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Strategies & Market Trends : Buffettology

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To: cfimx who wrote (1582)	6/9/1999 12:12:00 PM
From: Michael Burry	Read Replies (1) of 4691

As he states in the Berkshire Hathaway owners manual, Buffet, ignores the effects of amortization on reported earnings. When getting at the true profitability of a company, the analyst is advised to isolate the tangible operating assets of the business before making the calculations. But before making what calculations? The effect of amortization on earnings (non-cash expense) and the true amount of equity and invested capital to build or acquire the brand are two different things, IMO. If you are using Coke's tangible assets to make some calculations, then you are very much underestimating the company's assets. When a company is acquired for well above book (which is the source of both Mattel's and TLC's goodwill), it is important to differentiate what that goodwill is composed of. If one is primarily buying brands, and the brands are thought to last forever, then the amortization doesn't make sense because the asset isn't disappearing. If one presumes that the amortization shouldn't be there on the income statement, then it is necessary that the asset still be there on the balance sheet. This is especially true if the brand is considered timeless. Mike

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