Deep Value Investing has its Inherent Problems.

Buffett said it best:

Unless you are a liquidator, that kind of approach to buying businesses is foolish.

• First, the original 'bargain' price probably will not turn out to be such a steal after all. In a difficult business, no sooner is one problem solved than another surfaces - never is there just one cockroach in the kitchen. 
• Second, any initial advantage you secure will be quickly eroded by the low return that the business earns ...

There are better ways to make money (see below).


Warren Buffett, Berkshire Hathaway shareholder letter, 1989.
http://www.berkshirehathaway.com/letters/1989.html





When the overall market valuation is high, and everything else is rising, those dropping and appearing in the deep-bargain screener probably deserved to be traded by low valuations.

• Their stock prices were likely low for the right reasons, and buying these would likely have resulted in deep losses.
• Therefore, when it comes to deep-value investing, investors need to be cautious and aware of this approach's inherent problems.

The inherent problems with deep value investing

"Cigar-butt investing"

This was coined by Buffett for the strategy of buying mediocre businesses at prices that are much lower than the companies' net asset values.

He said the approach is like "a cigar butt found on the street that has only one puff left in it and may not offer much of a smoke, but the "bargain purchase" will make that puff all profit."




There are several problems with this approach.

1. Erosion of value over time.

Mediocre businesses do not create value for their shareholders; instead, they destroy business value over time.

The value of the business can decline and the initial margin of safety may gradually shrink, even if the stock price doesn't go up.

Investors need to be lucky enough to have the stock prices rise in time and sell before prices drop again following the intrinsic value of the business.

"Time is the friend of the wonderful business, the enemy of the mediocre." Buffett wrote in his 1989 shareholder letter.


2. Timing and Pain

Buy these bargain portfolios when you can find plenty of them, but if the broad market is in quick decline, like in 2008, the bargain portfolio will be very likely to lose much more than the general market.

• If the decline lasts longer, many of the companies in the portfolio may suffer steeper operating losses and may even go out of business.
• It is much more painful to hold such a portfolio in bad times, as anyone who owns these stocks during bear markets or recessions will attest - and lose much sleep over.

Because of the quick erosion of business value, selling the deep-asset bargains quickly is key, even if stock prices do not appreciate. The biggest profits are usually achieved within the first 12 months.

"If you buy something because it is undervalued, then you have to think about selling it when it approaches your calculation of its intrinsic value. That's hard." (Charlie Munger.)

Buffett likens buying mediocre businesses at deep bargain prices for a quick profit to dating without the intent of getting married. In that situation, it is essential to end the courtship at the right time and before the relationship turns sour.


3. Not Enough Stocks Qualify

To avoid errors and disasters caused by single stocks in the deep-bargain portfolio, it is important to have a diversified group of them.

But when the market valuation is high, it is just not possible to find enough stocks to satisfy the diversification requirement. They simply dried up as the market continued to tick higher.

This situation may last a long time, as the close-to-zero interest rate has lifted the valuations of all assets.


4. Tax Inefficiency

Because of the short holding time, any gain from the portfolio is subject to the same tax rate as the investor's income tax (for U.S. investors, unless it is in a retirement account.)

This drastically reduces the overall return over the long term.




If buying mediocre businesses at deep bargain prices for a quick profit is like a date without the intent of getting married, buying them and getting involved long term is like a marriage without love. A lot of other things need to be right to work things out, and it will never be a happy marriage.




Important Notes on Deep-Asset Bargains strategy


Though buying deep-asset bargains can be very profitable, this strategy comes with its inherent problems.

- This strategy comes with a much higher mental cost to investors.

- More importantly, business deterioration and the erosion of value put investors in a riskier position.

- As a result, they need to strictly follow the rules of maintaining a diversified portfolio and selling within 12 months whether investments worked out or not.




Ask yourself:

Why would you, as an investor, want to get involved in this mess (a deep-asset-bargain) and witness things deteriorating, hoping the situation will improve?

Even if it works out eventually, which is very unlikely (in the majority), the mental and psychological drain is simply not worth it.



There are better ways to make money.

Buy Only Good Companies!


"Bargain-purchase folly."


Instead of buying companies with deteriorating values on the cheap and hoping things will improve, why not buy companies that grow value over time?

Warren Buffett summarized in a single sentence the priceless lessons he learned from his personal "bargain-purchase folly".

"It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

A quality strategy - appreciating the future earning potentials of wonderful companies.

Though Warren Buffett popularized the idea of the moat, he credits partner Charlie Munger for bringing him around to the idea that "it's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

A quality strategy is a bet that the market doesn't appreciate wonderful companies enough, particularly their earnings potential many years out. 

As Charlie Munger said, "If a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you'll end up with one hell of a result." 

(Of course, it's not easy to identify in advance firms that can sustain such high rates of return for so long.)




http://news.morningstar.com/articlenet/article.aspx?id=643125&SR=Yahoo

Prospecting for Good Quality Stocks at the Right Price at any given time.

There are about 16,000 publicly owned companies in the U.S. for you to select from.  There are also about 3 times this number (48,000) of publicly owned companies in the other countries for you to select from too.

With so many companies, of course, some are much better candidates for your consideration than others.

Of these companies, fewer than 2% are likely to make the cut so far as your quality standards are concerned.

And perhaps, only 5% of THOSE might be available at the right price at any given time- and even this could be an overestimate.


Illustration:

1000 stocks

Only 20 are quality stocks (20/1000 = 2%)

Of these 20 quality stocks, only 1 is available at the right price at any given time, if at all. (1/20 = 5%)

A significant inaccurate notion - Equating a lower absolute share price automatically to a better value.

When Ben Graham was teaching his investing course at Columbia University in the 1950s, he used a brilliant form of instruction to illustrate relationship between price and value.  He often took two consecutive securities from the stock tables and analysed the fundamentals.  This method roved to be an effective tool for illustrating the price/value relationship.  Of significant importance is the inaccurate notion that a lower absolute price automatically equates to a better value.

Good quality company at fair price

COMPANY RD

Quarter	High Pr	Low Pr	ttm-eps	High PE	Low PE
1	16.90	16.18	111.27	15.19	14.54
4	16.20	15.42	110.48	14.66	13.96
3	15.96	15.02	107.18	14.89	14.01
2	14.46	14.18	104.76	13.80	13.54
1	13.80	13.50	102.70	13.44	13.15
4	14.04	13.54	99.47	14.11	13.61
3	12.78	12.30	98.59	12.96	12.48
2	13.46	12.52	95.28	14.13	13.14
1	13.26	12.98	91.10	14.56	14.25
4	13.54	12.84	87.17	15.53	14.73
3	12.86	12.50	82.66	15.56	15.12
2	12.22	11.92	78.83	15.50	15.12
1	12.04	11.26	75.57	15.93	14.90
4	12.00	10.94	73.31	16.37	14.92
3	11.02	10.62	73.15	15.06	14.52
2	10.30	9.84	73.00	14.11	13.48
1	8.80	8.35	72.99	12.06	11.44
4	9.25	8.55	76.94	12.02	11.11
3	8.80	8.15	74.78	11.77	10.90
2	10.30	9.80	72.62	14.18	13.49
1	12.00	11.30	70.55	17.01	16.02
4	11.80	10.30	63.35	18.63	16.26
3	11.40	10.40	59.38	19.20	17.51
2	11.10	9.90	56.21	19.75	17.61
1	10.20	9.65	54.27	18.79	17.78
4	9.55	8.80	51.79	18.44	16.99
3	8.90	7.60	50.32	17.69	15.10
2	6.90	6.60	47.88	14.41	13.78
1	6.75	6.25	45.39	14.87	13.77
4	6.70	6.45	54.88	12.21	11.75
3	6.75	6.35	63.93	10.56	9.93
2	6.90	6.70	73.23	9.42	9.15
1	13.80	12.90	77.80	17.74	16.58
4	15.50	15.00	64.23	24.13	23.35
3	14.70	13.80	50.49	29.11	27.33
2	10.40	9.92	37.23	27.93	26.64
1	9.84	8.80	29.10	33.81	30.24

ttm-EPS Growth Rates

1yrCAGR	2yrCAGR	5YrCAGR	7YrCAGR	10YrCAGR
8.3%	10.5%	8.9%	13.7%	14.4%

	HPE	LPE
Avg 5 Yrs	14.29	13.62
Avg 10 Yrs	16.47	15.47

	LDY%	HDY%
Avg 5 Yrs	4.63%	4.87%
Avg 10 Yrs	6.51%	6.91%

Quarter	Q1 eps	Q2 eps	Q3 eps	Q4  eps	FYE eps
31-Dec-13	27.65	0.00	0.00	0.00	27.65
31/12/2012	26.86	27.20	28.08	28.34	110.48
31-Dec-11	23.63	25.14	25.66	25.04	99.47
31-Dec-10	19.70	20.96	22.35	24.16	87.17
31/12/2009	17.44	17.70	18.52	19.65	73.31
31-Dec-08	21.39	17.69	18.37	19.49	76.94
31-Dec-07	14.19	15.62	16.21	17.33	63.35
31-Dec-06	11.71	13.68	13.04	13.36	51.79
31-Dec-05	21.20	11.19	10.60	11.89	54.88
31-Dec-04	7.63	15.76	19.90	20.94	64.23
				Sum	709.27
				DPO	89.7%

Quarter	FYE eps	Div	Ret Earn	DPO%
31-Dec-13	27.65	0.00	27.65	0.0%
31/12/2012	110.48	50.00	60.48	45.3%
31-Dec-11	99.47	48.00	51.47	48.3%
31-Dec-10	87.17	58.00	29.17	66.5%
31/12/2009	73.31	55.00	18.31	75.0%
31-Dec-08	76.94	55.00	21.94	71.5%
31-Dec-07	63.35	75.00	-11.65	118.4%
31-Dec-06	51.79	60.00	-8.21	115.9%
31-Dec-05	54.88	55.00	-0.12	100.2%
31-Dec-04	64.23	180.00	-115.77	280.2%
Sum	709.27	636.00	73.27
DPO	89.7%
	FYE eps	Div
1YrCAGR	11.1%	4.2%
2YrCAGR	12.6%	-7.2%
3Yr CAGR	14.6%	-3.1%
5YrCAGR	11.8%	-7.8%
8YrCAGR	7.0%	-14.8%

Qtr No	ROE
1	22%
4	22%
3	22%
2	22%
1	23%
4	23%
3	25%
2	24%
1	25%
4	23%
3	24%
2	23%
1	23%
4	23%
3	25%
2	24%
1	26%
4	27%
3	27%
2	26%
1	27%
4	23%
3	23%
2	21%
1	21%
4	19%
3	20%
2	19%
1	18%
4	21%
3	29%
2	33%
1	18%
4	13%
3	10%
2	9%
1	14%

Summary:
At today's price, this company is trading at:

P/E of 15.2 x

DY of 2.96%

Its EPS GR is around 9% to 10% for recent years.

It distributes dividends yearly, though in recent years, it has retained more of its earnings in the company.  

However, given its high ROE of 22% or so, this greater portion of retained earnings is advantageous and beneficial to the long-term investors.

Though its share price has risen over the last 2 years in this bull market, its P/E has only increased minimally or modestly.  

Warren Buffett on how to obtain superior profits from stocks.

     An investor cannot obtain superior profits from stocks by simply committing to a specific investment category or style.  He can earn them only by carefully evaluating facts and continuously exercising discipline. 

     Common stocks are the most fun.  When conditions are right that is, when companies with good economics and good management sell well below intrinsic business value - stocks sometimes provide grand-slam home runs.  

• We often find no equities that come close to meeting our tests.  
• We do not predict markets, we think of the business.  
• We have no idea - and never have had - whether the market is going to go up, down, or sideways in the near- or intermediate term future.

What should you do if you find that the price or P/E is significantly above or below the historically fair price or fair P/E mark?

"It is better to buy a wonderful company at fair price than a fair company at wonderful price."

In general, if you can buy a quality stock today for a historically fair price or fair P/E, you should probably do so, provided the reward and risk are attractive.

However, what should you do if you find that the price or P/E is significantly above or below the historically fair price or fair P/E mark?

A low price or low P/E is probably your biggest concern, because it suggests that people who are buying the stock today might know something negative about the company that you don't know.

Think about it.  Why would investors pay less for the stock than it has typically sold for?

• Is there something in the news that you haven't heard about?  
• Has an analyst - or have a number of analysts - announced a reduced expectation of future earnings based upon something they know that you don't know?  
• Have you missed something in your quality analysis - or (shame on you!) recklessly jumped over that barbed-wire fence, failing to evaluate quality deliberately enough before moving on to look at the value considerations? 

(E.g. Transmile, KNM).

If the price or P/E is too low - move on to another company and forget about looking at the risk and reward.  You may miss a few good stocks, but you won't have to lose any sleep worrying about being wrong.



If the price or P/E ratio is too high, this tells you two things.

1. The first is that other investors appear to agree with you about the quality issues, because they are paying a healthy price for the stock.  
2. The second is that it may be too healthy a price.  

• You may want to put off buying it until the price becomes more reasonable.  
• Or, it may be worth the premium if the risk and reward are satisfactory.

(E.g. _____________)

Just know that, if you buy a stock whose price or P/E is too far above the fair price or fair P/E, when it later comes back down - which it usually will - the decrease in P/E can reduce your gain considerably.  Your chances of having a superior portfolio are far better if you select stocks for which you don't have to make any allowances.  


As you gain more experience, you'll find that you can make some intelligent exceptions in cases of high or low price or P/E, but for now, the advice for those who are just starting out, don't.

Quality: There are a relatively small number of truly outstanding companies. Their shares frequently can’t be bought at attractive prices.

Investment is most intelligent when it is most businesslike. 
Ben Graham - "The Intelligent Investor"

“There are a relatively small number of truly outstanding companies. Their shares frequently can’t be bought at attractive prices. Therefore, when favourable prices exist, full advantage should be taken of the situation.”
Philip A. Fisher, ‘Developing an Investment Philosophy’, 1980

The moral of this is that only an excellent business bought at an excellent price makes an excellent investment. One without the other just won’t do. 

Investors start from the premise that there is no philosophical distinction between part ownership (i.e. buying shares in a company) and outright ownership (i.e. buying the business in its entirety). All we are looking for is pieces of businesses to buy at the right price.

Warren Buffett put it thus:
 “Stocks are simple. 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 own those shares forever.”¹ 

Criteria for Stock Selection 


It follows that there are several important criteria that companies selected for investment consideration must exhibit in abundance. Among these are that:

• Their business model is easily comprehensible; 
•  They produce transparent financial statements; 
•  They demonstrate consistent operational performance with earnings being relatively predicable; 
•  They generate high returns on capital employed; 
•  They convert a high proportion of accounting earnings into free cash; 
•  Their balance sheet is strong without unduly high financial leverage; 
•  Their management is focused on delivering shareholder value and is candid with the owners of the business; 
•  Their growth strategy is more likely to rely on organic initiatives than frenetic acquisition activity. 

 Buy when the Odds are in Your Favour 

 Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause their share prices to be misappraised. Again as Buffett puts it, “Price is what you pay, value is what you get”.² Having identified a universe of truly outstanding companies, we must wait until their shares can be bought at a price on the stockmarket that is substantially less than their true economic worth. 

References: 

 ¹ Warren E. Buffett, Forbes, 6 August 1990 

 ² Warren E. Buffett, Letter to Partners (Buffett Partnership), July 1966

http://www.sanford-deland.com/pages/quality+of+business

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."

Valuing a Business

"The critical investment factor is determining the intrinsic value of a business and paying a fair or bargain price."

- Warren Buffett

If you find a good company at a good price, who cares what "the market" is doing?

When buying a great wonderful company, also ensure that the stock was reasonably priced.

Even a great company can be a bad investment if you pay too much for it. 

If you find a good company at a good price, who cares what "the market" is doing?

Nestle revisited

In the year 2001, the after tax EPS of Nestle was 87 sen. and its share price was trading between $19.30 to $21.20, with a P/E ranging from 22.2 to 24.4.

For someone who bought Nestle in 2001, where was the margin of safety of this company?

Margin of safety in a company comes from various sources.  Among these are the qualitative factors which are difficult to quantify mathematically.  Nestle has durable competitive advantage and economic moat.  The only assessment for the investor is to "guess intelligently" what its earnings growth will be over the next few years.  

Margin of safety concept can be applied in two ways.  One that is obvious is buying a company at a big discount to its intrinsic value.  Of course, intrinsic value is not easy to determine and does vary widely depending on the assumptions one makes in deriving this value.  Another method that is not obvious, is the margin of safety that exists too when the present price that you are paying is at a discount to its intrinsic value based on its growth projections, conservatively estimated.

Let's look at Nestle.  In 2001, you were paying 22.2 times for $1 of its after tax earnings.  Was this underpriced, fair price or overpriced relative to its intrinsic value, conservatively estimated based on its growth potential?  Growth projections are at best intelligent guesstimates.  Nestle was projected to grow its business profit at 8% per year at that time.  Therefore in 9 years from 2001, it was projected then to have an EPS of 2 x 87 sen = 174 sen.  

Assuming that Nestle in 2010 had the same PE of 22.2, its share price in 2010 should be 22.2 x 174 sen = $.38.63, or CAGR of 8%.  The average DY of Nestle was 4%.  Nestle paid out virtually all its earnings as dividends.  Therefore, its DY in 2001 based on historical cost was 4% but in 2010, its DY based on historical cost was 8% (dividend paid had also doubled).  This was an average dividend yield of about 6% per year for that period.  Should you have reinvested all the dividends back into Nestle, you would probably be able to compound your initial investment at more than 14% per year.

So, in 2001, Nestle's PE was 22.2x.  Yet, knowing its earning growth potential, conservatively estimated, there was margin of safety even buying at this price, with a reasonable degree of probability.  Using a conservative growth estimate in earnings of 8% per year, its earnings was projected to double in 2010.  Based on this EPS projection, its (future) intrinsic value would be higher and herein was the margin of safety demanded by the value investor.  

Such way of investing may not appeal to some investors.  It is too difficult for them to realise that growth creates value.  One should be happy to pay a higher PE to own a stock of higher quality, better earnings growth, lesser risk and greater certainty of a positive sustainable return.

Buying a wonderful company at a fair price has made those who know how, very rewarding and rich indeed.  There is no reason to change something that has worked consistently over 2 decades of investing.  

Warren Buffett: About Socks and Stocks

"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."

Source: Letter to shareholders, 2008

Read more: http://www.businessinsider.com/warren-buffett-quotes-on-investing-2010-8?op=1#ixzz1oXHwI5c2

Warren Buffett: Wonderful v Fair

"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."


Source: Letter to shareholders, 1989


Read more: http://www.businessinsider.com/warren-buffett-quotes-on-investing-2010-8?op=1#ixzz1oXDD3b9D

Buffett's Big 4 Investments in Marketable Securities - American Express, Coca Cola, IBM and Wells Fargo

-  Finally, we made two major investments in marketable securities:

• (1) a $5 billion 6% preferred stock of Bank of America that came with warrants allowing us to buy 700 million common shares at $7.14 per share any time before September 2, 2021; and 
• (2) 63.9 million shares of IBM that cost us $10.9 billion. 

Counting IBM, we now have large ownership interests in four exceptional companies:

• 13.0% of American Express, 
• 8.8% of Coca-Cola, 
• 5.5% of IBM and 
• 7.6% of Wells Fargo. 
• (We also, of course, have many smaller, but important, positions.)

Comment:  "Buying wonderful company at fair price" and "holding period is forever".   This is classically Buffett's style.


We view these holdings as partnership interests in wonderful businesses, not as marketable securities to be bought or sold based on their near-term prospects. Our share of their earnings, however, are far from fully reflected in our earnings; only the dividends we receive from these businesses show up in our financial reports. Over time, though, the undistributed earnings of these companies that are attributable to our ownership are of huge importance to us. That’s because they will be used in a variety of ways to increase future earnings and dividends of the investee. They may also be devoted to stock repurchases, which will increase our share of the company’s future earnings.

Comment:  Buffett buys and holds for the long term.  He keeps these companies for their long-term prospects, knowing that he will obtain good returns from these companies, either through the dividends they distribute or through the undistributed growing earnings attributable to the owners from its reinvested retained earnings.


-  Had we owned our present positions throughout last year, our dividends from the “Big Four” would have been $862 million. That’s all that would have been reported in Berkshire’s income statement. Our share of this quartet’s earnings, however, would have been far greater: $3.3 billion. Charlie and I believe that the $2.4 billion that goes unreported on our books creates at least that amount of value for Berkshire as it fuels earnings gains in future years. We expect the combined earnings of the four – and their dividends as well – to increase in 2012 and, for that matter, almost every year for a long time to come. A decade from now, our current holdings of the four companies might well account for earnings of $7 billion, of which $2 billion in dividends would come to us.


Comment:  Only the dividends received are reported in Berkshire Hathaways account.  This is only a fraction (36%) of the actual earnings of $3.3 billion.  Buffett opines that these dividends will continue to grow as the retained earnings fuel earnings gains in future years.  I like the way Buffett projects the future earnings of these companies.

• For present earnings of $3 billion to grow to $7 billion in 10 years, he is projecting a CAG of 8.84%.  
• Projecting the dividends of $862 million growing to $2 billion in a decade is the equivalent of the dividends growing at a CAG of  8.77% for the same period.  
• The growth rates used in his projections are very conservative (8.84% and 8.77%).  Maybe Buffett just uses his simple rule of thumb of doubling the earnings or dividends every 10 years.
• Once again, he reiterates that $1 retained earnings by the company should deliver at least $1 value to the shareholder.

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

What is Warren Buffett's investing philosophy?

Buffett's investment philosophy has changed over time and can generally be thought of in two parts:

• Early Buffett (pre-1970): buy at a significant discount to intrinsic value. "Fair business at a wonderful price."
• Late Buffett (post-1970): buy companies at a price at or near intrinsic value, that can consistently increase their intrinsic value,.  "Wonderful business at a fair price."

He has said that the latter philosophy is far superior to the former and that it took him far too long to realize it.  Buffett's investment philosophy certainly evolved over the course of his investing lifetime, and did shift towards more of a focus on quality rather than cheapness, in part due to his association with and learning from his business partner Charlie Munger.  The intellectual father - the "Benjamin Graham," if you will - of this quality focus was Phil Fisher.  Generally, Buffett is a value investor; he studied under and worked for Benjamin Graham, the author of The Intelligent Investor and Security Analysis and the man generally considered the father of modern-day value investing, and credits Graham for much of his investment philosophy and success.

The best way to truly understand Buffett's investment philosophy is to read the following (links below):

1. His letters to investors from his early investment partnerships

2. His letters to shareholders of Berkshire Hathaway

3. The Intelligent Investor by Benjamin Graham

4. Common Stocks and Uncommon Profits by Phil Fisher

Early Partnership Letters (1959-1969):

http://www.ticonline.com/buffett...

Berkshire Hathaway Letters (1977-2010):

http://www.berkshirehathaway.com...

Intelligent Investor:

http://amzn.to/fycq54

Common Stocks and Uncommon Profits:

http://amzn.to/dU2p1i

http://www.quora.com/Warren-Buffett/What-is-Warren-Buffetts-investing-philosophy

Patience - a fundamental investment discipline to have a lot of.

There is only one strategy that works for value investors when the market is high - PATIENCE.

The investor can do one of two things, both of which requires steady nerves:
1.  Sell all stocks in a portfolio, take profits, and wait for the market to decline.

• At that time, many good values will present themselves.
• This may sound easy, but it pains many investors to sell a stock when its price is still rising.

2.  Stick with those stocks in the portfolio that have long-term potential.

• Sell only those that are clearly overvalued, and once more wait for the market to decline.
• At this time, value stocks may be appreciating at slow pace compared with the frisky growth stocks, but not always.

But come the correction, be it sudden or slow, the well-chosen value stocks have a better chance of holding their price.

As for the hot stocks, when they take a hard hit the investor is cornered.  If the stock is sold, the loss becomes permanent.  The lost money cannot grow.  If the investor hangs on to the deflated stock, the long trail back to the original purchase price will deeply erode the overall returns.


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When you buy wonderful companies at fair or bargain prices, you can often hold these forever.  The earnings power of these companies ensure that your returns will be positive over the long term.  You often do not need to sell, even if these companies are slightly overvalued as their intrinsic values in the future will probably be higher than the present prices.  When the share prices of these wonderful companies go down in tandem with the market corrections or bear markets, you often have the chance to buy more at lower prices.  The only action you should avoid is to buy these wonderful companies when they are trading at obviously overvalued high prices.  A wonderful company can be a bad investment when you buy it at a high price.

Warren Buffett Buys High Quality Companies

Warren Buffett loves high quality companies. He buys high quality business and holds them forever. Why? Because high quality companies do well in both good markets and bad markets.

GuruFocus' monthly Buffett-Munger Newsletter features the best Buffett-Munger bargains for today. These are companies of high quality, but that trade at far below their fair values.

Research shows that even in the "lost" decade from 2000 to 2009, high quality company stocks outperformed by more than 10% a year. GuruFocus' Buffett-Munger Screener is for high quality companies at reasonable prices.

In a recent interview Warren Buffett mentioned three companies that he finds attractive. Out of the three companies he mentioned, two of them are listed in GuruFocus' Buffett-Munger screener. Fortune magazine called this an "unintentional endorsement" from Warren Buffett.

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Long Term Growth and Value Stock Picks

A lot of people would love to know what is inside Warren Buffett’s portfolio because he is noted for his long term stock picks and his value stocks.  Obviously, a lot of his investment strategy comes from Benjamin Graham, the father of value stock investing but how does one judge value?  Sure, you can look through a company’s annual reports and their financial statements but there has got to be something to be said for how a company is run.  For this information, you need to ask the right questions to the right people and that is to management, competitors, suppliers and customers.  Buffett learned this from another famed investor named Philip Fisher.  Whereas Graham was noted for finding value stocks from fundamental analysis, Fisher was noted for finding growth stocks and hence his title for the father of growth stock investing.  Buffett has admitted that his stock pick strategy is 85% Graham and 15% Fisher.

So perhaps the notion that Warren Buffett is only a value investor is a bit misleading.  Sure, there is nothing wrong with finding undervalued cheap stocks but Buffett usually doesn’t sell once his holdings have rebounded to fair value.  In fact, Buffett has stated numerous times that his favourite holding period is forever.  This is because his stock picks have growth potential as well.  To put it in Buffett’s terms, he wouldn’t care if the stock market closed for the next five years because he’s not concerned about the macroeconomics.  He’s concerned with the company itself in that if it is a good business, the stock will eventually follow.  That being said, “time is the friend of a wonderful company and the enemy of the mediocre”.

For beginning investors (and perhaps “sophisticated investors” as well) time and patience is perhaps the downfall of most.   It is great that technology has allowed investors to take control of their finances and invest for themselves with stock trading programs and stock filters.  However, while these can be very helpful tools and help drastically cut down research time, one has to ultimately apply the teachings of value and growth investing and add a human element.  If the stock market could be distilled into a perfect mathematical formula or if the market was truly efficient, then people like Warren Buffett would not be able to make so many winning stock picks in his career.  That being said, it only takes a few top stock picks to make one rich and investors don’t need to make so many trades with buy and sell commissions that eat away at the returns.

So if you want to be rich like Warren Buffett, you now know the formula to his success: invest in value stocks with long term growth potential.

http://warrenbuffettstockpicks.com/long-term-growth-value-stock-picks/

Long Term Stock Picks For Long Term Gain

It is quite unfortunate that there are no formal personal finance classes when we are younger because money is an essential part of life.  Learning how to handle your finances and how to invest for yourself are very important life skills.  If people learned these things at an early age, then they would have had a great start on having a stock portfolio with long term stock picks.

It might be hard to believe that young adults would be capable of picking winning stocks but if you know basic math and can read, that’s all you really need.  Sometimes, people get ahead of themselves and overthink.  They are persuaded by the latest news and hype.  Perhaps the best way to pick stocks is through the eyes of an amateur and what go with what they can understand. After all, the stock market is the trading ground for everybody – investing beginners and so called experts.

Understanding a company’s business is fundamental in picking the best stocks.  So often, people hear about a hot stock tip and trust the investment advice of others rather than doing their own homework.  If you don’t understand what a company does, it becomes very hard in judging the intrinsic value of a company.  You want to know the true value of a company so you know when to buy in and when is a good time to sell.  If you don’t know at least that much, then it would be very hard for you to make money in the stock market.  In fact, it becomes more likely that you would lose money.

The investment strategy of buying stocks at fair value or below came from Benjamin Graham and was further reinforced by Warren Buffett and the margin of safety investing method.  By buying companies trading below its intrinsic value, it leaves room for error – or a margin of safety.  And since Warren Buffett’s stock pick advice is to hold stocks for the long term, an investor with a cheap blue chip stock pick has the luxury of waiting it out until the price goes up again.

Most newbies looking for investing advice often wonder why they don’t just buy penny stocks and wait it out for the long haul if it is a simple matter of a waiting game.  However, penny stocks are meant to be fast money in the stock market but it also carries a lot of risks as well.  When the market is turbulent, the first thing that people will sell is their penny stocks (they will keep their blue chip stocks for as long as possible).  If you are one of the traders trying to unload thousands of shares, good luck in finding a buyer.  You just might be left in holding the bag.  You can make lots of money day trading penny stocks but you can lose a lot of money too because of the sheer volume you would need to buy and sell to make it profitable on the smallest of fluctuations in stock price.

Another reason that penny stocks are not meant for the long term is that it is very hard to do fundamental analysis on new companies as that is generally what happens when start-ups want to generate money.  With no track record, you cannot do proper stock analysis and that is why penny stocks are meant for trading and not investing.

And just like day trading penny stocks, there are other methods of making lots of money in the stock market quickly such as shorting stocks, buying and selling options and playing with currency arbitrage.  Obviously, these ways of making money in the stock market work or else people won’t be doing them.  As mentioned however, fast and easy money is obviously not without risks.  And people often get far too ahead of themselves and create these complicated investment strategies when simple methods work best.  Have you ever seen a monkey making stock picks?  Sometimes, they beat the so called stock pick professionals so imagine what a young person can do with a little bit of knowledge and stock analysis.

If you truly want to learn how to invest in stocks, the person you should learn from is Warren Buffett.   As mentioned, he thinks ahead in the future with his long term stock picks.  There are a few reasons for his.  He doesn’t get flustered and forced into selling when the stock market falls.  In fact, recession stock picks are great when everyone is selling and you are buying because people are in a panic.  This is a great way to buy undervalued stocks.  That being said, is it a stock you’d be happy to hold in your portfolio for the long term?   Buffett says that you should only buy something if you’re happy to hold if the stock market were to close for 10 years.  Given this criteria, how many people’s stock picks would be filtered out?  There are other criteria for Warren Buffett stock picks such as: does the company have a branding advantage over its competitors?  In the case of one of Buffett’s most famous stock pick Coca Cola, “Coke” is synonymous with soft drinks.  Pepsi and other brands cannot compete with it as a brand without throwing huge money into it.  Coke is way ahead of the game in terms of being in the consciousness of its consumers worldwide.  This is what Buffett calls his business moat and it is far reaching across the globe.    This is how a huge behemoth of a soft drink company can still grow worldwide when you think it’s already plateaued.  Buffett’s portfolio picked it up as a value growth stock in the late 1980s and it has done very well for him since then.

For this reason, this is why amateur investors can do quite well managing a do it yourself stock portfolio with their own stock picks.   You don’t have to be on the lookout for the latest break out stocks.  Truly, a portfolio composed of blue chip stock picks purchased when they are undervalued will make you rich once they rebound.  It does take research to find these gems and patience but Warren Buffett has made a career of doing something just as simple instead of worrying about the noise of the market.  If the greatest investor in the world imparts such wisdom to us, who are we to argue with Buffett’s stock picks?

http://warrenbuffettstockpicks.com/long-term-stock-picks-for-long-term-gain/