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Originally published Saturday, May 31, 2014 at 8:02 PM

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The Motley Fool: Every Sunday, useful tips on investing


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Q: A year or so ago, two companies in the same industry had similar stock prices. But over the past year, one rose while the other fell. What’s going on?

A: No two companies are exactly the same, even if they’re in the same industry.

Different companies will have different performances, assets, debts, competitive advantages and prospects.

Their profit margins will likely vary, as will their sales and earnings growth rates.

Also, either or both might be overvalued or undervalued right now, and may be headed up or down. The similar prices were just a coincidence.

An estimated 30,000 Berkshire Hathaway shareholders gathered in Omaha in May to listen to Chairman Warren Buffett and his partner, Charlie Munger, answer their questions for five hours. Here are some nuggets from the annual meeting:

On disclosure of executive compensation: When asked why Berkshire Hathaway doesn’t publish compensation amounts for more than three top executives, Buffett explained that he thinks it would be counterproductive.

He suggested that one reason CEO pay levels have gotten to such ridiculous levels is that CEOs can see what their peers are earning, which helps them secure higher payments for themselves.

On adapting to change: Buffett and Munger explained that it’s always smart for a business to consider what might come along and mess up its business model.

They see all their businesses as subject to change, and cited Geico as a classic case. It began in the 1930s, originally communicating with customers by mail. Then it shifted to phones, to the Internet and to social media.

Dear Fool: My dumbest investment happened some 30 years ago, when I bought into a limited partnership focused on thermal energy.

It was claimed that I’d quadruple my money, so I put $5,000 into it. The company didn’t generate income, but I got stuck with “phantom income” of $15,000 that I had to pay taxes on. Don’t ask me to explain. And I was a stockbroker.

The Fool responds: We’ll explain. Phantom income isn’t common, but it does happen on occasion, in investments such as limited partnerships.

Backing up a bit, understand that at a traditional corporation, the company is taxed on its income. Partnerships, though, are “pass-through” entities, where income flows directly to partners, who are then taxed.

A K-1 form generally arrives annually, detailing a partner’s share of the partnership’s income or loss. Sometimes the income isn’t actually received by the partners, though, as it might have been reinvested in the business. Still, they’re on the hook for its taxes.

Zero-coupon bonds and forgiven loans can also generate phantom income. Learn much more about partnerships before investing in any. They can be tricky.

Buy eBay now?

There aren’t many business models lovelier than eBay’s (Nasdaq: EBAY).

Whereas traditional retailers have to build and support brick-and-mortar stores, eBay does not. While even Seattle-based Amazon.com has to stock massive distribution centers, eBay does not.

Instead, eBay maintains a huge online marketplace, where millions of items are sold by auction or fixed price.

Its customers carry the inventory, helping it keep costs low.

Its network size gives it a competitive advantage, too, as sellers favor eBay because that’s where millions of buyers are, and vice versa.

Better still, eBay owns PayPal, an electronic money-transfer business that has posted transaction volume growth of more than 20 percent year over year for 17 quarters in a row.

With a forward-looking price-to-earnings P/E ratio recently near 15, eBay stock is appealing.

It’s not without risk, though, as both PayPal and eBay’s e-commerce business are facing competition, and eBay Marketplace’s growth rate has been slowing.



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