Case Study-General Motors

When you look at GM's numbers, you do not have to have an MBA to understand them...sixth-grade math will do. Ask yourself this,

How can a company that earns $17.92 a share payout a dividend of $20.62 a share and stay in business?

Any child can tell you that if you have $17.92 in your hand, you cannot find $20.62 in that amount. The next question is,

How can a company spend $102.34 a share when it only earns $17.92 a share?
Once again, a 12 year old can tell you that spending $102.34 when you only
earned $17.92 is not good money management. It just does not make sense.

Yet, even though it does not make sense,millions of people are investing in GM, betting their retirement on GM's future, and listening to stockbrokers and financial planners who advise them to invest in blue-chip companies like GM. How can people be so naive? My answer:

No financial education!

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Warren Buffett may have another answer to that question. A quote:
"It has been helpful to me to have tens of thousands (of students) turned out of business schools taught that it didn't do any good to think."

This quote may explain why a company such as GM, with thousands of smart people working for it, can make such "unwise" financial decisions.
Mr. Buffett has also said:
"If calculus were required, I'd have to go back to delivering papers. I've never seen any need for algebra."

I believe he is saying, in other words, that getting rich is common sense, requiring only simple math. And that raises the obvious question: "How can so many educated people be persuaded to invest in a company that uses fuzzy math instead of logical math?"

A quote from Mr. Buffett that seems appropriate:
"Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway."

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Opportunity?

Recently, Warren Buffett made the news again. He had enjoyed an interview he had watched with Rich Wagoner about GM. To show his support, Mr. Buffett sent his daughter out to buy a new Cadillac for him. This generated a few questions and a lot of speculation. The bloggers were quite active with some of the following comments:

• Buying a Cadillac means Warren Buffett changed his mind about GM. It must be time to buy GM stock.

• With GM stock so low, he's just cashing in on good prices on Cadillacs.

• Even though GM is in trouble, Warren Buffett believes in "buying American."

• Warren Buffett has been making comments about the fundamentals of GM's financials being very poor. He is very carefully watching the stock price drop so he can swoop in and buy up the company at the right price. Which do you believe to be true? Maybe all, maybe some, maybe none.

It may be best to learn to do your own analysis of GM's financial situation, regardless of why Warren Buffett bought a Cadillac.

Recap

This phenomenon can be seen in the financial records of the General Motors Company, which indicate that between the beginning of 1985 and the end of 1994, it earned in total approximately $17.92 a share and paid out in dividends approximately $20.62 a share. During the same period of time, the company spent approximately $102.34 on capital improvements. The question that should be running through your mind is,
If General Motors' earnings during this time period time totaled $17.92 and it paid out as dividends $20.62, where did the extra $2.68 that is paid out in dividends and the $102.34 that it spent on capital improvements come from?"

To be continued

THINK RICH! BE RICH>>>RICHFOREVER!!