Three reasons to invest in the Square IPO (when it finally arrives)

Here are three reasons to invest in the Square IPO, even before we’ve gotten a chance to look at any financial documents.

One of the more exciting start-ups in the tech space comes in the form of a pocket-sized, half-inch plastic square. Said plastic square can be plugged into the audio jack on your iPhone, Andoid, iPod or iPad and transformed into a mobile credit card processor. That’s the premise behind Square – an inspiring start-up with 100 employees based in San Francisco. The IPO rumors haven’t started up yet, but there are lots of reasons to be excited about this small company (even before we’ve gotten a chance to look at any financial documents). Here are three reasons to invest in the Square IPO (when it finally arrives):

1) Leadership. Investing icon Warren Buffett argues that you shouldn’t invest in companies but rather people. “You can have the greatest goals in the world, but if you have the wrong people running it, it isn’t going to work,” he said recently. “On the other hand, if you’ve got the right person running it, almost anything is possible.”

Without question, Square’s got an excellent pedigree. One of the company’s co-founders, Jack Dorsey also co-founded Twitter, rising at one point to serve as CEO (he’s now a chairman working on product development and growth). That takes up a mere 8 to 10 hours of his day. After that, he ambles down the road to clock another 8 to 10 hours of work at Square.

“Most people have major positions at companies and they’re also raising families,” Dorsey told Fortune last week. “They have two-year-olds. I have it easy.”

Best of all, Dorsey seems to possess a sense of a wonder that he uses to inspire the developers working below him. He does that in part with his weekly “town square” meetings where he takes 15 minutes or so to talk values and aspirations with his employees.

In a recent town-square meeting, he compared what Square’s doing to building the Golden Gate Bridge: “Every single aspect of this is gorgeous,” he said (per TechCrunch). “So your homework this weekend is to cross this bridge, think about that, and also think about how we take those (design) lessons into doing what we do, which is carry every single transaction in the world.”

2) The volume game. Numbers aren’t readily available, but we do know that Square is “processing millions of dollars in mobile transactions every week,” according to NPR. Let’s conservatively say the site’s processing $2 million in transactions weekly. That’s good for more than $225,000 in revenue. Not bad for a company that just opened its doors to clients nine months ago. The key here is scale. By poaching a huge number of transactions and reaping 2.75 percent of every sale, the company needs to consistently grow it’s user base to move toward profitability. The numbers look good so far.

3) The writing on the wall. Your head is planted firmly in the sand if you’re not convinced that credit cards are going the way of the dodo bird. In fact, I’d argue that it’s not just your head that’s buried in sand; it’s your torso, midsection, legs and feet, too. The smartphone is transforming into a mobile wallet. Every major credit card company in the world has started forays into the mobile payment processing realm and few have made it as simple as Square.

Merchants get their card readers for free. They pay no monthly fees, and they can use it as little or as often as they like. In fact, we might even use it to give our friends a few bucks for the cab we’re sharing one day. If Square can keep gobbling up marketshare while PayPal, Visa, Mastercard and others are still scribbling on whiteboards, they’re either going to IPO or get bought out. And either scenario will likely be a boon for shareholders.



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BYD Auto IPO: Is the battered Chinese battery and car maker stock a buy?

BYD has applied to start trading in China via a new IPO. Not everyone’s sold on the company’s future prospects, though. Here are four reasons to consider avoiding shares in BYD despite an endorsement from Warren Buffett.

BYD Company Limited (HKG:1211) got one of the investment world’s biggest endorsements when a Warren Buffett company ponied up $230 million to invest in BYD during the height of the financial meltdown in 2008. Now, BYD Auto, which has long traded on the Hong Kong Stock Exchange, has applied to start trading on China’s Shenzhen Stock Exchange as it seeks new capital for expanding its operations. Not everyone’s sold on the company’s future prospects, though. Here are four reasons to consider avoiding shares in BYD’s latest IPO:

1) Time for a turnaround? Things haven’t looked good for BYD over the past year. The company’s Hong Kong-listed stock has tumbled 60 percent since the start of the year on weaker sales and the conclusion of a government subsidy for economy vehicles in China.

Sensing problems on the horizon, BYD has undertaken big plans to orchestrate a turnaround. The company has partnered with Daimler AG (PINK:DDAIF) to build its first all-electric car and its announced plans to unveil an SUV and several additional higher-end vehicles with larger profit margins.

BYD’s management is fully aware of the mounting competition it faces from GM, Volkswagen and Nissan. We’re “preparing for a price war,” BYD’s head of sales Xia Zhibing wrote on his blog last month (per Bloomberg). The problem is, BYD doesn’t have much room to tinker with its pricing. Profit margins were cut in half last year to 5 percent on growing competition in the Chinese market.

2) The E6 as savior? After several delays, BYD promises its on target to begin delivering it’s all-electric E6 to corporate and government clients in the U.S. this year. The E6 is expected to be available for retail consumers in the U.S. next year and should have a range of 186 miles on a single charge. Although BYD’s the world’s largest battery maker, some suspect the E6’s delays are due to problems achieving the electric car’s promised range.

If it’s any indication, American car reviewers have been less than impressed with BYD’s other offerings to date. The New York Times published a scorching review of the F3DM – a combination pure-electric/gas-powered car that operates like the Chevrolet Volt. “The steering wheel vibrates. The dashboard hums. You feel the vibration in your molars,” a reviewer wrote after test-driving the car in February.

3) Looming litigation. If the E6 does indeed make it to the U.S., the company could face intellectual property lawsuits. BYD has long been accused of backwards engineering existing cars, modifying them slightly and slapping their own logo on the hood. The company’s also been accused of falsely touting high safety standards. “If you shut the doors too hard, they fall off,” an unnamed consulate told Reuters.

4) The Sokol sting. Much of the credit for Warren Buffett’s investment in BYD goes to David Sokol – the embattled exec who left Berkshire Hathaway Inc. (NYSE:BRK.A) at the end of March, and has since taken fire for allegedly investing in a company that Berkshire ultimately acquired. “Whether or not they can manufacture their own cars isn’t relevant to us, because we see their real expertise is in the development of the batteries, the motors, the control systems for that,” Sokol told Reuters in January 2009. “That’s not to say that they can’t make a nice car, but a lot of people can make a nice car. The breakthrough from our perspective is the battery technology.” Until we get a real look at how BYD’s batteries perform in the E6, the rest is just smoke and mirrors.

Indeed, the whole thing has me wishing BYD would go back to focusing exclusively on batteries. The company has said a big chunk of the funds from it’s China IPO would go toward developing lithium-ion and solar batteries (per Reuters), but it’s also planning to spend heavily on growing BYD’s automotive line. Unless there’s a major cultural shift in the company’s highest level of leadership, though, I wouldn’t expect that turnaround to happen anytime soon. BYD may be good at batteries, but they’re a long ways off from being good at making cars.



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Silver conspiracy rumors gaining street cred

If silver prices continue rising at the pace of the past six weeks, we’d see what would amount to a 300+ percent annual gain. Is there a Central Bank or rich Russian billionaire behind the gains?

The rise in silver prices over the past six weeks has been nothing short of incredible. On March 15, the white metal ended trading at $34 an ounce. Yesterday, it closed at $46.61 an ounce – a gain of more than 37 percent. The extreme price movement has the media and analysts scratching their heads.

We’re all aware of the drivers for silver: double-digit inflation, growing industrial demand, geo-political instability, ballooning budget deficits, etc., but does that justify the ongoing surge in prices? If silver prices continue rising at the pace of the past six weeks, we’d see what would amount to a 300+ percent annual gain.

That’s got a lot of investors on the outside crying foul. “I just do think it has the smell of somebody with a pretty significant buying programme,” a senior banker told the Financial Times yesterday. “Silver is the sort of market that every decade attracts someone.”

Chalk it up to a mysterious Russian billionaire or the back-door policies of China’s Central Bank. The point is, someone’s hoarding silver to drive up prices. Or so the conspiracies go.

Silver conspiracy theorists point to the sudden change in the gold:silver ratio as evidence that something fishy is going on. As the Financial Times reports, the gold:silver ratio has fallen this low just twice in more than three decades – and in both instances, we’ve got scapegoats: in 1980, it was the Hunt Brothers, and in 1998 it was Warren Buffett.

I’m just not convinced that there’s one wealthy individual or government behind the current mania. Several prominent investors have been predicting exactly this sort of scenario for more than a year. Most notably, Eric Sprott of Sprott Asset Management in Canada has been urging investors to buy silver via every media outlet he can get on. Why? In his mind, the gold:silver ratio had tilted too far in favor of gold.

As it stands at the time of this writing, the gold:silver ratio is currently under 33. Sprott predicts we could see a gold:silver ratio of 16:1 before it’s all said and done. If that were the case today (and gold prices didn’t rise concurrently with silver), the white metal would be trading at more than $90 an ounce.

Of course, only time will tell if there’s one entity or buyer behind the sudden spike in silver prices, but the widespread interest in the metal indicates to me that we’re entering a full-blown metals mania. It’s not just a single billionaire acquiring bullion, it’s scores of them, along with every day investors pouring into silver ETFs and the silver bugs who live in shanties on the outskirts of town gobbling up every silver American Eagle bullion coin they can get their hands on.

With faith in the dollar hitting all-time historic lows, it makes little sense to invest in anything else. Perhaps, we’re not witnessing a silver conspiracy so much as a group realization that the U.S. Treasury is flirting with insolvency.



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The secret to investing in stocks for beginners

Investing isn’t about uncovering the next Apple or Microsoft, it’s about finding companies that are going to produce ever-larger amounts of money without dramatically increasing their costs.

We’ve all heard that markets are driven by fear and greed. Those two emotions are what cause the wild intraday swings in stock prices, and they’re what makes learning to invest so difficult. We all want large and immediate gains. If we could all get them, though, none of us would have jobs. We’d trade stocks for a few years and retire to a cozy island in the Caribbean.

To invest successfully, you’ve got to banish the idea that you can predict where the markets are going from day to day. One of my favorite quotes from Warren Buffett – the CEO of Berkshire Hathaway Inc. (NYSE:BRK.A) and the so-called Oracle of Omaha – came when he was asked how long he likes to hold onto specific stocks. His one-word answer? “Forever.”

If you’re looking to get rich quickly, you’d be better served by going to the horse track or riverboat; not the NASDAQ or NYSE. But, if you’re emotionally able and willing to let your investment plans play out over months or years, you can and probably will make money in the stock market – even if you’re starting out with a relatively small chunk of change.

Here’s a simple secret beginning investors can use to make money on stocks: you’ve got a profound advantage over giant hedge funds, professional money managers and corporations. The relatively small size of your portfolio gives you access to stocks that the big fish just aren’t able to invest in.

“It’s a huge structural advantage not to have a lot of money,” Buffett said in 1999. “I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that. But you can’t compound $100 million or $1 billion at anything remotely like that rate.”

See, investors with lots of capital at their disposal just can’t meaningfully invest in small-cap, high-growth companies. They have too much capital to put to work. The small caps you have access to today might end up in the portfolios of the big fish investors a decade from now, and that’s where you stand to make mountains of cash.

Jim Fink at InvestingDaily boils Buffet’s ideas down to three requirements to earn 50 percent returns every year:

1) Your portfolio must have less than $1 million. Just about all of us (unfortunately) fall into this camp.

2) You must buy small cap stocks “before they grow up.” Fink defines small cap stocks as companies with market caps of $3 billion or less.

3) Pick companies with high returns and low spending requirements. “The best businesses by far for owners continue to be those that have high returns on capital and that require little incremental investment to grow,” Buffett wrote in 2009. For Fink, that means finding companies that generate at least $5 in cash flow for every $1 they spend.

Remember, investing isn’t about uncovering the next Apple Inc. (NASDAQ:AAPL) or Microsoft Corporation (NASDAQ:MSFT). It about finding companies that are going to reliably produce ever-larger amounts of money without dramatically increasing their costs. Find those stocks, and you’ll do just fine.



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Profits at Berkshire’s home construction companies crumble 72 percent (BRK.B)

Profits from businesses related to home construction at Berkshire Hathaway (NYSE:BRK.B) have tumbled 72 percent from their peak in 2006. Buffett’s not worried, and here’s why.

In his annual letter to shareholders, which was released this weekend, billionaire investor Warren Buffett called for a housing recovery that “will probably begin within a year or so.” That’s welcome news for Berkshire Hathaway Inc.’s (NYSE:BRK.B) shareholders as profits from businesses related to home construction have tumbled 72 percent from their peak in 2006.

“Johns Manville, MiTek, Shaw and Acme Brick have maintained their competitive positions, but their profits are far below the levels of a few years ago,” Buffett writes. “Combined, these operations earned $362 million pre-tax in 2010 compared to $1.3 billion in 2006, and their employment has fallen by about 9,400.”

Berkshire’s kept investing in its home construction businesses, though, as the company expects the economy to breathe life back into the sector soon. MiTek’s made five acquisitions. Acme’s made one. Johns Manville is building a roofing membrane plant at a cost of $55 million, and Shaw will spend $200 million on plant and equipment upgrades.

The investments are a bet on a macro-trend Buffett sees as imminent: America’s housing market (and the economy at large) will find ways to start growing again; no matter how dire the predictions of politicians.

Another macro-trend Buffett foresees? Rail will grow significantly in the future. The sector’s three times more fuel-efficient than trucking, he argues. That means its more cost-effective, reduces a dependence on foreign oil and makes American goods more affordable.

“The railroad (Burlington Northern Santa Fe) will need to invest massively to bring about this growth, but no one is better situated than Berkshire to supply the funds required,” Buffett writes. “However slow the economy, or chaotic the markets, our checks will clear.”

The beauty of Berkshire is it has the cashflow and long-term outlook to make investments that help it weather economic storms. That might mean smaller gains than you could get off a company that’s just had its IPO, but the gains will be stable, and Buffett’s confident they’ll out-perform the S&P over the long run. In Buffett’s own words: “At Berkshire, our time horizon is forever.”

When you give yourself that sort of timeline, it fundamentally changes the way you look at stocks. It makes it OK that profits in your home construction division are off 72 percent. The sector will recover, and the goal is to be in the best position possible to profit from that recovery when it comes. It doesn’t matter if it’s this year or next. All we know is that recovery is coming.



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Buffett trims fat from portfolio (BAC, NKE, FISV, LOW)

Interestingly, Berkshire wasn’t the only investment company to shift capital out of banks. Trian Partners made the same bet in order to focus on food stocks.

We got a glimpse at Warren Buffett’s recent investment moves with Berkshire Hathaway Inc.’s (NYSE:BRK.B) 13F filing, which details the company’s stock trades through the end of 2010. Most notably, the Oracle of Omaha ditched 5 million shares in Bank of America Corp. (NYSE:BAC).

“He’s closing out a loser,” Jeff Matthews, author of ‘Pilgrimage to Warren Buffett’s Omaha’ told Bloomberg. “We bought it during the crisis. But its earnings power coming out the crisis has been reduced.”

Buffett took a loss of more than 55 percent on the trade after purchasing the shares during the height of the mortgage crisis. Some analysts see the move out of BAC as a sign that Buffett’s cleaning house as he prepares to hand over the reins to a group of successors.

Other positions Berkshire closed out last year:

  • Becton Dickinson & Co. (NYSE:BDX)
  • Comcast Corp. (NYSE:CMCSA)
  • Fiserv Inc. (NYSE:FISV)
  • Lowe’s Companies Inc. (NYSE:LOW)
  • Nalco Holding Co. (NYSE:NLC)
  • Nestle (NSRGY.PK)
  • Nike Inc. (NYSE:NKE)

Berkshire now holds positions in just 25 companies. That’s down from 37 in June, according to Interestingly, Berkshire wasn’t the only investment company to shift capital out of banks.

Trian Partners, which is headed by widely-followed investor Nelson Peltz, ditched stakes in Bank of America, J.P. Morgan Chase (NYSE: JPM) and U.S. Bancorp, (NYSE: USB), according to, to make a big bet on food stocks, specifically Kellogg’s (NYSE: K).



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