Should I put one space or two after a period?

Ok, this answer is easy:

Unless you are using an old fashioned typewriter, you should only use one space after a period.

Look at any professional publication you respect. Look at every book you have. Look in every magazine. You will find only one space after the periods.

The reason why (older) people were taught to put two spaces after a period is because back before computers, people wrote things on typewriters. Typewriters used something called monospace fonts, that is, fonts in which every letter was the same width. In order to make a pleasing space after a period, two spaces were needed when using a typewriter.

However, once the personal computer came into existence, every person had the power of a professionally typeset (i.e., non-monospace font) at their fingertips. Two spaces after a period were no longer required.

If your coworkers use two spaces after a period, just ask them to stop. If you want to fix their document, you can just do a "find and replace" for ".  " (that is, a period with two spaces after it) and replace with ". " (a period with one space after it).

The one instance where I would make an exception is in any technical sort of writing where part of the requirements you are given are specifically to add two spaces after a period. I would argue that anyone with such a rule is stuck in the past, but rather than put your career/script/legal brief etc. in jeopardy, just roll with it. (Side note: I ran into this situation once. I just wrote the document correctly (with one space after the period), then did a find and replace when I was finished to fix the formatting. I also gently informed the person who required this archaic practice about modern typesetting, and I never had to do this again.)

Before this turns into a major debate like my post about not putting the MBA designation on your business card or in your email signature, just remember that you don't have to take my word for it.

Listen to the Chicago Manual of Style, which is of the view  that there is "no reason for two spaces after a period in published work."

Listen to the MLA Handbook, which only uses a single space after a period in all of its examples.

Listen to Typography For Lawyers (a personal favorite), which says to "put exactly one space after any punctuation." (I particularly like how in this link they show you the difference between monospaced and non-monospaced fonts).

Listen to the always cool Slate Magazine, which punches you right in the face with the following statement: "typing two spaces after a period is totally, completely, utterly, and inarguably wrong."

Finally, listen to The Economist, which has a macro that automatically strips a second space from after a period if one should find its way onto the magazine's online content management system.

The Economist does leave the door open a crack for some debate, taking the view that spaces after a period are a style choice rather than a hard and fast rule. I think they were a bit too kind in that approach. It is also a "style choice" not to wear bellbottoms or a stovepipe hat, which, if you use two spaces after a period, you might as well do because you are truly living in the past.

Feel free to comment if you disagree- the internet is a beautiful thing!

Professionally Formatting a Word Document

Chances are if you work for a company, you may occasionally need to create a document in Microsoft Word, either by taking someone else's document and using it as a template or creating your own from scratch. If you just type things in Word and haven't taken the time to learn how to do it professionally, you are doing yourself a disservice. I've seen documents at different companies that have had pretty bad formatting. They have been passed around over time between 5 or 6 people, copied, pasted, formatting has been updated and adjusted, spaces have been put in where tabs should be, bullets aren't consistent, etc.

You can significantly improve the quality of your work in MS word by putting in a few hours of practice that will pay off over the course of your career. (College students in particular, pay attention to this. The more time you spend learning this stuff now when you have more time to devote to learning, the more time you will save yourself later when you're going to work).

I've always been able to learn a few things from the "For Dummies" books, and this is no exception. (Well, the one exception is with respect to investing. There are a lot of good books on investing outside of this series.) So if you're into having a book to hold in your hands, an investment in Word 2013 For Dummies or 

Word 2010 For Dummies will pay for itself many times over.

If you don't want to use a book, there are a number of different sources/tutorials across the web, particularly on youtube, but they aren't very systematic, meaning they typically only address specific topics you might be searching for help on.

Anyway, if you want my advice, the first thing to focus on if you want to create a professional looking document is styles (link directs you to office.microsoft.com).

Many people have never heard of "Styles" in Word (myself included, until a few years ago), or if you've heard of them you might have thought that they were some kind of super advanced thing you never needed to use. Let me tell you right now that you are wrong if you think that. They are actually very easy once you get used to them, and they are essential to creating a professionally formatted document. One of the key things styles allow you to do is ensure consistent formatting throughout your document. Consistency is extremely important because it helps the reader to orient themselves (and helping the reader is important- to quote Strunk and White's The Elements of Style, "you must sympathize with the reader's plight (most readers are in trouble about half the time)"). If all of the section headings look the same, the reader will always know exactly where they stand. Consistent formatting also gives the benefit of looking pleasing to the eye.

Particularly among finance and engineering types, I have noticed an inability to properly use MS Word, but no matter how good your excel models or technical drawings are, if you can't communicate them in a professional looking format, you will be doing yourself a great disservice. 

A few more tips to help you out in Word:

1. Break your words up with pictures. Use tables, figures, diagrams, and illustrations. Though your prose may be excellent, your report will be more appealing with some figures.
2. Consistently format these figures. If you are using reasonably sized tables, use MS Word's embedded table function to create tables. They will have the same look and feel and will vastly improve the quality of your document vs. a Frankenstein-like compilation of tables extracted from various excel documents, pdf screenshots etc. It may take time to retype a table into word, but the results are often worth the effort. Also, caption the figures consistently. (by the way, if you need to move rows around in a Word table, try this trick, it changed my life. Even if you don't need to move rows around, try this trick out because I can almost guarantee it will come in handy.)
3. Use a cover page, particularly for longer reports. The built in cover pages are pretty awesome and you can modify them a bit if needed.
4. Study other documents. Look around on the web and at different reports you may have on your desk right now. See what works and what doesn't. Academic papers are all usually very consistently formatted and can be used as a basic starter model. If you can get your hands on them, I really like equity analyst research reports from a finance perspective. In particular, the  bigger banks have large, well-paid editing departments that produce some good looking documents. (notice all of the tables in this Goldman report on Apple have a consistent feel).
5. Don't go overboard. Simpler is often better. Adding a ton of page outlines, header and footer content, colored fills etc... often makes the document look worse.
6. Learn how to match colors exactly by changing RGB values. Color Cop is an awesome, free tool you can use to exactly match colors in your document to a company logo, picture, or any other color you might find on the web.

I won't lie to you- learning all of this stuff can be a tedious, painful exercise at first. This is why many people don't bother and why it will help set you apart as someone who produces top quality, professional work. You don't have to learn it all at once, but make a consistent effort to dedicate a few hours a week to this and you will definitely notice the results.

Excel data table for sensitivity analysis

I've used Microsoft Excel for so long that it has become kind of like another appendage at work. It is one of the most powerful tools you can learn to use to increase your productivity in an office. I played a lot of video games growing up, and in video game terms increasing your Excel skill is kind of like adding experience points and making your character more powerful. The better you know how to use excel, the more you can do in less time, especially if you're in finance/accounting/marketing/other numbers-oriented fields (and these days with rise of big data, almost every field is now numbers oriented). Every day I learn a new function, re-learn how to use an old one that I haven't tried in a while, or discover a new way to do something quicker.

One powerful tool I use often enough to have memorized how to use it is the data table function. Let me put its usefulness in context...

So you've created a working DCF model that values a company and you've assumed a discount rate and a revenue growth rate as part of this. Your boss/portfolio manager/wife/self looks at it and says "ok, but a DCF is just a tool to estimate value. You're giving me an precise number. How sensitive is that number to the discount rate you chose? By the way I don't believe the revenue growth rate you chose- what would the value look like if you dropped it by 5%?"

You go back to your spreadsheet and build a table. You spend the next hour methodically changing the discount rate input, and the earnings rate input, and noting the results. You come up with a whole range of values. You format them nicely, print it out and show your boss/portfolio manager/wife/self. He/she says "great, this is what I was looking for. I'm not confident the revenue growth will be as high as it needs to be to make a good return buying the stock at its current price so I'm not sure what to do here. How about you change the margin assumption in your model and show me what it does to this sensitivity table?"

You sigh. It's six o'clock. It will take another hour to do this, but you go back and make the change to your margin assumption. You then slog through, methodically changing the discount rate and the revenue growth rate and noting the results. You think about that beer waiting for you at home. Your mind wanders and you wonder if Excel has a way to automatically create a data table that will be sitting there, ready to update at a second's notice if you change any part of your model. One that will vary the assumptions for you behind the scenes and print out the results for you... 

You fire up the google. Your hard drive and RAM are jolted with electrical impulses. The google algorithm does your bidding. It sorts, it seeks. Your ISP brings you data at your maximum download speeds, your monitor renders bits and bytes into pleasing words and pictures.... and one second later you get search results. Pages upon pages of search results, all of them pointing you to the data table function. You fire up youtube, watch a tutorial, and seconds later you have a dynamically linked sensitivity table ready to do your bidding at a moment's notice. It takes a bit of time to get it right- some videos only use a single variable analysis, you keep getting the row and column inputs confused.... but it is time well spent. Learning how to use a data table just shaved an hour off of every future DCF you do. It made you more efficient. It made you better at your job. 

Anyway, if you haven't learned this yet, I strongly suggest you check out how to create a data table in Excel. Yes it is a bit complicated at first, but it gets much, much easier. 

As a side note, I've found the best way to learn how to do things in excel is with actual live problems. Something that you need to deliver and that would be mind-numbingly tedious without an excel trick. 

I suck at using blogger for anything but text, so as of now I'm not able to give you an effective tutorial on how to use data analysis (apologies to anyone who came here looking for this). What I can say is that there are hundreds of demos just waiting for you on google. I tend to prefer a youtube demo because you can see how people do things live, which helps you understand what you may be doing wrong when you mess up. 

I just did a quick search and thought this demo was pretty good.

Have fun.

-Bernanke

As many advanced googlers know, if you type in a search term with a minus sign before it, your search will not return results with that word in it. I was just sitting here doing a thought experiment- what if I spent the next few weeks only reading financial news stories/research/information that do not contain the word "bernanke." Better yet, what if I could just run the big "minus" filter on a host of terms including "qe," "fed," "gold," and also "bubble" for good measure.

I probably wouldn't be able to visit zerohedge anymore, which would be a bummer because that is one of my favorite sites.

I know this whole thing is in uncharted waters currently, but Every now and then don't you get bernanke fatigue? Fiat fatigue? Maybe it is just a part of getting older. Maybe my father was in this position 30 years ago when he was looking at the economic future of the country and hearing doubts about where it was going to be in 30 years. Maybe you can always find things to worry about.. Maybe my father had Volker fatigue in 1983. Maybe things have never looked good to anyone and all of us current market participants are just in the same position our fathers were in. Maybe it is time to stop worrying about it so much.

I know you can respond with umpteen stats about how this time it's different. How the gap between the rich and the poor has steadily increased, and how incomes have come down (or if you want to make the argument they've gone up in aggregate). Don't bother making them to me though. At this point I tend to just nod my head when I hear someone's prediction about where the economy and the country are headed.

I'll continue to read about and follow it all because that's the way I'm wired, but boy a vacation would be nice. 

Thoughts on 3G Capital's LBO of Heinz or "Warrant" Buffett Strikes Again

On Feb 14 (last Thursday), Berkshire and 3G Capital announced that they agreed to acquire food company H.J. Heinz Co. for $23 billion in cash ($72.50 per share, a 20% premium to where the stock closed the day before).

Well, that's what the headlines would have you believe anyway. However, that is not what is happening. My headline is a bit more accurate. I'll explain below.

Initial read

I was pretty busy last Thursday so I didn't pay a whole lot of attention to the acquisition, but as may you know I'm a big Buffett buff and I made a mental note to take a closer look at the numbers at some point in the future. I like to check in on what smart people are valuing businesses at every now and then so I have a good market reference point in my head.

My initial assumption based on the headlines alone was that the deal made sense- Buffett loves these big, high quality brand name companies and Heinz seems to make sense as a piece of the portfolio alongside Wrigley, Coke, and Gillette. I also know Buffett likes to pay a reasonable for a business (read basically any book about him and you'll see some reference to the "margin of safety" concept he learned from Ben Graham) so I assumed that he got a good deal. I haven't really followed Heinz, so I thought that maybe the stock had been neglected and possibly didn't take part in the recent market rally.

Today I revisited the story, pulled open Heinz's last 10-K and realized that I was completely wrong. This was not an old-style Warren Buffett margin of safety "be greedy when others are fearful" acquisition of a great business at a substantial discount to intrinsic value. This was much more what I've come to think of as a "new style" Warren Buffett where he gets to put capital to use at rates no mere mortal can obtain. The price paid for Heinz was not a bargain from what I can see.

The price tag was high - 25x earnings!

Looking at Heinz's 2012 10-K (see page 33 for the income statement), the company earned about $939 million of net income for the year ended April 2012. I opened another couple of 10-Ks to look at the five year history, and net income averaged a bit below $939 million for this period, so I figured it was a pretty good number. Divide the purchase price of $23 billion by $939 million and you'll see the Buffett/3G team paid about 25 times trailing earnings for the company, not a low multiple by any stretch of the imagination. For the sake of comparision, Google sells for a similar multiple, is trading at an all time high, and though I'm getting out of my league here, I think it is considered more of a growth stock. Heinz does not make technology, it makes food products.

Going a few pages further in the 10-K, I figured I'd get a rough sense of what the company's free cash flow is. Take net income of $939 million, add back $300 million of depreciation, $50 million of amortization, deduct CAPEX of $400 million and you're at roughly $900 million of free cash flow. If you pay $23 billion for the company, $900 million of free cash flow equates to roughly a 4% yield. The multiple is still about the same, roughly 25x FCF. I also checked how FCF looked over the past five or six years, and again the average was below the current $900 million number.

I didn't create a DCF model of the company because I'd seen enough at this point and I didn't have the time to put into it, but I think if you do a DCF with some reasonable assumptions, you're not going to get to a $23 billion valuation for the company assuming things continue along as they have in the past.

I believe I read in the press that the price was something along the lines of 8x book value and 14x EBITDA, again generally high multiples (though book value isn't the greatest metric for a company like this).

Berkshire didn't buy the company, it bought half of the equity in the deal, plus high-yielding preferred and warrants as a kicker

Reading past the headlines of the articles, I realized that Berkshire's investment in the company wasn't purely an equity stake (like Buffett's investments in Coke, Gilette, Washington Post etc. that he became famous for). Instead, Berkshire is going to pay $8 billion for preferred stock in Heinz yielding 9%, and invest $4 billion of equity.

In addition, 3G is only investing $4 billion of equity and financing the rest. The company is also going to roll its current $5 billion of debt.

So doing some rough math, when the deal is complete, the capital structure will be something like:

$8 billion of equity
$8 billion of preferred stock
$12 billion of debt ($5 billion existing plus ~7 billion of new debt hence the "LBO")

Oh, and if you dig around, Buffett is also getting warrants to buy shares of the company. ("Warrant" Buffett also has Bank of America warrants, had Goldman warrants, and GE warrants). Terms of these warrants weren't disclosed.

Anyway the upshot of all of this is that if the deal is approved, Heinz will become a private company 50% owned by a PE firm with a history of cost cutting. It will have twice the debt load it had previously and its debt will be downgraded by the rating agencies, but as the LBO story goes, should be able to service the debt over time with steady cash flows thrown off by the business. It will enjoy levered returns for a few years, and then 3G will likely look for an exit, possibly selling its 50% stake to Berkshire. The company may be more profitable at that time.

In the meantime, Berkshire rakes in the 9% dividends on the preferred stock. Don't forget that preferred stock dividends enjoy a very favorable tax deduction for corporate owners, so Berkshire also gets to avoid some taxes it would have been hit by had it acquired Heinz outright.

And those warrants. Berkshire can maybe exercise those warrants someday.

Berkshire's price tag - more like 18x earnings, with upside

My final thought- Berkshire's earnings stream from the company will be as follows:

-$8 billion of preferred stock at 9% yield for $720 million a year in pretax preferred dividends
-Since generally 70% of preferred stock dividends are deductible for corporations, the effective tax rate on these dividends will be approximately 10%, for after-tax preferred dividends of about $650 million.
-Plus, Berkshire's 50% share of the company's earnings. This is a harder number to take a guess at but I'll do some extremely rough late-night math. $939 million of earnings in 2012. Subtract preferred dividends of $720 million and this leaves you with about $220 million of earnings. 2012 earnings include about $300 million of pretax interest expense. Since the debt load of the company is going to roughly double, lets assume interest expense doubles, to $600 million (since the rating will fall to junk, the rate on new debt will likely be higher and the cost of rolling old debt will be higher but im not going to get too precise here). Tax effecting the additional $300 million of interest expense at 30%, you get about a $210 million hit to after tax earnings, reducing the $220 million to $10 million of after-tax earnings. Buffett gets the right to half of that, roughly $5 million
-$650+5 = $655 million of after tax earnings per year
-Buffett invested $12 billion of cash
-This results in a P/E multiple of more like 18x earnings. Better than 25, but still not cheap.

Let me know if I missed something. It's late.

Urban Hurricane Preparation

So I've recently lived through the effects of Hurricane Sandy here in the Northeast and I want to give my perspective on how to prepare for a Hurricane if you live in an urban area like me. This isn't a guide per se, but a few things I ran into.

• Thanks to modern weather forecasting, we knew there was a potential monster storm coming in at least 3 days before it actually hit. My first tip is not to ignore the weather forecasts. Especially if they are dire.  In fact, if you need to guarantee productivity (ie power and internet connection) for office/computer work etc., you might even want to fly you or some of your staff out of town and stay in a cheap hotel somewhere out of harm's way for a week.

• Gas up. Before the storm comes in, fill your car with gas, and if you have gas cans, fill those also. (Note: if you live in an apartment you likely can't keep gas cans in there due to fumes and general safety. This is more for people with garages and generators. Be extremely careful when storing and transporting gas.) There are long gas lines in NY, NJ and CT at the moment. Bonus points if you have a bicycle that you can attach a basket to for groceries in a pinch so you dont even need to use that much gas.

• This is an odd one, but something that came up. Your garage door opener might not work after a storm. Go into your garage and pull the disengagement handle for the electronic opening mechanism. You now have an old fashioned door that pulls up and down by hand. Tie a rope with a heavy weight on the end to weigh the door down so it does not blow up in strong winds.

• A lot of people were so focused on the storm that they ignored the weather forecast for after the storm, which was pretty cold. Be ready to stay warm if needed. Blankets!

• If you have an electric stovetop, you could be screwed. People with gas at least had something on which to cook, make coffee and tea etc. Ditto for the electric coffeemaker. I highly recommend this regardless of hurricaines, but get an Aerobie AeroPress Coffee and Espresso Maker immediately (check out my review of the aeropress here)!

• Stock up on dry, canned foods and water. 

• Stuff sealed ziplock bags mostly full of water into the empty spaces in your freezer. They keep stuff cold longer if the power goes out and in a pinch you can even drink the water.

• Follow the advice on ready.gov. Go bags etc. are handy. If floods are a threat, you need to be ready to move.

• Have good battery powered lighting. I own a Fenix E21 Flashlight and I kept it on me at all times during the power outage. I love this thing. The advantages of this light are: 1) it is super bright. I'm talking daylight in a dark room bright. 2) it is small 3) It is heavy duty and waterproof. I saw a youtube video where someone had it lit in a bucket of water for a day or something and it still worked. 4) It takes common AA batteries. Another suggestion is to get a book light for reading and a LED lantern for general lighting. A headlamp is also good for doing dishes or other work in the dark. Try to get them all running on common batteries so you can stock up on those (AA for example). Also have CANDLES. I hadn't had a candlelight (only) dinner in years and its amazing how much light a couple of candles can throw off. 

• Have a good battery powered radio. When the power goes off, BOOM, instant loss of all those nice news anchors giving you up to the second updates on doppler radar so you will be dying to hear some kind of news and the radio is your friend in this situation. Seems like all of our clock radios took 9 volt batteries and at one point we ALMOST considered taking the battery out of the smoke detector to put in a radio for a few minutes but luckily we found one. Bonus points if it also has a hand crank as backup in case you're out of batteries. I can see these things selling like hotcakes in the wake of the storm. If you had solar powered stuff, it might have been ok for a very brief period of time, but there hasn't been much sun around lately.

• Make friends. So you haven't spoken to your neighbor in three years? Well how do you feel now that he has a generator and you're in desperate need of someplace to plug an electric heater for an hour to keep frostbite at bay? I saw a lot of examples of people helping eachother out with some food, or even a place to stay. Your neighbors and family can be a huge help in times of emergency.

That's just a little advice from personal experience. There are more complete guides elsewhere (ready.gov for example) and I definitely recommend you check them out if a storm is headed your way.

Smallcap Screen Part II - Lotus. Jiangbo and Huifeng

Ok, so maybe I should call this a microcap screen, but for now lets ignore the semantics.
I finally got around to checking into Lotus Pharmaceuticals. They use essentially the same corporate structure as Skystar, controlling a china-based entity through "contractual arrangements." They also executed a reverse split in 2010, yet the shares still trade for less than a dollar. I'm going to rule this one out as well. (If you want to know why, refer to my previous analysis.)

The final 2 similar-looking pharmas that show up on the list are Jiangbo Pharma and Huifeng Bio-Phar. I am going to save myself some work and assume that these companies also have a similar corporate structure as Skystar. To repeat: I'm not saying these are necessarily bad structures, I'm just saying they don't offer me enough certainty to invest my hard-earned money. You are free to make your own determination.