Become Buffett: research, compliment, strategy, suggestion

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markyears
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Become Buffett: research, compliment, strategy, suggestion

Post by markyears »

This post is a follow-up of my earlier post http://www.capitalism2.com/forum/viewto ... =10&t=4672 on the calculation of earnings per share: is that net profit or operating profit? And how to take advantage of earnings per share to get a better net worth and stock price of my own company.

This post is a mixture of my research, and a strategy based on my research, a compliment to the developers of this game, and some suggestion to them:

Research: What I want to understand is what the earning per share is based on. I'm interested in this since I really care about my company's stock price and the earning per share certainly makes a big impact.

This is a typical stock focused company, doesn't do any retail or manufacturing.
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So it doesn't have any operating profit. But according to its income statement, the net profit is good, since the owned stocks are rising.
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Now the earnings per share, interestingly, it is not 0, that should be the number if it's really only based on operating profit. Is this based on net profit per share? If so, then it should be $761,771,230/76,000,000=$10.02, which is much larger than $0.82. Then, what is it? After some study, I finally got it, it = received dividends/shares=62,683,433/76,000,000=0.82.
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So earnings per share is not based on operating profit purely nor net profit, it is (annual operating profit+received dividends)/shares.

The next question is whether this dividends received will impact the stock price. The answer is yes. In my old post, I made a wrong conclusion that dividends you received will not impact the IPO market cap. This is not correct, please see the following careful research.
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Lionheart is my own company, this company is only a shell and is currently a private company. LT foods is my subsidiary, also private. And I just received a decent dividends from it. Now I let my Lionheart to go public. Even though, it shows earnings per share is 0, the P/B ratio IPO can give me is 2.22. As we know, if I'm not making any profit, the P/B ratio should be 1. This fact tells us, the dividends I received are in fact consider as a boosting factor in IPO and stock price.
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But why the boosting is so small for an typical stock focused company like the above example: the p/b ratio is below 1. I conjecture that the boosting factor is based on the ratio of profit to the net worth. That is to say, if your company is already very big, your profit is relatively minor compared to a small company making the same amount of profit. This explains why the stock focused company usually get a very low p/b ratio (less than 1 usually): Its net worth is growing very fast by the raise of stocks it purchases, but the stock raising is not accounted in earnings per share. The only profit is coming from dividends received, but it is very minimal.

I also did some research to verify that conjecture. (This part is not very important, ignore if you think this post is too long :o )
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Going back to our earlier example, this time I first let my subsidiary LT foods go to public, since it makes a good profit last year, it of course have a very good market cap. Now it goes to public, my own company's net worth suddenly grows. But at the next day, when my own company goes to public itself, the p/b ratio is only 1.05 now, and the market cap is the same as before. Why? Because the boosting is minimum since the base (my net worth) is suddenly doubled.
Last edited by markyears on Sun Oct 29, 2017 10:05 pm, edited 5 times in total.
markyears
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Posts: 30
Joined: Fri Sep 22, 2017 4:45 am

Re: Become Buffett: research, compliment, strategy, suggesti

Post by markyears »

Compliment: So the holding company usually has a low p/b ratio. Is that true in reality? Holy cow, it is true!

Buffett's "Berkshire Hathaway Inc's P/B Ratio of today is 1.56."
vs
"Microsoft Corp has a PB Ratio: 7.29."

Great job, developers!! That's quite an impressive simulation!

(Of course I'm not certain in real world the p/b ratio has necessarily the same mechanism, but still the game is doing a wonder job!)
Last edited by markyears on Sun Oct 29, 2017 10:43 pm, edited 2 times in total.
markyears
Level 2 user
Posts: 30
Joined: Fri Sep 22, 2017 4:45 am

Re: Become Buffett: research, compliment, strategy, suggesti

Post by markyears »

Strategy: Now it is the most important part, how should we take advantage of this dividends received, p/b, etc, to get a good net worth and a good stock price of my own company.

Before I proceed, let's see what I got so far. After 14 years, I'm the top billionaire.
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But a headquarter is only what my company owns:
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plus some stocks:
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And my own company's stock does not perform so well, but p/b ratio is above 1 (1.4) and earnings per share is decent ($20.79).
mygame4.png
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Yes, I'm playing as Warren Buffett!
So the strategy I'm recommending here is do not make your own company super large, set up subsidiaries and enjoy their stock arising.

If the goal is to increase the net worth of your own company, then clearly you should use subsidiaries. Since usually, the p/b ratio is large than 1 for public company, enjoying their stock values will be more benefit than enjoying the net worth, that is the float.

If the goal is to increase the market cap of your own company, then it is a little complicated. Your own company's net worth will be really great, but on the other side, its stock price usually has a low p/b ratio. So how to balance?

I am still recommending using subsidiaries. Here is my reason: imaging you put everything in your own company. Then, after a while, the growth of the company will become slower since the base (net worth) is too large. Then the p/b ratio will be not as high as a rapid growing small company. If I split my company into small subsidiaries, then the growth of profit will be more significant. The p/b ratio can be easily over 5, or even 10 if you work harder. This will reflect on your own company's net worth. And, if your own stock's p/b ratio is >1, then you're not losing anything.

So last question is: why my company's p/b is >1, different from other purely stock focused company? (I'm having huge amount of debts now btw). That is because I let my subsidiaries pay a very high dividend (nearly 100%) every year. According to my theory earlier, this dividend is accounted in earnings per share, which has a significant boosting on my stock price. Doing this has also two other advantages. First, of course, my cash is increasing, I can use this to buy other companies. Second, this dividends paying will not affect (if not have a positive impact on) your subsidiaries' own stock price, since they're paying out the dividends, not losing money.
Last edited by markyears on Sun Oct 29, 2017 11:22 pm, edited 2 times in total.
markyears
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Posts: 30
Joined: Fri Sep 22, 2017 4:45 am

Re: Become Buffett: research, compliment, strategy, suggesti

Post by markyears »

Suggestion: Finally, some suggestion to developers: I suggest the profit we make from speculation (buying and selling) in stock market should be accounted in earnings per share.

I'm repeating what I said in http://www.capitalism2.com/forum/viewto ... =10&t=4672.

"I understand the investment in other company's stock may not be considered operating profit. But for the part has been "cashed out", it may be put into operating profit. What I mean is, suppose I purchase 10,000 shares from a company at 10.00 and after a year, the price is 20.00. Well, if I never sell my stock, it is hard to say I am making money since the price may drop later. But let's say, I sell 5,000 shares at 20.00 at the end of the year. Then IMO 5,000*(20.00-10.00)=50,000 should be accounted operating profit, like in an hedge fund company..."
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