myinvestingnotes.blogspot.my (Bullbear Buffett Stock Investing Notes)

Keep INVESTING Simple and Safe (KISS) ****Investment Philosophy, Strategy and various Valuation Methods**** The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It’s true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner!****Warren Buffett: Rule No. 1 - Never lose money. Rule No. 2 - Never forget Rule No. 1.

Friday, 20 February 2009

Some Insights from Berkshire's Latest 13-F Filing

Morningstar.com

Some Insights from Berkshire's Latest 13-F Filing

Thursday February 19, 1:00 pm ET
By Bill Bergman

Berkshire Hathaway (brk.b.B) (brk.a.B) recently filed its quarterly 13-F statement with the Securities and Exchange Commission. The filing revealed few significant changes in the composition of the firm's equity portfolio in the fourth quarter of 2008. The overall market value of the portfolio deteriorated sharply (about 25%) from the third quarter to the fourth quarter, which is not a surprise in light of market conditions. Together with estimated losses from Berkshire's equity put option positions (see the Stock Strategist article "Our Take on Berkshire's Equity Put Option Positions"), the firm's equity portfolio performance will likely contribute significant losses in the firm's upcoming report on fourth-quarter earnings. From a longer-term perspective, however, we see the recent and possible near-term future weakness in Berkshire's shares as a compelling investment opportunity.

Warren Buffett penned an op-ed piece in October 2008 in The New York Times titled "Buy American. I Am." One might question why Berkshire didn't pursue greater buying activity in the fourth quarter in light of that article, at least on the face of the 13-F filing. But it's worth noting that the firm has been quite active in taking senior equity positions in long-successful companies that have been hit relatively hard by the financial and economic crises. These large transactions required the application of much of Berkshire's previously massive cash position, and included stakes in preferred shares in Goldman Sachs (NYSE:GS - News), General Electric (NYSE:GE - News), and Harley Davidson (NYSE:HOG - News). These multibillion-dollar purchases fall outside of Berkshire's 13-F filing, and they also fall outside the realm of opportunities available to most ordinary investors. Berkshire managers continue to work for their shareholders as the firm applies valuable capital to attractive investment opportunities.

Some of Berkshire's largest common-stock position changes in the fourth quarter were actually sales, including two of the firm's better-performing holdings. Berkshire sold half of its stake in Johnson & Johnson (NYSE:JNJ - News), the best-performing stock in the past few years among its largest seven holdings. Berkshire also shaved about 10% of its position in Proctor & Gamble (NYSE:PG - News). Berkshire still has a substantial position in both of these firms, however, and Morningstar analysts currently have each of these wide-moat stocks rated at 5 stars (Consider Buying). On the buying side, Berkshire added to its holdings in Burlington Northern (NYSE:BNI - News) and Ingersoll Rand (NYSE:IR - News), and established a new position in Nalco (NYSE:NLC - News). We currently have Burlington Northern, Ingersoll Rand, and Nalco rated at 5 stars.

Rather than focusing too closely on short-term changes in the composition of Berkshire's common stock portfolio, we are using the latest 13-F filing to briefly review Berkshire's record from a longer-term perspective. It has clearly been a tough external environment recently; in fact, the market downturn has been so severe that it has cut significantly into longer-term performance records for many managers.

From December 1998 to December 2008, a volatile 10-year period whose endpoints generated a 25% decline in the S&P 500 (even in nominal terms, before inflation), Berkshire Hathaway's equity investments rose from $39.8 billion to more than $60 billion. The growth in Berkshire's aggregate portfolio reflects the allocation of cash flow arising from insurance and other businesses, of course, as well as stock performance. But Berkshire's effective stock selection also played a role--one that has continued to display itself recently, on average, among the firm's largest holdings.

Since Jan. 1, 2008, the S&P 500 has fallen almost 45%, with most of those losses arising since midyear 2008. But Berkshire's seven largest holdings at the outset of 2008 (which made up about 75% of the portfolio market capitalization) have outperformed the S&P 500 significantly, on either a simple or weighted-average basis. This despite the fact that Berkshire is relatively heavily weighted in financial stocks, and its Wells Fargo (NYSE:WFC - News) and American Express (NYSE:AXP - News) holdings have been significant drags. We currently have both of those firms rated at 5 stars as well. For that matter, one doesn't have to look very hard to find stocks in Berkshire's portfolio that we recommend these days, given the market's swoon. (A complete list of Berkshire's latest 13-F holdings and our ratings on those stocks is at the bottom of this article.)

Berkshire's investment record highlights a broader and very interesting investment issue. Last year, we had one of the roughest years for equity ownership since World War II. How have insurance companies whose investment portfolios carry a relatively large allocation to stock holdings (relative to government debt, corporate bonds, and other fixed-maturity investments) stacked up against other insurance companies? One would think those insurers who were invested relatively heavily in equities did worse in the stock market. But that isn't the case, in general or at Berkshire Hathaway.

We've taken a close look at the investment portfolios of 80 insurance companies that we follow here at Morningstar. For that group as a whole, as well as a subset of about 20 larger property & casualty insurance and reinsurance companies, the share of equity in a firm's investment portfolio last year was not significantly associated with the firm's performance in the stock market. The two things that do seem to matter are, first, the share of mortgage and other asset-backed securities in total investments, as well as the amount of capital backing the total investment portfolio. The higher the weighting of investments in mortgage and asset-backed securities, the worse the firm did in the stock market, and the higher the level of capital relative to investments, the better the firm did in the stock market. Berkshire is a relatively heavy investor in equities, but it also has a high level of capital relative to its investment portfolio, and it avoided much of the mess in structured finance that ensnared other insurers.

In some important and underappreciated ways, the equity markets have actually been performing relatively well in the past year or so. At a time when markets for a lot of fancy structured debt vehicles were frozen up, liquidity could easily be had by selling stocks last year. Stock markets performed well from a liquidity standpoint for institutional and mutual fund companies being pressed to raise cash. This can help explain how stock prices have fallen so significantly and pervasively below the fair value estimates we have developed using longer-term assumptions here at Morningstar.

We do not view Berkshire's latest 13-F filing or its equity portfolio with a great deal of alarm. Berkshire's stock has fallen so far as to approximate its book value at the end of the third quarter, a rare thing. Fourth-quarter losses may cut into Berkshire's book value significantly, but getting Buffett et al. anywhere near book seems like a bargain.

To see the table associated with this article, click here:http://news.morningstar.com/articlenet/article.aspx?id=280571

http://biz.yahoo.com/ms/090219/280571.html?.v=1

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My 18 points guide to Successfully compounding your money in Stocks

Be a good stock picker.
Think as a business owner.
Always look at value rather than the price. Do the homework.
Buy and hold is alright for selected stocks.
Compounding is your friend, get this to work its magic.
Mr. Market is there to be taken advantage of. Do not be the sucker instead. BFS;STS.
Always buy a lot when the price is low.
Never buy when the stock is overpriced.
It is alright to buy when the selected stock is at a fair price.
Phasing in or dollar cost averaging is safe for such stocks during a downtrend, unless the price is still obviously too high.
Do not time the market for such or any stocks.
By keeping to the above strategy, the returns will be delivered through the growth of the company's business.
So, when do you sell the stock? Almost never, as long as the fundamentals remain sound and the future prospects intact.
The downside risk is protected through only buying when the price is low or fairly priced.
Tactical dynamic asset allocation or rebalancing based on valuation can be employed but this sounds easier than is practical, except in extreme market situations.
Sell urgently when the company business fundamental has deteriorated irreversibly.
You may also wish to sell should the growth of the company has obviously slowed and you can reinvest into another company with greater growth potential of similar quality. However, unlike point 16, you can do so leisurely.
In conclusion, a critical key to successful investing is in your stock picking ability.

http://myinvestingnotes.blogspot.com/2012/07/my-18-points-guide-to-successfully.html

11 Lessons From Peter Lynch

Peter Lynch taught me:

1. Behind every stock is a company. Find out what it’s doing.
2. Never invest in any idea you can’t illustrate with a crayon.
3. Over the short term, there may be no correlation between the success of a company’s operations and the success of its stock. Over the long term, there’s a 100% correlation.
4. Buying stocks without studying the companies is the same as playing poker – and never looking at your cards.
5. Time is on your side when you own shares of superior companies.
6. Owning stock is like having children. Don’t get involved with more than you can handle.
7. When the insiders are buying, it’s a good sign.
8. Unless you’re a short seller, it never pays to be pessimistic.
9. A stock market decline is as predictable as a January blizzard in Colorado. If you’re prepared, it can’t hurt you.
10. Everyone has the brainpower to make money in stocks. Not everyone has the stomach.
11. Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what’s actually happening to the companies in which you’ve invested.

Lynch’s advice had a profound effect on my stock market approach. He taught me that investment success isn’t the result of developing the right macro-economic view or deciding when to jump in or out of the market. Success is about researching companies to identify those that are likely to report positive surprises.

Capital Expenditure

A great company with a Durable Competitive Advantage will have a ratio of Capital Expenditures to Net Income of less than 25%. Less is better.

Capital Expenditures are expenses on:
- fixed assets such as equipment, property, or industrial buildings
- fixing problems with an asset
- preparing an asset to be used in business
- restoring property
- starting new businesses

A good company will have a ratio of Capital Expenditures to Net Income of less than 50%.

A great company with a Durable Competitive Advantage will have a ratio of less than 25%.

Less is better.

Benjamin Graham's 113 Wise Words

The true investor scarcely ever is forced to sell his shares, and at all times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons' mistakes of judgement."

Philip Fisher's Wise Words

"The refusal to sell at a loss, while completely natural and normal, is probably one of the most dangerous in which we can indulge ourselves in the entire investment process.

More money has probably been lost by investors holding a stock they really did not want until they could 'at least come out even' than from any other single reason. If to these actual losses are added the profits that might have been made through the proper reinvestment of these funds if such reinvestment had been made when the mistake was first realized, the cost of self-indulgence becomes truly tremendous."

(Common Stocks and Uncommon Profits)

The Ultimate Hold-versus-Sell Test

Here is the overriding primary test, followed by observations on why it is so critically important:

Knowing all that you now know and expect about the company and its stock (not what you originally believed or hoped at time of purchase), and assuming that you had available capital, and assuming that it would not cause a portfolio imbalance to do so, would you buy this stock today, at today's price?

No equivocation. Yes or no?

Answers such as maybe or probably are not acceptable since they are ways of dodging the issue. No investor probably buys a stock; they either place an order or do not.

Here is the implication of your answer to that critical test: if you did not answer with a clear affirmative, you should sell; only if you said a strong yes, are you justified to hold.

Some thoughts on Analysing Stocks (KISS)

Ideally a stock you plan to purchase should have all of the following charateristics:

• A rising trend of earnings dividends and book value per share.
• A balance sheet with less debt than other companies in its particular industry.
• A P/E ratio no higher than average.
• A dividend yield that suits your particular needs.
• A below-average dividend pay-out ratio.
• A history of earnings and dividends not pockmarked by erratic ups and downs.
• Companies whose ROE is 15 or better.
• A ratio of price to cash flow (P/CF) that is not too high when compared to other stocks in the same industry.

Margin of Safety Concept: Stocks should be bought like groceries, not like perfume

The high CAGR in the early years of the investing period, due to buying at a discount, tended to decline and approach that of the intrinsic EPS GR of the companies over a longer investment time-frame.

Chapter 20 - “Margin of Safety” as the Central Concept of Investment

A single quote by Graham on page 516 struck me:

Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions.

Basically, Graham is saying that most stock investors lose money because they invest in companies that seem good at a particular point in time, but are lacking the fundamentals of a long-lasting stable company.

This seems obvious on the surface, but it’s actually a great argument for thinking more carefully about your individual stock investments. If most of your losses come from buying companies that seem healthy but really aren’t, isn’t that a profound argument for carefully studying any company you might invest in?

myinvestingnotes.blogspot.my (Bullbear Buffett Stock Investing Notes)

Friday, 20 February 2009

Some Insights from Berkshire's Latest 13-F Filing

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All equity security investments present a risk of loss of capital

The Ultimate Hold-versus-Sell Test

Some thoughts on Analysing Stocks (KISS)

Benjamin Graham

Sell the losers, let the winners run.

Investment Style

Warren Buffett

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