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.

Thursday, 12 March 2009

Buffett Likes Banks

Buffett Likes Banks
By Alex Dumortier, CFA
March 11, 2009 Comments (3)

When Warren Buffett speaks, the market listens. On Monday, in a three-hour interview on CNBC, Buffett had some good things to say about the banking sector. That was all the fuel that was needed for some of the bank stocks to take off:

Bank
Daily Return (03/09/2009)

Bank of America (NYSE: BAC)
19.4%
Wells Fargo (NYSE: WFC)
15.8%
US Bancorp (NYSE: USB)
15.5%
SunTrust Banks (NYSE: STI)
7.8%
BB&T (NYSE: BBT)
4.1%

Some of the best gains were naturally reserved for stocks that Buffett owns on behalf of Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B): US Bancorp and Wells Fargo.
"Banking has never been better, in one sense." Spelling out the reasons for his cheery disposition toward the sector in straightforward terms, Buffett said:
The banks are getting their money very cheaply, deposits are coming in, spreads have never been wider, all the new business they're doing is terrific. They will earn their way out of it [in the] overwhelming number of cases.

He went on to give specifics concerning Wells Fargo:
I would expect $40 billion a year pre-provision income. And under normal conditions I would expect maybe 10 to $12 billion a year of losses … So, you know, you get to very interesting figures.
What could Wells earn a few years out? Those numbers are pretty close to the results that Wells put up last year (which don't include Wachovia), so I'm going to assume that Buffett was referring to Wells Fargo's earnings power without Wachovia.
Let's accept those numbers (using the upper bound for loan losses) and make the following assumptions:
Wachovia provides an incremental $3 billion in net income.
The merger achieves the announced $5 billion in cost savings.
Wells Fargo doesn't repay the government's $25 billion preferred share investment.
Under that scenario -- that of a normal operating environment -- I estimate that Wells Fargo could generate approximately $2.50 in earnings per share annually. Based on Monday's closing price of $9.97, that's equivalent to a price-to-earnings ratio of 4 -- pretty attractive!

Let's remember a couple of things, though: First, we aren't in a normal environment yet, and it's not clear how long it will take us to get there. Second, there is a reason that bank shares are trading at such depressed valuations. As Buffett pointed out:
"The only worry in that is the government will force you to sell shares at some terribly low price." He went on to admit that forced dilution isn't an idle concern -- it's something that he himself thinks about. Furthermore, even the Oracle has been bitten by banks in this crisis. In 2008, he purchased $244 million worth of shares in two Irish banks, leaving him with an 89% loss at year's end. He gave himself a stern self-assessment on that situation during the interview: "I did not do my homework sufficiently on that, and I was just dead wrong."

Nonetheless, Berkshire is Wells Fargo's largest shareholder -- the position dates back to the last banking crisis in the early 1990s. In other words, Buffett's been doing his homework on Wells Fargo for a long time, and his degree of confidence should be much higher. I have to go with Buffett on this one: Despite my concerns about the California lender, I think it looks like a good bet right now.

More Foolishness:
Are GE Shares Finally a Buy?
10 Dividend Stocks for the Next Decade and Beyond
The Worst News in 53 Years

Take a hint from Buffett's recent investments in preferred shares with fat yields: In this market, dividends -- those that are sustainable -- will be a big component of future shareholder returns.

Alex Dumortier, CFA has a beneficial interest in Wells Fargo and BB&T, but not in any of the other companies mentioned in this article. BB&T is a Motley Fool Income Investor pick. Berkshire Hathaway is a Motley Fool Inside Value and a Motley Fool Stock Advisor recommendation. The Fool owns shares of Berkshire Hathaway. US Bancorp is a former Motley Fool Income Investor pick.

http://www.fool.com/investing/dividends-income/2009/03/11/buffett-likes-banks.aspx

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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)

Thursday, 12 March 2009

Buffett Likes Banks

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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

Political and Economic News

Interesting Blogs