore it. This company may not be relevant to you.
宏正做KVM切換器，這是什麼？
1 秒鐘、2秒鐘、3秒鐘，想不出來就放棄。
ATEN International (6277.TW) manufactures KVM switches, which stands for Keyboard, Video, Mouse switch.
What does this mean? Take one second, two seconds, three seconds... If you don't know, it's okay to give up.
Here are some examples of straightforward businesses:
Formosa Plastics - manufacturing plastics
China Steel - producing steel
Presidential Chain - operating supermarkets
Giant - manufacturing bicycles
And here's the simplest one:
TSMC - providing IC foundry services.
You can immediately tell what each company does. So, use this approach to evaluate companies!
A student wrote me an email asking whether a certain stock is durable ?
She said she had been thinking about it for a long time.
I suggested that she invest in a simple company and explained what I meant by simple - a company that can be understood in three seconds.
If you have to ask about a company, then it may not be simple enough to understand easily.
She said, "Oh, it's still difficult to judge!"
When it's difficult to judge, that is the answer!
If the student have already explained the answer and she still doesn't know, then it's not a simple matter.
A beginner asks, if they don't know much, should they only buy a few leading stocks?
It may be safer to only buy those few leading stocks that they are familiar with, and these stocks may also have higher potential for growth. In recent years, TSMC and Largan have been very successful stocks.
As the beginner's knowledge and abilities grow, they can start to expand their investment options.作者: mikeon88 時間: 2018-11-20 08:21
How to Avoid the Risk of a Company Deteriorating
First, invest in companies that are unlikely to change.
Second, diversify broadly—like planting many different fruit trees.
It’s best to distribute your portfolio evenly.
For example, if you hold 100 stocks, allocate about 1% of your total investment to each.
For any single stock, set a maximum allocation of 2% (two portions).
Once you’ve reached the 2-portion limit, don’t continue averaging down.
This way, you cap the maximum risk per stock at 2%.
I personally follow one more rule:
If the stock performs poorly after purchase,
I won’t add a second position—because that would be like rewarding a bad student.
Take Vale (VALE) as an example: at its worst, I was down 90%.
If I had kept averaging down, would I still be able to laugh about it today ?
Students may feel like they don't have enough money to diversify their investments, but it's okay to slowly invest in stocks one by one. Save up enough money to purchase another stock and gradually build a diversified portfolio. Everyone goes through the process of transitioning from having no money to accumulating wealth. For example, after serving in the military, I only had NT$60,000 to start investing in stocks. Today's young people are fortunate to have learned about Buffett's investment philosophy at an early age. My biggest regret in life is not having learned about Buffett when I was in junior high school.
The students asked if they should set a cut-loss point. I don't believe that setting a cut-loss point is a good strategy, as it can lead to losses through speculative trading. For instance, if we set a cut-loss point of 10%, but the stock often rebounds at 12%, we would miss out on potential gains. I wrote in my "Magic Book" about a recommendation I made to a senior lady to buy UMC (2303.TW) at NT$20 in 1992. I congratulated her when the stock price rose to NT$30. However, she was unhappy and said that she was losing money. I was puzzled and asked her how she could be losing money since she trusted and believed in me when I recommended the stock to her at NT$20. She explained that she had bought the stock, but then sold it when it broke the monthly moving average, only to buy it back three times at higher prices and ultimately losing money. This is an example of the disadvantage of monthly moving average trading. UMC later rose to a maximum of NT$175, and the adjusted stock price was as high as NT$300.
建議單一持股最多買2份，
已經隱含了設停損的意思，
即這支股票最多賠2份的錢。
It is recommended to purchase a maximum of two shares of a single holding. The implication of setting a cut-loss point is that we are willing to lose up to two shares of the stock.作者: mikeon88 時間: 2018-11-20 08:22
If your investment portfolio is well-diversified, you may not need to use stop-loss measures. While this may be surprising to some, it is based on a simple mathematical principle. If a stock falls, you may only lose a small portion of your portfolio, but if it rises, you have the potential to earn several times your initial investment. The gains from earning several times can outweigh the losses from any small dips in the portfolio.
Where is the problem?
The problem lies in the fact that most people don't have stocks that have multiplied in value several times, as they are all engaged in speculative trading. You need to give your holdings more time and space to rise several times in value.
Using the Buffett method, it's easy to earn several times your initial investment.
In Lecture 5/21, I presented a chart showing my tenbaggers, or stocks that have increased in value tenfold.
It is not advisable to sell stocks solely based on a 20% gain and hesitate to sell when experiencing losses. This investment strategy is used by many investors, but it ultimately results in a negative expected return rate. Expected value mean an average, the expected return rate is calculated as the average of a 20% gain and a 100% loss. Therefore, following this approach will likely lead to losses.作者: mikeon88 時間: 2018-11-20 08:23
Some investors prefer to invest in a single stock, but they often choose the wrong one. They come to me in distress, asking what they should do.
If you find yourself in this situation, my suggestion is to sell half of your shares. This way, you can at least recoup some of your investment.
So, I am not responsible for any rise or fall. Later, I realized that it's not true, I have a responsibility regardless of whether the stock goes up or down. If the stock continues to fall, the student will complain about why I only advised them to sell half. If the stock rises, they will blame me for telling them to sell half! In 2015, when the market rose to 10,000 points, I recommended everyone to reduce their holdings. Later, when the market fell to 7,200, a student questioned me about why the performance of the remaining stocks was so poor. "Of course, it's poor, which proves that advising everyone to sell at 10,000 points was the right decision!
I discourage making concentrated bets because even Warren Buffett is not immune to buying the wrong stock. In fact, he has done so on several occasions. For example, in 2013, he invested in corporate bonds of Energy Future Holdings, which ultimately became worthless and resulted in a loss of NT$26.2 billion (US$837 million). Additionally, two Irish banks that he invested in went bankrupt in 2008. If Mr. Buffett had put all his assets into these three companies, I would have to rename my Buffett class.
Some people claim that Mr. Buffett advocates concentrated investing. However, whether you choose to concentrate or diversify your assets is not a decision to be based solely on what Buffett has said. Ultimately, it is up to you to make this decision and take responsibility for it. Remember that if you find yourself stuck in a particular stock, Mr. Buffett will not be there to bail you out.作者: mikeon88 時間: 2018-11-20 08:23
Before deciding whether to concentrate or diversify your stock holdings, it's crucial to first address a key question: What is the likelihood of selecting the wrong stock? In other words, how likely is it that the stock you purchase will drop by 20%? From my own and my students' experiences, the probability of choosing the wrong stock is approximately 30%.
The conclusion drawn from the review of everyone who has made incorrect stock purchases is always to intensify research. This involves visiting companies more frequently, delving deeper into financial statements, extensively reading financial media, and supplementing with technical analysis, among other strategies.
A harsh reality stares us in the face: the probability of making incorrect stock purchases, at 30%, cannot be significantly reduced. Even investment gurus face the same challenge. Warren Buffett frequently makes incorrect stock purchases, and Charlie Munger's final stock investment was mistakenly placed in BABA.
When this 30% probability of making incorrect purchases is concentrated in a few stocks, performance can swing dramatically. Making the right choices leads to significant gains, while incorrect decisions result in substantial losses, ultimately leading to adverse outcomes. Just one misstep can undo all prior successes, potentially leading to bankruptcy.
How to reduce the bias of extreme outcomes?
Interval estimation in statistics provides a solution. Stock selection is like statistical sampling. The probability of picking the wrong stock is 30%, meaning the success rate (p) is 70%. However, the results from sampling won't always be exactly 70%, as there will be some bias.
For example, if you only pick one stock, the success rate is either 100% if correct or 0% if wrong. If you pick 5 stocks, the success rate will range between 29% and 100%.
......
As the sample size increases, the success rate is likely to fall within plus or minus two standard deviations.
The statement "The success rate is likely to fall within plus or minus two standard deviations" can be expressed in statistical terms as:
At a 95% confidence level, the confidence interval is plus or minus 2 standard deviations (s), written as:
[p−2s,p+2s]=[70%−2s,70%+2s]
In this context, a 95% confidence level is equivalent to saying "very likely" in common language.
When n=1, [0, 100%], there is a high likelihood that the winning rate for a single bet could be either 0% or 100%.
When n=5, [29%, 100%], with only five bets, the winning rate could likely range from 29% to 100%.
Both scenarios demonstrate significant variability in performance, ranging from very poor to very good.
When n=100, [61%, 79%], buying 100 stocks could likely result in a winning rate falling between 61% and 79%.
A winning rate of at least 61% is considered acceptable, which is why I recommend purchasing at least 100 stocks.
The above statistical evidence underscores the significance of holding a minimum of 100 stocks in your portfolio. Whether to diversify or concentrate one's holdings is no longer a debatable issue, but a guideline that must be followed. This also gives everyone confidence that the likelihood of poor performance with holding more than 100 stocks is low. There is no need to be nervous and pay close attention to the stock market every day, instead, we can spend more time enjoying life.
Buying over 100 stocks, there's no need to worry about poor performance because we're not shooting blindly. Instead, we choose stocks from a list of candidates with expected annual returns greater than 15%. A portfolio holding over 100 stocks will tend to stabilize towards a 15% annual return rate.
Some people attribute poor performance to holding too many stocks and being unable to manage them effectively. In reality, the opposite is true: broad diversification protects investors from far worse outcomes. As the sample size grows, performance converges toward an investor’s true win rate. With a small sample, returns are far more volatile, swinging between outsized gains and losses, and often end in a significant drawdown.
Diversified holdings are crucial for long-term investment success. Even well-performing companies can experience extended periods of stagnant stock prices. For instance, TSMC's stock price fluctuated between 40 and 80 TWD from 2003 to 2011, remaining in this range for nearly nine years before it soared to 688 TWD in 2022. Investors who exclusively held TSMC shares found this period particularly challenging to endure and difficult to maintain their investment.
I suffered the biggest loss in VALE, which dropped by 90%. VALE is an iron ore company in Brazil and is the world's largest. Brazilian stocks do not suit me, but I bought VALE in 2013. At that time, the US economy was on the verge of recovery, and the Fed had stopped quantitative easing. Therefore, it was the best time to buy raw material stocks for cyclical growth. Unexpectedly, while the US economy later recovered, other countries did not improve. This kind of uneven recovery was rare in the past, and the price of iron ore even hit a record low. Furthermore, with the Brazilian currency depreciating by 50%, VALE's shares dropped by 90%.
After careful consideration, I realized that VALE is a highly cyclical stock, with a stock price that fluctuates greatly. In contrast, it is safer to invest in public utility stocks. One student strongly recommended AES Tiete SA (AESAY), a hydroelectric power plant in Brazil, which is not affected by fuel prices. However, after I bought it, the company experienced a hundred-year drought, causing its stock price to fall by 50%. But eventually, it rained and the stock price rebounded. Unfortunately, in February 2016, when the stock price was at its lowest, the company announced its delisting, forcing me to sell the stock at the lowest price. It's like a player wanting to continue playing, but the dealer takes away their chips.
In 2016, VALE had a strong rebound, and its stock price rose 4 times. It was the highest increase in my holdings within a year in history, yet I still lost 50%. It is estimated that it will require a total of 9 rebounds to mitigate my loss. VALE has become my eternal holding.
I suffered the biggest loss in VALE, which dropped by 90%. VALE is an iron ore company in Brazil and is the world's largest. Brazilian stocks do not suit me, but I bought VALE in 2013. At that time, the US economy was on the verge of recovery, and the Fed had stopped quantitative easing. Therefore, it was the best time to buy raw material stocks for cyclical growth. Unexpectedly, while the US economy later recovered, other countries did not improve. This kind of uneven recovery was rare in the past, and the price of iron ore even hit a record low. Furthermore, with the Brazilian currency depreciating by 50%, VALE's shares dropped by 90%.
After careful consideration, I realized that VALE is a highly cyclical stock, with a stock price that fluctuates greatly. In contrast, it is safer to invest in public utility stocks. One student strongly recommended AES Tiete SA (AESAY), a hydroelectric power plant in Brazil, which is not affected by fuel prices. However, after I bought it, the company experienced a hundred-year drought, causing its stock price to fall by 50%. But eventually, it rained and the stock price rebounded. Unfortunately, in February 2016, when the stock price was at its lowest, the company announced its delisting, forcing me to sell the stock at the lowest price. It's like a player wanting to continue playing, but the dealer takes away their chips.
In 2016, VALE had a strong rebound, and its stock price rose 4 times. It was the highest increase in my holdings within a year in history, yet I still lost 50%. It is estimated that it will require a total of 9 rebounds to mitigate my loss. VALE has become my eternal holding.作者: mikeon88 時間: 2018-11-20 08:25
I am planning to purchase 100 U.S. stocks, with an allocation of $10,000 for each stock. Why have I decided to diversify my investment into 100 different stocks? When I opened my account in 2012, the U.S. stock market was already on the rise, making me hesitant to enter the market. However, upon reviewing On's table, I found that there were still many undervalued companies with good potential, prompting me to buy. Investing in the U.S. stock market is like discovering a treasure mountain full of the world's best companies. It's tempting to want to invest in all of them, but in order to control my purchasing desires and maintain a balanced portfolio, I have chosen to diversify my investment into 100 different stocks. This decision has effectively helped me to control my shareholding ratios.
Fortunately, when I entered the US stock market, I repeatedly emphasized the importance of diversification. This proved to be a wise decision in 2015 when the BRIC stock markets crashed, causing many stocks to fall by half. Without diversification, my students may have been tempted to buy on dips and found themselves in trouble.
I have found it difficult to manage my portfolio due to owning too many stocks. Whenever a quarterly report is released, I feel the need to study it thoroughly. However, after examining the first three holdings on On's table, I often become too fatigued to review the remaining stocks. When the financial report for the next quarter was released, I started from the end and checked three stocks before feeling sleepy again. Realizing that I cannot properly manage all of my stocks alone, I have decided to share my list with fellow students to seek their help.
My students are indeed taking good care of my holdings. I am not always aware of which stocks are becoming expensive. One day, while browsing through the forum, I came across a post from one of my students that read, "Why not sell the stock at an expensive price?" It made me realize that I had missed an opportunity to sell one of my stocks at a higher price. Without wasting any time, I sold it immediately. On another occasion, a student warned on the forum that LLY was expensive, and its stock price was skyrocketing. I decided to wait a few days before making any decision. After three days, another student asked me, "If it's expensive, why not sell it? Can you explain?" Since I didn't want to write a report for not selling the stock, I sold it to her. Thanks to my students' valuable insights and timely warnings, I was able to sell my stocks at the highest possible prices.
我們巴菲特班的投資流程：
同學在討論區報老師明牌，
我買了之後同學再蜂擁而上。
In our Buffett class, we have an investment standard operating procedure (SOP): students report their stock tips to the teacher on the discussion forum, and after I purchase the recommended stocks, my students flock to follow suit.
「不是立即而上，
而是等老師買了跌20%再上。」，
比較精明的同學這樣說。
The smarter students say that they don't rush to buy a stock immediately. Instead, they wait for the teacher to buy it, and then they observe if the stock price drops by 20%.
I have shared my investment strategy with everyone and publicly disclosed the stocks I buy. If you are still unable to learn it, I cannot be held responsible. If you cannot learn, simply replicate my purchases. If I invest $10,000 in a stock and you invest $100,000 in the same stock, your profit will be greater than mine.作者: mikeon88 時間: 2018-11-20 08:25
If a company meets these three criteria:
A record of high ROE in the past
Consistently high dividend payouts
A durable business model
Then it is highly likely to maintain a high ROE in the future. However, even if there are some uncertainties, it's important to diversify investments in order to limit the risk of potential deterioration.
When I purchased TEF, my student Peter gave me a call specifically. He works at the Sinzhu Scientific Park and believed that I had conducted extensive research on the company. "Telefonica is a big European company. Our company has sold many products to it," he stated. I only then realized, "Oh! That company is called Telefonica." Peter was surprised and asked, "What? You don't even know the company name? How do you buy stocks?" I nonchalantly responded, "Yes, I've purchased a lot of US stocks, but I don't know their names. For instance, NGG and NNI, which 'N' and 'G' do they stand for? I can't seem to figure it out." He was even more astounded and asked, "Then how did you buy TEF?"
I replied, "I read the discussions in the forum and checked On's table. TEF had a good ROE and stable dividends. The most important thing was this sentence: 'It is the largest telecommunications company in Spain and Portugal.' I knew it was similar to Chunghwa Telecom, so I bought it!" I made the decision in just 3 seconds. I had never heard of this company before!
I only invest in stocks that look good on On's table. If I have to spend a lot of time thinking about it, I won't buy it. It takes me less than 3 seconds to make a decision about whether to buy a stock. To date, I have invested in 120 stocks. Is there a simpler way to make money in the world?
A student inquired, "TEF's ROE is declining, will it continue to do so?" I am uncertain if TEF's ROE will persistently decrease. However, I opine that if the industry situation remains unchanged, there is a possibility for ROE to improve. Nevertheless, diversification is crucial in any case.
By maintaining a high ROE and buying stocks at a cheap price, you can ensure the highest return on your investment. What else is there to know when you have the highest return?
Peter was confused and asked, "You bought Telefónica. Aren't you going to call the spokesperson, visit the company, attend the general meeting of shareholders, and track its revenue?" “What~“, I replied, “Call spokesperson of Telefonica. What should I tell him ? Ano~"
It took me less than 3 seconds to decide to buy NNI. After seeing the recommendation from my students, I checked Wikipedia and found out that it is the second largest student loan company in the US and is unlikely to change. Additionally, its ROE is better than that of the first university student loan company NAVI. Therefore, I decided to buy NNI.作者: mikeon88 時間: 2018-11-20 08:26
In recent years, it has become popular to read financial reports when selecting stocks. Several books have been published to teach people how to read financial reports for stock selection. Interestingly, most of the authors are not business school graduates, with some even having backgrounds in Fine Arts or Political Science and no prior knowledge of basic accounting. The financial publishing industry in Taiwan has become absurd in recent years, with publishers hiring amateurs to write books. Therefore, after my retirement, I also plan to publish a book on how to extract teeth and join the trend of peculiar publications. Let's have some fun with it! If Art majors can teach people how to read financial reports for stock selection, then as a Master of Statistics, I can certainly teach tooth extraction with the same level of expertise.
These non-experts discuss numerous indicators and have a tendency to go off-topic by making improbable connections. They mistakenly believe that scrutinizing financial reports is the sole determinant for stock selection, whereas in actuality, it only constitutes one-third of the process. Stock selection necessitates three actions: firstly, scrutinizing the financial report to ensure the stability of past ROE and adequate cash flow; secondly, evaluating the company's susceptibility to changes; and thirdly, determining whether the stock is overpriced or underpriced. The first and third criteria can be effortlessly evaluated by referring to On's table. However, the only factor that requires human judgment is assessing the company's susceptibility to changes. This cannot be accomplished solely by reviewing the financial report or consulting with the company. Rather, you must evaluate it yourself, which only requires three seconds of careful thought.
Understanding investing can be simple, just like it is for me. We all have a dream of achieving the highest level of investment, which includes:
1. Simple, so simple that people think this class is like a kindergarten. Some people criticized me for not being able to analyze and only rely on On's table. I said, "Yes, that's right. This class is like a kindergarten. We don't need to analyze, just use On's table. That's exactly what this class is all about!"
2. Good performance - my investment portfolio has yielded impressive results.
3. No pressure - even if you make a few mistakes and purchase the wrong stocks, there's no need to worry on a regular basis.
My investment portfolio fully demonstrates the aforementioned characteristics.
Let's examine if Mr. Buffett's holdings align with the investment principles I mentioned.
Firstly, there's Burlington Northern Railway Company (BNI), which is the second-largest railway company in North America. In 2009, Buffett acquired the company for a whopping $44 billion, which is the same scale as the market value of TSMC in the same year. Acquiring TSMC alone would be the pinnacle of investment! I have a small wish to acquire TSMC on my own one day and summon Morris Chang to ask him, "What are you doing now?" However, my student reminded me that I better hurry up since Morris Chang won't wait for me!
Burlington boasts an ROE of 16%, making Taiwan Railway and High Speed Railway appear inferior. Mr. Buffett acquired Burlington at $100 per share with an expected return of 7%. As the stock price declined and the expected return rose to 15%, he initiated discussions of mergers and acquisitions with Burlington. To acquire the entire company, he had to pay a premium resulting in an expected return of 7%. This $44 billion investment equals NT$1.3 trillion. The railway holds a monopoly for the next 100 years, ensuring a 7% return each year, creating an excellent investment opportunity. If our labor and health insurance funds had invested in this railway stock, they would not have gone bankrupt. The average annual performance of labor insurance fund traders is a mere 2%.
Following in the footsteps of Buffett, I observed his acquisition of the second largest railroad company in North America and decided to purchase CSX, the third largest railway company with a stable ROE of 21%. I bought it at a price of $22.8 per share, with an expected return of 14%. With my investment of $10,000, I can expect to receive a 14% annual return for the next 100 years.
I purchased shares of UNP, which stands for Union Pacific Railroad, in 2015. It is the largest railway company in North America with an ROE of 24%. I acquired the stock at a price of $87.2, with an expected return of 13%. In contrast, Buffett only acquired shares of the second largest company. Additionally, I also invested in CSX, the third largest railway company.
Nestlé (NSRGY) is a Swiss food company and currently holds the position of the largest company in Europe in terms of market value. Most of us have consumed Nestle milk powder at some point, and the company has a solid ROE of 35% along with a profit reinvestment rate (PR%) of 19%, making it a standard Buffett stock. Warren Buffett purchased Nestlé shares at a price of $47.6 and expected a return of 20%, which is considered quite cheap.
Lubrizol (LZ) is the world's largest manufacturer of lubricant additives. While the company boasts a strong ROE of 33%, its PR% is comparatively low, standing at only 6%. Warren Buffett purchased LZ shares at $135 with an expected return of 15%, and chose to wait for a cheaper price before making any further investments.
Wells Fargo (WFC) is Warren Buffett's second-largest holding, and he has been actively buying shares. The reason for his strong interest in the company could be attributed to its strong performance during the 2008 subprime mortgage crisis, where it managed to remain profitable despite other banks suffering heavy losses. This indicates that the asset quality of Wells Fargo Bank is quite good. The last time Mr. Buffett negotiated a deal for Wells Fargo, the expected return was 14%, and he managed to purchase the shares for a price that was considered cheap by On's table.
Tesco (TSCDY) is the largest supermarket chain in the UK and the third-largest in the world. Prior to 2012, the company had a solid ROE of 18%. Warren Buffett purchased the stock at 3.3 pounds, with an expected return of 18%. However, after his purchase, the stock price fell by 14%, which prompted me to buy the stock as well, thinking that it was a wise decision to follow the "stock god." Unfortunately, the profits of the company were impacted by competition from Germany's low-cost supermarkets, which led to a decline in profits. As a result, I suffered losses of up to 60%. To make matters worse, Buffett sold his shares early without notifying me, which was disappointing.
Exxon Mobil (XOM) is the world's largest oil company with a ROE that has consistently remained above 20%, which is better than Formosa Plastics. I purchased the stock first, and then Mr. Buffett followed. It is possible that he might be following our discussion forum.
The above are Mr. Buffett's holdings, and we like to invest in the same stocks. The price at which he purchased these stocks is similar to the cheap price listed in On's table. Interestingly, he also bought some of the stocks that I own, indicating that my investment approach is quite similar to that of Mr. Buffett.
After reviewing Mr. Buffett's holdings, how do you feel? These are all well-known, leading stocks, such as railway companies, Nestle milk powder, and Wells Fargo Bank, which most people have at least heard of. Does this make you feel excited and eager to call Buffett to be his successor? We all know the kind of companies he likes. Moreover, you can tell Buffett that he doesn't need to take 5 minutes to make a decision; if he checks On's table, it will only take him 15 seconds.
Do you now feel confident in your ability to invest in stocks around the world? In the first lesson, I promised that in two days, you would be able to learn how to invest like Buffett and play stocks all over the world. Now, I have fulfilled that promise. Thanks to On's table, you can now invest in stocks not only in Taiwan but also in the US, China, Britain, Switzerland, and 49 other countries.作者: mikeon88 時間: 2018-11-20 09:01
There are three primary criteria for selecting stocks. Firstly, the company's ROE must remain stable. Secondly, the company should have high dividends, which means that the payout ratio in the last three years should be over 40%, and the current dividend should be less than 80% of last year's PR%. The third and final criterion is that the company should have durability. Its products should be irreplaceable, and it should be a leading company in an industry with a stable status. Ideally, the company should be easily understandable within three seconds. If you can identify a durable company, you possess Buffett's investment skills.
Once you have selected stocks, you should wait to purchase them at a cheap price and then sell them when they become more expensive. The following explains how to determine what is considered cheap and expensive. Stock prices do not fluctuate randomly. Instead, they move up and down along the value line, which is determined by the company's ROE. The value line is the middle line, also known as the fair price, which is equivalent to the 1-year time deposit rate of 6.7% during normal periods. When considering investments, it is important to compare them with the interest rate. Stocks are riskier than deposits and require a higher discount. Therefore, stocks should not be purchased at the fair price. To be considered cheap enough, the price should be at least 15% higher than the 1-year time deposit rate of 6.7%.
Students may ask whether the cheap and expensive prices should be adjusted with interest rates. Theoretically, yes. However, once the prices are linked to interest rates, we would have to predict the rise and fall of interest rates, which is unpredictable. For example, when I bought VALE and AESAY in 2013, I had no way of knowing that interest rates in Brazil would rise sharply from 7% to 15% in three years.
Furthermore, there is a significant difference in the PER among various sectors in the same market. For instance, in early 2016, the PER of Amazon.com (AMZN) was 176 times, while the oil industry's PER was only 2 times. It is not clear how to adjust the PER based on interest rates.
A more practical approach is to base the calculation on a 6.7% interest rate during a normal period and adjust it according to the GDP. The GDP theory is explained in detail in Lecture 16/21.作者: mikeon88 時間: 2018-11-20 09:02
During Lecture 4/21, it was demonstrated that the greatest investment return can be achieved when both the Return on ROE is high and the purchase price is cheap. We can calculate the expected return by using the ROE and purchase price. The ROE is determined by recurring net profit.
One-time profits include gains from the disposal of land and stocks. The concept of intrinsic value implies that only profits that occur consistently each year are considered. Some companies may sell land to improve their financial statements when they experience poor profits, but these gains must be deducted as they are not recurring.
Non-operating profits, such as investment income, will not be deducted as only one-time profits are considered. Companies such as Berkshire Hathaway, Hon Hai Precision Industry, Delta Electronics, and Giant Manufacturing, which have high investment income, would be eliminated if investment income were deducted. These are all great companies.
Hon Hai Precision Industry and Giant Manufacturing have high investment income because they establish overseas factories through subsidiaries. Their investment income is considered part of their operating business. When evaluating a company's profit, what matters is whether it is recurring, including investment income. If you suspect that a company's financial report is not transparent, it is recommended to review the consolidated statement.
Indicators related to net profit, such as ROE, PR%, EPS, and net profit over NT$500 million, will be adjusted to reflect recurring net profit. Financial stocks only deduct gains from the disposal of assets, as gains from the sale of stocks are considered part of their operating business.
The concept of recurring net profit originated from my experience as an analyst at Jardine Fleming. Restated earnings are equivalent to recurring net profit, while reported earnings refer to net profit. Restated earnings are calculated by subtracting disposal gains from reported earnings. Similar terminology, such as recurring earnings, is used in other foreign securities firms.
一次性利益即財報上之異常利益
底下說明請搭配Excel版盈再表設定之公式閱讀
One-time profits is Unusual Income reported in financial statements.
Please compare the formula setup in the Excel version of On's table with the explanation provided below.
Unusual income
Taiwan Stocks: Land + Investment + Others + Rent + Subsidy + Discountinued Operations
Land = [Disposal gains or loss on real property, plant and equipment]
Investment = [Disposal gains or loss on investment]
Other = [Other income-other]-[Other income and losses-other] + [Other operating income-other]-[Other non-operating income (expense)]
Rent = [Rental Income] + [Non-operating Rental Income (Expenses)]
Subsidy = [subsidy income]
Discountinued Operations = [Income or Loss from Discountinued Operations]
Thanks to Guangfu Siu for identifying the above accounting accounts
US stocks: [unusual expense] including
Sale of land and stocks, Income or Loss from Discountinued Operations, goodwill, capital gain or loss on stock holdings
Goodwill: 4Q18 KHC withdraws $15.4 billion in goodwill impairment
Capital gain or loss on shareholding: 4Q18 Berkshire recognizes $35.4 billion of capital loss in holdings
港股：[特殊項目]+[出售資產]
中股：[非流动资产处置损失]+[其中:非流动资产处置损失]
Hong Kong Stocks: [Special Items] + [Sale of Assets]
China Stocks: [loss on disposal of non-current assets] + [including: loss on disposal of non-current assets]作者: mikeon88 時間: 2018-11-20 09:03
After obtaining the recurring profits, we will use the recurring profits from the past 5 years to calculate the expected recurring profits.
Only the past 5 years are considered, as profits from earlier years are not relevant.
This year refers to the past 4 quarters.
Take the median of the recent 5 years.
Take the average of the recent 2 years.
The recent 5 years includes the current year and the 4 preceding years; the same applies to the recent 2 years.
1. Expected Recurring Net Profit = (Recent 2-Year Average × 0.7) + (Recent 5-Year Median × 0.3)
2. If the Recent 2-Year Average is more than twice the Recent 5-Year Median, then:
Expected Recurring Net Profit = (Recent 2-Year Average × 0.9) + (Recent 5-Year Median × 0.1)
Expected ROE = expected recurring profit / last year's net assets
Instead of directly averaging the ROEs of the past 5 years, we use the expected recurring profit to calculate the expected ROE. This is because the average ROE method can be inaccurate when there are significant changes in net assets, such as a buyback of treasury shares or a large amount of rights issue.
Obtaining expected ROE through expected recurring profit does not imply that the company's future profits will be limited to expected recurring profit. Instead, they will be achieved through the expected ROE. As net assets increase, future profits will continue to grow.
If you find the default expected recurring profit to be unreasonable, you can manually adjust it. For instance, during the bottom of the business cycle of cyclical stocks or when the company's performance deteriorates for a while, you can substitute the recurring profit during a normal period by yourself.
作者: mikeon88 時間: 2018-11-20 09:03
股價反映常利，而非淨利，
GSK是明顯例子，
用淨利算GSK股價是貴的。
Stock prices are based on recurring profit rather than net profit, which is exemplified by GSK. Using net profit to calculate GSK's stock price would be expensive.
可是以常利來算卻是便宜的，
股價跌到此就跌不下了，
顯示股價反映常利，而非淨利。
However, using recurring profit to calculate GSK's stock price is cheap. The stock price cannot fall below the cheap price, indicating that the stock price reflects recurring profit rather than net profit.
作者: mikeon88 時間: 2018-11-20 09:03
我們要用股息折現公式(IRR)來算投資報酬率，
買進價等未來8年股息和賣出價的折現值，
所謂折現值是除以1+r的幾次方，
r = 平均報酬率，
用這個價格買進，持有未來8年，平均每年報酬率 r。
The internal rate of return (IRR) is utilized for computing the return on investment. The purchase price is determined by discounting the value of dividends and the selling price over the next 8 years. The discounted value is then divided by the power of 1+r, where r denotes the average rate of return. One should purchase the asset at this price and hold it for the next 8 years, earning an average annual rate of return r.
This formula is considered the most crucial in investment science. Regardless of the investment type, it can be applied to calculate the rate of return. This includes stocks, bonds, houses, gold, insurance, and more. For instance, suppose a house costs $10 million to purchase, with an annual rent of $100,000. If sold for $12 million in the eighth year, the average annual rate of return after eight years would be denoted as r.
The IRR is based on the fundamental concept of an investment of $100 transforming into $120 in one year. This sentence can be expressed in mathematical formula as: 100(1+r) = 120.
The status of buying stocks is:
I bought the stock, the first year dividend1, the second year dividend2 and the stock sold,
It is actually a combination of Formula 1 and Formula 2:
Stock bought = buy
First year dividend1 = dividend1/(1+r)
Second year dividend2 = dividend2/(1+r)^2
Stock sold = sell/(1+r)^2
So buy = dividend1/(1+r)+dividend2/(1+r)^2+...+sell/(1+r)^2
There are 3 questions here:
1. Are dividends reinvested in stock purchases ?
Someone multiplies both sides of discount formula by (1+r)^8, and the formula becomes
Buy (1 + r)^8 = dividend1(1+r)^7 + dividend2(1+r)^6 + ……
At first glance, it seems that dividends paid out every year have been invested in buying shares ?
Dividends of dividend discount formula are not reinvested.
底下式子才是有再投入，
股息再投入買股，則分子為0，
最後賣出價將不只 1 股而是好幾股
The formula below is used for reinvesting dividends. If dividends are used to purchase shares, the numerator will be 0. The final selling price will not be for a single share but for multiple shares.
謝謝陳新元桑指導。
Thanks to Sinyuen Chen for his instruction.
2. 股子呢，擺在哪裏？
股子和母股全歸到最後的賣出價，賣 = 母股+子股。
2. Where are the stock dividends?
The stock dividends, along with the parent stock, are both factored into the final selling price. Therefore, the selling price equals the sum of the parent stock and the stock dividends.
3. Why should we assume a period of 8 years?
The assumption of an 8-year period made some students uneasy and they exclaimed, "I haven't held stocks for 8 days, let alone 8 years!" However, it is important to note that this formula does not mandate any specific holding period but rather provides a reference point. Investment theories are typically based on sufficiently long assumptions. My proposition is to "buy cheap with a high ROE, and guarantee big returns." However, for this proposition to hold true, it must be established under certain prerequisites, with the most critical being a sufficiently long investment horizon.
What is the optimal holding period? Examining the adjusted stock price of China Steel Chemical, it is not a guarantee of profit if we only consider the past 2 years. Over this period, the stock price has fluctuated between NT$49-NT$57, which is lower than the historical high of NT$95-NT$96. However, looking back over the past 5 years, it is likely to be profitable as the adjusted stock price has ranged from NT$81-NT$102, much higher than the historical stock price of NT$45-NT$60.
As for more than 5 years, students asked "Why not pick 6 or 7 years but 8 years ?" This is unexplainable. The whole algorithm was suddenly thought of when I sit there, it ended hastily, and I pulled up my pants, I came out and started fighting. At that time, I didn't think too much about it. Anyway, I gave it to it for 8 years. When I invented this On's table and became a investment master, I don’t have to explain to others. Otherwise...Don't everyone use it ! Einstein said that e = mc^2, and he didn’t explain why it should be squared. Why not 3rd, 4th power ? We both are masters, so there is no need to explain. No wonder some students scolded me for macrocephaly !
A student asked me to demonstrate how Mr. Buffett calculated the answer of $25 million, using an example cited in his 1991 annual report. I used the IRR calculation in On's table and substituted the numbers from the example. The result I obtained was the same as Buffett's. It's worth noting that the table covers an eight-year period, which is consistent with the timeframe used by Buffett.
4. IRR calculation pertains to dividends, not free cash flow. If calculated based on free cash flow, the increased capital expenditures for factory expansion may reduce free cash flow and lower its intrinsic value, which is a contradiction. The expansion of the factory should lead to higher earnings and an increase in intrinsic value.
5. IRR is not related to cash on the balance sheet. Unallocated cash does not contribute to shareholders' returns. For instance, if a company has $100 in cash and goes bankrupt, with its stock price falling to zero, the shareholders will receive nothing. However, if the company distributes a dividend of $100, the shareholders will still retain the cash even if the stock price falls to zero after bankruptcy.作者: mikeon88 時間: 2018-11-20 09:05
Firstly, we need to determine the starting NAV by dividing last year's net assets by the current number of shares, which is 18.7. As the number of shares is up to date, the stock price will be adjusted accordingly when ex-rights are encountered. Next, we can calculate the dividends and final selling price for the next 8 years.
根據前述預期常利計算方法得出預期ROE 21%
EPS 3.9＝ROE 21% x NAV 18.7
Based on the aforementioned expected recurring net profit calculation method, the expected ROE is 21%.
EPS 3.9＝ROE 21% x NAV 18.7
要算的不是EPS，而是隔年配多少息？
股息 = EPS x 配息率，
需要算未來的預期配息率
The goal is not to calculate EPS but rather to determine the amount of dividends that will be paid out next year. This can be achieved by multiplying EPS by the dividend payout ratio. To do so, we must first calculate the anticipated dividend payout ratio.
Expected dividend payout ratio = (past dividend payout ratio + (1 - PR%))/2
Where 0<1 - PR%<1
Why do we need to calculate the average of 1 - PR%? Because PR% can impact the future dividend payout ratio. Specifically, the higher the PR%, the lower the expected future dividend payout ratio.
Pure Dividend Yield A = This Year’s Dividends / Last Year’s Recurring Net Profit
Dividend Payout Ratio B = (This Year’s Dividends + This Year’s Share Buybacks) / Last Year’s Recurring Net Profit
Blended Ratio C = (Pure Dividend Yield A + Dividend Payout Ratio B) / 2
The Blended Ratio C is the average of Pure Dividend Yield A and Dividend Payout Ratio B,
i.e., C = (A + B) / 2.
Using only Pure Dividend Yield A would overestimate the expected return;
using only Dividend Payout Ratio B would underestimate it.
Therefore, the average of the two is taken as C.
過去配息率 ＝中位數(去年、前年、大前年混合率C)
取中間值為避免極端值。
Past Dividend Payout Ratio = Median of the Blended Ratio C from the past three years (i.e., last year, the year before last, three years ago).
The median is used to avoid the impact of outliers.
Lastly, the expected dividend payout ratio should not fall below 90% of the dividend payout ratios in the past three years.
If the calculation cannot be performed due to missing data, the expected dividend payout ratio shall be set at the default value of 65%.
This is a conservative measure because, given a fixed ROE, a lower dividend payout ratio results in a higher IRR.
如此可算出預期配息率，
EPS 3.9 x 預期配息率90%＝3.51 隔年股息。
By following these steps, we can calculate the anticipated dividend payout ratio.
EPS 3.9 x expected dividend payout ratio of 90% = 3.51 dividends for the next year.
隔年NAV = 去年NAV + 去年EPS - 去年股息
Next year NAV = last year's NAV + last year's EPS - last year's dividend
接下來依此類推，得到未來8年EPS和股息。
Following this, we can derive the EPS and dividends for the next 8 years accordingly.
To calculate the final selling price, you can multiply the EPS from the 8th year by the final PER. What is the final PER? The final PER can be determined based on the assumption that the stock price will eventually return to its value. Specifically, the reciprocal of the 6.7% one-year time deposit rate multiplied by 15 times the PER provides a reasonable estimate. However, to be conservative, it may be better to use a multiple of 12 times the PER instead.
Is the PER different for each company? Yes, the PER can vary across different companies, and some companies may have higher PERs than others. However, a fixed PER can be used as a consistent basis for determining whether a stock is cheap or expensive. The actual value of the PER doesn't matter as long as it is the same for all stocks being compared, even if it is set at a high value like 10,000 times.
PER often changes every 10 years. For instance, Microsoft's PER was 30 times in the 1990s. However, in 2010, it dropped to 10 times due to the challenge posed by Android to its monopoly position.
Are there any issues with the above calculation process? Typically, this part is unproblematic, and it tends to put people to sleep. It is not necessary to understand the calculation process fully, as this is not typically tested on exams. You can simply focus on the final answer: what is the expected return ?作者: mikeon88 時間: 2018-11-20 09:06
未來8年股息和最後賣價算出來之後即可代入折現公式，
公式變成一元八次方方程式，
在國中因式分解教過如何解，
同學有興趣上來解解看嗎？國中數學而已。
不用自己解，Excel有一個函數IRR
可以算出預期報酬率 r = 10%。
Once the dividends for the next 8 years and the final selling price have been calculated, they can be substituted into the IRR equation. This formula can be transformed into a one-variable eighth power equation that can be solved using factorization, which is a math concept that students learn in junior high school. However, students do not necessarily need to solve it themselves, as Excel has an IRR function that can do the calculations. The expected return can be calculated as r = 10%.
A 10% expected return is not sufficient, as a 15% expected return is required for a cheap price. What constitutes a cheap price is not specified. However, when the NPV function is substituted, the result is $35.
When should you sell a stock? You should sell when the stock becomes expensive, and the expected return drops to 0. An expensive price can be determined by substituting it into the NPV equation. For instance, a price of $86.1 is considered expensive.
If the stock price is deemed pricey you should sell it because the expected return is negative. This means that if you hold on to the stock, the total reward will only decrease, rather than increase.
貴淑價於財報出爐和除權時會變動。
預期報酬率除息時將上升。
Cheap and pricey prices can change when financial reports are released or when ex-rights dates occur. The expected return is expected to rise on the ex-dividend date.
The IRR formula is a fundamental concept taught in investment courses. However, in practice, few investors use it to buy and sell stocks. Even professors who teach investment courses rarely use the IRR formula because the course curriculum often neglects to cover how to choose parameters, which is the key to making the IRR formula feasible.
In situations where ROE is extremely high, the expected return calculated by the IRR formula will be unreasonably high. However, this is not a formula error. In reality, it is unlikely for an ultra-high ROE to persist over many years.
If the expected payout ratio is too high, the expected return calculated by the IRR formula may be unreasonably low. For instance, the PER for UL is only 23 times, yet the IRR's expected return is -11%, which is clearly an unreasonable figure.
To address the above issue, investment textbooks teach us to use a binary approach:
if a company enters a low-growth phase after reaching a certain stage of development.
However, this approach is overly subjective,
as it is unclear how much the growth rate should be reduced in the mid to long term.
If the IRR formula yields unreasonable results, I suggest using the PER method instead to eliminate the drawbacks of subjective adjustments. The standards for using the PER method are clear and can be easily applied.
PER method:
I stipulate that for pricey price the PER is 30 times and expected return is 0;
for cheap price expected return 15%
PER increases from 4 times to 30 times, expected return is (30/4)^(1/8 )-1=28.6%
cheap price x(1+15%)^8=expected EPSx30
pricey price x(1+0%)^8=expected EPSx30
Change point: from IRR to PER method
We will switch from using the IRR method to the PER method for calculating expected returns when the average of the cheap and pricey prices obtained by the IRR method deviates more than 20% from that obtained by the PER method.
Across the entire market, the only ones who truly buy and sell stocks based on the IRR formula are probably just our Buffett class. On's table includes several indicators such as adjusted stock price, ROE, recurring profit, PR%, payout ratio, IRR, PER method, and change point. While these indicators may appear ordinary, each has its own secrets. On's table fully discloses how to set up these indicators, but they may be difficult for most people to comprehend due to their complexity.
In conclusion, I have finished my speech for this section. The mathematical content covered here is the most complex in the entire course. One student couldn't believe that someone would sit on the toilet and contemplate such complicated calculations, and kept asking me how long I had been sitting there. However, toilets and apple trees are the cradles of human civilization!作者: mikeon88 時間: 2018-11-20 09:08
Berkshire Hathaway's valuation calculation currently stands as the only exception.
1. In order to comply with new accounting standards, Mr. Buffett has classified the capital gains of his investment portfolio as exceptional interests. However, fluctuations in holdings are a routine matter and not exceptional. Therefore, the On's table employs net profit instead of recurring profit as the valuation calculation solely for BRK. This results in a more reasonable return on equity (ROE) calculation.
2. 2011年波克夏股價跌到淨值，
老巴即宣布買回庫藏股，生平第一次，且連買了2次，
顯示祂認定淨值是便宜價。
2013年報老巴明白指出波克夏內在價值＝淨值 x 120%，
便宜價是內在價值打8折，便宜價＝淨值。
2. In 2011, the stock price of Berkshire Hathaway fell to its NAV. Mr. Buffett announced that he would repurchase treasury stock for the first time in his life and buy it twice, indicating that he believed the NAV was undervalued.
In the 2013 annual report, he clearly stated that Berkshire's intrinsic value = NAV x 120%.
Cheap price is 20% lower than intrinsic value, cheap price = NAV.
3. Nevertheless, based on my personal experience, I bought BRK.B when its NAV was $141 in April 2018. My purchase price of $200 represented 141% of the NAV at that time. After holding the stock for 4 years, I have achieved a total return of 71%, which translates to a compound annual return of 15%. It is clear that BRK's expected return based on net profit is more reasonable than Mr. Buffett's estimate.作者: mikeon88 時間: 2018-11-20 09:08
貴了要賣掉，績效才會最好，
否則只能得到中等績效。
If it is expensive, you should sell it to achieve optimal performance. Otherwise, you will only be able to achieve moderate performance.
In 2011, I purchased China Steel Chemical stock at NT$173 with an expected return of 1%. As it seemed relatively expensive at the time, I made the decision to sell it. Looking back, had I held onto the stock until December 2017, it would have taken 6 years and 7 months for it to reach the original price at which I sold it. This means that I would have lost 6 years and 7 months for nothing!
價值投資是便宜買，貴了賣，
有2招，工夫別只學一半。
台灣人有句話「會賣股票的才是師父！」
Value investing means buying cheap and selling pricey. There are two skills to this strategy, so it's essential not to learn only one half. In Taiwan, people often say, "The true master is the one who knows how to sell stocks!"
If a stock is expensive, it's crucial to sell it; otherwise, holding onto it will yield no benefits. On the other hand, just because a stock is cheap doesn't mean you shouldn't consider selling it. Also, high dividends should not be the sole reason for holding onto a stock as a retirement fund, as passive income can also be earned by selling the stock at an opportune time. These common misconceptions about stock investing are incorrect.
In 1998, Coca-Cola's stock price reached an all-time high of $89, which was considered very expensive. If you had held onto the stock until 2010, its price would not have returned to $89, even after 12 years. It's futile to hold onto expensive stocks, even if they have high ROE and dividend payouts. Some people believe that Mr. Buffett never sells stocks, but he actually does. If you look at the 1998 annual report, you will see that Buffett's holdings, including Coca-Cola, American Express (AXP), Gillette razors, and even Berkshire's own stock, had become expensive. He knew that selling the large amount of shares he held on the market would not be practical. Instead, he conducted a stock swap merger, which involved merging the expensive Berkshire stocks with cheaper general reinsurance swaps. This was essentially a way of selling stocks. Similarly, I exchanged my expensive China Steel Chemical stocks for New Taiwan dollars.
Mr. Buffett's actions reveal his true thoughts, and he cannot deceive others. When he exchanges shares for shares in a merger, it indicates that he considers the Berkshire shares to be expensive. It's more cost-effective to purchase stocks with cash instead.
In his 2016 annual report, Mr. Buffett explicitly stated that there are no permanent holdings. This is contrary to what some previous books on Buffett's biography suggest, which advocate for a "buy and hold" strategy. Buffett clarified that he would not sell controlled businesses because he has acquired the entire company, and some of these companies may not have a stock price or have already been delisted, such as railway and lubricant companies. However, he would sell securities that only hold a portion of the equity because there are still stock quotes and the prices may be either cheap or expensive. His statement aligns with my trading strategy of buying cheap and selling pricey.作者: mikeon88 時間: 2018-11-20 09:09
億豐窗簾股價最高漲到408元，
盈再表算的貴價僅260元，
同學據此質疑盈再表不準？
Nien Made's share price increased to NT$408, but according to On's calculations, the fair price should be only NT$260. Based on this, a student questioned the accuracy of On's analysis.
The pricey and cheap prices calculated by On's table are not meant to identify the high and low points of stock prices. A pricey price is not necessarily the highest, and a cheap price is not necessarily the lowest. The stock price may rise to a level that is close to pricey, just hitting the pricey mark, or even reaching an extremely expensive level. However, reaching an extremely expensive level does not mean that On's table's pricey price calculation is incorrect.
The occurrence of many events is not absolute but rather a matter of probability. Is the statement "Human nature is inherently good" correct? People won't simply answer "yes" or "no," but rather "70% correct, 30% incorrect"—that's the answer.
70%股票在淑貴價之間波動，
5%股票貴了還會更貴，
請問如何操作最好？
A. 遵守淑買貴賣
B. 貴了也不賣
70% of stock fluctuations occur between cheap and pricey prices, and 5% of stocks that are already expensive can become even more expensive. What is the best approach?
A. Follow the strategy of buying cheap and selling pricey.
B. Do not sell even when the stocks are expensive.
The answer is A.
Bloomberg has conducted this analysis, as shown in the figure below. The study of U.S. stock returns between 1954 and 2014 indicates that the "pricey" and "cheap" prices established by On's table are quite suitable. The expected return for "pricey" prices is 0%, with a PER of 30 times, while the expected return for "cheap" prices is 15%, with a PER of 12 times.
Upon closer examination of Bloomberg's analysis, it is evident that the lower the PER, the higher the expected return. Conversely, a high PER corresponds to a low rate of return. This supports the idea that a "buy cheap and sell pricey" strategy is likely to yield the best results.
The time it takes for a stock to go from cheap to expensive or from expensive to cheap is very long, often lasting 5-6 years or even more than a decade.
People’s vision can’t see that far ahead.
For example, China Steel Chemical only started rising after 2009, but for several years before that, it remained below a cheap price.
Students frequently asked why China Steel Chemical wasn’t getting expensive.
Then in 2014, when it climbed to NT$200, they began asking why it wasn’t getting cheaper.
Never buy stocks that are too expensive. This is often the only way investors avoid being wiped out when a bubble bursts. In the AI investment mania of 2025, tech giants relentlessly sell grand visions,roll out trillion-dollar spending plans, and are amplified by nonstop media hype. The world falls into collective euphoria, and almost no one dares to be skeptical. The Buffett Class stayed clear of this massive bubble by sticking to one simple rule: never buy a stock that’s too expensive.作者: mikeon88 時間: 2018-11-20 09:09
The On's table includes a performance table that tracks investment results.
it’s like a report card, and the total score determines which school you get into.
Many people ask me questions such as:
Should I invest in stocks, real estate, bonds, or ETFs?
Can I make investing my full-time career?
I find these questions difficult to answer — because what’s missing is one crucial number:
your own performance table.
It’s your performance table, not mine.
Even if we both use Warren Buffett’s investment methods,
the results will still be different. What should you do? My performance results have no reference value for you.
Everyone should diligently track their own investment performance —
only then can you make the right decisions on major issues.
My average return over 12.5 years has been 14%.
In comparison, bond yields are around 3%, ETFs about 7%, and real estate roughly 5%.
It’s obvious where the money should go —
this is as basic as a kindergarten entrance exam question.
When I was a child, I had to take a test to get into kindergarten.
The teacher showed me two building blocks, one large and one small,
and asked which one was heavier.
It’s essentially the same kind of question.
I’m genuinely amazed that so many adults still can’t figure out where to put their money.
績效表用XIRR來算，而非IRR，
因為IRR假定現金投入和提出時間固定
可是實際做投資卻是不固定
The performance table should use XIRR rather than IRR,
as IRR assumes cash inflows and outflows occur at fixed intervals,
while in real-world investing, the timing is often irregular.
XIRR is the annualized rate of return —
it represents the return from the first investment up to the current one.
A 12% XIRR in 2023 means that the average annual return from 2013 to now
has been 12% over the past 10 years.
[本金]僅在加錢或提錢時才需增減，平時不變
[股票]和[現金]依帳上顯示填入
[Principal] should only be adjusted when adding or withdrawing funds; otherwise, it remains unchanged.
[Stocks] and [Cash] should be recorded based on the account statement.
If a stock is held for less than one year, the XIRR return can appear extremely high.
For example, if a stock hits the daily limit and gains 10% on the purchase day,
the XIRR would be calculated as (1 + 10%)^365 - 1 — an astonishingly high number.
To adjust for this, use the following formula:
For holdings less than one year:
(1 + XIRR)^(days held / 365) - 1
This formula should be used regardless of whether the total return is positive or negative.
This adjustment method is my own original creation and has been verified for accuracy.
The total profit shown in the above table is NT$30.140 million, and the principal is NT$26.601 million.
Some people think my performance is an 8% annual compound return.
They are mistaken because they calculate performance using the ending principal.
My principal increased year by year, starting from NT$7 million, then NT$14 million, and so on.
The principal should be weighted by the number of years invested, which amounts to only NT$16 million.
If you want to understand the performance over the past five years,
the first year would be from 2017 to the present.
You can simply take half of the 10-year table.
At this time, the principal for 2017 should be adjusted to the combined stock and cash amount of 24,778,950,
instead of 17,775,983.
Even with a highly diversified portfolio, Mike-san managed to double his capital in five years,
consistently achieving an annual return of at least 10%–20%.
Even in 2022, when the market reversed compared to 2021, he still saw an 8.5% gain.
He reduced his equity exposure at the 2021 GDP peak (from 99% to 85%)
and increased it again at the 2022 GDP trough (from 85% back to 99%).
This was a flawless application of the GDP theory Mike-san developed.
His outstanding performance is truly admirable.
There is an issue when using XIRR to calculate average performance:
Over different periods, which is better — a 12% average annual return over 5 years or a 10% average annual return over 8 years？
I propose an indicator called the "Distance from Buffett,"
using Buffett’s average 20% annual return over the past 50 years as a benchmark.
1.2^50 ≈ 9,100 times growth.
If your average return over the past 9.6 years is 11%,
your distance from Buffett is 93.
The smaller the number, the closer your performance is to Buffett’s, indicating better performance.
Gap A (time difference):
A = 1.2^(50 − 9.6), then take the square root to get A^0.5 ≈ 40
The square root is used to keep the numbers manageable and maintain calculation stability.
Gap B (return difference):
(1 + 11%)^B = 9,100, solving for B gives approximately 87 years.
Distance from Buffett:
Distance = 100 × (A^0.5 × B) ÷ 3,701
Where 3,701 is a reference baseline calculated as:
3,701 = (1.2^(50 − 8 ))^0.5 × log₍₉,₁₀₀₎ (1 + 12%)
This represents the comparison baseline for “12% annual return over 8 years.”
Special thanks to Mr. Wen-Hong Jiang for his guidance in designing the formula for Gap B.
Building a portfolio that steadily aims for a 15% annual return is the most important step to becoming wealthy,
because having confidence in this portfolio means:
You’re willing to bet your entire capital — the principal will grow substantially over time.
You’re willing to hold it long-term without constantly moving in and out, allowing the power of compounding to work.
Large principal × long-term compounding = becoming wealthy.作者: mikeon88 時間: 2018-11-20 09:49
The IRR formula is the correct method for calculating return on investment as it considers both future dividends and selling prices. Other methods are incorrect. The popular cash yield method used in recent years is flawed as it only accounts for the dividend in the first year. For example, China Steel Chemical had a yield of 7% in 2003, but this is far from the actual rate of return as I earned six times my initial investment over eight years, resulting in an IRR of 31%.(Note)
Note: Investing in a stock involves a combination of simple and compound interest, rather than just one or the other. Dividends represent simple interest, while unallocated dividends represent compound interest. Therefore, the correct method for calculating the rate of return is to use IRR, which accounts for both simple and compound interest.
Does a stock's price reflect its IRR or cash dividend yield?
For example, Is the price of NT$200 per share of China Steel Chemical expensive?
On's table clearly shows that it is expensive, but some still consider it cheap because of the 4% cash yield (= 8.3 dividend / 200).
In 2011, I sold China Steel Chemical at the expensive price of NT$173 and announced it on a discussion forum. I noticed that netizens in other investment clubs thanked me, saying "Thank you, Uncle On, for selling China Steel Chemical so that we can buy it for NT$180." However, this netizen's purchase of China Steel Chemical for NT$180 was the result of a misunderstanding of cash yield.
Cash dividend yield can be distorted by high payout ratios or stock buybacks, making it unreliable for accurately assessing whether a stock is overpriced or undervalued.
The high payout ratio will drive up the cash dividend yield, which may lead to a higher estimation of the stock's value, whether cheap or expensive.
One of my famous success stories is China Steel Chemical. I discovered it in early 2003 and included it in my "Magic Book". I also mentioned it in my class on numerous occasions, and all my students who invested in it made a fortune.作者: mikeon88 時間: 2018-11-20 09:50
Most people believe that short-term trading is about profiting from price differences, while long-term investing focuses on earning dividends. This is incorrect ! In both short-term and long-term investing, the primary goal is to profit from price appreciation. When dividends are distributed, the stock price drops by the same amount, meaning you haven’t truly benefited from the dividend until the stock price recovers to its pre-dividend level. Only then can it be considered a real profit. I achieved a sixfold return from my investment in China Steel Chemical, with onefold coming from dividends. However, all the profits ultimately stemmed from the sixfold increase in the stock price.
A student spent 10 minutes on the phone pestering me about this issue.
I asked him, "Have you ever heard of earning dividends but losing on capital gains?"
This is a guy who complains every time stock prices drop, yet now suddenly seems to have dismissed the importance of capital gains.
He even boasted about being a student at a top university, which made me realize how stupid people can become when it comes to investing.
He insisted he was a long-term investor, saying, "I only care about dividends and don't care about capital gains."
So, I replied, "Here’s an idea: hand over the stocks you bought, and I’ll send you the dividends every year."
It was only then that he grudgingly hung up the phone.
There are so many lousy financial experts and magazines misleading people, claiming that simply investing in stocks with a 5% yield and accumulating enough to earn NT$2 million in annual dividends will lead to financial freedom.
A young man excitedly shared this idea with me, as if he had discovered a hidden treasure.
I replied, "Isn't this nonsense ? The real question is, where do you get the NT$40 million in principal needed for that ?"
This student then mentioned that his monthly salary is just over NT$30,000.
I responded, "Didn’t the books and magazines you read explain that? Why are you asking me instead ?"
Those so-called experts know nothing but pretend they do. They even claim that as long as the dividend is high, there's no need to sell, and you can buy no matter how expensive it gets ! Really ? For instance, if one bought China Steel Chemical at NT$200, and the price subsequently dropped to NT$100, with a dividend yield of NT$4, it would take 25 years to break even! A person probably only has three sets of 25 years. During the first 25 years, one learns from books that are often of little use. During the next 25 years, most people work in jobs with low added value. Time flies by quickly, and I only have my last 25 years left. It would be miserable if I were still here teaching everyone about "high ROE, low P/E ratios". Realizing this, I decided to do something more meaningful and announced that I would no longer teach. How sad it is for those who bought China Steel Chemical at NT$200 and have been waiting for 25 years to break even !
On September 5, 2024, China Steel Chemical's stock price returned to the adjusted level where I sold it back in 2011.
Those who chose not to sell when I did have been stuck holding the stock for a long 13 years and 4 months.
This clearly demonstrates that selling overpriced stocks is essential for achieving strong performance.
Buying overpriced stocks—are you setting yourself up to be taken advantage of?
Not selling when it's expensive? Are you a fool ?作者: mikeon88 時間: 2018-11-20 09:50
2015年理專猛推南非幣，說利率高。
結果呢？賠了匯差。
In 2015, financial advisers strongly recommended investing in the South African currency, Rand, due to its high interest rates. The outcome? Investors suffered significant exchange losses.
Housing investors are calculating rental returns and considering 3% to be a good rate. However, they seem to overlook the possibility of house prices falling. In 2013, I warned others that house prices were likely to decline, but nobody believed me. They all thought that house prices were invulnerable and would never decrease. However, if such a commodity existed, nobody would be poor in the world. Our ancestors purchased houses during the Han Dynasty and passed them down to the next generation. Does that mean everyone is wealthy now?
Many people evaluate housing returns by comparing homes purchased 20 years ago with new ones today.
That’s a mistake — a 20-year-old house has already aged and depreciated, so it’s no longer as valuable.
I recently came across a strange argument that bank advisors are encouraging customers to take out a mortgage on their homes at a 3% interest rate and invest in 6% high-yield bonds, claiming it as an arbitrage opportunity. But is it really an arbitrage opportunity? The premise of this strategy is based on the assumption that the price of 6% bonds will not decline, but high-yield bonds are known to fluctuate with the stock market and can be quite volatile. So, how can one actually arbitrage in this scenario?
以上種種問題俱是殖利率陷阱！
賺股息，賠了價差。
All of these issues can be yield traps: earning dividends while suffering capital losses.
為何高股息ETF的績效很差
因為不是只看股息還要看價差
貴淑價的計算不是殖利率
而是IRR或本益比
Why has the performance of high-dividend ETFs been so poor ?
Because it’s not just about dividends you also need to factor in capital gains. Whether a stock is cheap or expensive isn’t determined by its yield rate, but by its IRR or PE ratio.
Beyond dividend yield, four key conditions must also be met:
1. High ROE
2. The ability to consistently generate cash for dividends (i.e., high dividend payout ratio and low profit reinvestment rate)
3. A stable and enduring business
4. An expected return above 15%
只看殖利率等於瞎子摸象，
只摸到尾巴就以為大象是一條蛇，
當然畫虎不成反類犬
Focusing only on dividend yield is like a blind person feeling an elephant—touching just the tail and thinking the elephant is a snake. Naturally, you end up trying to draw a tiger but producing something more like a dog. 作者: mikeon88 時間: 2018-11-20 09:59
Cheap price only means that stock price is cheap, but during a market downturn, the prices can plummet even further. For instance, during the 2008 financial crisis, many stocks that were previously deemed cheap fell by an additional 40%. Relying solely on selecting stocks with high ROE and dividends and waiting for them to become cheap is not sufficient. It is still possible to experience a margin call with this approach.
Based on past records, it has been found that the annual GDP growth rate is highly correlated with the major stock indices. The chart below, which covers the period from 1990 to the present, is quite comprehensive. If this phenomenon has consistently held true in the past, there is no reason to doubt its accuracy this time. Whenever the stock market reaches a high point, some people inevitably question the validity of the GDP theory.
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