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Strategies & Market Trends : Buffettology -- Ignore unavailable to you. Want to Upgrade?

To: cfimx who wrote (1582)	6/9/1999 12:12:00 PM
From: Michael Burry	Read Replies (1) \| Respond to 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

To: cfimx who wrote (1582)	6/9/1999 1:05:00 PM
From: cfimx	Read Replies (2) \| Respond to of 4691

>>But before making what calculations? << your "return on" calculations, such as roa, roe. >>If you are using Coke's tangible assets to make some calculations, then you are very much underestimating the company's assets.<< Don't you want to get at what kind of return can be generated from a given level of operating assets? What if it never made an acquisition. You would then be forced into using operating assets. The problem with Goodwill is that it usually doesn't, or soon won't reflect the value of what you acquired. Why? Because when Buffet buys a business, he expects the economic goodwill to INCREASE substantially. When he buys a business, he obviously thinks the goodwill is, or will be worth substantially more than what will be recorded on the balance sheet at purchase time. So you can see why he thinks REDUCING it over time is so bogus. Does it matter if See's has some goodwill on it's books from 1970 or whenever they bought it? Not one bit because true economic goodwill has increased maybe 100 times since the initial goodwill went on the books. Do you want to write up the goodwill to get to TRUE 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. << All goodwill is the premium over book an acquiring company pays upon purchase. It doesn't matter whether its "brands" or some type of permanent competitve advantage that has NOTHING to do with brands, such as economies of scale or low cost manufacturing position that will likely continue into the future, like a Wall-Mart for example.