Buffett (1991): Highlight a simple fact that the probability of success in investing increases manifold if one is focused on building a portfolio that comprises of companies with the best earnings growth potential from a 10-year perspective.

We saw how Warren Buffett gained significantly from the phenomenon of 'double-dip' that engulfed two of his investment vehicle's best holdings and how we as investors, stand to benefit from the same. In the following write-up, let us see what other tricks the master has up his sleeve through the remainder of his 1991 letter to his shareholders.

"We believe that investors can benefit by focusing on their own look-through earnings. To calculate these, they should determine the underlying earnings attributable to the shares they hold in their portfolio and total these. The goal of each investor should be to create a portfolio (in effect, a "company") that will deliver him or her the highest possible look-through earnings a decade or so from now.

An approach of this kind will force the investor to think about long-term business prospects rather than short-term stock market prospects, a perspective likely to improve results. It's true, of course, that, in the long run, the scoreboard for investment decisions is market price. But prices will be determined by future earnings. In investing, just as in baseball, to put runs on the scoreboard one must watch the playing field, not the scoreboard."

Yet again, the master's crystal-clear thinking and his ability to draw parallels between investing and other fields shines through in the above quote. The master is trying to highlight a simple fact that the probability of success in investing increases manifold if one is focused on building a portfolio that comprises of companies with the best earnings growth potential from a 10-year perspective. However, this is easier said than done. The attention of a multitude of investors in the stock markets is focused on the stock price rather than the underlying earnings. These gullible sets of investors seem to confuse between cause and effect in investing. One must never forget the fact that it is the earnings that drive the returns in the stock markets and not the prices alone. Thus, any strong jump in prices without a concomitant rise in earnings should be viewed with caution.

However, if the trend in the Indian stock market these days is any indication, investors seem to be turning a blind eye towards earnings growth and are buying into equities with promising growth prospects but very little actual earnings to justify the price rise. The risk of indulging in such practices becomes clear when one considers the tech mania of the late 1990s. In anticipation of strong earnings, investors had bid up the price of a lot of tech stocks to such levels that when the earnings failed to meet the lofty expectations, prices crashed, resulting into huge capital erosion. But alas, the investor memory seems to be very short and a similar event is waiting to be played out, although this time in some other sectors.

Hence, one would do well to heed to the master's advice and try and focus not on the stock prices but the underlying earnings. Further, the master is also in favour of having a 10 year view so that the tendency of investors to invest based on a short term view of things gets nipped in the bud and there emerges a portfolio, having companies with a proven track record and a strong and credible management team at the helm.

http://www.equitymaster.com/detail.asp?date=11/15/2007&story=2

Buffett (1991): Recognise the enormous benefit of the 'double-dip' benefit. Pay a reasonable multiple despite high growth rates.

In Warren Buffett's 1990 letter to shareholders, he touched upon his fondness for doing business in pessimistic times, mainly for the prices they provide. Let us look what the master has to impart in terms of investment wisdom in his 1991 letter to shareholders.

"Coca-Cola and Gillette are two of the best companies in the world and we expect their earnings to grow at hefty rates in the years ahead. Over time, also, the value of our holdings in these stocks should grow in rough proportion. Last year, however, the valuations of these two companies rose far faster than their earnings. In effect, we got a double-dip benefit, delivered partly by the excellent earnings growth and even more so by the market's reappraisal of these stocks. We believe this reappraisal was warranted. But it can't recur annually: We'll have to settle for a single dip in the future."

The master's above-mentioned quote has been put up not to extol the virtues of the two companies but instead to drive home the enormous advantage of the 'double-dip' benefit that he has mentioned at the end of the paragraph. In the stock markets, it is very important to pay a reasonable multiple to the earnings of a company because if you overpay and if the multiples contract despite the high growth rates enjoyed by the company, then the overall returns stand diluted a bit. In fact, it can even lead to negative returns if the multiples contract to a great extent. On the other hand, investing in even a moderately growing company can lead to attractive returns if the multiples are low.

Imagine a company 'A' having a P/E of 25 and a company 'B' having a P/E of 10. Company 'A' is a high growth company, growing its profits by 20% per year and company 'B' is a relatively low growth company growing its profits annually by 12%. Now, two years down the line, because of 'A's growth rate, if its P/E were to come down to 20 and 'B's were to rise up to 12, then we would have in the case of 'B' what is known as a double dip effect. 'B' has benefited not only from the growth but also from the multiple expansion, resulting into returns in the range of 23% CAGR. 'A' on the other hand, despite its high earnings growth has helped earn its investors a return of just 7.3% CAGR. The main culprit here was the contraction in multiples of 'A', which fell to 20 from a high of 25.

This analysis could easily lead to one of the most important investment lessons and that is to pay a reasonable multiple despite high growth rates. For if there is a contraction, all the benefits from high growth rates go down the drain. Little wonder, the master has always insisted upon an adequate margin of safety, which if put differently, is nothing but buying a stock at multiples, which leave ample room for expansion and where chances of contraction are low.

If one were to apply the above lesson to the events playing out in the Indian stock markets currently, then it becomes clear that while the robust economic growth would continue to drive the growth in earnings of companies, most of the good quality companies are trading at multiples, which do not leave much room for expansion. In fact, if anything, the probability of the multiples coming down for quite a few companies is on the higher side, thus diluting the impact of high growth to a significant extent. Thus, we would advice investors to pay heed to the master and wait patiently for the multiples to come down to levels, where the benefits of the 'double dip' effect become apparent.

http://www.equitymaster.com/detail.asp?date=11/2/2007&story=4

Buffett (1989): We've never succeeded in making a good deal with a bad person.

Warren Buffett mentioned about his investment mistakes of the preceding 25 years in his 1989 letter to shareholders. Let us round off that list of what he feels were his key investment mistakes.

"My most surprising discovery: the overwhelming importance in business of an unseen force that we might call 'the institutional imperative'. In business school, I was given no hint of the imperative's existence and I did not intuitively understand it when I entered the business world. I thought then that decent, intelligent, and experienced managers would automatically make rational business decisions. But I learned over time that isn't so. Instead, rationality frequently wilts when the institutional imperative comes into play."

How often have we seen merger between two companies not producing the desired outcome as was projected at the time of the merger? Or, how often have we seen management retain excess cash under the rationale that it will be used for future acquisitions? Further still, a lot of companies do things just because their peers are doing it even though it might bring no tangible benefits to them. The master has labeled these so called propensities to do things just for the sake of doing them 'the institutional imperatives' and has termed them as one of his most surprising discoveries. Further, he advises investors to steer clear of such companies and instead focus on companies, which appear alert to the problem of 'institutional imperative'.

Given the master's great predisposition towards choosing business owners with the highest levels of integrity and honesty, it comes as no surprise that one of his investment mistake concerns the quality of the management. This is what he has to say on the issue.

"After some other mistakes, I learned to go into business only with people whom I like, trust, and admire. As I noted before, this policy in itself will not ensure success: A second-class textile or department store company won't prosper simply because its managers are men that you would be pleased to see your daughter marry. However, an owner - or investor - can accomplish wonders if he manages to associate himself with such people in businesses that possess decent economic characteristics. Conversely, we do not wish to join with managers who lack admirable qualities, no matter how attractive the prospects of their business. We've never succeeded in making a good deal with a bad person."

Next on the list of investment mistakes is a confession that makes us realise that even the master is human and is prone to slip up occasionally. But what makes him a truly outstanding investor is the fact that he has had relatively fewer mistakes of commission rather than omission. In other words, while he may have let go of a couple of very attractive investments, he's hardly ever made an investment that cost him huge amounts of money.

This is what he has to say: "Some of my worst mistakes were not publicly visible. These were stock and business purchases whose virtues I understood and yet didn't make. It's no sin to miss a great opportunity outside one's area of competence. But I have passed on a couple of really big purchases that were served up to me on a platter and that I was fully capable of understanding. For Berkshire's shareholders, myself included, the cost of this thumb-sucking has been huge."

The master rounds off the list with a masterpiece of a comment. It gives us an insight into his almost inhuman like risk aversion qualities and goes us to show that he will hardly ever make an investment unless he is 100% sure of the outcome. It comes out brilliantly in this, his last comment on his investment mistakes of the past twenty-five years: "Our consistently conservative financial policies may appear to have been a mistake, but in my view were not. In retrospect, it is clear that significantly higher, though still conventional, leverage ratios at Berkshire would have produced considerably better returns on equity than the 23.8% we have actually averaged. Even in 1965, perhaps we could have judged there to be a 99% probability that higher leverage would lead to nothing but good. Correspondingly, we might have seen only a 1% chance that some shock factor, external or internal, would cause a conventional debt ratio to produce a result falling somewhere between temporary anguish and default.

We wouldn't have liked those 99:1 odds - and never will. A small chance of distress or disgrace cannot, in our view, be offset by a large chance of extra returns. If your actions are sensible, you are certain to get good results; in most such cases, leverage just moves things along faster. Charlie and I have never been in a big hurry: We enjoy the process far more than the proceeds - though we have learned to live with those also."

http://www.equitymaster.com/detail.asp?date=10/25/2007&story=3

Buffett on “Small, Unknown Companies”

http://docs.google.com/present/view?id=dfz95fm7_598g7gppkdf

Buffett at U of Kansas

http://www.valueplays.net/wp-content/uploads/vinvesting-com.pdf

University of Kansas : Warren Buffett Q&A

Notes by Professor Hirschey, University of Kansas ( May 6, 2005 )

Question: According to a business week report published in 1999, you were quoted as saying “it's a huge structural advantage not to have a lot of money.  I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.” First, would you say the same thing today? Second, since that statement infers that you would invest in smaller companies, other than investing in small-caps, what else would you do differently?

Yes, I would still say the same thing today. In fact, we are still earning those types of returns on some of our smaller investments. The best decade was the 1950s; I

was earning 50% plus returns with small amounts of capital. I could do the same thing today with smaller amounts. It would perhaps even be easier to make that much

money in today's environment because information is easier to access.

You have to turn over a lot of rocks to find those little anomalies. You have to find the companies that are off the map - way off the map. You may find local companies

that have nothing wrong with them at all. A company that I found, Western Insurance Securities, was trading for $3/share when it was earning $20/share!! I tried to buy

up as much of it as possible. No one will tell you about these businesses. You have to find them.

Other examples: Genesee Valley Gas, public utility trading at a P/E of 2, GEICO, Union Street Railway of New Bedford selling at $30 when $100/share is sitting in

cash, high yield position in 2002. No one will tell you about these ideas, you have to find them.

The answer is still yes today that you can still earn extraordinary returns on smaller amounts of capital. For example, I wouldn't have had to buy issue after issue of

different high yield bonds. Having a lot of money to invest forced Berkshire to buy those that were less attractive. With less capital, I could have put all my money into

the most attractive issues and really creamed it.

I know more about business and investing today, but my returns have continued to decline since the 50's. Money gets to be an anchor on performance. At Berkshire's

size, there would be no more than 200 common stocks in the world that we could invest in if we were running a mutual fund or some other kind of investment business.

Q: Since Ben Graham isn't around anymore, what money managers do you respect today? Is there a Ben Graham today?

You don't need another Ben Graham. You don't need another Moses. There were only Ten Commandments; we're still waiting for the eleventh (j/k). His investing

philosophy is still alive and well. There are disciples of him around, but all we are doing is parroting. I did read Phil Fisher later on, which showed the more qualitative

aspects of businesses. Common stocks are part of a business. Markets are there to serve you, not to instruct you. You can often find a couple of companies that are

out of line. Find one; get rich. Most people think that what the stock does from day to day contains information, but it doesn't. It isn't just something that wiggles

around. The stock market is the best game in the world. You can take advantage of people who have no morals. High prices inside of a year will typically be 100% of

the low price. Businesses don't change in value that much. That is simply crazy. There are extreme degrees of fluctuation, and Mr. Market will call out the prices. Wait

until he is nutty in one direction or the other. Put in a margin of safety. Don't find a bridge that says no more than 10,000 pounds when you have a 9800 pound vehicle.

It isn't a function of IQ, but receptivity of the mind.

When investing you don't have to invest in all 10,000 companies available, you just have to find the one that is out of line. Mr. Market is your servant. Mr. Market is

your partner and wants to sell the business to you everyday. Some days he is very optimistic and wants a high price, others he is pessimistic and will sell at a low price.

You have to use this to your advantage. The market is the greatest game in the world. There is nothing else that can, at times, get this far out of line with reality. For

example, land usually only fluctuates within a 15% band. Negotiated transactions are less volatile. Some get this; others don't. Just keep your wits about you and you

can make a lot of money in the market.

Q: Do you expect the stock market premium to continue to be 6.5% over bonds?

I don't think that the stock market will return 6.5% over bonds in the future. Stocks usually yield a little more, but that isn't ordained. Every once in a while, stocks will

get very cheap, but it isn't ordained in scripture that this is so. Risk premiums are mostly nonsense. The world isn't calculating risk premiums.

Best book prior to Graham was written by Edgar Lawrence Smith in 1924 called Common Stocks as Long Term Investments. It was a study that evaluated how

bonds compared to stocks in various decades of the past. There weren't a whole lot of publicly traded companies back then. He thought he knew what he was going to

find. He thought that he'd find that bonds outperformed stocks during periods of deflation, and stocks outperformed during inflationary times. But what he found was

that stocks outperformed the bonds in nearly all cases. John M. Keynes then enumerated the reasons that this was so. He said that over time you have more capital

working for you, and thus dividends would grow higher. This was novel information back then and investors then went crazy and started buying stocks for these higher

returns. But then they started to get crazy, and no longer really applied the sound tactics that made the reasons given in the book true. Be careful that when you buy

something for a sound reason, make sure that the reason stays sound.

If you buy GM, you need to write the price and the respective market valuation. Then write down why you are buying the business. If you can't, then you have no

business doing it.

Quote from Ben Graham: “You can get in more trouble with a sound premise than an unsound premise because you'll just throw out the unsound premise”.

Q: What was your biggest mistake?

First off, follow Graham and you'll be fine.

My biggest mistakes were errors of omission vs. commission. Berkshire Hathaway was also a big mistake. Sometimes the opportunity costs of keeping money in

something (like a lousy textile business) can be a drag on Berkshire's performance. We didn't learn from the previous mistake and bought another textile mill

(Womback Mills) 6-7 years after buying Berkshire Hathaway. Meanwhile, I couldn't run the one in New Bedford.

Tom Murphy, my friend, bought the newspaper in Fort Worth. The previous ownership of these entities owned NBC as well, but he wanted to divest the NBC affiliate

- $30 million to buy, doing $75 million in earnings. It was really a pretty good company, but he wanted to sell it anyway. There wouldn't be many more of it. Network

television stations don't require excessive brains to run. They add a lot of money to our bottom lines.

We have never lost lots of money in things, except in insurance after 9/11. We don't do the kinds of things that lose you a lot of money. We just might not be finding the

“best” opportunities.

Don't worry about mistakes. You'll make mistakes. Get over it. At the same time, it's important to learn from someone else's mistakes. You don't want to make too

many mistakes.

Side note: Warren once asked Bill Gates, “If you could only hire from one place, where would it be?” Gate's reply was Indian Institute of Technology.

Q: Could you comment on your currency position?

We have about $21 billion in about 11 foreign currencies. We have $60-70 billion in things that are denominated in US Dollars. We still have a huge US bias. If

Martians came down with currency certificates and could choose any currency on earth, I doubt it would be 80% in US Dollars.

We are following policies that make me doubt that our currency will not follow a downward spin. We lost $307 million this quarter. The net gain since we started

holding foreign currencies in 2002 is $2.1 billion. We have to mark these future contracts to market daily. If we owned bonds instead of sterling forward contracts, it

wouldn't fluctuate around so much.

Identifying bubbles is fairly easy. You don't know how big they will get and you don't know when they will pop. You don't know when midnight will hit, but when it

does, it turns carriages to pumpkins and mice. What markets will do is pretty easy. When they will do it is more difficult. Some people want to stick around for the last

dance, and they thought that a bigger fool would be just around the corner tomorrow.

When we bought those junk bonds, I didn't know we would make $4 billion in such a short time. It would have been better if it wouldn't have happened so quickly, as

we would have gotten a bigger position.

Q: When did you know you were rich?

I really knew I was rich when I had $10,000. I knew along time ago that I was going to be doing something I loved doing with people that I loved doing it with. In

1958, I had my dad take me out of the will, as I knew I would be rich anyway. I let my two sisters have all the estate.

I bet we all in this room live about the same. We eat about the same and sleep about the same. We pretty much drive a car for 10 years. All this stuff doesn't make it

any different. I will watch the Super Bowl on a big screen television just like you. We are living the same life. I have two luxuries: I get to do what I want to do every

day and I get to travel a lot faster than you.

You should do the job you love whether or not you are getting paid for it. Do the job you love. Know that the money you will follow. I travel distances better than you

do. The plane is nicer. But that is about the only thing that I do a whole lot different.

I didn't know my salary when I went to work for Graham until I got his first paycheck. Do what you love and don't even think about the money. I will take a trip on

Paul Allen's Octopus ($400M yacht), but wouldn't want one for myself. A 60 man crew is needed. They could be stealing, sleeping with each other, etc. Professional

sports teams are a hassle, especially when you have as much money as him. Fans would complain that you aren't spending enough when the team loses.

If there is a place that is warm in the winter and cool in the summer, and you do what you love doing, you will do fine. You're rich if you are working around people

you like. You will make money if you are energetic and intelligent. This society lets smart people with drive earn a very good living. You will be no exception.

Q: What is your opinion of the prospects for the Kmart/Sears merger? How will Eddie Lambert do at bringing Kmart and Sears together?

Nobody knows. Eddie is a very smart guy but putting Kmart and Sears together is a tough hand. Turning around a retailer that has been slipping for a long time would

be very difficult. Can you think of an example of a retailer that was successfully turned around? Broadcasting is easy; retailing is the other extreme. If you had a network

television station 50 years ago, you didn't really have to invent or being a good salesman. The network paid you; car dealers paid you, and you made money.

But in retail you have to be smarter than Wal-Mart. Every day retailers are constantly thinking about ways to get ahead of what they were doing the previous day.

Retailing is like shooting at a moving target. In the past, people didn't like to go excessive distances from the street cars to buy things. People would flock to those

retailers that were near by. In 1996 we bought the Hochschild Kohn department store in Baltimore. We learned quickly that it wasn't going to be a winner, long-term,

in a very short period of time. We had an antiquated distribution system. We did everything else right. We put in escalators. We gave people more credit. We had a

great guy running it, and we still couldn't win. So we sold it around 1970. That store isn't there anymore. It isn't good enough that there were smart people running it.

It will be interesting to see how Kmart and Sears play out. They already have a lot of real estate, and have let go of a bunch of Sears' management (500 people).

They've captured some savings already.

We would rather look for easier things to do. The Buffett grocery stores started in Omaha in 1869 and lasted for 100 years. There were two competitors. In 1950, one

competitor went out of business. In 1960 the other closed. We had the whole town to ourselves and still didn't make any money.

How many retailers have really sunk, and then come back? Not many. I can't think of any. Don't bet against the best. Costco is working on a 10-11% gross margin

that is better than the Wal-Mart's and Sams'. In comparison, department stores have 35% gross margins. It's tough to compete against the best deal for customers.

Department stores will keep their old customers that have a habit of shopping there, but they won't pick up new ones. Wal-Mart is also a tough competitor because

others can't compete at their margins. It's very efficient.

If Eddie sees it as impossible, he won't watch it evaporate. Maybe he can combine certain things and increase efficiencies, but he won't be able to compete against

Costco's margins.

Q: What led you to develop your values and goals at an early age?

I was lucky because I knew what I loved at an early age. I was wired in a certain way when I was born, and I was lucky enough to stumble upon some books at a

library at a very early age. In 1930, I won the ovarian lottery. If I had been born 2000 years ago, I'd have been somebody's lunch. I couldn't run fast, etc.

I was lucky. I had a terrific set of parents. My father was an enormous inspiration for me. The job when you are a parent is to teach them. Be a natural hero. They are

learning from you every moment you are around. There is no rewind button. If your parents do what they say and their values match what they teach you, you are

lucky. What I observed in the world was consistent with what my parents taught me. That was important. If you are sarcastic, and use it as a teaching tool to kids,

they'll never learn to get over it. Those first few years they are very impressionable.

Q: Could you discuss your views on estate planning and how you will allocate your wealth to your children?

It really reflects my views on how a rich society should behave. If it weren't for this society, I wouldn't be rich. It wasn't all me. Imagine if you were one of a pair of

identical twins and a genie came along and allowed you to bid on where you could be born. The money that you bid is how much you had to agree to give back to

society, and the one who bids the most gets to be born in the US and the other in Bangladesh. You would bid a lot. It is a huge advantage to be born here.

There should be no divine right of the womb. My kids wouldn't go off and do nothing if I give them a lot of money, but if they did, that would be a tragedy. $30 billion

will be generated from estate taxes, which will go to help pay for the war in Iraq and other things. If you take away the estate tax, that money will have to come from

somewhere else. If not from estate taxes then you inherently get it from poorer citizens. Less than 2% of estates will pay the estate tax. They would still have $50 million

left over on average. I think those that get the lucky tickets should pay the most to the common causes of society. I believe in a big redistribution. Wealth is a bunch of

claim checks that I can turn in for houses, etc. To pass those claim checks down to the next generation is the wrong approach. But for those that think I am

perpetuating the welfare state, consider if you are born to a rich parent. You get a whole bunch of stocks right at the beginning of your life, and thus you are sort of on a

welfare state of support from your rich parents from the beginning. What's the difference?

At $100,000 a year, I can find 10 people to paint my portraits to find the perfect one. I have that kind of money. But that is a waste, as those people could be doing

something useful. I feel the same way about my kids and other heirs. They should be doing things that help to contribute to society.

Q: What kind of impact will the demographic shift (i.e. baby boomers) have on the United States?

We aren't big on demographic trends. It's difficult to translate that information into profitable decisions. It is hard to figure out what businesses will prosper in the future,

based on macro trends. See's candy is for anyone and Fruit of the Loom is for people who need underwear today. We want to be right on something that will work

right now, not something that might work in the future. I doubt that Wal-Mart spends a lot of time on demographics. They instead focus on where to put the store and

what to put on the shelves. I've never found those kinds of stats useful. People were all excited to go into stocks 6 years ago, but it wasn't because of demographic

trends.

Warren then referred to a recent WSJ article written by Jeremy Siegel that discussed funds flowing out of investments because baby boomers will need to cash in their

investments during retirement. He said he respected Siegel, but he doesn't find fund flows data useful.

Q: What would Berkshire be like if you hadn't met Charlie Munger?

It would be very different, but I could say the same thing about a lot of other people, too. I've had a lot (at least a dozen) of heroes, including my parents. Charlie and I

didn't meet until 1959, although he grew up a half a block from where I lived. Charlie was 35 and I was 29. We've been partners ever since. He is very strong-minded,

but we've never had an argument that whole time. I've never been let down once. It must be a terrible feeling to be let down by a hero.

Hang around people who are better than you all the time. You do pick up the behavior of people who are around you. It will make you a better person. Marry upward.

That is the person who is going to have the biggest effect on you. A relationship like that over the decades will do nothing but good.

Q: Are investors more or less knowledgeable today compared to ten years ago?

There is no doubt that there are far more “investment professionals” and way more IQ in the field, as it didn't use to look that promising. Investment data are available

more conveniently and faster today. But the behavior of investors will not be more intelligent than in the past, despite all this. How people react will not change – their

psychological makeup stays constant. You need to divorce your mind from the crowd. The herd mentality causes all these IQ's to become paralyzed. I don't think

investors are now acting more intelligently, despite the intelligence. Smart doesn't always equal rational. To be a successful investor you must divorce yourself from the

fears and greed of the people around you, although it is almost impossible.

Do you think Ponzi was crazy? The tech and telecom madness that existed just 6 years ago is right up there with the craziest mania's that have ever happened. Huge

training in capital management didn't help.

Take Long Term Capital Management. They had 100's of millions of their own money, and had all of that experience. The list included Nobel Prize winners. They

probably had the highest IQ of any 100 people working together in the country, yet the place still blew up. It went to zero in a matter of days. How can people who are

rich and no longer need more money do such foolish things?

Q: What effect does large institutional ownership have on stock price volatility?

Never has so much been managed by so few that care so much about what happens tomorrow. So much of the world of investing is people who are trying to beat

indexes, and they have a willingness and eagerness to make decisions in the next 24 hours. This condition didn't exist years ago. It has created a “hair trigger” effect. An

example of this hair trigger effect was Black Monday in '87. The cause was program trading and stop loss orders.

Q: What sectors are hurting? Is there a bear market coming?

Humans are still made up of the same psychological makeup, and opportunities will always present themselves. All these people have not gotten more rational. They are

moved by fear and greed. But I'm never afraid of what I am doing. What are directors thinking [by not repurchasing shares] if the business is selling on a per share basis

for one-fourth of what the whole business would sell for? They don't always think rational. I simply don't have that problem.

Berkshire owned the Washington Post, the ABC network and Newsweek. It was selling for $100 million based on the stock price. No debt. You could have held an

auction, and sold off the companies individually for $500M total, but $100M was the price. In other words they were willing to sell us money that was worth $1 for

$0.25. According to efficient markets, the beta was higher when the stock was at $20 than at $37. This is insanity. We bought what was then worth $9 million that is

now worth $1.7 billion.

Q: How do you feel about divisions of conglomerates trying to horde capital?

Berkshire wants the capital in the most logical place. Berkshire is a tax efficient way to move money from business to business, and we can redeploy capital in places

that need them. Most of the managers of companies we own are already independently rich. They want to work, but don't have to. They don't horde capital they don't

need.

Q: How do you feel about the current real estate environment?

If you are buying to own a home, that is fine. Otherwise, it seems to be getting into bubble territory. We're not excited about real estate because generally there is not

enough return at current prices.

Wealth Maximising Strategies for your Portfolio

Buy only GREAT (good quality) stock.

Buy at a bargain price, when the upside reward/downside risk ratio is highest. Be patient.

Sell the losers.  Stay with the winners.

Sell the losers early.  Reinvest into GREAT stocks.

Sell the under-performers early.  Reinvest into GREAT stocks.

# Sell the overpriced stocks to lock in the 'transient bubbling' gains (PE > 1.5x Signature PE).  Reinvest into GREAT stocks.

Reinvest and Stay with the GREAT winners for the long term.

Stay concentrated.  Do not overdiversify. Invest big.

? Tactical Asset Allocation when the market is OBVIOUSLY too expensive or too cheap.  (Difficult strategy to apply consistently).


# Warren Buffett's investment in PetroChina



Also read:

Growing at 15% a year - what does this entail?

It is the selling of losers that is the wealth-maximizing strategy!

Many investors will not sell anything at a loss because they don't want to give up the hope of making their money back. Meanwhile, they could be making money somewhere else.


So, do you behave in a rational manner and predominately sell losers, or are you affected by your psychology and have a tendency to sell your winners? 


This is not a recommendation to sell a stock as soon as it goes down in price - stock prices do frequently fluctuate. Instead, the disposition effect refers to hanging on to stocks that have fallen during the past six or nine months, when you really should be considering selling them. 


Don't hang on to chronic losers! Not only do you lose, but you also lose the out on opportunities to gain. If it's broke, fix it!

It is the selling of losers that is the wealth-maximizing strategy!

Ref:

Emodons Rule

A time to sow and a time to reap.

While farming is dictated by the weather, the stock market fluctuates to sentiment.

The general public often price the stocks poorly, thus the volatilities in some stocks.

Often the pricing is about right, at certain times, it is definitely wrong.

Thus the importance of distinguishing price from value.

It is better to be approximately right than be absolutely wrong.

At a certain price, a stock is a bargain.

When you buy a stock, do not expect to buy at the bottom.

Be prepared to see the stock price goes lower than your buying price in the short term.

Your goal is in the long term, the price should be higher than your buying price.

Similarly, when selling a stock for good reasons, do not expect to sell at the very top.

Be prepared to see the stock price going up further after you sell.

In the long term, if your reasoning is correct, the price should be lower than your selling price.

Under this circumstance, the buyer's regret of not buying at the lowest price is irrational.

Under this circumstance, the seller's remorse of not selling at the highest price is irrational.

Through understanding these, you will be a better and rational investor.

Singapore retail investors back as volume surges

Retail investors appear to have returned to Singapore market, judging from today’s robust trading volume, says Dow Jones.

More than 2.76 billion shares changed hands so far vs 1.59 billion for whole of yesterday, clearing 2 billion mark for first time since February. Activity driven mostly by penny stocks, led by GMG Global (5IM.SG), Advanced Systems Automation(520.SG), United Fiber System (P30.SG).

While STI +8.2% since beginning March, run-up so far not accompanied by substantial volume. Still, value of all shares currently traded on SGX not much higher than yesterday’s $1.17 billion, last at $1.52 billion, as penny shares main volume driver.

Whether coming sessions can attract equally robust volume remains to be seen, especially with investors expected to be watchful when Singapore earnings season begins next week. STI +0.5% at 2,990.59.

http://www.theedgesingapore.com/the-daily-edge/business/14190-singapore-retail-investors-back-as-volume-surges.html

HLG Research positive on Pos Malaysia's postal rate revision

KUALA LUMPUR: HLG Research is positive on POS MALAYSIA BHD []'s announcement that it would increase its domestic postal rates for standard mails, effective 1 July, for the first time in 18 years.

The research house said the rate revision would enhance the value of Pos and returns of seller Khazanah; and that the new rates will arrest the declining margins and declining postal volume.

HLG Research also views Pos Malaysia's partnership agreement with Green Packet's subsidiary P1, whereby P1 subscribers are able to pay, top up or register a new account via its 1,047 outlets nationwide.

Previously, P1 users are only able to pay their bills via PosOnline.

"We are positive on the developments as a sign that the company is actively diversifying their services beyond the traditional postal services to seek new revenue growth.

"Pos Malaysia is currently trading at FY11 P/E of 17 times and P/B of 1.3 times," it said.

Pos Malaysia added 14 sen to RM3 at 10am Wednesday, April 7 and was among the most actively traded stocks with 4.64 million shares done


http://www.theedgemalaysia.com/business-news/163310-hlg-research-positive-on-pos-malaysias-postal-rate-revision.html

Also read:
A quick look at POS 2009

Buffett's Value Investing Style

Warren Buffett is the world famous stock market guru. Recently, he bought stakes of General Electric Co (GE) and Goldman Sachs Group. General Electric Co (GE) is a technology and services giant company which is listed in Dow Jones board; whereas, Goldman Sachs Group (GS) is a financial heavyweight company, which is listed in New York Security Exchange (NYSE). Through his famous investment company; Bershire Hathaway, Buffett invested US$8bil in these two companies. His action startled many people in stock market. When everybody was taking their money out from the Wall Street, he invested such a huge amount of money. There is no surprise actually because he at one time said that the best time to enter the market was when everybody was not interested in stocks. He also stated that it was difficult to buy a popular stocks and made profit from it. Besides, he also said that when everybody was in fear was the best time to enter the market but not when everybody was greedy. According to financial specialists, Buffett investment is a long term investment.

Currently, stock prices are considered as irrational due to the heavy sell down. So, now it is the best time to invest. When investing in a company, we should invest to the company management and market strategy. In this type of investment, good stocks should be held as long as possible by the investors.

When investing in stock market, Warren Buffett is very careful. He sets very strict requirements to select stocks. So, stocks that fulfill his requirements are seldom being found.

• Earnings versus growth, 
• high return on equity, 
• minimal debts, 
• strength of management and 
• simple business model 

are five main criteria, which are used by Buffett to select stocks to invest.

He usually concentrates in a few solid stocks, which able to give high return of investment. These few stocks usually are in the industries that he understands the most. He is also very careful to the local bourse, which is an emerging market that could be very volatile. Besides, he is also watchful to the market sentiment, which could be easily affected by many other external factors.

Good stocks are worth to hold for as long as possible. This is because good stocks such as blue chip stocks are able to ride through bad times and recover over time. Buffett is the most successful and trusted investors. His investments in GE and Goldman Sachs will restore the confidence of some of the investor on the Wall Street. When Buffett invests in stocks, underlying fundamentals of a company are the must will be investigated by him rather than market sentiment. Because of his astute investment skill, he is dubbed as “The Oracle of Omaha”. Intrinsic value of a business is always will be determined by him and he is willing to pay a good price for it as long as the business has the intrinsic value. Buffett is very prudent and holds a principle that if he can not understand the operation of the business; he will not invest in it. That’s why, he escaped the dotcom market crash. He will check the fundamentals of the companies that he intends to invest by analyzing the companies’ annual reports. This is his simple investment principle.

He is the chairman of Berkshire Hathaway and this company’s stock is the most expensive on Wall Street. In a letter last year to his shareholders, he stated that Bershire was looking to invest to the companies, which had competitive advantage in a stable industry for long-term prospects. His philosophy is that the stock price will increase as long as the business does well. Investment in PetroChina, which is an oil and gas firm in China, was one of his most successful investments. He bought the stake for this company for an initial sum of US$500 mil and then sold it for US$3.5 bil. Investments in companies such as Coca-Cola, American Express and Gillette are also among his successful investments.

http://fourstarinvestor.com/buffetts-value-investing-style/336/

Insight into stock trading

Wednesday April 7, 2010

Insight into stock trading
PERSONAL INVESTING

By OOI KOK HWA

ooi_kok_hwa@hotmail.com

A LOT of retail investors like to trade in stocks. As a result of high losses incurred over the years, especially on stocks that have been delisted, they do not believe in holding stocks for the long term.

They believe stocks are suitable for trading and not for long-term investment.

Stock trading is not as simple as trading based on tips and market rumours. Most retail investors actually rely on tips from their remisiers to help them make quick gains from the stock market.

Investors need to understand that trading involves high discipline, commitment of time and skills. Based on interviews with some top traders, Jack D. Schwager concluded that all successful traders are serious about their trading and are willing to spend a lot of time on market analysis and trading strategies.

The secret to their success is usually a methodology that worked for them, together with having very rigid loss-control.

They always act independently of the crowd and have the patience to wait for the right timing for trading. In addition, all the successful traders understand that losing money from trading is part of the game.

A lot of traders always say that trading in stocks has a lower risk than buying stocks for the long term. Many retail investors like to buy stocks for trading because they do not have the patience to hold stocks for the long term.

But whenever they incur losses, they tend to change their original objective of stock trading to long-term investment, not knowing that the majority of those stocks for trading are not suitable for long-term investment.

While some of them may be aware of this important fact, due to their unwillingness to admit their mistakes by cutting losses, they choose to continue to hold on to the stocks. As a result, they get stuck with a lot of poor fundamental stocks in their portfolio for the long term. Most of the time, they will hold those stocks until they get delisted!

'Investors' need to understand that stock trading involves constant locking in of gains and cutting of losses. They must always set target profits (profits per trade or PPT) and maximum loss (loss per trade or LPT) for every trade. They need to set the target number of trades that are supposed to bring gains, which is also known as trading success ratio (success ratio or SR).

They then need to set the target number of trades that they are willing to be involved in per month (trades per month or TPM).

Hence, profits that can be made by a trader will very much depend on his SR as well as TPM. Most of the time, the target PPT and maximum LPT are relatively constant and are dependent on individual risk tolerance level and skills.

For example, an investor has set his PPT at RM500, LPT at RM300 and SR at 60%. If he sets 10 TPM, based on SR of 60%, of the 10 trades that he has made, six trades will make gains of RM500 each and four trades will incur losses of RM300 each. The net gain for 10 trades will be RM1,800 ((6xRM500) – (4xRM300)). If the trader intends to increase his profits, he needs to do more trades per month; in other words, increase the TPM.

Given that the movement of stock prices is random, the probability of stock prices moving up or down is 50%. We think it is a great achievement if a trader can achieve an SR of 55% to 60%. Most retail investors hope for 90% because they are not willing to cut losses.

As a result, they will wait for the stock price to break even whenever it drops below their purchase prices. However, the longer they wait, the more losses they will incur. Most of the time, of the 10 trades done, they may achieve SR of 90% where nine trades may give them gains but the one trade that incurs loss may wipe out all their nine gains!

We agree that the above methodology is easier said than done. A lot of times, investors may have the discipline to lock in their gains, but do not have the discipline to cut losses.

Besides, investors need to allocate a certain amount for their trading capital, which is the amount that investors are willing to lose in stock trading. It should not cause financial problems to investors if they lose all the trading capital.

Lastly, investors should not average down their losing position. If they have incurred losses in the past three to four trades, it means they may have lost touch with the market timing and sentiment. In this case, it may be good for them to take a break from trading and analyse the reasons behind those losses before continuing.

● Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.


http://biz.thestar.com.my/news/story.asp?file=/2010/4/7/business/6003482&sec=business