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The One Dollar Premise

“When stock can be bought below a business’s value, it is probably the best use of cash.”

Every year, a new strategy appears, claiming to be the secret to stock market success. Some are profitable for a time, even spectacularly so. However, trends eventually lose their momentum, reality intervenes, and yesterday’s win leads to failure tomorrow. Cycles of booms, bubbles, and busts repeat in all markets, from Dutch tulips and Florida real estate to dot.com companies and collateralized mortgage obligations (CMOs).

The most successful long-term investors avoid the temptations of fads, esoteric formulae, and schemes, preferring the simple for the sizzle. They rely on common sense to make investment decisions rather than following the crowd. Warren Buffett started investing in 1956 with $100, became a millionaire in 1962, and a billionaire in 1985. In 2020, he was acknowledged as the world’s sixth-wealthiest person with a net worth of $81 billion (after giving $37 billion to charity the previous fourteen years. For his success, he earned the sobriquet, “Oracle of Omaha.

Buffett’s investment philosophy is surprisingly simple and based on a few basic tenets:

  1. The best returns are achieved by companies producing the same product or service for several years.
  2. A company must produce a product or service that is (1) needed or desired, (2) has no close substitute, and (2) is not regulated. Buffett believes these characteristics enable a company to maintain or increase prices without losing market share or unit volume.
  3. Companies without the ability to reinvest excess cash at above-average rates should return that money in dividends or share buy-backs to the shareholders.
  4. Every dollar of retained earnings should create at least one dollar of market value (The One Dollar Premise).
  5. Buy the stocks of companies that earn above-average returns at prices far below their intrinsic value.

Calculation of the One Dollar Premise

 Anyone with access to historical results and the time to spend in the exercise can make a quick calculation of the return on retained earnings:

MVi = (MCe – MCb)/(REe – REb)


MVi = market value increase (decrease) per $1 retained earnings
MCe = market cap at the end of the period
MCb = market cap at the beginning of the period
REe   = retained earnings at the end of the period
REb   = retained earnings at the beginning of the period

  1. Subtract the retained earnings balance from 3, 5, or 10 years past. For example, Alphabet (Google) had retained earnings in 2014 of $75.06 billion and $152.12 billion in 2019. In the 5-year, the company kept $77.06 billion of profits in the company.
  2. Compare the market value today with the market corresponding to the beginning year of the retained earnings above. Alphabet’s market cap was $357.55 billion at the beginning of 2015, with $920.32 billion in 2019. Market value increased $562.76 billion during the five years.
  3. Compare the increase in market value with the increase in retained earnings. In this case, Google produced $7.30 in increased market value for each $1.00 in retained earnings.

While knowing that Google does make excellent use of its retained earnings, a comparison with other companies – in and outside its industry – is a more reliable indicator of management’s prowess. A similar calculation for Coca Cola and Deere & Co provides additional insight:

A comparison of different periods highlights the difference in management’s ability to create value in various industries:

While the above figures suggest that all three companies are adept at reinvesting their retained earnings, Coca-Cola would seem to be the best investment. However, when looking at the compound average increase in stock value of the last five years, COKE provided its owners with the least market appreciation with a CAGR of 9.25%. Looking at stock appreciation alone, Deere would appear to be the best buy based on their average of 17.43% over the five-years. In comparison, Google was second at 11.9% during the same period.

The Importance of Intrinsic Value of a Company

The objective of fundamental analysis is to determine the intrinsic value of a company. A ratio of the intrinsic value with the market price is an indicator to buy or sell. Buffett recommends buying a company only when its intrinsic value is higher than its market price. While Buffett’s One Dollar Premise is one indicator of value, relying on a single indicator is not recommended.

The table above compares three ratios for Coca-Cola, Deere & Co, and Alphabet (Google). Deere & Co produced the highest 10-year return on equity (ROE) but has the lowest price/earnings multiple (PE), a sign that investors believe the company’s future earning potential is less than Coca-Cola or Google. Coca Cola produced a higher 10-year ROE than Google but has a lower PE. Since each company’s use of leverage is different, investors need to understand how debt affects future earnings.

Fundamental investors rely on hundreds of financial statement calculations to identify candidates for purchase, akin to looking for the “needle in the haystack” since there are more than 6,000 publicly traded companies. The process is arduous because market prices continuously change, and each price change can affect the result.

Final Thoughts

Professional investors rely on massive databases and sophisticated computers to perform the heavy lifting of data collection and analysis. Many supplement their experience with complex logarithms to make comparisons and suggestions. Fortunately, non-professionals today have access to many of the same tools used in the big investment houses.

An investment adviser like wealthX, using Artificial Intelligence (AI), continuously updates and recalculates hundreds of financial ratios and relationships – including Buffett’s One Dollar Premise – to make investment recommendations to their clients. A low monthly membership fee allows investors to benefit from the same strategies employed by the Oracle of Omaha.

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Private Equity Risk: What You Don’t Know Can Hurt You

“Ignorance is bliss,” writes the English poet Thomas Gray. While such sentiments may be true in love matters, lack of knowledge in financial matters is an invitation to disaster. The need for information is especially acute in the private equity market, where millions of dollars are at risk in startup and early-stage businesses led by unproven management teams.

The Importance of Due Diligence

Due diligence is a process often under-valued in investment decisions. Yet, the exercise is typically the last opportunity for an investor to confirm or walk away from an investment. Private equity firm analysts and principals complete numerous types of due diligence before deciding to invest in a business, primarily focused on financial data, marketing plans, and company representations. Much of investment management due diligence is binary: Does a specific document or asset exist: Yes or No? Firms typically develop a proprietary checklist of requirements to ensure nothing of importance is overlooked. However, effective due diligence – the kind that reveals the information behind the curtain – is much more than ticking items on a list.

Investment Risk Management

A principal purpose of due diligence is to raise ‘red flags” about the intended investment’s management team responsible for delivering the expected returns. Are they experienced? Are they leaders or managers? Calm under pressure or quick to run and scapegoat? Does a company’s culture reflect the investor’s desired values or a case of “greenwashing” – claiming to follow desirable environmental, social, and governance practices in public while ignoring them in practice? Ignoring ESG issues can be expensive as credit-rating agencies like S&P Global regularly downgrade companies for ESG failures.

Reputational Risk Management

Companies with strong positive reputations attract better talent and have higher quality ratings of their products and services. The higher value enables them to charge a premium and deliver higher earnings, which translates into higher Pes and lower capital costs. A 2007 Harvard Business Review article detailed companies’ failure to adequately manage reputation risks, often confusing it with crisis management – closing the pen gate after the sheep have scattered.

More than a decade later, intangible assets continue to represent 70%-80% of the market value of most growth companies. This value can quickly melt and disappear at the appearance of a single negative Instance. A 2013 Deloitte Reputation Risk Study found that 88% of the global executives surveyed ranked reputation risk as a critical business challenge.

New Pressures on Private Equity Due Diligence

Multiple factors have unsettled the global private equity markets, increasing the investment risk for PE firms and their clients. According to Pitchbook, more than a quarter of VC and PE firms have lost partners or key recruits in 2021, requiring them to pay a premium to recruit and train top talent.[i] At the same time, firms are under pressure to invest enormous sums of capital in an increasingly competitive market due to

  • Increase in investible funds. An unprecedented flood of capital from endowment and pension funds seeking to escape falling bond yields and a volatile stock market has pushed PE investment demand to new heights. Deloitte, a global accounting firm, predicts that global PE assets will reach $5.8 trillion by 2025, significantly above the $4.5 trillion at the end of 2019.[ii] The investment rate declined considerably during the Covid-19 pandemic, creating a mountain of uninvested, available funds. Over $500 billion at the end of the 2nd quarter of 2021).[iii] In mid-2020, the U.S. Department of Labor issued guidelines allowing 401(k) retirement plans to invest in PE under certain conditions, adding more fuel to the fire of private equity.[iv]
  • Increase in Private Equity firms. The number of private equity firms raising investor funds and seeking investments has increased on average about 7% each year since 2013, with an estimated 9,000 globally in 2021.[v]  The number of completed investments has been stable since 2015, while investment totals have increased. Growing competition for deals increases valuations and prices, exaggerating investment risk.
  • Importance of ESG operations. PE firms and their investors are increasingly conscious of a prospective investment’s environmental, social, and governance goals. According to Elias Koronis, a partner at Hermes GPE, “The big mindset shift is that now ESG risk is as important and as central to a company as any other type of financial risk, such as leverage risk.” [vi] 

Over-worked and under-trained PE firm analysts are especially adept at reviewing quantitative financial and industry data to confirm or modify prospective investments’ pro forma statements, valuations, and cap tables. However, management due diligence – evaluating the quality and skill of management – is the most difficult due to its intangible nature. Search engines index a small portion of available online information (4% to 6%), consequently omitting masses of data that could provide valuable insight about a company or its executive reputations, work histories, values, and abilities.

Financial analysts rarely have the search and database query skills and experience required to complete enhanced due diligence (for risk & compliance), investment (or management) due diligence, or specific functions, including ESG. Their lack of experience can overlook indications of questionable actions – allegations of discrimination and abusive behavior, data leaks, fraudulent behaviour, and corruption – by the potential investment candidate or its founders.

Under competitive pressures to quickly determine whether an investment is warranted, private equity analysts may be tempted to minimize reputational risk in their due diligence, especially if a cursory search confirms their subconscious biases. An open-source internet search – enhanced by machine learning and natural language processing – provides independent, unbiased information about the attitude and aptitude of individuals and firms, ensuring they comply with regulatory guidelines and identify potential conduct or financial crime risks.

Final Thoughts

The financial stakes of private equity are exceptionally high in this hyper-competitive PE period. The combination of increased client expectations and higher investment amounts forces PE firms to identify, Collect, analyze, and confirm investment decisions within abbreviated due diligence periods.

Simultaneously, the global increase of social activism exposes companies to new risks – the possibility that a company’s sales and market value will fall due to public exposure of personal or corporate indiscretion or failings. While no strategy is failsafe, a thorough and complete diligence process, including reputation and management risks, may avoid the more onerous costs of negative publicity. The use of trained database and search specialists expands and supplements a PE firm’s traditional due diligence practices, often providing management team and reputational risk information commonly overlooked.

  [i] Mathur, P. (2021) VC, PE firms resort to salary hikes amid historic quitting spree. Pitchbook.com (September 23, 2021) Access through https://pitchbook.com/news/articles/venture-capital-private-equity-compensation-resignation

 [ii] Henry, P., Taylor, T., Fumai, F. and Patel, J. (2020) The growing private equity market. Deloitte Insights. (November 5, 2020) Access through https://www2.deloitte.com/us/en/insights/industry/financial-services/private-equity-industry-forecast.html

[iii] Geisi, S. (2021) Private-equity powerhouses are sitting on piles of uninvested cash. MarketWatch.com website. (August 25, 2021) Access through https://www.marketwatch.com/story/private-equity-powerhouses-are-sitting-on-piles-of-uninvested-cash-11629913878

[iv] Staff. (2020) U.S. DEPARTMENT OF LABOR ISSUES INFORMATION LETTER ON PRIVATE EQUITY INVESTMENTS. U.S. Department of Labor News Release No. 20-1160-NAT. (June 3, 2020) Access through https://www.dol.gov/newsroom/releases/ebsa/ebsa20200603-0

[v] Staff. (2019) Private markets come of age. McKinsey Global Private Markets Review 2019. McKinsey & Company. (2019) Access through https://www.mckinsey.com/~/media/mckinsey/industries/private%20equity%20and%20principal%20investors/our%20insights/private%20markets%20come%20of%20age/private-markets-come-of-age-mckinsey-global-private-markets-review-2019-vf.ashx

 [vi] Papadopoullos, C. (2021) Why private equity has started taking ESG seriously. Capital Monitor website. (July 20, 2021) Access through https://capitalmonitor.ai/asset-class/equity/why-private-equity-is-finally-taking-esg-seriously/

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Using Leverage for Business Success

Leverage, to most people, is the use of borrowed money in combination with one’s capital to maximize an investment’s volatility. While an example of “financial” leverage, the meaning of the term is more succinct and inclusive.  Leverage, in its many forms, is the ability to affect a decision, action, or outcome to one’s advantage.

Movie-goers will recall the famous line in the 1972 film,  The Godfather, where Don Corleone (played by Marlon Brando) tells his godson about dealing with a Hollywood mogul: “I’m gonna [sic] make him an offer he can’t refuse.” Discounting the implied threat, the remark illustrates the use of influence to one’s advantage. The Don understands the various “levers” available to him to get his desired outcome.

Examples of leverage are present in most aspects of human relations, from the so-so student accepted into a prestigious college due to the father’s position to the business getting the highest price for its products as the only supplier. Whether the influence is overt or packaged in allusion and innuendo, the impact is equally effective.

Entrepreneurs sometimes fail to appreciate their leverage potential with customers, competitors, and potential funding sources. Consequently, they accept less favorable terms than might be possible in a more balanced arrangement.  Successful entrepreneurs use leverage to accomplish their organization’s internal and external goals. They understand that a point of leverage is present in most business transactions in one guise or another. To be successful, they need to identify its nature and determine when and how to best deploy or counter it.

Sources of Potential Leverage

Leverage is applicable to individuals and organizations in varying degrees and relationships. Managing leverage requires understanding and responding to organizational vulnerabilities to external influence. The following sources of potential advantage are not exclusive since managers, companies, market conditions, and relationships constantly change.

For example, employees are subject to the employer’s power of the purse – the ability to hire, set compensation levels,  and terminate. At the same time, a company’s success depends on the skills, commitment, and institutional knowledge of its employees, qualities that are not easy to replace. In most cases, the leverage possible to either party is offset by the other’s party’s advantage.

Using Leverage to Your Advantage

Potential sources of leverage are present in every transaction, some more applicable in certain situations than others. The following are examples of areas that might be exploited by entrepreneurs:

  • Customer Knowledge. The ability to identify customer needs and create products that anticipate and fill those needs drives revenues and stifles competition. The ability to understanding your customers’ needs faster and more completely is a highly sought-after skill easily leverageable to one’s advantage.
  • Complexity. The advantage of complexity – the use of unique materials, processes, and skills – enables organizations to deliver superior customer solutions (lower costs, higher quality, greater choice, expanded availability).
  • Technology. Technology allowed mankind to unlink physical effort and production outcomes as well as time from income. Individuals and organizations with  the skill to design, use, and adapt mechanical and electrical machines in the workplace can upend whole industries by their influence on customer and competitor actions.
  • Leadership. The ability tomultiply one’s effort and output through directing other people is the key to deliver more products of higher quality for less costs in shorter periods. Those with the ability to lead others are highly valued in every organization.
  • Individuality. Each person is unique with a varying set of experiences, skills, aptitudes, education, and goals.  Each of us take a different path in life to reach different objectives. Find a niche/model/arena that aligns with your path, and no one can compete with you, in being you.
  • Patience.  The personal ability to defer instant gratification encourages fuller investigation and reflections about the consequences of an action before implementation, reducing or eliminating mistakes of haste and carelessness. Leveraging patience to forcefully overcome the urge for immediacy and  focus on long-term results.
  • Brand. Effectively, each person and organization have their own “brand,” or reputation, that signals who we are and what we offer others in a relationship. Branding typically affects a consumer’s choice between two similar products or the willingness to accept a celebrity’s endorsement over that  of a man-on-the-street. Entrepreneurs should work to enhance and preserve their reputations as they are often a big factor in other’s decisions.
  • Equity. The position that some call “skin in the game” is a powerful influence, especially when dealing with those who have no ownership or consequence from a decision. Equity shows commitment and persistence, two qualities essential for a successful relationship.
  • Capital. The presence or lack of available capital is mistakenly believed to be the most valuable source of influence, especially by those who have it. Most entrepreneurs are familiar the Business Golden Rule: “He who has the gold makes the rule.”  While a factor in most relationships, those with money ( and those who need it) frequently overstate its value and enter into alliances that are disappointing for both parties and cannot be sustained.

Entrepreneurs should understand that influence cannot be universally applied since the nature of the relationship is a determining factor. The effectiveness of influence typically depends on who needs who the most. Understanding the balance is critical in exerting influence or responding to it. Negotiation is the parries and thrusts between parties to achieve the desired result, though not necessarily to the detriment of the opposite party. Win-win outcomes are most likely to endure as both parties achieve a benefit.

While a Fortune 500 company generally has more clout in the general market than a startup organization, the outcome of the former’s applied pressure depends on each company’s relative influence with the specific subject of the influence. For example, if your supplier’s success depends on your company’s success, a rival’s efforts to shut off supply are apt to work.

Final Thoughts

Entrepreneurs voluntarily accept one of the greatest challenges in business: the creation and maintenance of a growing, vibrant company. Statistics indicate that most startups are not successful.  Even so, a few not only survive but thrive. Many of today’s largest, most profitable companies were startups a few decades before. Their founders understood leverage and applied their influence adroitly to capture customers, attract employees, and engage their communities.

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Food Packaging Labels: How to Understand Nutrition Facts to Eat Healthier & Save

For most of recorded history, humans were intimately connected with their food. It was essential to know which plants, animals, and fish were edible, as well as the optimal ways to preserve excess foodstuff for periods of drought and famine. Before the invention of canned food in the early 19th century, people typically grew or purchased fresh vegetables and fruit, butchered live animals and birds, and relied on pickling, salting, smoking, sun drying, and underground cold storage to keep their food from spoiling.

Mass-produced processed food gradually replaced fresh food in American diets after World War II, spurred by massive advertising campaigns. The replacement of processed foods for fresh foods extended and complicated the link between food preparation and consumption, forcing consumers to rely on the processes, skills, and integrity of food producers and processors to provide edible, nutritious products free from harmful substances and bacteria.

Our inability to differentiate safe food from spoiled or dangerous food – a skill past generations had when the link between farm and table was more direct – has led to a reliance on food labels as an indication of safety. Unfortunately, consumers are often confused by the various labels, which can lead them to overpay for food with certain labels and throw out perfectly good food because they think it’s past its “expiration date.”

As with anything, knowledge is power when it comes to food labels. Here’s what you need to know to be an informed and savvy consumer.

Food Safety Regulations

Thanks to the meat-packing abuses exposed in Upton Sinclair’s “The Jungle” and food industry practices revealed by the Poison Squad of 1902, Congress passed the Pure Food and Drug Act of 1906 and the Federal Meat Inspection Act, turning the Patent Office’s Agricultural Division into today’s Federal Food and Drug Administration (FDA). In 1938, Congress passed the Food, Drug, and Cosmetic Act, significantly expanding the FDA’s authority.

Food safety in the U.S. is provided by three federal agencies, in addition to each state’s public health agencies:

  • Food and Drug Administration (FDA). The FDA’s Center for Food Safety and Applied Nutrition regulates all foods, excluding those within the scope of the FSIS.
  • Food Safety and Inspection Service (FSIS). This agency within the U.S. Department of Agriculture (USDA) regulates the labeling and packaging of meat, poultry, egg products, and some fish to ensure safety.
  • Centers for Disease Control and Prevention (CDC). This agency collects data and investigates instances of foodborne illnesses and outbreaks. It’s especially visible in circumstances such as the 2015 Foster Farms salmonella outbreak and Chipotle Mexican Grill E.coli incident.

Before the passage of the Food Safety Modernization Act in 2011, fresh fruits and vegetables were unregulated, and consumers relied on their ability to distinguish the safety of these foods by appearance, feel, and smell. Most fruits and vegetables are now regulated, but those that are considered “rarely consumed raw” remain unregulated.

How to Read Food Labels

The FDA and FSIS rely heavily on manufacturer labeling to inform buyers about the foods they eat. Though different foods are regulated by different federal agencies, producers, processors, and distributors are required to disclose specific data on labels easily visible to consumers. To ensure compliance, food producers, distributors, and retailers are subject to the Federal Trade Commission’s (FTC) prohibition against false and deceptive advertising.

Read more. . .