Wireless Electricity Becomes a Reality

Imagine a world where all your portable devices can be charged and powered simply by placing them on a desktop. Chip manufacturer MobileWise has gone well beyond imagining such a world and this week unveiled "a conductive solution" that it believes can make it all possible.

A team of scientists from MIT has come up with a way to light a 60-watt lightbulb. The trick is that the bulb is located about seven feet from the power source and no wires connect the two. Wireless electricity, or "WiTricity" as MIT likes to call it, could one day allow consumers to carry notebooks or cell phones without batteries. It could also make it easy for contractors to remodel homes. Someday. To make it happen, the waves would need to be targeted and tracking mechanisms would need to exist to link the power source and the intended target.

Various techniques for transmitting power wirelessly have been around for years. Radio is an example. Transmitting electrical power, however, is tricky.

WiTricity couples resonant objects: the source and recipient resonate on the same frequency, allowing them to communicate efficiently without interfering with other objects. MIT analogizes this to an opera singer and 100 wine glasses. If the wine glasses all contain different amounts of liquid, they will resonate at different frequencies. When the singer hits a particular frequency, one glass will shatter but others will remain unaffected.

In the MIT experiment, the scientists used two copper coils to create the wireless link between the power source and the bulb. The scientists found there was strong interaction between the sender and receiver and only weak interaction between the sender and the ambient environment.

Book value

What is book value?

The book value of a company is generally considered its net worth; the book value per share would be the net worth of a company divided by the number of shares outstanding.

Benjamin Graham definitions

There is a need, in considering the book value of a company share, to know what certain terms mean - and who better to explain them than the doyen of investment analysis, Benjamin Graham. His definitions are:

Tangible assets: Assets either physical or financial in character eg plant, inventory, cash, receivables, investments.

Intangible assets: Assets which are neither physical nor financial in character. Include patents, trademarks, copyrights, franchises, good will, leaseholds and such deferred charges as unamortized bond discount.

Graham took the view in Security Analysis that intangible assets should not be taken into account when calculating book value; hence, in this sense, book value per share would be the same as net tangible assets per share (NTA) as opposed to net assets per share (NA).

So, the assets of a company can be either tangible or intangible and, on this point, Benjamin Graham and Warren Buffett appear to have differences in importance.

The Benjamin Graham approach to book value

Graham clearly considered book value an important factor in assessing share investment. He did not include intangibles in his calculations of book value and was attracted towards companies that sold at below their book value. This was a big factor in making a judgment about the company as an investment. He said this:

‘It is an almost unbelievable fact that Wall Street never asks, "How much is the business selling for?". Yet this should be the first question in considering a stock purchase.

'If a business man were offered a 5% interest in some concern for $10,000, his first mental process would be to multiply the asked price by 20 and thus establish a proposed value of $200,000 for the entire undertaking. The rest of his calculation would turn about whether the business was a "good buy" at $200,000.’

Graham did however acknowledge that under ‘modern conditions’ intangibles were just as much an asset as tangibles, assuming of course that a proper value could be determined. They could, in some situations, even be superior assets.

What Benjamin Graham said about intangible assets?

‘Earnings based on these intangibles [e.g. goodwill] may be even less vulnerable to competition than those which require only a cash investment in productive facilities.

'Furthermore, when conditions are favorable, the enterprise with the relatively small capital investment is likely to show a more rapid rate of growth.

Ordinarily it can expand its sales and profits at slight expense and therefore more rapidly and profitably for its stockholders than a business requiring a large plant investment per dollar of sales.’ Emphasis added.

How Warren Buffett looks at intangible assets

This last comment of Graham has importance for Warren Buffett, who seems to really like companies with valuable, and sometimes irreplaceable, goodwill. To Warren Buffett, it is this intangible good will, an asset that continually produces profits without the need to spend money on maintenance, upgrading or replacement that adds value to a company. Consider what it is that is most important in producing profits for Coca Cola: its name and recipe, or the various factories that produce the drink.

Warren Buffett on economic goodwill

This is what Warren Buffett calls economic good will which he explained in 1983 like this:

‘[B]usinesses logically are worth far more than net tangible assets when they can be expected to produce earnings on such assets considerably in excess of market rates of return.’

Using by analogy, one of the favorite examples of Warren Buffett, take two separate companies. Company A has a net worth of $100,000, $40,000 of which is net tangible assets and $60,000 of which is intangible (brand name, goodwill, patents etc). Company B has the same net worth but $90,000 its assets are tangible. Each company earns $10,000 a year.

So Company A is earning $10,000 from tangible assets of $40,000 and Company B is earning $10,000 from tangible assets of $90,000.

If both companies wanted to double earnings, they might have to double their investment in tangible assets. For Company A to do this, it would have to spend $40,000 to add $10,000 of earnings. For Company B to do this, it would have to spend another $90,000 to add $10,000 to earnings. All other things being equal, Company A would have better future prospects of increase in real earnings than Company B.

The real profitability of a company

For these reasons, Warren Buffett has said that, in calculating the real profitability of a company, there should be no amortization of economic goodwill. Does the Gillette brand name actually decrease in value each year? Of course not.

The thoughts of both Graham and Warren Buffett are worth consideration. Book value is another ingredient in the investment equation.

Warren Buffett Buyback Stocks

Warren Buffett, the CEO and largest shareholder of Berkshire Hathaway (BRK.A - Cramer's Take - Stockpickr - Rating), is the third richest man in the world, and he achieved that status through savvy investing.

We at Stockpickr thought it would be interesting to look at those Buffett stocks that are also the subject of big company share repurchases. As we often highlight here, many stocks have successfully risen in price through company buybacks. So at Stockpickr.com, we have come up with the 10 Warren Buffett stocks with stock buyback programs.

When a company buys back its own stock, it reduces the number of shares outstanding and therefore increases the earnings per share. It also sends a signal to investors that the company has confidence in its business and that its own shares are the best investment for its surplus funds.

As an example, Wal-Mart (WMT - Cramer's Take - Stockpickr - Rating) recently implemented a $15 billion stock buyback program. And we also saw that Buffett increased his position in the company. Wal-Mart recently announced a 49.1% quarterly increase in earnings on a 10% increase in revenue. The stock has a price-to-earnings (P/E) ratio of 14 and a P/E-to-growth (PEG) ratio of 1.1. The yield on the stock is 2%.

Wal-Mart shows up in the Bill and Hillary Clinton Portfolio, which lists the stocks held and recently liquidated by the Bill and Hillary Rodham Clinton blind trust. The Clintons also owned Biogen Idec (BIIB - Cramer's Take - Stockpickr - Rating), which also recently announced a $3 billion buyback. The pharmaceutical company, which is working on developing a treatment for lymphoma, as well as for multiple sclerosis and psoriasis, has a P/E of 37 and a PEG of 1.8.

Compounding: a snowball rolling down...

Probably there isn't any other subject in the (financial) world that gets that little attention, and is that important at the same time... as compounding. Albert Einstein (1879-1955) called it the 'Eighth Wonder of the World'. Warren Buffett has been said to agree with him. And probably you should too!

Compounding is one of the most powerful principles in our universe. Almost everything you see around you is the result of a compounding process.

The human brain is programmed in a linear way. We are too much focused on the short run, on annual or even quarterly returns. Most of us are underestimating the effects our short term focus will have over time.

Our unconscious mind is much more suitable for calculating e.g. the total time of ten biking trips of two hours each, or to say 'run' when we would see a smilodon walking on the street... than to calculate the end sum of a specific amount of money invested growing exponentially at a specific rate, for a certain period of time.

The more you think about compounding, the more you discover its true and remarkable power. Maybe you will even start to see the compounding process as an organic process, as a living creature! Hopefully you will not only see the remarkable consequences, but also act on this knowledge. Quite probably you will - as you see yourself the differences of applying this process to your investments and your life.

Three elements

With compounding there are three components to be distinguished. These are:

1) The amount of money you start with (this doesn't not only hold true for investing!)

2) The returns (annual growth rate)

3) Time (the number of year's available)

First, as you may expect, it's better to start your compounding journey with a considerable amount of money. This was in effect the situation of Warren Buffett or Joel Greenblatt as they started their careers. Because they didn't have much money themselves, they attracted money to their hedge funds they started at a young age. (Buffett probably wouldn't call his early partnerships this way, but nonetheless his fee structure was quite hedge-fund like).

Instead of a big amount to start with, it's also recommended to add money to your compounding-'friend' on a regular basis: this will further 'fertilize' the accumulation process. As I said before, this process doesn't hold true for investing only. It's a process that can be put into action in all kinds of ways. So, after finishing this article, you can read it again... and every time you see 'money', read 'effort' instead!

The second component of compounding lies in the returns. As we have seen before, a high return will bring in wealth over time. And probably this is also the strategy used behind most of the other 'normal' millionaires in the world: they didn't start with a lot of money, but as their stock investments (or their businesses) compounded over time, they suddenly 'discovered' that they too had joined the club of millionaires.

The third and last component of the compounding process is simply time. As your money is doubling every x years, it is very logical that the more time you have, the more often your money can double (for 'effort': think of scalability). So, especially younger people can profit from compounding: they still have a lot of time, a critical resource and component of the compounding formula.

To reach the billionaire status, you actually need all of these components. Although Buffett always told he started with only $100 dollar, he in fact started a partnership with a hedge-fund like fee structure. And with these fees Buffett was able to generate quite an amount of money, in just a few years.

So, from that moment on, Buffett was 'fully loaded' with all the essential compounding ingredients. A lot of money to start with, a long investment horizon (over half a century!) and the knowledge to generated structural, high returns.

And as we look to Joel Greenblatt, and besides of him a lot other billionaires, we see exactly the same: they had all components of the compounding formula in place. Although, in some of these billionaire-cases the starting capital was at the moment just 'a really good idea', the only thing they had still to do was to convert it, into money (or freedom).

The Rule of 72

The 'Rule of 72' is a simple, but nonetheless very handy rule to calculate the number of years it takes to double your money. This is how it works: divide 72 by your expected annual returns and the number of years it takes your money to double follows.

So, if you expect an annual return of 12%, it takes 6 years to double your money (72 / 12 = 6).

With this simple formula you can also calculate the 'required return': if you know how many years you have to double your investments, but don't know the return which is required for that.

For this, you divide 72 by the number of years. If you have 10 years to double your money, you need a 7.2% annual return (72 /10 = 7.2). Only 5 years available? Your required annual return would be 14.4% (72 /5 = 14.4).

Final thoughts

Maybe you don't have a lot of money to start with or don't possess the substitute for it (a really good business idea), but you can still profit from the compounding formula! Also the possession of two of the components of the compounding formula will most likely direct you to impressive results. Just make sure to earn a satisfactory return, add money along the way and let the compounding formula do the rest.

Over time you will really see the value of your investment portfolio accelerate. Personally, I like to compare compounding with a snowball. A snowball rolling down the slope of a mountain. A rather remarkable slope... as the end of this slope is further away then you can imagine!