Does Warren Buffett’s Purchase Show the Credit Crisis is Over?

Flight to Quality –Flight to Warren Buffet His Berkshire Hathaway How many of you purchased shares of BRKA (Berkshire Hathaway) when it was all over the news last November that shares were approx 0 dollars each. If you had purchased you would have seen your shares fall to a point in August of this year to approx 0 dollars a share, rather unsettling. However last week like a shooting star BRKA jumped to 7 dollars a share. Anyone can see this by just looking at a chart, but the point I want to make all of this volatility really does not matter in the long run. You are associating yourself with one of the most astute investors of all times.

This was accentuated by this week’s current activity of Mr. Buffett. He is buying shares of Goldman Sachs to the tune of billion dollars. He is not buying just the basic shares but the preferred stock with a 10 percent dividend. Berkshire also gets warrants to buy billion of common stock at 5 a share at any time in the next five years. The common stock closed yesterday at 5.05, providing Buffett with an instant paper profit of 7 million (Not a bad days pay for anyone including Mr. Buffett.). The last time Buffett invested on Wall Street was in 1987, when New York- based Salomon Inc. pleaded with him for a 0 million cash infusion to fend off an unwanted takeover. Buffet ever the value investor has picked up Goldman Sachs (GS) after its stock has dropped approx 42%.

It seems that Goldman was somewhat desperate and the cost to them, could be considered high.

What is the stamp of approval from Warren Buffett worth???

Most investors have been so shaken from recent events it is hard to find them under any rock. Now Goldman is planning to offer stock to the public (approx .5 billion dollars) as well as one of Japans largest banks Sumitomo Mitsui is considering investing.

So does this mean the credit crisis is over? Your guess is good as mine.

Still there are concerns present regarding Goldman. The leverage they manipulate is still large. For every dollar of shareholder equity, Goldman owned .70 of assets for every dollar of shareholder equity. That is 23.7 times but the leverage that regulators allow usually in the ball park of 20 times. Even with this said, in this environment is this too much leverage?

Time will tell and you will need to be patient with Mr. Buffett. In 1999 shares peaked at approximately ,000 and then fell to ,000 per share (unsettling). More so it took until 2004 to arrive back at ,000. However long term investors have been amply rewarded exhibiting patience.

Andrew Abraham

My Investors Place

Andrew has been in the financial arena since 1990. He is a Registered Investment Advisor ad affiliate of Abraham Bedick Capital. Since 1993 Andrew has been a proponent of quantitative mechanical trading programs. Andrew’s major concern is not only total return on investment but rather the amount of risk that one would have to tolerate in order to achieve returns He focuses on developing quant models that encompass strict risk adherence and correlation. He has been a speaker at conferences as well as an author of numerous articles. Andrew has spent years researching ideas that have the potential to outperform indices as well as maintain fewer draw downs.

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Upsizing Financial Intelligence in a Financial Crisis

Many people have called the current global economic meltdown a financial tsunami. Do you have the necessary financial intelligence to ride out these challenging economic waves to protect your company’s and your own financial interests?

A world in crisis

Around the world, demand is falling, banks are failing, and companies are faltering. The result is a rising trend in corporate frauds, financial misstatements and company failures. As corporate managers and investors, how can you ensure that you or your company does not become the next casualty in this swirling financial tide?

3 ways you are exposed

Firstly, with bank financing hard to come by, your customer could be using you as their long term financier for free, by stretching their payment. This would add to your company’s own cash flow problems. Secondly, your supplier may have asked for advanced payment and gone bust before they deliver the goods to you. Or alternatively, they may be in such financial troubles that their failure would seriously disrupt your supply chain. Thirdly, your personal investments are at risk from the companies in your portfolio going bust due to cash flow problems.

Can you tell who is naked?

Accordingly to legendary investor Warren Buffett, he said that it is when the tide goes out that you know who is naked. It could be your customer, supplier or the company in your investment portfolio that are already or showing signs of vulnerability of financial collapse. When you read about how they went bust in the local newspapers, it would be too late for you to take precautions. To protect yourself, you must be able to see who are the vulnerable players (the naked ones) and take pre-emptive action early, before the tide goes out. This could mean selling on cash terms, switching suppliers or rebalancing your personal portfolio ahead of the curve.

Foretelling corporate fortunes

What form of business intelligence is needed for you to remain ahead of the curve? It is none other than the ability to read financial statements. Financial statements are like autobiographies of companies. They tell you volumes about a company, such as its strength, risk and potential. When you are able to master reading of financial statements, you will be able to foretell the fortunes of companies. This would enhance your ability to make financially intelligent decisions when it comes to managing businesses and money.

3 quick indicators

The 3 key financial statements that each company must prepare are:

a. Balance Sheet

This reveals the strength and risk of the company. The three elements of the balance sheet are Assets, Liabilities and Equity. The Law of Balance says that all Assets must be funded either by shareholders’ money (Equity) or borrowed money (Liabilities). The higher the amount of funding that comes from borrowings, the higher the fixed costs and cash outflows for the business. With declining profits and cash inflows, this increases the riskiness of businesses that are highly leveraged in today’s environment. This is also the key reason that brought down many once venerable financial institutions.

What to watch out for:
Companies with high Liabilities relative to their Equity are vulnerable. In particular, if their current assets (such as cash, trade debtors and inventories) are less than their current liabilities (bank borrowings and trade creditors), be very cautious. This is a sign that the company may not be able to convert its assets quickly enough into cash to pay for its obligations when they become due.

b. Income Statement

This measures the performance of the company. Essentially, Sales less Cost of Sales less Operating Expenses equals Profit. If you take Profit and divide by Sales, you obtain the Profit Margin of the business. If the margin is 10%, what it means is that for every dollar of sales, the company is able to extract 10 cents as profit (think of a juice extractor). The other 90% has gone to pay for costs and expenses.

What to watch out for:
Companies that have high margins before the downturn would be in a better position to weather the current economic climate. If you compare a business with a 2 % margin with a 20% margin business, the margin for error is very slim for a low margin business. A slash in the selling price of its products to compete would quickly erode whatever profit it has previously to a loss. Marginal players would be the first to leave the game as they run out of chips fast, while strong players will remain in the game during this shake out and consolidation phase and emerge stronger.

c. Cash Flow Statement

This measures the ability of the company to generate sufficient cash from its business operations to sustain its normal business and for investing in growth. It also shows you the extent of reliance on external sources of funding for its survival.

What to watch out for:
Check if their Cash Flows from Operating Activities are positive or negative. If it is negative, check if their trade debtors and inventories are swelling. This is a clear sign that the company is suffering from a cash crunch or liquidity crisis, caused by the inability to convert its current assets into liquid resources quickly enough.


The more you are able to make sense of financial jargon, you more you can appreciate and fully utilize financial statements as a readily available tool to size up companies instantly and make snap decisions about them. In this perfect financial storm, financial intelligence is the ark to shelter our assets and cash flow from unnecessary and preventable loss.

James Leong, Chartered Accountant and Certified Financial Planner, is the managing director and principal consultant of VisionsOne Consulting Pte Ltd. He can be reached at or