The other term in their strategy is equally important. This is what the Schlosses shared.
"We don't buy derivatives, indexes or commodities.
We don't short stocks. We have in the past, and have made some money, but the experience was uncomfortable for us.
We don't try to time the market, though we do let the market tell us which stocks are cheap.
We did invest in bankrupt bonds at one time, and if the situation presented itself to us, we might again. But that field has become crowded over the years, and like most value investors, we don't want too much company.
We stay clear of ordinary fixed income investments. The potential returns are limited, and they can be negative if the interest rates rise.
We buy stocks. We invest in cheap stocks.
If we find a cheap stock, we may start to buy even before we have completed my research. We have at least a rudimentary knowledge of many companies and we can consult Value Line or the S&P stock guide for quick check into the company's financial position.
We believe the only way really to know a security is to own it, so we sometimes stake out our initial postion and then send for the financial statements.
The market today moves so fast that we are almost forced to act quickly."
Showing posts with label circle of competence principle. Show all posts
Showing posts with label circle of competence principle. Show all posts
Thursday 28 January 2010
Wednesday 20 January 2010
How Buffett avoided mistakes by staying within his circle of competence
Understanding Your Circle of Competence
If Buffett cannot understand a company's business, then it lies beyond his circle of competence, and he won't attempt to value it.
Although it might seem obvious that investors should stick to what they know, the temptation to step outside one's circle of competence can be strong.
Buffett has written that he isn't bothered when he misses out on big returns in areas he doesn't understand, because investors can do very well (as he has) by simply avoiding big mistakes.
Buffett is simply a better investor than just about any other in the world. Brilliant, consistently rational, and blessed with a superb mind for business, he has managed to avoid the mistakes that have crushed so many portfolios. Let's look at two examples.
Burton G. Malkiel, Princeton economics professor and author of 'A Random Walk Down Wall Street,' and Charles D. Ellis, author of 'Winning the Loser's Game,' have teamed up to write 'The Elements of Investing.' He commented:
"We're both in our seventies. So is Warren Buffett. The main difference between his spectacular results at Berkshire Hathaway and our good results is not the economy and not the market, but the man from Omaha. "
If Buffett cannot understand a company's business, then it lies beyond his circle of competence, and he won't attempt to value it.
Although it might seem obvious that investors should stick to what they know, the temptation to step outside one's circle of competence can be strong.
Buffett has written that he isn't bothered when he misses out on big returns in areas he doesn't understand, because investors can do very well (as he has) by simply avoiding big mistakes.
- In early 2000, Berkshire Hathaway's portfolio had underperformed funds that enjoyed spectacular returns by loading up on stocks of technology companies and Internet startups. Buffett avoided all tech stocks. He told his investors that he refused to invest in any company whose business he did not fully understand - and he didn't claim to understand the complicated, fast-changing technology business - or where he could not figure out how the business model would sustain a growing stream of earnings. Some said he was an old fuddy-duddy. Buffett had the last laugh when Internet-related stocks came crashing back to earth.
- In 2005 and 2006, Buffett largely avoided the mortgage-backed securities and derivatives that found their way into many investment portfolios. Again, his view was that they were too complex and opaque. He called them "financial weapons of mass destruction." When they brought down many a financial institution (and ravaged our entire financial system), Berkshire Hathaway avoided the worst of the meltdown.
Burton G. Malkiel, Princeton economics professor and author of 'A Random Walk Down Wall Street,' and Charles D. Ellis, author of 'Winning the Loser's Game,' have teamed up to write 'The Elements of Investing.' He commented:
"We're both in our seventies. So is Warren Buffett. The main difference between his spectacular results at Berkshire Hathaway and our good results is not the economy and not the market, but the man from Omaha. "
Monday 14 September 2009
Find a Stock Investing Strategy that Works for You
Find a Stock Investing Strategy that Works for You
By Ken Little, About.com
Investing in stocks can be as simple or as complicated as you want to make it. The important part of that sentence is the personal pronoun “you.”
Too often investors are led to believe that investing in stocks must be a complicated, deeply analytical process involving hours of pouring over financial statements, analysts’ reports, spreadsheets and market analysis before making a decision.
For some investors, this is the only way they feel comfortable investing and they enjoy the digging for information as much as the actual return on investing.
What Works
The complicated analytical approach to investing works for them, but that doesn’t mean it is the only way to successful investing or that it works for every investor.
You may not have the time or educational background to do the complicated financial analysis of every stock you make buy. Does that mean you will be less successful?
Not necessarily, some investors who do tons of research still get it wrong. Still, what can you do to improve your chances for investing success if you aren’t the analytical type and don’t have a lot of time to devote to research?
•Keep the number of targets small. Set your parameters tight to limit your universe. For example, say you’re interested in the health care industry. Pick out a sector in that industry and focus on the leaders (market leaders, not price leaders).
•If your objective is growth, invest in growth industries. This may seem obvious, but it is easy for investors to get side tracked. You will probably do better with a so-so company in a growth industry than a great company in an industry that’s going nowhere. If you want growth, invest in technology or one of the other growth industries and don’t waste your time on utilities alone.
•Invest in market leader wherever you find them if they are overpriced. Market leaders are companies that dominate their corner of the industry and the ones you are looking for are so entrenched it will be hard to dislodge them. Microsoft is the obvious example of a market leader. I’m not suggesting investing in Microsoft, that’s your decision, but they are in no danger of losing their position of market dominance. Of course, you would have said the same thing about GM 10 or 15 years ago.
Conclusion
The point is that you should find an investing strategy that works for you. If it is complicated and data heavy or simple and more intuitive, make it yours and don’t be bullied into adopting another’s strategy.
By Ken Little, About.com
Investing in stocks can be as simple or as complicated as you want to make it. The important part of that sentence is the personal pronoun “you.”
Too often investors are led to believe that investing in stocks must be a complicated, deeply analytical process involving hours of pouring over financial statements, analysts’ reports, spreadsheets and market analysis before making a decision.
For some investors, this is the only way they feel comfortable investing and they enjoy the digging for information as much as the actual return on investing.
What Works
The complicated analytical approach to investing works for them, but that doesn’t mean it is the only way to successful investing or that it works for every investor.
You may not have the time or educational background to do the complicated financial analysis of every stock you make buy. Does that mean you will be less successful?
Not necessarily, some investors who do tons of research still get it wrong. Still, what can you do to improve your chances for investing success if you aren’t the analytical type and don’t have a lot of time to devote to research?
•Keep the number of targets small. Set your parameters tight to limit your universe. For example, say you’re interested in the health care industry. Pick out a sector in that industry and focus on the leaders (market leaders, not price leaders).
•If your objective is growth, invest in growth industries. This may seem obvious, but it is easy for investors to get side tracked. You will probably do better with a so-so company in a growth industry than a great company in an industry that’s going nowhere. If you want growth, invest in technology or one of the other growth industries and don’t waste your time on utilities alone.
•Invest in market leader wherever you find them if they are overpriced. Market leaders are companies that dominate their corner of the industry and the ones you are looking for are so entrenched it will be hard to dislodge them. Microsoft is the obvious example of a market leader. I’m not suggesting investing in Microsoft, that’s your decision, but they are in no danger of losing their position of market dominance. Of course, you would have said the same thing about GM 10 or 15 years ago.
Conclusion
The point is that you should find an investing strategy that works for you. If it is complicated and data heavy or simple and more intuitive, make it yours and don’t be bullied into adopting another’s strategy.
Saturday 17 January 2009
CIRCLE OF COMPETENCE PRINCIPLE ****
CIRCLE OF COMPETENCE PRINCIPLE ****
Value investors make hard-headed assessments of their competencies. If they doubt their skill in stock selection, they steer clear.
Value investors know their limits, thickly drawing the boundaries of their circle of competence.
They avoid investment prospects beyond those boundaries as well as anything even close to the boundaries.
This rules out broad segments of industry, enhancing prospects and economizing on time and resources devoted to studying business.
Those who cannot even identify a circle of competence should avoid stock picking altogether.
However, these operate as subparts of the broader market, and therefore can be over- or underpriced.
This means applying the same ten principles of disciplined investing, but perhaps less rigorously so.
Value investors make hard-headed assessments of their competencies. If they doubt their skill in stock selection, they steer clear.
Value investors know their limits, thickly drawing the boundaries of their circle of competence.
They avoid investment prospects beyond those boundaries as well as anything even close to the boundaries.
This rules out broad segments of industry, enhancing prospects and economizing on time and resources devoted to studying business.
Those who cannot even identify a circle of competence should avoid stock picking altogether.
----
For those who feel a need to allocate a portion of their wealth to stocks, choose vehicles other than individual stocks, such as mutual funds, index funds, or do so through a diversified retirement account.However, these operate as subparts of the broader market, and therefore can be over- or underpriced.
This means applying the same ten principles of disciplined investing, but perhaps less rigorously so.
Also read: 10 TENETS OF VALUE INVESTING
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