To make sure every $1 investment will generate $2000 in just 30 years ...

Fundamental analysts can have good dreams because they usually sleep well. If you are one of them, you don’t have to be afraid of daily stock price fluctuations. Why care so much for $1 to $2 per day price movements and uncertainties when you can get $100,000 30 years later almost certainly and do nothing? The ‘do nothing’ is what makes you an investor. Don’t you think so? Once you bought the shares, you will only sell them if there are fundamental changes; such as change in management or business model. Otherwise, continue riding on their profits and keep on collecting dividends or bonus issues by ‘doing nothing’.

Doesn’t it sound so peaceful?

"To make sure every $1 investment will generate $2000 in just 30 years, make sure you buy the stock at the lowest price possible."

Warren Buffett: No limit. Our favorite holding period is forever.

"When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever."

Source: Letter to shareholders, 1988

Read more: http://www.businessinsider.com/warren-buffett-quotes-on-investing-2010-8?op=1#ixzz1oXGABTgS

Intrinsic Business Value - Look for the long term growth in the intrinsic values of your invested businesses.

Intrinsic Business Value


Charlie and I measure our performance by the rate of gain in Berkshire’s per-share intrinsic business value. If our gain over time outstrips the performance of the S&P 500, we have earned our paychecks. If it doesn’t, we are overpaid at any price.

We have no way to pinpoint intrinsic value. But we do have a useful, though considerably understated, proxy for it: per-share book value. This yardstick is meaningless at most companies. At Berkshire, however, book value very roughly tracks business values. That’s because the amount by which Berkshire’s intrinsic value exceeds book value does not swing wildly from year to year, though it increases in most years. Over time, the divergence will likely become ever more substantial in absolute terms, remaining reasonably steady, however, on a percentage basis as both the numerator and denominator of the business-value/book-value equation increase.

Comment:  It is not easy to determine intrinsic value.  The best PROXY for intrinsic value of Berkshire Hathaway is its book value.  Though this closely tracks the intrinsic value of Berkshire Hathaway,  it actually understates the intrinsic value of the company.  Nevertheless, Buffett opines that using book value to denote intrinsic value is meaningless for most other companies.


We’ve regularly emphasized that our book-value performance is almost certain to outpace the S&P 500 in a bad year for the stock market and just as certainly will fall short in a strong up-year. The test is how we do over time. Last year’s annual report included a table laying out results for the 42 five-year periods since we took over at Berkshire in 1965 (i.e., 1965-69, 1966-70, etc.). All showed our book value beating the S&P, and our string held for 2007-11. It will almost certainly snap, though, if the S&P 500 should put together a five-year winning streak (which it may well be on its way to doing as I write this)

Comment:  Psychological forces trump the fundamental forces in the short term.  In the long term, the fundamental forces always trump the psychological forces that affect the stock price of a company.  Buffett looks at long term performances.  He highlighted that in any given 5 year period, the percentage gains in book value of Berkshire Hathaway have beaten those offered by the S&P 500.

http://www.berkshirehathaway.com/letters/2011ltr.pdf

A growth maverick shares his ideas.

Chuck Akre on the Search for Compounding Machines

A growth maverick shares his ideas.

Kinnel: You've said you look for "compounding machines." Would you explain what that means?

Akre: When I started in the investment business a good while ago, I was not trained for it in a traditional sense. I had been a pre-med major, and then I was an English major. So, I quite naturally had all kinds of questions about the investment business, and among them were the questions of what makes a good investor and what makes a good investment, and taking a look and studying different asset classes using data from what is now your subsidiary Ibbotson and other places. I came across the well-known piece of information that over the last roughly 90 years common stocks in the United States have had an annualized return that's in the neighborhood of 10%.

So, my question naturally was, well, what's important about 10%? What I concluded was that it had a correlation with what I believe was the real return on the owners' capital of all those businesses across all those years, all kinds of different balance sheets and business models--i.e., that the real return on owners' capital was a number that was probably in the low teens and therefore that kind of 10%-ish return correlated with that, and it caused me to posit that my return in an asset would approximate the ROE of a business given the absence of any distributions and given constant valuation. So, then, we say, well, if our goal is to have returns which are better than average, while assuming what we believe is the below-average level of risk, then the obvious way to get there is to have businesses that have returns on the owners' capital which are above that.

Early in the 1970s, I came across a book written by a Boston investment counselor, whose name was Thomas Phelps. And the book he wrote was called 100 to 1 in the Market. You probably know from the history books that Peter Lynch was around Boston in those days, and he was talking about things like "10-Baggers." But here was Thomas Phelps, who was talking about "100 to 1." He documented characteristics of these businesses that caused one to have an experience, where they could make 100 times their investment. The answer is, of course, it's an issue at the rate at which they compounded the shareholders' capital on a per unit of ownership basis and those that compounded the shareholders' equity at a higher rate had higher returns over long period of years. And so that's what comes into play is this issue of compounding compound machines, and we're often identified with this thing in our process that we call the three-legged stool. The legs of the stool have to do with the business models that are likely to compound the shareholders' capital at above-average rates, combined with leg two, people who run the business who are not only killers at running the business but also see to it that what happens at the company level also happens at the per share level--and then number three, where because of the nature of the business and the skill of the manager there is both history as well as an opportunity to reinvest all the excess capital they generate to reinvest that in places where they earn these above-average rates of return.

The most critical piece of that is the last leg, that reinvestment leg. Can you take all the extra capital you generate and reinvest it in ways that you can get continued earnings above-average rates of return? And that's at the core of what we're after in our investments.

Kinnel: On the sell-side, deterioration on those key fundamentals may lead you to sell, but do you also sell on valuation?

Akre: So, in response to your first observation, deterioration to any one of those three will certainly cause us to re-evaluate it. It won't automatically cause us to sell, but it will certainly cause us to re-evaluate it. Our notion is that if we don't get those three legs right where there develop differently in the future than they have in the past, theoretically our loss is the time value of money that it hasn't always been the case. But the deterioration of one of those legs or more than one of those legs diminishes the value of that compounding and, indeed, is likely to cause us to change our view. That's number one.

Number two, the issue of selling on valuation is way more difficult for us. And what we've said is that from a matter of life experience, if I have a stock that's at $40 and I think it's way too richly valued and I sell it with a goal of buying it back at $25, my life experience is it trades to $25.01 or trades through $25 and back up and it trades 200 shares there.   The next time I look at it, it's $300, and I've missed the opportunity. It's my way of saying that the really good ones are too hard to find.  

If I have one of these great compounders, I'm likely to continue to own it through thick and thin knowing that periodically, it's likely to be undervalued and periodically likely to be overvalued. The things that cause us to sell when one or more of the legs of the stool deteriorates. Occasionally, on a valuation basis, maybe we'll take some money off the table.

Lastly, if we're trying to continue to maintain a very focused portfolio, if we run across things that we think are simply better choices, then we may make changes based on that.


http://news.morningstar.com/articlenet/article.aspx?id=534635

Buy-and-Hold: Golden Strategy That Takes an Iron Will

Buy-and-Hold: Golden Strategy That Takes an Iron Will

August 10, 1997|TOM PETRUNO

http://articles.latimes.com/1997/aug/10/business/fi-21077/2

Anne Scheiber's life was no happy tale. Embittered after the federal government failed to promote her from her IRS auditing job at the end of 1944, she retired and spent the next 51 years mostly alone, living on the Westside of Manhattan.

Her only hobby was investing. She apparently put every penny she had into stocks, rarely selling, her broker would later explain.

By the time she died in 1995, Scheiber had amassed a $22-million fortune in about 100 stocks--all of which she left to a stunned, but grateful, Yeshiva University.

If Scheiber's story is something of a cliche--"aged, frugal recluse buys and holds stocks, leaves millions to charity"--it's too bad we all can't be beneficiaries of such cliches.

But then, many investors have in fact benefited handsomely in the 1990s from the same basic investment philosophy: Just buy stocks and don't sell them. Period.

The proven long-term success of buy-and-hold is the basis for the retirement savings plan boom of the past decade, of course. Americans are encouraged to invest regularly in the market, avoid the temptation to sell when stocks suddenly sink, and trust that when retirement happens in 10, 20 or 30 years, a hefty nest egg will be there to fund it.

And why doubt that? Since Dec. 31, 1989, the Dow Jones industrial average has risen 192%, from 2,753.20 to 8,031.22 at Friday's close.

Even better: Measured from the start of the 1980s bull market on Aug. 13, 1982, the Dow has increased a spectacular tenfold.

What's more, if buy-and-hold still is good enough for Warren Buffett--perhaps the greatest living spokesmodel for that investment style--it still should be good enough for the rest of us, right?

Yet as stock prices have zoomed this year, adding to the huge gains of 1995 and 1996, many investors have understandably grown uneasy. The nagging worry is that stocks might have reached such historically high levels that buying and holding at these prices may never pay off.

On days like Friday--when the Dow sank 156.78 points, or 1.9%, as bond yields surged on concerns about the economy's growth rate--investors' darkest concerns about the market's future can surface.

*

Is there a danger in trusting buy-and-hold at this point?


Certainly not if you have 51 years, like Anne Scheiber did. Academic studies show that the longer your time horizon, the lower the possibility of losing money in stocks.

That's not terribly surprising: Over time, the economy's natural tendency is to grow, because humankind's tendency is to strive to achieve more. If you own stocks, you own a piece of the economy--so you participate in its growth.

But over shorter periods--and that includes periods as long as a decade--it is indeed possible to lose money in stocks. Consider: The Dow index was at 890 on Dec. 31, 1971. Ten years later, on Dec. 31, 1981, the Dow was at 875. Your return after a decade of buy-and-hold was a negative 1.7%.

True, the 1970s were a miserable time for financial assets overall, as inflation soared with rocketing oil prices, sending interest rates soaring as well. But we don't even have to look back that far to discover just how difficult it can be to stick with a buy-and-hold strategy.

From the late 1980s through 1991, major drug stocks such as Merck & Co. and Pfizer Inc. were among Wall Street's favorites. They were well-run businesses, and the long-term demand for their products seemed assured.

By December 1991, Merck was trading at $56 a share, or a lofty 31 times its earnings per share that year.

Then came the Clinton administration's push for national health care. Suddenly, the drug companies found their pricing policies under attack. The stellar long-term earnings growth that Wall Street anticipated seemed very much in doubt. And the stocks fell into a decline that lasted more than two years and which shaved 40% to 50% from their peak 1991 prices.

Merck, for example, bottomed at $28.13 in 1994, which meant a paper loss of 50% for someone who bought at the peak in 1991.

If that had been you, could you have held through that horrendous decline? You should have: Today, Merck is at $98.81 a share, or 76% above its 1991 year-end level. After restructuring its business, Merck's earnings began to surge again in 1995 and 1996.

And this year, the drug stocks have once again become market darlings. But therein lies the problem: Merck is again trading for a high price-to-earnings ratio--26 times estimated 1997 results.

*

That doesn't necessarily mean that Merck is primed to drop 50%, as it did in 1992-94. But it does mean that if you own that stock--any stock, for that matter--you must allow for the possibility of a deep decline from these current high levels, something much worse than the just-short-of-10% pullbacks the market has experienced twice in the last 14 months.

Anne Scheiber, angry recluse that she was said to be, somehow managed to show no emotion at all about the stock market's many ups and downs in her 51 years of investing. A cynic might say she had nothing on which to spend her money, anyway. But the point is, she managed to remain true to buy-and-hold, when many other investors were probably selling out at the market's lows.

Mark Hulbert, editor of the Hulbert Financial Digest newsletter in Alexandria, Va., and a student of market history, worries that too few investors will have Scheiber's iron stomach when the tide eventually turns for the market overall, as it did for the drug stocks in 1992.

"I am cynical about all of these people genuflecting at the altar of buy-and-hold," Hulbert says. "They're not buy-and-hold--that's just what is working now," so investors are happy to go with the flow, he says.

Most investors, Hulbert maintains, are too new to the market to imagine how psychologically painful a major and sustained loss in their portfolio would be.

What is key to judging how much of your assets should be in stocks is your tolerance for risk, your tolerance for loss and, of course, your time horizon. But as a simple rule of thumb, many Warren Buffett disciples like to use this line: If, for whatever reason, you can't take a temporary, 50% loss in your portfolio, then you don't belong in the stock market.

For the relative handful of pros who really invest like Buffett, what the market does on a short-term basis isn't important. Their faith in buying and holding stocks derives from their long-term faith in the underlying businesses.

George Mairs, the 69-year-old manager of the $324-million Mairs & Power growth stock fund in St. Paul, Minn., owns just 33 stocks in the fund. He is among the least active traders in the fund business--he almost never sells. And his results speak for themselves: Mairs & Power Growth has beaten the Standard & Poor's 500 index every year in this decade.

Does Mairs fear that buy-and-hold isn't a great idea at these market levels? Hardly. High-quality stocks aren't cheap, he says, but neither does he find them to be drastically overpriced. "It's the long-term earnings stream that we look at," he says. "If the earnings are going to be there, we don't worry too much.

"What we want to do is own businesses," Mairs says. "If we like a business for the long term, we don't worry about what the stock value is on a week-to-week basis."

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)


How Patient Can You Be?

"Buy and hold" sounds great on paper, but it can require enormous patience. Major drug stocks, for example, soared 94% between March, 1990 and December, 1991, as measured by the Standard & Poor's index of five major drug companies. But when the threat of federalized health care surfaced in 1992, drug stocks began a sustained decline that lasted more than two years--and slashed the S&P drug index by 42%. With the stocks again rocketing this year, 1992-1994 stands as a sobering reminder of how bad things can get. S&P drug stock index, quarterly closes and latest



Source: Bloomberg News

Growth Stocks - When Should You Bank Your Profits?

By: James Woolley l Sep 16, 2010

Growth stocks can mean different things to different people, but I personally define a growth stock as being shares in a company that continues to increase both it's earnings and dividends each year (and has a long history of doing so). So with that in mind, I want to talk about when you should sell these stocks, because this is very important.

If you're lucky enough to have found some good quality growth stocks and are sitting on some decent profits, then it can be tempting to bank your profits and reinvest the proceeds elsewhere. However, as Warren Buffett will tell you, this isn't necessarily the best strategy.

The best strategy, provided that you're prepared to hold on to your shares for the long term, is to resist the temptation to sell and hold on for further gains. Yes there may be short-term fluctuations along the way, but providing that the company in question continues to increase both it's earnings and dividends each year, there is no need to sell because the share price will eventually rise to reflect this continued growth.

If you hold on to shares for as long as a company continues to grow and reinvest the dividends received each year, then you can be sure that you will be sitting on some substantial gains when you do finally decide to sell. This is something that Warren Buffett does to devastating effect. He simply looks for outstanding market-leading companies that continue to grow their profits each year, and holds on to these shares for years and years to benefit from both capital growth and dividends.

It requires a great deal of patience because in the short-term the share price can fall in line with the overall market, but in the long-term it rewards you with some fantastic profits. The difficulty is finding the right companies to invest in, but there are some obvious candidates amongst some of the large-cap stocks. For example here in the UK Tesco is a fantastic company because it has a long history of growing both it's earnings and dividends. Indeed I believe Buffett himself owns shares in Tesco at the time of writing.

So to answer the original question of when should you sell your shares in growth stocks, you should hold on to your shares for as long as possible to benefit from both capital growth and dividend reinvestment. The only time you should consider selling is when there is a danger that the company may stop increasing it's bottom line each year, maybe due to another major competitor gaining market share, for instance, because that will obviously mean that the share price is unlikely to continue rising in future years.


http://business.ezinemark.com/growth-stocks-when-should-you-bank-your-profits-1680a0ff66c.html

20 Questions to Focus the Hold versus Sell Decision

Key to Investment Success
20 Questions to focus the hold versus sell decision
http://spreadsheets.google.com/pub?key=txuLCrK4TZX_7uR7KDlLE7A&output=html

Time, and not timing, is the key to successful investment.

So who has the best chance of success?

Another approach is to disregard the risks of market timing and to ask how great the benefits would have been if an investor's timing had been right.

Let us take a hypothetical situation of 3 people who invested a fixed amount every year for 20 years.

• Person A is extremely lucky and annually invests at a market low, as determined by a particular Stock Market Share Index (JSE All Share Index). 
• Person B is unlucky and annually invests at a market high.
• Person C invests on a 'random' date every year, in this case 31st January.

The compound return earned by

• person A over the period is 14.0% a year,
• while in the case of person B it amounts to 11.3%. 
• person C achieved a return of 12.9% a year. 

(Dividend income was not taken into account in the research.)

It is

• not surprising that an investment at a market low achieved a better return than an investment at a market high, but
• the difference in return between the high and the low/'random' date is less than expected.

Although there are times when you should be more heavily invested,

• the risk of underperformance increases considerably if you are continually with-drawing from and returning to the market. 

Investors who buy and hold have the best chance of being successful.

Buy and Hold vs. Market Timing: Some personal observations

Short term traders do not hold their stocks for too long.  They often take their profit.  They then plough them back into another new trade when they perceive the upside is better than the downside.  They are not the buy and hold types.  To them, rightly so, buy and hold is a very dangerous strategy, especially so too if they are not picking carefully the stocks they trade in.   Short term trends are totally unpredictable.  They react to graphs depicting volumes and prices; searching for and attributing meanings to these.

When the market is on the uptrend, everyone benefits.  Postings were similarly optimistic.  "Why I like stock XXX?"  "Why I like stock XYZ, very much?"... Blah. Blah. Blah.   Now that the market has shown some volatilites and uncertainties, the postings turned pessimistic.  "Beware the black swan..."  Blah. Blah. Blah.  Such thinking is typical of a market timer. 

Yet, the reality is:  No one can predict the market with any certainty.  If he can, he will own the world.  But one should invest with some knowledge of the probabilities of likely outcomes. Even more importantly, is knowing the consequences arising from these probabilities, however unlikely these maybe.  Nassim Taleb is right to point these "fatal downsides" of unintelligent or emotional investing in his two classic books.

Let me share with you a "well known' secret.  Do you know that the richest persons  in the world are all mostly "buy and hold" type investors?  Look at the KLSE bourse.  Who owns the major wealth in the KLSE?  Lee family of KLK, Lim family of Genting, Yeoh family of YTL, Teh family of PBB, Lim family of TopGlove, Lee family of IOI, .......  They are the major shareholders of the good quality successful companies.  Do they buy and sell their shares in their companies regularly?  Do they make more of their money from trading their shares or from holding onto their shares over a very very long period?

Buy and hold is safe.  It is very safe for those with a long term investing horizon.  However, there is one provision:  You need to be in the right stock.  You will need to be a stock-picker.  Pick the good quality successful companies and you will have few reasons to sell them. 

Buy and hold is certainly very safe for selected stocks.  Do not react emotionally to price volatilities.  Price volatility is your friend to be taken advantage of:  giving you the opportunity to buy these companies at a bargain and to sell them if they are overpriced.  Often, the price is correct and fair, and you need not do anything.   For the super-rich whose wealth are locked in a "buy and hold" mode for umpteen years in their good quality successful companies, this strategy has benefitted them immensely.  If they can grow rich, so can you.  After all, you can be a co-owner in their companies.  Think about this and you may wish to follow them too, buying into their companies at fair or bargain prices.  For this, you will need to be rewired appropriately.

Sit on Your Assets, if You Can

While most investors associate Buffett and Munger with finding good stocks cheap, Munger points out that quality can trump price.

"If you buy something because it's undervalued, you have to think about selling it when it approaches your calculation of its intrinsic value," he says. "That's hard. But if you buy a few great companies, then you can sit on your ass. That's a good thing."

8600% gains with a buy and hold strategy

Maximising gains with a buy and hold strategy

Buffett is so confident in his stock-picking ability that he is incline to continue holding an investment perpetually. Rather than lull himself into believing he can win by continually darting in and out of the market.

Buffett believes he can earn and retain more money picking a few choice companies and letting them grow over time.

"All you do is buy shares in a great business for less than the business is intrinsically worth, with managers of the highest integrity and ability. Then you hold those shares forever," he told a Forbes reporter in 1990.

To make the point, Buffett's porfolio is concentrated in a small number of companies he has owned for years.

• - He began accumulating stock in The Washington Post in the mid-1970s until he owned 1,869,000 shares. In 1985, he sold about 10% of his holdings but has kept the remaining 1.727,765 to this day.

• - He continues to hold all 96,000,000 million shares of Gillette bought in 1989. He originally bought a preferred stock that converted into 12,000,000 shares; there have been three splits since.

• - He vows never to sell his 200,000,000 shares of Coca-Cola despite the recent slump in revenues and earnings.

• - Buffett began studying and buying shares of GEICO at the age of 21. He reportedly made a nearly 50 % gain on his first GEICO investment in a single year. Later, when Wall Street belived GEICO was on the verge of bankruptcy, Buffett began accumulating large stakes in the insurer. By 1983, he owned 6.8 million shares, which turned into more than 34 million shares - 51% of the company - by virtue of a 5 for 1 split. In August 1995, he announced he would buy the remaining 49% of GEICO and bring the company under Berkshire's umbrella.

Such patience has paid off.

• - His $45 million investment in GEICO in the 1970s became worth $2.4 billion (a 54-fold increase in 20 years) when Buffett announced he was buying the rest of the company.

• - He has held shares in The Washington Post for 27 years, over which time his $10.6 million investment grew to $930 million by the end of 1999, an 86-fold increase. During a period in which Wall Street's brokerages alternately told investors numerous times to buy and sell The Washington Post, Buffett held on for the maximum gain. Buffett has not paid a dime of capital gains taxes on The Washington Post since he sold a portion of his position in 1985.

Few investors can brag of attaining an 8,600 percent return on one investment because so few will hold a stock long enough to maximise the stock's potential.

Even thought the past few years has provided several stocks that surged 8,000 percent within a few years, such as Dell Computer, Qualcom, or America Online, it's doubtful that many investors reaped the full gain.

These stocks rallied so prodigiously because investors flipped them so rapidly. Turnover caused most of the gains. The majority fo investors tripped themselves up playing the market's short-term lottery.