If Buffet can, you can!

THE world loves nothing better than a success story. And Warren Buffet, one of the richest men in the world, fits the bill perfectly.

How did a quiet man from the American Midwest start with USD 100,000 and build it to $35 billion? The answer is terribly simple.Through stubborn adherence to the time-honoured fundamentals of value investing.

If you had invested $1,000 in Warren Buffet's Berkshire Hathaway stock in 1965, we would be worth roughly $5 million today. If you missed this investment opportunity, author James Pardoe gives you a step-by-step guidebook to follow Buffet's footsteps in the book, How Buffet Does It.

Here are some pointers from it with my comments as well.

1. Choose simplicity over complexity
When investing, keep it simple. Do what is easy and obvious. If you don't understand a business, don't buy it.

2. Make your own investment decisions
Don't listen to brokers, analysts or pundits. Figure it out for yourself. Become a value investor. It has proven to be a very rewarding technique over the long term.

3. Maintain the right temperament
Let other people overreact to the market. To succeed in the market, you need ordinary intelligence. But you also need the temperament to help you ride out the storms and stick to your long term plans. If you can stay cool while those around you are panicking, you can surely prevail.

4. Be patient
Think 10 years rather than 10 minutes. Don't dwell on the price of stocks. Instead, study the underlying business, its earnings capacity and its future.

If you ask, 'How long must I wait?', Buffet would say, "If we're in the right place, we’ll wait indefinitely."

5. Buy business, not stocks
Once you get into the right business, you can let everyone else worry about the stock market. Business performance is key to picking stocks. Study the long term track record of any company on your buy list.

Buffet looks for following five main things before investing in a company.
~ Business that he can understand
~ Companies with favourable long term prospects
~ Business operated by honest, competent people
~ Businesses priced very attractively
~ Business with free cash flow

Don't think about stock in the short term. Think about business in the long term.

6. Look for a company that is a franchise
Some businesses are franchises. A franchise generates free cash flows. And free cash flows are one of the requisites that Buffet has listed above. Go for it.

7. Buy low tech, not high tech
Successful investing is rarely a gee-whiz activity. It is less often about rockets and lasers and more often about bricks, carpets, paint, shaving blades and insulation.

Do not be tempted by get-rich-quick deals involving relatively complex companies. For example, high tech companies. They are the most unpredictable in the long run.

Look for the absence of change. Look for the business whose only change in the future will be doing more business. Example: Gillette Blades.

8. Concentrate your stock investments
Follow the Noah's Ark style of investing. That is, a little of this and a little of that. Better to have a smaller number of investments with more of your money in each.

Portfolio concentration -- the opposite of diversification -- can also focus your mind. If you are putting your eggs in only a few baskets, you are far less likely to make investments on impulse or emotion.

9. Practise inactivity not hyperactivity
There are times when doing nothing is a sign of investing brilliance. As hard as this is to believe, it is true. Sometimes, it is hardest to just sit by and watch. Be a decade's trader, not a day trader.

10. Don't look at the ticker
Tickers are all about prices. Investing is about a lot more than prices. It is about value. It is about wealth. Abstain from looking at share prices every day.

Study the playing field and not the scoreboard. Know the value of something rather than the price of everything.

Buy low, sell high: How Buffet does it

BUY low, sell high.

This is the most popular theory in stock market investing. But the question is -– how would you know when a stock's price is ‘low’?

The key: Compare a stock's price with its ‘value’.

How is price different from value?
-- Price is what the market is willing to pay for the share at a given time. It fluctuates from minute to minute.

-- Value of a stock is the worth of its underlying business. It is more stable as fortunes of a company do not change overnight.

Buy when price is lower than value
If a share's value is Rs 150 and price is Rs 125, then you get the stock at a discount of Rs 25.

While there is no guarantee that the price will not go below Rs 125, the probability is low.

This principle is called the 'margin of safety' and finds it roots in the teachings of legendary investors -- Warren Buffet and Benjamin Graham.


How to find out a share's value?

To begin with, you can read financial statements and understand the nitty-gritties of stocks.

If you are willing to walk that extra mile, then pay heed to these valuation methods that Warren Buffet swears by:

Method 1:
Look at the net liquid assets per share.

Net liquid assets per share = Current assets (cash, debtors, liquid investments etc) - liabilities
Number of shares


Thumb rule: Warren Buffet prefers paying not more than two-thirds of such value for a stock.


Method 2:
Look at the PE (Price to earnings) growth ratio.

PE growth ratio = Market price/ Earnings per share
Annual EPS growth

where Annual EPS growth = Current year's EPS – previous year's EPS x 100
Previous year's EPS'


Thumb rule: A PE growth ratio of 1 indicates a fairly valued share; less than 1 means undervalued; and more than 1 means overvalued.

PE: an indicator of margin of safety

Let's assume you buy a share at Rs 550 whose EPS is Rs 50. In one year, you earn Rs 50 on an investment of Rs 550, that is, a return of about 9 per cent.

You can earn 8-9 per cent risk-free returns on bank deposits as well. So, the margin of safety in this case is practically nil.

To reduce the risk, we must have a higher gap.

Thumb rule: Warren Buffett recommends this gap to be at least 1.25-1.5 per cent.

Last word: During a bull run, investors pay a high price for any and every share. So, it becomes difficult to find stocks with a high margin of safety.

It is in bear markets, as the one we are in now, that there are opportunities to spot the gems.

Why Warren Buffet Makes Money and You Don’t

When we are talking about Stock Market Riches, the Oracle of Omaha – Mr. Warren Buffet’s name has to be taken in the same breath. The world’s richest man sits on the top of the world having made him a fortune investing in stock markets over a period of time. What’s more, he has done it for millions of his shareholders as well, invested in Berkshire Hathaway.

Did you know that a $10,000 investment in Berkshire Hathaway in 1965, the year Warren Buffett took control of it, would grow to be worth nearly $30 million by 2005

The marketplace is abuzz with Buffet’s investment principles with dozens of books and millions of citations on the Internet. But, then we haven’t seen anyone come remotely close to the fortunes that Mr. Buffet has made.

Technical and Fundamental Analysis apart, there are some very simple yet important principles which are highlighted in Mr. Buffet’s Investment rationale.

Never invest in a business you cannot understand

Sound simple. The philosophy is so profound yet how many of us tend to avoid it. One look at his portfolio and the statement makes all the more sense .Coca-Cola, Nike, Procter & Gamble, J&J. The business intricacies apart, the companies make products we can all relate to and probably use them too on a regular basis.

Risk can be greatly reduced by concentrating on only a few holdings

How many of us have heard, “Never put all eggs in one basket” or Diversification is the key to effective investment. But, then aren’t we culprits of over-diversification at times. I remember holding 17 stocks in my portfolio at one time. Over diversification leads to dilution of possible gains and it is difficult to track 17 companies at once.

Mr.Buffet’s portfolio has a list of 41 stocks. It may sound too much, but then he has accumulated them over years and has hundreds of people managing his investments now.

Patience

This single word is the game changer of sorts. This virtue alone separates the likes of Mr. Buffet, Peter Lynch from the average Joe. The explanation for this is best understood in terms of Mr. Buffet’s principles itself.

1. Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years
2. Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market
3. The advice “you never go broke taking a profit” is foolish
4. Buy a business, don’t rent stocks

The quotes speak for themselves; invest in Stock Markets to become a co-owner and not to make profits out of fluctuations.

It would be wrong to say that these 3 are the principles that made Mr. Buffet his riches. A lot of research and number crunching is responsible for Mr. Buffet buying stocks at a “Fair” price or on the basis of intrinsic value which the whole world is trying to figure out. But these are some no-nonsense jargon free fundamentals that can go a long way in ensuring a long term healthy investment portfolio.

I would like to know from Stock Market Enthusiasts out there – Do you think that if you stick to these 3 principals of Mr. Buffet, you will make money in Stock market?

US economy has bottomed, to bounce back soon: Warren Buffet

Warren Buffett, Chairman and CEO, Berkshire Hathaway said the market were unlikely to fall any further and only a 9/11 kind of situation could rock the economy now. “The market sort of formed a plateau at the bottom right now but if you have got some horrible events, some of the 9/11 type of event or worse you could have something that could be really disruptive and start things all over again. We are past the critical point.”

Buffet said though the economy has not bounced back it has quit going down and it would soon come back. “I have never been able to tell whether it's going to be a week, a month or six months but we are on the mend.”

On the real estate front Buffet said, “We are certainly through the worst of our residential real estate in all probability and the reason is we are building a lot fewer houses than we are forming households, so that solves itself overtime than do it in a day or week, but it solves itself. Some of the toxic assets have been flushed through, there has been capital raised, we are measurably better off than we were a year ago.”

Investment lessons from the worlds greatest investors

An elite group of great professional investors (world’s greatest investors) have shown time and again that it is certainly possible to beat the market continuously and consistently over long periods of time. These people act as an inspiration and as an example to less experienced investors. The methods they followed have become legendary and these can act as a starting point for beginners looking to familiarise themselves with the basics of investing and trading in the financial markets (stock markets, forex markets and so on)

Becoming a successful investor needs patience, learning and sometimes even a bit of luck. But investing other people’s money is entirely a different ball game. Fund managers rely on hard work, intelligence and financial discipline to find opportunities that other professionals might have missed.

Given below is a list of 7 people who excelled in this and managed to beat the markets continuously over long periods of time.

Warren Buffett
Peter Lynch
John Bogle
George Soros
John Templeton
Julian Robertson
Michael Steinhardt

Warren Buffett
Born: Omaha, Nebraska in 1930
Employer: Berkshire Hathaway Chairman
Most Known For: A $10,000 investment into Berkshire Hathaway when Buffett took control in 1965 would be worth over $50 million today. By comparison, $10,000 in the S&P 500 would have grown to only $500,000.
Less Known For: Buffett is considered by many to be a real Scrooge (in fact his personalized license plate reads, “Thrifty”). Reportedly he is only going to bequeath around $3 to $4 million to each of his children, despite his $40+ billion net worth. However, he does so with good intentions and plans on leaving the vast majority of his fortune to charitable causes.
Quotes: “If past history was all there was to the game, the richest people would be librarians.”
“Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.”
“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
“Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway.”
“Risk comes from not knowing what you’re doing.”

Peter Lynch
Born: United States in 1944
Employer: Former Fidelity fund manager, today he is the vice-chairman of Fidelity
Most Famous For: When he started managing the Fidelity Magellan Fund in 1978, it had assets of $20 million. When he retired in 1990, it had assets of $14 billion.
Less Celebrated For: Some people were not too pleased when Lynch, one of the greatest, retired at the tender age of 46.
Quote: “Go for a business that any idiot can run - because sooner or later, any idiot probably is going to run it.”

John (Jack) Bogle:
Born: Montclair, New Jersey in 1929
Employer: Founder and Chairman of The Vanguard Group
Most Famous For: Often referred to as the father of index fund investing, he’s the creator of the first S&P 500 index fund.
Less Celebrated For: Admits that mutual funds “haven’t been up front with investors - top fund performance has always been followed by mediocre returns”.
Quote: “If you have trouble imagining a 20% loss in the stock market, you shouldn’t be in stocks.”

George Soros
Born: Budapest in 1930
Employer: Founder of Soros Fund Management
Most Famous For: A highly respected currency speculator, he once shorted the British Pound for a one day gain in excess of $1 billion.
Less Celebrated For: Although not entirely responsible, Soros’ comments on the Russian economy contributed to its stocks plunging 12% in the first hour of trading. Five days later, the currency had devalued 25%.
Quote: “It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.”

John Templeton
Born: Winchester, Tennessee in 1912
Employer: Founder of the Templeton Group
Most Famous For: Created some of the world’s largest and most successful global investment funds using his independent investment strategy.
Less Celebrated For: More recently, his funds have failed to provide the astounding gains his followers were used to, partly due to the recent Asian recession.
Quote: “The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell.”

Julian Robertson
Born: Salisbury, NC in 1933
Employer: Founder/Chairman, Tiger Management Corp.
Most Famous For: A titan of hedge fund investing, his funds today require a minimum investment of $5 million per person. He turned $8 million in 1980 into over $8 billion in the late 1990s.
Less Celebrated For: Remembered for losing $200 million in 1996 when a “bet” on U.S. Treasuries went wrong.
Quote: “[O]ur mandate is to find the 200 best companies in the world and invest in them, and find the 200 worst companies in the world and go short on them. If the 200 best don’t do better than the 200 worst, you probably should get in another business.”

Michael Steinhardt
Born: 1941
Employer: Founder, Steinhardt Partners
Most Famous For: $1 invested with Steinhardt when he founded his firm in 1967 would be worth $462 today.
Less Celebrated For: Steinhardt didn’t exactly go out with a bang. He ended his illustrious hedge fund career in 1995, a year after suffering big losses.
Quote: “In the 1950s and 1960s, the heroes were the long-term investors; today the heroes are the wise guys.”

Do feel free to add other great investors whom I might have missed out.

Buffettology for India

Warren Buffett is the last word in the stock market. Or is he? There is no denying his investing principles. Yet, these seem difficult, and often irrelevant, when put into practice. Why?

Consider Buffettology's first rule: Hold for the long term. So what would have happened if you had held some blue chips forever? In the past 18 months, you would have seen Reliance and L & T crack to 30% of their peaks, DLF and Tata Steel to 15% and Bharti Airtel to under 50%. Inaction in the face of gross overvaluation is sinful; anyone who did not see the big correction coming in Indian equities was obviously blind to the high valuations across sectors.

As it turned out, no one did. The antidote is to heed valuation norms and seek a margin of safety, especially when sane valuations are crossed. This, too, is part of Buffett's investing axioms. The fine print of a rule is as important as the rule itself.

Reading the macro signs right would have paid off in India, irrespective of the stocks you punted on. Those who called the growth and investment cycle as early as 2003 (interest rates coming off multi-year highs, sentiment was rock-bottom, private and public capex had all but stalled) were rewarded with four years of appreciation. India is a little different from the country that Buffett has lived in.

So we need to temper his methods to fit in with the desi scheme of things. No amount of RoCE or DuPont analysis of Bhel and SBI would have tempted you to buy them when they were poised for multi-bagger growth. They were just mountains of promise staring into an ocean of opportunity.

Another favourite theme of Buffettologists is to look for competitive 'moats' or entry barriers that companies build around their businesses. To me, the only meaningful moat that Reliance has built is the ability to 'manage' the government getting the regulatory and administrative regime tailored to suit it. Otherwise, who would pay close to 15 times the forward earnings on a refiner with (increasingly visible) upstream assets?

Our fair value sum-of-the-parts valuation for Reliance is about Rs 1,700, after making some benevolent assumptions. Tell this to the guys who bought it recently for over Rs 1,900 (or those who took it up to over Rs 3,000 in the frenzy of 2007-8).

Free cash flow is another mantra of the Buffett fan club. There is no substitute for this vital part of value creation, but sometimes growth overshadows everything. When a company is growing at 40-60% year on year and has to reinvest in the business, you should not complain about the lack of cash flow. We need to read the micro cycle of a company's life, pour capital for a few years to take it to a steady state, and wait for the stock market to do its tricks.

An example is Pantaloons, which earned 70.64% annualised return for its shareholders in 2004-8. It was virtually creating the organised retail sector in India, changing every rule in the game and guzzling capital even as its revenues grew from Rs 655 crore in 2003-4 to Rs 5,296 crore in 2007-8.

Of course, the cycle turned and Buffett's principles prevailed. The important thing is not to let an ill-fitted version of his principles to come in the way of recognising genuine investing opportunities. Buffett's principles are not irrelevant or dated. They just need to be applied appropriately in India.

Interview with Warren Buffet the Amazing Individual

There was a one hour interview on CNBC with Warren Buffet, the second richest man who has donated $31 billion to charity. Here are some very interesting aspects of his life:

1.) He bought his first share at age 11 and he now regrets that he started too late!

2.) He bought a small farm at age 14 with savings from delivering newspapers.

3.) He still lives in the same small 3 bedroom house in mid-town Omaha,that he bought after he got married 50 years ago. He says that he has everything he needs in that house. His house does not have a wall or a fence.

4.) He drives his own car everywhere and does not have a driver or security people around him.

5.) He never travels by private jet, although he owns the world's largest private jet company.

6.) His company, Berkshire Hathaway, owns 63 companies. He writes onlyone letter each year to the CEOs of these companies, giving them goals for the year. He never holds meetings or calls them on a regular basis.

7.) He has given his CEO's only two rules. Rule number 1: do not lose any of your share holder's money. Rule number 2: Do not forget rule number 1.

8.) He does not socialize with the high society crowd. His past time after he gets home is to make himself some pop corn and watch television.

9.) Bill Gates, the world's richest man met him for the first time only 5 years ago. Bill Gates did not think he had anything in common with Warren Buffet. So he had scheduled his meeting only for half hour. But when Gates met him, the meeting lasted for ten hours and Bill Gates became a devotee of Warren Buffet.

10.) Warren Buffet does not carry a cell phone, nor has a computer on his desk.

11.) His advice to young people: Stay away from credit cards and invest
in yourself.