In Robert Hagstronm's book The Warren Buffett Way, Hagstrom says that when Buffett calculates Return on Equity, he values marketable securities at cost so as to remove the effects of the capricious stock market on the net worth of the company and therefore the return on equity. How do you do this? Does this refer to the marketable securities which a business owns and therefore is in the asset column of the balance sheet? If so, how do you find the cost at which the business bought the securities?
"Hagstrom says that when Buffett calculates Return on Equity, he values marketable securities at cost so as to remove the effects of the capricious stock market on the net worth of the company and therefore the return on equity."I think that this is more of a concern with financials or large conglomerates than with most run of the mill industrials, retailers, etc.For any company where it is a concern, investments carried at market ("marketable securities") should be presented at both market as well as cost basis. Look in the notes to the financial statements that immediately follow the financial statements in the 10-K. One section should provide detail on their investment portfolio. The information on their cost basis should be in that section.Is there a specific company that you're studying? It might be more strightforward to just name that company and someone can hopefully find that info and point you to where it lives. Many 10-Ks follow very similar formats, but nuances in how they're organized can and do exist.Peter(A more populated board that deal with these things is "Reading Financial Statements":http://boards.fool.com/reading-financial-statements-100104.a... It's still somewhat sparsely populated, but has more readership.)
Thanks for the info Peter. Right now I'm looking at Harry Winston's 10-k. I'll try to find those sections you mentioned. If you have any other boards you find helpful and would like to share, i'd really appreciate it.-Ryan
Are you looking at Harry Winston Diamond (HWD)? If so, HWD is a Canadian company registered to list its stock on the American exchanges and as such doesn't file a 10-K with the SEC, but instead files a 40-F. Here's a link to their most recent 40-F from the www.sec.gov site:http://www.sec.gov/Archives/edgar/data/841071/00012044591100...American companies file 10-K's.Foreign companies listed on US Exchanges file 20-F's.Canadian companies listed on US Exchanges file 40-F's.That said, if you are looking at HWD, I don't see much in the way of marketable securities on the balance sheet (page 30). They do list their capital assets such as their mines, equipment, and property in footnote 5 on page 40, showing their historical cost and accumulated amortization. That said, these types of assets don't have the kind of wild swings that marketable securities do, and don't get constantly re-adjusted to whatever their current market value would be like marketable securities do anyway. Other than land, which is not depreciated, the assets gradually get amortized/depreciated over time. They might get marked down if there's a permanent impairment, but that's about it.Mike
Mike,"That said [land and mines], these types of assets don't have the kind of wild swings that marketable securities do, and don't get constantly re-adjusted to whatever their current market value would be like marketable securities do anyway. Other than land, which is not depreciated, the assets gradually get amortized/depreciated over time. They might get marked down if there's a permanent impairment, but that's about it."What about their true value, however? Once a leasehold or property is known to be prospective, it's value changes a great deal Thinking oil here... A leasehold in the Gulf of Mexico can be had for chumpp-change in these guys' terms. But, a leasehold with proved reserves is worth considerably more, and a preforming well even more. Is land that has been proved prospective still carried at cost. That would make comps between companies more difficult, not less difficult. Mining seems to be a "different" area where some kind of mark to market calculation of ROE would actually be desireable, albeit difficult.Peter
Thanks for correcting me Mike, you're right. I am reading the company's annual report. The question about marketable securities was just a general question if I ever run into the problem, not one directed at Harry Winston's balance sheet. Since you're looking at their 40-F, would you mind giving me an idea of anything that jumps out at you about their business? Anything you think that i should take a look at? I'm just learning the ins and outs of reading these reports.Thanks again for your help-Ryan
Ryan,I don't know anything about HWD in particular, I was just skimming the 40-F for ya. But here's a couple things in general that you might want to look out for when looking at a mining/drilling company (this goes for oil and gas e&p's, gold miners, etc.).One is how many years of production they have based on their estimated resource base size and how good they are at securing new resources. If they only have 10 years' worth of production based on their current production rates, how certain are you of applying any terminal growth rate beyond zero after 10 years? It all depends on how knowledgeable you are on the company and industry as well as your level of optimism/pessimism. The second thing to look at is what their cost of production is. For example, not all gold mines are created equal. Some might have a cost of production of $350 an ounce and some might have a cost of $700 an ounce. The fixed costs for mining are fairly high. If the price of gold drops from $1,500 an ounce to $1,000, the $350 mine still has a nice fat margin, not so much the $700 mine.Mike
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