The key to profitable investing - knowing how to capitalize successes and curtail failures.

An investor who year in and year out procures for himself a final net profit.

An investor who year in and year out who is usually in the red.

What might be the reasons to explain their different outcomes?

Is this entirely a question of superior selection of stocks?  Maybe NOT entirely.

Is this entirely a question of superior timing of buying and selling of stocks?  Maybe NOT entirely.

How good are economists in their forecasts?

In a meeting of economists, they agreed if their forecasts were 1/3 correct, that was considered a high mark in their profession.

You cannot invest in securities successfully with odds like that against you if you place dependence solely upon judgement as to the right securities to own and the right time or price to buy them.

It is also a case of knowing how to capitalize successes and curtail failures.

You have to learn by doing.

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This blog was started in August 2008 in the midst of the Global Financial Crisis.

It is on developing a sound investing philosophy, strategies and methods to profit from investing in stocks.

It has been an interesting and a rewarding journey blogging on investing.

Thank you for visiting my blog and wishing you a safe and rewarding investing in stocks over your lifetime..

This was the first post in this blog dated 

FRIDAY, 1 AUGUST 2008

INVESTMENT POLICIES (BASED ON BENJAMIN GRAHAM) SUMMARY OF INVESTMENT POLICIES

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WHEN TO SELL by Buffett

When To Sell Quotes

Warren Buffett’s advice on when to sell is fairly straightforward. Sell when the business you are invested is performing poorly (and will likely continue to do so).

“Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”

As an individual investor, you can’t fix a declining business. Your energy is best spent cutting losses and moving on.

“The most important thing to do if you find yourself in a hole is to stop digging.”

Buffett sells infrequently. He is a long-term investor that would rather hold forever than sell as long as a business maintains its competitive advantage. Even Buffett gets it wrong sometimes. When you make a mistake, learn from it and cut your losses.

Selling businesses in decline is a form of risk management. 

http://www.suredividend.com/warren-buffett-quotes/#when to sell

WHEN to Buy by Buffett

Warren Buffett on When To Buy

Warren Buffett’s buying wisdom can be condensed into 2 statements:

1. Buy great businesses when they are trading at fair or better prices.
2. This occurs when short-term traders become pessimistic

The 8 quotes below clarify Warren Buffett’s thinking on when to buy great businesses.

“Long ago, Ben Graham taught me that ‘Price is what you pay; value is what you get.’ Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”

In the quote above, Buffett explains that he acquired his value-focused mindset from his mentor Benjamin Graham. Graham was the father of value investing and a fantastic investor in his own right. It makes sense that his philosophies significantly influence Warren Buffett.

There is a stark difference in investing style between Graham and Buffett. Graham focused on deep value plays – businesses that were trading below liquidation value. These were typically poor businesses that were undervalued because they had such bad future prospects.

Buffett focuses on great businesses trading at fair or better prices, as the quote below clarifies:

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”

Wonderful companies compound your wealth year-after-year. Poor quality businesses that are exceptionally cheap only grow your wealth once (when you sell them – hopefully for a profit).

Note that Buffett does not say to buy great businesses at any price.

“For the investor, a too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favorable business developments.”

Overpaying severely limits the growth of your wealth. If you pay for a large part of future growth today, you will not benefit from that growth down the line. Great businesses can be very overvalued…

“Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.”

You don’t need to be a contrarian to do well in investing, but you do need to exhibit emotional control and be realistic.

Just as great businesses can be overvalued, they can also be undervalued.

“The best thing that happens to us is when a great company gets into temporary trouble…We want to buy them when they’re on the operating table.”

It’s not easy to buy great businesses when they are ‘on the operating table’. That’s because the zeitgeist is decidedly against buying – stocks become undervalued because the general consensus is negative. Intelligent investors profit from irrational fears.

“Be fearful when others are greedy and greedy only when others are fearful.”

Fear and market corrections create opportunities for more patient, long-term investors. The two quotes below expand upon this.

“So smile when you read a headline that says ‘Investors lose as market falls.’ Edit it in your mind to ‘Disinvestors lose as market falls—but investors gain.’ Though writers often forget this truism, there is a buyer for every seller and what hurts one necessarily helps the other.”

&

“The most common cause of low prices is pessimism—some times pervasive, some times specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It’s optimism that is the enemy of the rational buyer.”

Paying too high a price is an investing risk that can be avoided (for the most part) by staying disciplined.

Buying is only half of investing. The next section covers when to sell.

http://www.suredividend.com/warren-buffett-quotes/#when to buy

WHAT to Buy by Buffett

Buffett Quotes on Great Businesses & Competitive Advantages

Investors can be divided into two broad categories:

• Bottom up investors
• Top down investors

Top down investors look for rapidly growing industries or macroeconomic trends. They then try to find good investments that will capitalize on these trends.

Bottom up investors do they exact opposite. They look for individual investment opportunities irrespective of industry or macroeconomic trends.

Warren Buffett wants to invest in great businesses. He is a bottom up investor.

“The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.”

Buffett prefers to invest in businesses that have differentiated themselves from the competition. Commodity selling businesses don’t have a differentiator (unless they are the low cost producer).

“Stocks of companies selling commodity-like products should come with a warning label: ‘Competition may prove hazardous to human wealth.’”

Commodity business (in general) are not quality businesses for long-term investors. The reason is because competition will erode margins and make investing in the business a zero-sum game.

Commodity businesses that have found a way to survive are not great businesses. The analogy below emphasizes this point:

“A horse that can count to ten is a remarkable horse—not a remarkable mathematician.”

Don’t invest in horses that can count to 10. Invest in businesses with a strong competitive advantage that allows for large excess profits…

And make sure that company’s competitive advantage is durable.

“Our approach is very much profiting from lack of change rather than from change. With Wrigley chewing gum, it’s the lack of change that appeals to me.”

Chewing gum doesn’t change much. Neither does Coca-Cola (KO), or banking with Wells Fargo (WFC), or Ketchup at Kraft-Heinz (KHC). Buffett invests in slow changing businesses because they will compound growth over the long run. 

Businesses in rapidly changing industries have shorter periods of time in which they can compound investor wealth.

Now that we have covered what to buy, it is time to see Warren Buffett’s thoughts on when to buy.

http://www.suredividend.com/warren-buffett-quotes/#circle of competence

Constructing a Winning Portfolio using a general methodology that will serve you well

No one can predict the course of the market over the next month or the next year but you will be able to better the odds of constructing a winning portfolio.

The price levels of stocks and bonds will undoubtedly fluctuate beyond your control.

You need to acquire a general methodology that will serve you well in realistically projecting long-run returns and adopting your investment program to your financial needs.


What determines the returns from stocks and bonds?

Very long run returns from common stocks are driven by two critical factors:

• The dividend yield at the time of purchase, and,
• The future growth rate of earnings and dividends.

In principle, for the buyer who holds his or her stocks forever, a share of common stock is worth the present or discounted value of its stream of future dividends.

A stock buyer purchases an ownership interest in a business and hopes to receive a growing stream of dividends.

Even if a company pays very small dividends today and retains most (or even all) of its earnings to reinvest in the business, the investor implicitly assumes that such reinvestment will lead to a more rapidly growing stream of dividends in the future or alternatively to greater earnings that can be used by the company to buy backs its stocks.

LONG RUN EQUITY RETURN = INITIAL DIVIDEND YIELD + GROWTH RATE.

From 1926 to 2010:
Common stocks provided an average annual rate of return of about 9.8%.
The dividend yield for the market as a whole on Jan 1, 1926 was about 5%.
The long-run rate of growth of earnings and dividends was also about 5%.
Adding the initial dividend yield to the growth rate gives a close approximation of the actual rate of return.


OVER SHORTER PERIODS, SUCH AS A YEAR OR EVEN SEVERAL YEARS, A THIRD FACTOR IS CRITICAL IN DETERMINING RETURNS.

This factor is the change in valuation relationships - specifically, the change in the price-dividend or price-earnings multiple.  (Increases or decreases in the price-dividend multiple tend to move in the same direction as the more popularly used price-earnings multiple.)



Price-dividend and price-earnings multiples vary widely from year to year.

In times of great optimism, such as early March 2000, stocks sold at price-earnings multiples well above 30.
The price-dividend multiple was over 80.

At times of great pessimism, such as 1982, stocks sold at only 8 times earnings and 17 times dividends.



These multiples are also influenced by interest rates.

When interest rates are low, stocks, which compete with bonds for an investor's savings, tend to sell at low dividend yields and high price-earnings multiples.

When interest rates are high, stock yields rise to be more competitive and stocks tend to sell at low price-earnings multiples.

Buffett's Investment Philosophy. That's it. That's the secret formula.

Buffett’s investment philosophy is succinctly summarized in this quote below:

“We select such investments on a long-term basis, weighing the same factors as would be involved in the purchase of 100% of an operating business:

(1) favorable long-term economic characteristics;
(2) competent and honest management;
(3) purchase price attractive when measured against the yardstick of value to a private owner; and
(4) an industry with which we are familiar and whose long-term business characteristics we feel competent to judge.”

That’s it. That’s the basic ‘secret formula’ to Warren Buffett’s $60 billion fortune.

http://www.valuewalk.com/2016/04/107-profound-warren-buffett-quotes-learn-build-wealth/?all=1

Berkshire Hathaway live-streamed its annual shareholder meeting for the first time in the company's history (video)

For the first time in the company’s history, Berkshire Hathaway live-streamed its annual shareholder meeting for all of the world to see.
https://finance.yahoo.com/brklivestream

The risk you can assume is determined by: your sleeping point, your age and the sources and dependability of your noninvestment income.

The theories of valuation worked out by economists and the performance recorded by the professionals lead to a single conclusion:  There is no sure and easy road to riches.

High returns can be achieved only through higher risk-taking ( and perhaps through acceptance of lesser degrees of liquidity).

The amount of risk you can tolerate is partly determined by your sleeping point.

You should understand the risks and rewards of stock and bond investing and be able to determine the kinds of return you should expect from different financial instruments.

But the risk you can assume is also significantly influenced by your age and by the sources and dependability of your noninvestment income.

You should have a clear notion of how to decide what portion of your capital should be placed in common stocks, bonds, real estate and short-term investments.

You should develop  a sound philosophy and specific stock market strategies that will enable you as  amateur investors to achieve results as good as or better than those of the most sophisticated professionals.



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