Easy ways to Make Money: Secretary Calls

Ask anyone who works at a large corporation and they know that if you want to learn the dirt about what is going on in the office you just need to talk to the secretary. Secretaries know everything about what is happening in the company, they may not have the acumen to diagnose the severity of problems but they certainly have the acumen to understand how upset their bosses are that week.

Secretaries are a great resource in understanding the health of the company. This may sound a bit foolish but I will often give an executive secretary a quick call before making any sizable investment in a company.

I recently made one call to a company, with some simple honesty about being an investor and wanting someone's personal opinion who works at a company I learned the water cooler gossip. Nothing unethical here just asking a few questions about someone's personal opinion, and nothing that would get anyone in trouble with their N.D.A.

I know this sounds silly but try it some time, again in the big picture of things what is a five minute phone call with a receptionist when you consider this is your hard earned money.

Easy ways to Make Money: Investor Calls

Many listed companies will setup an investor call every quarter to allow shareholders and others to ask questions about the company's latest financials and overall health. Investor calls are often skipped by the common investor as they are thought to be too technical or too involved. But, to pull a Yogi Berra, "you can hear a lot by listening". So what if you don't know what a tipping point ratio is, so what if you don't understand what the market bend is, it does not matter in the least. Listen to how the people in these calls talk as much as you listen to what they say.

The execs they march out for these calls are salesmen here to persuade investors to buy their company's stock, if you don't feel sold after a call it is probably by no shortcoming of your own- pay attention to that gut feeling. There have been some phenomenal details revealed (purposely and accidentally) in more than one of these calls. In an Enron call just prior to the collapse one exec went as far as to call an investor an "a**hole" after asking being a tough question- think he was trying to cover up an obvious problem in the company?
Another call I remember sitting in on involved an exec being asked if he thought his company would survive the year, his response was something to the effect of "Well John that is a tough question...". I ran for the door.

There is also another opportunity for the common investor with these calls- listening to other analysts before they recommend a buy or sell. Listen to the questions they ask, are they focusing in on one area of business and asking a lot of questions- perhaps this is something you should look at more deeply. Are the analysts upbeat? Maybe they are all going to post positive buy rating on the company.

At the end of the day do not skip the call because you are afraid of not understanding the nature of the call. When you consider the amount of time you spend deciding if you want to buy a company an extra hour or two listening to an exec and some analysts talk is pretty insignificant, pick up that phone and listen in you never know you might just hear something!

Buy a Company with a Future (Based on its past) (Session 6)

The ratios we have looked at so far tend to be a snapshot of the current condition of the company and don’t really explore a company’s history. Graham didn’t believe in investing in the next hot company, he was about buying companies with history and tangible revenues; companies where the paint on the sign out front is dry- basically boring companies. Graham also wanted a company that had proved that it understood its business and was on a path to continued success.

What it is?

Some earnings in each of the past 10 years.

Earnings growth of 33% over 10 years (Average)
Revenue of more than $100 Million (1950 dollars)

Some earnings in each of the past 10 years.

A company has to make money, if there has been a period in which they have failed to earn they may be in the mist of a change in the company’s direction, are in a market that is too competitive to support future growth, or they may simply be poorly managed. All of these situations indicate something unhealthy that will affect the long term prosperity of the company. Earnings are the heart of any business; you don’t want your heart to stop even for a moment.

Earnings growth of 33% over 10 years (Average)

Growing earnings is an indication that the company understands its market and is good at capturing their consumer’s dollars. It also indicates that the markets this company is attacking are growing, or at least their percentage of that market is growing. We don’t want to get fooled by a flash in the pan industry that has just had one or two great years because they are servicing a fad. Obviously the company also has to have 10 years in business too, Graham sees young companies as just too risky; they haven’t had a chance to prove what kind of company they are.

Revenue of more than $100M (1950 dollars)

Without Graham here to provide us with an updated number we could probably take the equation and add inflation of 3% to the $100M.

2009 Value (FV) = Present Value (PV) * (1 + average inflation rate) years
FV = $100M * (1 + 3%) 58
FV = $555.34M

What Graham was trying to do here though was find companies with a stable base. Any list of things can cause a company to have a bad quarter or bad half; it can be as simple a cause as the condition of the overall economy. Graham and Buffet both believed that trying to guess what the economy is going to do is a fruitless endeavor, better to be safe than to get burned in a downturn. Big companies tend to have the resources to winter these conditions whereas the smaller companies tend to fall by the wayside when things get really tough.

Summary

It is really about not getting fooled.The past is our best indicator of the future unless you have a crystal ball. So if a company has proven it can grow its earnings, has never been in financial trouble, and is big enough that a few waves are not going to turn the boat over then is it not at least somewhat likely that it will continue to perform in this way in the future?

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Buy a Company with a Future (Book Value) (Session 3)

Book Value is a pretty easy one as compared to Price to Earnings. So let’s get into it we will need it for other calculations.

What is it?

(Total Assets – Intangible Assets (Goodwill) – Total Liabilities)

What does it tell us?

As with price to earnings ratio imagine if you will that you are buying a company but instead of running the company you are closing it out and selling off all the equipment. To do that you have to pay off the debts of course no one is going to let you walk out the door without paying the bills.
So if you have $1,300M in current assets, Current and long term Liabilities of $600M and preferred shares of $450M. Then you have a book value of:

(Total Assets – Intangible Assets (Goodwill) – Total Liabilities)
($1300M - $600M - $450M) = 250M.

So basically if you close up shop after you buy the company pay off the bills and you pocket 250M- not too shabby.

What does Graham use?

A book value of greater than 0. The company has to have enough to clean off the liabilities that are coming soon and will come in the future- basically it has to be able to afford its own future.