Bloomberg is reporting that more than 2,000 companies around the world have cash balances exceeding their market capitalization. That’s more than eight times as many cash rich companies as when the last bear market bottomed in 2002.

With these companies, a $1 share is worth more than $1, just in terms of the cash held by the company. The actual business of the company is thrown in for free.

And these aren’t tinpots but rather big global companies that hold more cash than they’re worth:

Bank of New York Mellon Corp. in New York, Danieli SpA in Buttrio, Italy and Seoul-based Namyang Dairy Products Co. hold more cash than the value of their stock and debt as the slowing world economy wiped out $32 trillion in capitalization this year. Companies in the MSCI World Index trade for an average $1.17 per dollar of net assets, the lowest since at least 1995, and 39 percent sell at a discount to shareholder equity, data compiled by Bloomberg show.

Of course it’s not a one-way bet. The market is pricing the companies expecting falling profits or big losses that start to eat into their reserves.

But that’s always a danger with stock investing – you don’t normally get to buy a $1 for less than $1 to calm your nerves.

Apple and Microsoft: two cash-rich tech aristocrats

Besides the ‘free’ companies, the article also looks at Microsoft and Apple, two companies in the S&P 500 that have more than $20 billion in cash and securities and less than $2 billion in debt (excluding financial companies).

Now that’s not more than their market caps ($192 billion buys you Microsoft and $82 billion secures Apple). But it’s a very healthy cushion to fall back on. Both companies look excellent buys to me.

Techs never really recovered from the dotcom bust, in terms of getting their old pre-bubble ratings back. The tech sector is currently about as cheap as it’s ever been, yet as a group these giants still enjoy deeply embedded advantages and are churning out billions in cash from relatively small capital bases and workforces.

Here in the UK I’ve been buying shares in the Polar Capital Technology Investment Trust, which holds a wide range of tech shares from around the world and is overweight in the big US companies. It has just bounced off an all-time low, and must now be even cheaper, relatively speaking, then when I started buying, given the fall of sterling versus the dollar over that time.

Of course if you’re based in the US you can buy these cheap tech shares direct and not worry about the currency risk at all. I envy you!

The economy is going to get worse before it gets better, but I think it’s very hard to make a bear case at these levels, with dividend yields well over stupidly expensive government bonds in the US and the UK. You must make your own mind up, of course.

Bloomberg says the cash rich equivalents in 2002 rose 115% over the next year.

Food for thought. I’ll ferret out some cash-rich UK companies for an article in the next few days, so please do subscribe for free to ensure you get the article when it’s written.

Government bonds are being touted as the safest place for your money during the latter stages of this financial crunch. I’m no economist or financial adviser, but I think that’s a load of baloney.

Cash is the way to guarantee preserving the nominal value of your wealth (inflation and bank runs aside).

Government bonds are assets that fluctuate in value. Just like any other asset, making or losing money with government bonds boils down to:

• The price when you buy them
• The price when you sell them
• The income you get from holding

Government bond yields have plunged. At the time of writing:

• Long dated yields in Europe and the UK are at their lowest in 50 years
• The yield on the 10-year German Bund is below 3%
• 10-year Gilts in the UK dropped from 3.77% to 3.32% in a week
• US 10-year Treasuries touched a 53-year low of 2.52%
• 30-year US Treasuries yield only a little over 3%
• Short-dated US Treasuries are yielding less than 1%

Priced to imperfection

The corollary of falling yields is rising prices. Another way of saying ‘yields have plunged’ is ‘the price of buying bonds has gone up’.

If you pay more for your government bonds than their face value, you will experience a capital loss if you hold them to maturity. If you want to avoid this, you need to expect to be able to pass them on to another investor before then.

Long-dated UK Gilts are as expensive as they’ve been since just after the Second World, and you’re paid a pittance for holding them. Do you really fancy your chances of selling them for a profit?

Is it rational to expect a 3% yield to compensate an investor for the next 30 years? Will inflation never again hit 4/5/6%? In my humble opinion these yields and the resultant prices are absolutely bonkers.

Dividend yields in the UK from the FTSE All-Share are substantially higher than Gilt yields. In a theoretical sense, Gilt investors are saying equity investors can have all the likely growth in the dividend yield to come for free. As David Stephenson of Wise Investments told CityWire:

On a valuation basis, markets appear even cheaper than they were a month ago.  The UK Equity Market is yielding 5.5% and the Gilt/Equity yield ratio has fallen to 0.79, a massive 20% below where the market reached in 2003, the bottom of the last bear market.

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I have just finished the The Snowball, the first biography Warren Buffett has cooperated with. It’s full of surprises, such as how Buffett had three leading ladies for two decades, and how his 1960s home was an accidental outpost of the counterculture.

But I’m more interested in how Buffett made his money. And while there’s few new facts about Buffett’s deals in The Snowball, the biographical format does put them into context. You get to see what makes him tick.

Here are seven interesting things I learned about Warren Buffett from The Snowball, and some ideas on how they can help your investing:

1. Buffett set goals young. (He really started, really young)

Buffet began obsessing over numbers as a child. He raced marbles with a stopwatch and calculated the lifespan of hymn composers when six-years old. He sold chewing gum at seven and Coca Cola when he was eight: the same year he began wearing a money-changer on his belt.

• His dad was a stockbroker. This gave him an early view of the markets
• At ten he was chalking stock prices at a local broker’s office
• The same year he visited the New York Stock Exchange, and was asked for a tip by senior Goldman Sachs partner Sidney Weinberg – an experience he never forgot
• His favourite childhood book was One Thousand Ways to Make $1,000
• At 11 he announced he was going to be a millionaire at 35, a seemingly crazy goal in 1941 (when a million really was a million)
• He filed his first tax return aged 14, having already made $1,000 (equivalent to around $12,500 in today’s money)

The takeaway: The power of compound interest takes years to work its magic. None of us has a time machine, so the main lesson is not to delay a day when investing for the future.

2. Buffett bought his first stock when he was 12-years old

Warren put everything his schemes had earned him into a stock, Cities Service Preferred, when he was 12. He also enrolled his sister, Doris.

Buffet was already learning how to hold shares through a slump

He paid $114.75 dollars for three shares, and watched the stock price fall from $38.25 to $27 a share. His sister Doris was not happy. When Cities Service went back up to $40, he sold. He made $5 a share profit, and got Doris off his back. After he sold, the stock rose to $202 a share.

Takeaway: We all learn the same lessons. Buffett’s business partner Charlie Munger says that because Warren started thinking about odds, stocks, and goals before he was a teenager, he’s years ahead of the rest of us.

I used to watch share prices rise and fall on the Teletext TV service when I was 11 or 12. At the same age Buffett was learning real-world lessons on holding shares through a slump and selling too soon.

You’ll only discover whether you have the stomach to invest through a bear market or whether you’ll be sucked up by the next property bubble by being an active investor. Start with small sums, sure, but don’t delay that start.

3. Buffet lied, shoplifted, and played truant as a kid

This one was a real surprise. As a teenager Buffett revealed a wild streak. He says:

“We’d steal stuff for which we had no use. We’d steal golf bags and golf clubs. I walked out of the lower level where the sporting goods were, up the stairway to the street, carrying a golf bag and golf clubs, and the club was stolen and so were the bags. I stole hundreds of golf balls.

“I made up this crazy story for my parents – I told them I had this friend, and his father had died. He kept finding more of these golf balls that his father had bought. Who knows what my parents talked about at night.”

Takeaway: Even Buffett had to learn to be Buffett. I don’t know about you, but I found this heartening to read. Together with discovering that Buffett was a shy child who enrolled himself in Dale Carnegie’s public speaking course, it made him seem more human.

It’s easy to feel you haven’t got what it takes to make money. Some are born special, you might conclude. But Buffett’s history shows that even the world’s richest and most admired investor had to iron out his kinks.

Buffett’s history also makes me proud to be an outsider. Many of my college classmates entered the city or became management consultants, and have earned six-figure salaries for a decade. When property prices were booming, I’d sometimes wonder if I’d made the wrong decision by deciding to go it alone – even though I know that working a nine-to-five in an office and answering to some buffoon of a manager would kill me.

Discovering Buffett made being his own boss a top priority puts me in good company. I also suspect the unusual structure of Berkshire Hathaway grew out of Buffett’s non-confirming mentality.

4. Buffett is a businessman first, investor second

You’ll often read that Buffett evaluates stocks as if he’s buying the whole business. What I realised after reading The Snowball was Buffett doesn’t do this because he’s an investor who thinks like a businessman. Buffett is a businessman who is also an investor.

• Buffett ran multiple businesses while still a student: He sold refurbished golf balls, peddled stamps to collectors, ran a network of pinball machines when he was 17, owned a tenanted farm, and managed a 50-strong paperboy route
• He dealt hands-on with strikes and turf wars at newspapers from The Washington Post to the Omaha Sun
• Buffett didn’t just buy, hold and drink Coca-Cola – he engineered the replacement of its CEO
• With all the new businesses, from See’s Candies to GEICO, he added everything from their stock level reports to weekly sales projections to his endless daily reading
• Berkshire Hathaway is far from a simple holding pen for Buffett’s investments. He’s used his business acumen to produce an intricate money-making machine which takes cash from its subsidiaries and the float from its insurance businesses and reinvests it at higher rates of return, multiplying his returns

Takeway: Buffett’s success will never boil down to filters or ratios. Investors who try to ape him simply by reducing his methods to dubious cashflow projections or buying any old listed household name when its stock price falls 20 per cent will never replicate Buffett’s success. (Okay, rounding down roughly nobody is ever going to replicate Buffett’s success, but you know what I mean).

Buffett’s record suggests investors should spend as much time reading about business and management as they do calculating P/E ratios. The trouble is, all manner of financial ratios are available at a touch of a button. Buffett’s sense of business value is far harder to emulate.

5. Buffet makes mistakes

He really does! I was even more heartened by Buffett’s stinkers than by his golf ball robbery.

Some classic Buffett cock-ups include:

• Him and his friends spending $25,000 in 1957 on four-cent Blue Eagle stamps that the US government was about to take out of circulation. By securing and controlling the supply, they destroyed any chance of the stamps becoming valuable. His partners in the caper were still mailing him with postage paid for by sheets of the stamps decades later.
• He bought The Buffalo Evening News in 1977 and had lost $10 million within three years by becoming embroiled in a price war and a fight with the unions (though it later became very profitable)
• Buffett’s firm Berkshire Hathaway is living testament to his biggest mistake – spending millions to gain control of a doomed textile manufacturer
• Buying into Salomon Brothers in 1987 for $700 million eventually plunged him neck-deep into the Wall Street culture he so despised, when its rogue traders and poor management threatened his reputation and fortune

Takeaway: Mistakes happen even to the best of us. Sadly, having read The Snowball cover-to-cover I haven’t found a Buffett blunder to rank with my own worst investment (an iffy company called Homebuy that went bust overnight). But I saw plenty of examples where Buffett dusted himself down after an investment misfired and tried to learn from what went wrong.

Virtually all Buffett’s purchases of major insurance companies seem to have gone awry in the early years, for instance, and yet it’s by reinvesting all the cash thrown off by these companies that Buffett has maintained Berkshire Hathaway’s incredible growth rate.

The moral is to not despair when an investment turns out badly, but try to figure out what you can takeaway from it, as well as what you can salvage the situation.

6. Buffett considered quitting investing in his early 30s

In 1969 Buffett wrote to his investors that he was going to close their partnerships:

“I know I don’t want to be totally occupied with outpacing an investment rabbit all my life. The only way to slow down is to stop. I am not attuned to this market environment, and I don’t want to spoil a decent record by trying to play a game I don’t understand just so I can go out a hero.

“I do know that when I am sixty, I should be attempting to achieve different personals goals than those which had priority at twenty.”

Takeaway: What can anyone learn from this but humility? I already knew before reading The Snowball that Buffett wound down his partnerships in 1970 because he thought the market too over-valued to deliver an adequate return for his investors. That move alone would seal Buffett’s place in history among value investors, even if he had retired.

Of course, Buffett didn’t retire. He is still compounding his investments at an average rate of over 20% a year, nearly four decades later.

7. Buffett treats becoming the world’s richest man as a game

I couldn’t even begin to quote examples from The Snowball showing how Warren Buffett is in it for the scorecard, not for the payday: the entire biography is a testament to it.

No sports cars or private islands for Warren Buffett – even when he eventually bought a corporate jet he called it ‘The Indefensible’. For decades he bought suits from the everyman outfitter nearest his office, and his biography frequently mentions (and has photographic evidence of) his favourite threadbare jumper. And famously, his main residence is the first house he bought in 1961.

From setting that goal aged 11 of becoming a millionaire by 35, Buffett seems to treat investing as an intellectual challenge. He probably learned this from his great mentor Benjaman Graham, who seemed more bothered by being right than being rich, and for whom investing was just one of several high-end hobbies.

Buffett’s ‘inner scorecard’ helped him save and reinvest his money early on

Unlike Graham, however, Buffett really cares about every penny. From ‘Buffetting’ a few cents off the price he paid for stocks to demanding his friends sell him shares they’d bought in companies he was interested in, right up to his close personal friendship with his rival for the title of world’s richest man, Bill Gates, Buffett really wants to have the biggest snowball.

If you were to say there’s something rather peculiar about chasing money as a means to an end, I could certainly see your point. But when the recipient chooses to leave virtually all $62 billion of his winnings to charity, it’s hard to complain. I’d rather have Buffett as the world’s richest man than the Salomon traders who almost destroyed his reputation.

Takeaway: Spend less than you earn and reinvest the difference in the stock market. Buffett may have lived a remarkable life, but that central practice is something we can all aspire to.

Beyond that, I don’t want to get too moral. I’m happy to live below my means, but can I honestly say I’d be happy with Cherry Coke and a steak from the local shop if my means were sufficient to buy up The Maldives or launch me into space? Unfortunately I’m not qualified to comment.

I do think my attitude is closer to Buffett’s than to the more visible of the cityboys I’ve seen in London over the past few years, for whom cash is flash. Also, Buffett’s self-containment from materialism – he calls it his ‘inner scorecard’ – undoubtedly helped him save and reinvest his money early on, and got his investing career off to a flying start in his 20s. You have to accumulate before you can speculate. Good luck rolling your own snowball.

I can’t recommend The Snowball enough for anyone interested in business and investing. Obviously, anyone interested in Warren Buffett should buy it too, but I imagine you’ve all got two copies already (one for your library and one for your bathroom). The book is seemingly always discounted at Amazon (click through for the latest price at Amazon US or at Amazon UK) so there’s no excuse. Except, perhaps, it weighs a tonne, so you might put your back out while reading it.