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Archive for Sunday, May 9, 2004

The Motley Fool

May 9, 2004

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Last week's answer

I was born in Seattle in 1907 and am now headquartered in Atlanta. I rake in more than $33 billion per year, thanks to my 357,000 employees around the world. I deliver 13.6 million packages and documents each day, 2 million by air and 1.3 million internationally. I serve nearly 8 million customers in more than 200 nations and territories, and my Web site gets 115 million hits per day. I operate 88,000 package cars, vans, tractors and motorcycles, as well as 266 jet aircraft and 316 chartered aircraft. I serve more than 851 airports. Who am I?

(Answer: UPS)

Minor burps

Coca-Cola (NYSE: KO) is being assaulted on multiple fronts. Institutional Shareholder Services has advised shareholders not to re-elect superinvestor Warren Buffett to the board, as he isn't "independent" enough. In addition, the CalPERS pension fund giant has announced it will withhold votes for three directors and Coke's entire audit committee including Buffett.

Next, Coke's head general counsel, Deval Patrick, recently resigned, leaving investors to wonder just what the heck is happening at Coke. The firm also is seeking a replacement for CEO Douglas Daft.

These events add up to uncertainty. But remember that Warren Buffett is a man of integrity, someone shareholders should want on a board of directors. Regarding the resignation and CEO search, it's not uncommon for corporations to occasionally go through times of management upheaval. When the dust settles, they're often better off than before, with stronger management in place.

Finally, even though Coke has battled sluggish sales during the past year, it remains fundamentally healthy, with almost $3.5 billion in cash and a dividend yield near 2 percent. It's a solid company with tangible products that the world loves. And the current clouds hanging over the soft-drink heavyweight are not measured in the company's financial statements. Before you panic and sell based on the recent spate of news, take a step back, and remember that this can is half full, not half empty.

Farewell, Fisher

One of the world's seminal investment thinkers passed away recently -- Philip Fisher, author of the classic "Common Stocks, Uncommon Profits" (Wiley, $20). Here are the eight points of his investment philosophy:

  • Buy stock in companies with disciplined plans for achieving dramatic long-term growth in both profits and revenues. These firms also must have inherent qualities that make it difficult for new entrants into that business to share in such growth.
  • Aim to find such companies when they are out of favor -- when market conditions are not favorable, or the financial community does not properly perceive the true worth of such companies.
  • Hold the stocks you buy until there has been either a fundamental change in the company's nature or it has grown to a point where it will no longer be growing at a faster rate than the economy as a whole. Don't sell your most attractive stocks for short-term reasons.
  • If your primary investment goal is long-term appreciation of capital, then de-emphasize the importance of dividends.
  • Recognize that mistakes are an inherent cost of investing. Recognize them as soon as possible, understand their causes, and learn from them so they're not repeated. A willingness to take small losses in some stocks while letting profits grow bigger and bigger in your more promising stocks is a sign of good investment management. Don't just take profits for the satisfaction of taking them.
  • Realize that there are a relatively small number of truly outstanding companies. Concentrate your money in the most desirable opportunities. Holding more than 20 companies is unmanageable (and "a sign of financial incompetence"). Aim for 10 or 12.
  • Have more knowledge than others and apply your judgment after thoroughly evaluating specific situations. You also should have the moral courage to act against the crowd when your judgment tells you that you are right.
  • One of the basic rules of life also applies to successful investing -- success is highly dependent upon a combination of hard work, intelligence and honesty.

Sold Microsoft

My dumbest investment came from a stock tip in a hallway several years ago. I had stock in Microsoft and had made 20 percent on the shares. I sold them, though, to invest in the recommended company, System Software. System Software shortly thereafter filed for Chapter 11 bankruptcy protection. I know I'll never make this mistake again, but it still hurts. -- K.W., via e-mail

The Fool Responds: Many people sold shares of Microsoft during the past many years, and most of them are kicking themselves. Still, there are other stocks that have fared as well or better than Microsoft -- especially in recent years. Your job, if you're considering investing based on a hot tip, is to do enough research into the proposed investment to determine whether it's worthy of your money. Find out if you understand its business and how it makes money. Read through an annual report or two, and look for signs of management integrity. Examine its track record, growth potential and advantages vs. competitors.

Front-running

What's "front-running"? -- P. C., Huntsville, Ala.

Front-running is a shenanigan practiced by some unscrupulous folks in the financial realm. A mutual fund manager, for example, may buy shares of a company for her personal portfolio and then begin buying many shares for her fund, driving the price up and generating profits for herself. A talking head on television may talk up a company after having bought into it. A broker, knowing that his firm will be releasing a positive report on a company, may buy shares of it for himself. These are all examples of front-running, which in some cases is illegal.

What does a company's CFO do? -- L.V., Chicago

A company's chief financial officer (CFO), such as PepsiCo's Indra Nooyi, Home Depot's Carol Tome and Merck's Judy Lewent, is responsible for all things financial at the firm. These include determining what its financial needs are and will be, how best to finance those needs, and informing all stakeholders (investors, creditors, analysts, employees, management) of the firm's financial condition.

The CFO also is focused on creating and maintaining the best mix of internal cash, debt financing and equity financing for the company (this is known as a firm's "capital structure"). As part of those responsibilities, the CFO plans and oversees the forecasting and budgeting process, maintains relationships with funding sources such as commercial and investment banks, and oversees the process of developing and communicating the quarterly and annual financial statements. Finally, the CFO has ultimate accountability for maintaining the books and records of the company, ensuring that the company's assets are protected.

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