Growing Rich - Arabictrader.com

KIRK KAZANJIAN
It was like buying a house. You finance 85 percent of your purchase.
The difference is you can’t strip a house down, whereas you can strip
a company and sell off assets, shrink the asset base, and maybe build
the earnings, especially by turning around or selling loser divisions.”
Davis specifically points to the Dow Jones Company as a good
modern-day example of this. Although he didn’t own the stock as
this book went to press, he was closely monitoring the company’s
progress. “It has a wonderful product in The Wall Street Journal,” he
insists. “Nobody in the investment business can deny their need to
read that paper. Its circulation has been growing for decades. The
company’s other products, such as Barron’s and Smart Money
magazine, are also doing well. Where Dow Jones is losing money is
in the electronic news business. It announced plans to spend $650
million over a three-year period on the old Telerate, an electronic
pricing and information bank. That thing isn’t making any money.
Who knows if it can compete with Bloomberg and Reuters? Maybe
it can. But it’s a real gamble. I would rather see the company close
that thing down or sell it and focus on its core business. The company
could buy back a lot of stock once earnings go up. That move, in my
opinion, would definitely make the price of the stock increase.”
UNCOVERING VALUE
While some value-oriented investors pay close attention to a stock’s
book value, Davis argues that number is virtually meaningless to him.
“Unless you’re planning to liquidate the company, you really want
to look at earnings power,” he insists. “My basic thrust is to look at
the growth of earnings power, not by quarter or even year-to-year,
but whether average earnings three years from now will be higher
than they are now.”
In order to make that determination, you must rely in part on your
own intuition. The rest is raw math. “In insurance companies, which
are my specialty, if you believe underwriting can be at a breakeven,
and assuming you have more cash every year to reinvest and are receiving
dividends on what you’ve already invested, you’ll constantly
have a new stream of cash coming in,” Davis offers. “So, in a sense,
the earnings power of an insurance company is the investment income
per share after taxes. Investment income per share is like a compounding
machine. It frankly has not been as good lately as when my
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