Friday, 25 May 2012

The power of conviction

Buffett wrote to his investors and explained that stock pickers ''have to work extremely hard to find just a few attractive investment situations'', and because such opportunities are rare, why just nibble at them?

Buffett was no nibbler; he put 40 per cent of his partnership's assets into Amex because there was ''an extremely high probability that our facts and reasoning are correct, with a very low probability that anything could drastically change the underlying value of the investment''. His attitude paid off - within a year the stock price rose more than 40 per cent and compounded at high rates thereafter.

So-called efficient markets suffer from regular outbreaks of inefficiency. Over the past two years, News Corp, Cochlear, QBE Insurance and Cabcharge have all offered attractive investment opportunities due to temporary factors. Buffett's three simple rules show us how to take advantage of them.

Nathan Bell is the research director at Intelligent Investor, intelligent This article contains general investment advice only (under AFSL 282288).

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