Published
by: Lyon Capital Management, LLC - A Registered Investment Advisor
24B Grove Street * Pittsford, NY 14534 * Tel: 585-248-9821 *
www.lyoncapital.com
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Buffett Bits |
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Corporate Boards |
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Stock Buy Backs |
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Electronic Research |
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What's Up With Warren?
By Doug Lyon, CFA
In his most recent annual letter to
shareholders, Warren Buffett states "Prices are higher for both businesses and
stocks." He says that in the current market environment he uses a Ted Williams
discipline when committing new funds. Paraphrasing from Mr. Williams' book "The
Science of Hitting," Mr. Buffett says that swinging at only the best pitches will
increase the chances of batting .400, while swinging at the worst pitches will allow him
to hit only .230.
The analogy drawn to investing, something
to remember in our roller coaster market is: be patient and wait to buy a stock when it is
undervalued. This is the investment approach taken at Lyon Capital Management. Don’t
buy just to avoid being out of the market when a stock is "high and outside."
Who is Mr. Buffett and why do we care what
he is saying? Warren Buffett, originally from Nebraska, got his start with a New York City
money management firm. In 1956 he returned to Nebraska and started his own limited
partnership investment fund. He ran the fund until 1969 when he dissolved it because he
felt there just weren’t enough undervalued companies on the market.
In 1969 Buffett purchased the, now famous,
Berkshire Hathaway which, at the time, was a small textile company in Bedford, MA. To this
base he has added insurance companies, banks, department stores, and food and media
companies.
In the late 80s he prevented corporate
raiders from taking over Salomon Brothers, and then in the early 90s he took over as
interim chief of the firm during the shake-up resulting from illegal bond-market
activities. He brought the firm back onto solid ground. In 1989 he became the 2nd largest
stock holder in Coca-Cola. Today he is the largest.
Mr. Buffett has an outstanding track
record as a "value" investor - one who finds companies undervalued by the market
and then patiently waits for the value in them to be realized. His fortune rivals that of
Bill Gates - a close personal friend.
You may ask, "How does one go about
purchasing shares in Mr. Buffett's company?" Currently regular shares (class A) sell
for about $66,800 each. But recently class B shares became available. They sell for $2,215
a share. Class B shares have a voting power equal to 1/200th that of A shares. Each A
share is convertible into 30 class B shares.
Mr. Buffett’s annual letter to his
shareholders appears in the Berkshire Hathaway annual report. Reading these letters is
like getting a graduate degree in investing.
(See our article on page 3 for how to
access current and past Berkshire Hathaway shareholder letters by Mr. Buffett.)
If you’re interested in learning more
about the value investment style used by Mr. Buffett and our application of it,
please call us at 585-248-9821. $$
Board-ering on a Good Investment
by Doug Lyon, CFA
When researching a company as a potential
investment, evaluating the board of directors is an important step. At Lyon Capital
Management we seek to know whether or not the board of a company tends to act in the
shareholder’s best interest or in their own!
According to CalPERS ( the California
Public Employee's Retirement System), the largest public pension plan in the United
States, and a group known for shareholder activism, the ideal board is likely to be one
which has the following characteristics:
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The CEO is the only company employee who is a director.
Non-independent directors, beyond the CEO, comprise no more than 20 percent of the board.
The chair of the board is an independent director. |
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Independent directors meet at least once a year without the CEO or
other non-independent directors. |
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At least 50 percent of the director's compensation is in stock. |
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Important committees, such as audit, director nomination and
evaluation, CEO evaluation and compensation, and ethics, consist entirely of independent
directors. The chairs of these committees have access to their own advisers. |
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The board establishes performance criteria for itself, including
standards for individual director attendance, preparedness, participation, and candor. |
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The independent directors establish performance criteria and
compensation incentives for the CEO. The board has a CEO succession plan. |
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All directors have access to senior management. The board also has
a formal program for dialogue with shareholders. |
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No director sits on more than two other boards. A company’s
retiring CEO may not continue to serve on the board. |
(Source: The Federal Reserve
Bank of Boston Regional Review)
Criteria that Lyon Capital
Management adds to this list include:
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A board size between 5 and 10 dilute decisiveness. |
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For top officers of the company, the value of their stock holdings
should be at least equal to their salary. |
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Management should be focused on growth and profitability for
shareholders. |
It takes some digging to find
out whether or not a company meets these criteria. Much of the information is found in a
company's proxy statement.
Knowing the characteristics
of a corporate board is just one important piece of the investment research puzzle. At
Lyon Capital Management we consider these factors along with many others. $$
Stock Buy-Backs ... Why
We Like Them
By Doug Lyon, CFA
IBM bought back 174 million
shares or 15% of its outstanding shares over the past 5 years while cutting the cash
dividend over the same period.
Coca Cola bought back 157
million shares or 6% of its shares outstanding over the past 5 years. The company has
plans to continue to use excess cash flow to buy back stock.
Phelps Dodge, the large
copper producer, has used excess cash to buy back 17% of its shares outstanding over the
past 3 years.
Stock buy backs are, on
balance, viewed as favorable by Lyon Capital Management for several reasons.
First, using excess cash for
buy backs as opposed to cash dividends is a way to generate shareholder returns that are
taxable only when the investor sells and then taxable at a rate that is potentially 1/2
that of dividends. (Currently the maximum tax rate on capital gains for investment held
for 18 months or longer is 20% compared to the maximum marginal tax rate of 39.5% on
dividend income.)
Secondly, using excess cash
to buy back stock is preferable to making unprofitable investments that distract a company
from core competencies. Eastman Kodak's ill-advised investment in Sterling Drug would
almost certainly have been better spent buying back company stock.
Thirdly, buy backs are a way
for company managers to return unneeded capital to the owners of the company (the
shareholders). In this age of increasing productivity less capital is needed to generate a
dollar of sales or earnings.
Finally, buy backs are a way
to reduce a company's cost of capital. With less equity in a company's capital base, it
can provide shareholders a higher return on their investment with the same level of
earnings. Looked at another way, the same level of earnings can produce more earnings per
share; thus each remaining share of the company is worth more.
If buy backs are not part of
your investment strategy, consider them or hiring a professional who does. $$
Investment Research in
the New Millennium
By Kate Lyon
When you use an investment
manager, be sure he or she is using the latest technologies to do research on companies
selected for your portfolio. Find out how comfortable your investment manager and staff
are with technology. In the late 90s and on into the next millennium a high comfort level
with technology and its use will be key to staying abreast of the latest company
information and trends in the marketplace.
At Lyon Capital Management we
use many technology tools to gather company information. We also rely on grass roots
investment research - digging it up ourselves. Much of this is done now on the internet
where current information is quite readily available. Below are a few web sites that as an
investor you might find interesting.
www.berkshirehathaway.com
Warren Buffett’s company
web site. Current and past shareholder reports written by Mr. Buffett are found here. If
you dig deep you will find Buffett witticisms like how to become a millionaire. Answer:
"start as a billionaire and buy an airline." This site is definitely for the
serious investor.
www.[company].com
Substitute the company name
for [company] to get to most corporate web sites. Once you get there, an endless supply of
information about the company is available. Just remember, it's like the annual report:
written with the best possible marketing spin.
www.nasdaq.com
You can access this site to
view a chart of the current day's activity both with the DOW and the NASDAQ market. You
can get quotes for your NASDAQ stocks in both a "flash" and "info"
format. Unfortunately the New York Stock Exchange doesn't provide a comparable service. So
the next best thing might be to ...
View your portfolio
electronically and securely, at any time, when you are a client of Lyon Capital
Management. For information or answers to other investing questions, email us at
lyon@frontiernet.net
Lyon
Capital Management is an investment management firm based in Pittsford, New York.
We
invest in individual securities (stocks and bonds) for our clients who are primarily
individuals and businesses.
We
use a value-contrarian strategy.
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