Investing in Businesses That Earn More Than Their Cost of Capital: An Expert Portfolio Manager Discusses His Investment Strategy with The Wall Street Transcript

Wall Street Transcript

67 WALL STREET, New York - April 2, 2013 - The Wall Street Transcript has just published its Investing in Gold and Value for Downside Protection Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Value Investing - Long-Term Investing - High Quality Companies - Global Investing - Investment Strategies - Large Cap Investing - Longer-Term Investing - High Quality Companies - Investing in Gold - Long-Term Value Conservation - Precious Metals

Companies include: Berkshire Hathaway Inc. (BRK-A), Newmont Mining Corp. (NEM), Barrick Gold Corporation (ABX), Kinross Gold Corporation (KGC), Mercury General Corp. (MCY), Pepsico, Inc. (PEP), Johnson & Johnson (JNJ), General Electric Co. (GE), Microsoft Corporation (MSFT), The Coca-Cola Company (KO), Citigroup, Inc. (C), Leucadia National Corp. (LUK), Exxon Mobil Corp. (XOM) and many more.

In the following excerpt from the Investing in Gold and Value for Downside Protection Report, an expert portfolio manager discusses his investment philosophy and his portfolio-construction strategy:

TWST: You mentioned you invest in outstanding companies. We have talked about the mining companies and we have talked about Berkshire Hathaway. Who else fits in that category for you?

Mr. Bloomstran: We think at least 90% of publicly traded companies aren't worthy of investment because they don't earn their cost of capital. Let's say you have a business that has a positive profit margin of say 5% or 10%, but relative to capital earns only 3% on an honest calculation of the capital employed in the business. If your business has a typical amount of debt in the capital structure and you've got a debt cost of capital of 6% or 7%, you also must have some kind of an assigned cost of capital on the equity piece of your capital structure of maybe 10%. If you're earning 3% and you've got a blended cost of capital of 8%, you are losing 5% a year. Your business is slowly losing money, despite a seemingly nice profit margin.

In the world of publicly traded securities, where you can merge your operation with another company and bury a lot of intermediate-term costs in the accounting, where you have until recently open lines of access to new capital, you can borrow money at cheap rates through the bond market or through the banking system.

Companies that slowly lose capital have generally been able to raise new capital and mask what is really going on. In that way, many businesses operate on the order of a legitimate Ponzi scheme. How many small business owners do you know who lament if we could only borrow more money we'd be OK? We are very interested in businesses that earn more than their cost of capital. Berkshire is a big piece or our portfolio. As I said, we have an almost 10% weighting in our two gold mining companies.

We have a big position in a very undervalued and overcapitalized auto insurer in California, Mercury General (MCY). We have a decent-sized position in Leucadia (LUK), we own Pepsi (PEP), we own J&J (JNJ)...

For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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