Buffett Overpaid, and It Made Sense

By Morgan Housel 
March 1, 2010 | 

"Buffett overpaid for Burlington Northern Santa Fe Corp. and ... should have instead returned the company's excess cash to investors."

That quote, pulled from a news article, is a common attitude when it comes toBerkshire Hathaway's (NYSE: BRK-A)(NYSE: BRK-B) November purchase of railroad giant Burlington Northern.

The $100-per-share buyout represented a 30% premium on Burlington's stock price -- a stock that had already gained 50% over the previous eight months. By any valuation metric, Buffett was coughing up top dollar for Burlington. Coming from the guy who coined the phrase, "price is what you pay, value is what you get," and who built his reputation buying companies like Coca-Cola (NYSE:KO) and American Express (NYSE: AXP) at fire-sale prices, this was a puzzle. Berkshire suddenly looked more like Blackstone (NYSE: BX).

Buffett also partially financed the deal with Berkshire's common stock, a rare move for him, and one he often later regretted. And since he was willing to use Berkshire's stock as currency, he was sending a clear signal to the market: Either Berkshire shares were fully valued (if not overvalued), or he was using an undervalued stock to buy Burlington, making the deal even more expensive than it looked.

Please don't tell me he's lost his marbles
On Saturday, Berkshire released its 2009 letter to shareholders. Within, Buffett went into detail on the mechanics and valuation of the Burlington acquisition. In short, yes, Berkshire paid a full price. Yes, Berkshire shares were probably undervalued at the time. And yes, that means the full price could turn into a dear price.

But the decision nonetheless made sense. Here's exactly what Buffett had to say:

In our [Burlington] acquisition, the selling shareholders quite properly evaluated our offer at $100 per share. The cost to us, however, was somewhat higher since 40% of the $100 was delivered in our shares, which Charlie and I believed to be worth more than their market value ...

In the end, Charlie [Munger] and I decided that the disadvantage of paying 30% of the price through stock was offset by the opportunity the acquisition gave us to deploy $22 billion of cash in a business we understood and liked for the long term. It has the additional virtue of being run by Matt Rose, whom we trust and admire. We also like the prospect of investing additional billions over the years at reasonable rates of return. But the final decision was a close one. If we had needed to use more stock to make the acquisition, it would in fact have made no sense. We would have then been giving up more than we were getting.

The price of being huge
One of the unfortunate rules of finance is that returns wither with size. As individual investors, we can meaningfully buy any stock in the market universe, since the few thousand bucks we'll invest probably won't contort the company's stock price. Our tiny investments mean nothing to the market, but they can mean big bucks for our humble portfolios. The world is our oyster.

Not so for big investors like Berkshire. Heck, Berkshire makes more than $1,000 a minute in dividends on its stakes in General Electric (NYSE: GE) and Goldman Sachs (NYSE: GS) -- and that's a fairly small portion of the overall portfolio. When cash piles up that fast, you have to be able to deploy it in massive chunks -- billions at a time -- to make a dent in the portfolio. That purges most small investment opportunities, forcing investors like Berkshire to settle for lower returns.

That's exactly what happened with Burlington. Paying an overvalued price made sense because it provided the opportunity to deploy tens of billions of cash at reasonable, but not great, returns.

For decades, Buffett has repeated a similar line in Berkshire's annual letters: "[O]ur performance advantage has shrunk dramatically as our size has grown, an unpleasant trend that is certain to continue ... huge sums forge their own anchor and our future advantage, if any, will be a small fraction of our historical edge."

After the Burlington deal, it's clear he isn't kidding.

http://www.fool.com/investing/general/2010/03/01/buffett-overpaid-and-it-made-sense.aspx?source=irysithln0000001

Buffet's view on Derivative contracts

Derivative contracts

Finally, you should expect large swings in the carrying value of these contracts, items that can affect our reported quarterly earnings in a huge way but that do not affect our cash or investment holdings. That thought certainly fit 2009’s circumstances. Here are the pre-tax quarterly gains and losses from derivatives valuations that were part of our reported earnings last year:

Quarter    $ Gain (Loss) in Billions
1    (1.517)
2    2.357
3    1.732
4    1.052

As we’ve explained, these wild swings neither cheer nor bother Charlie and me. When we report to
you, we will continue to separate out these figures (as we do realized investment gains and losses) so that you can more clearly view the earnings of our operating businesses. We are delighted that we hold the derivatives contracts that we do. To date we have significantly profited from the float they provide. We expect also to earn further investment income over the life of our contracts.

We have long invested in derivatives contracts that Charlie and I think are mispriced, just as we try to
invest in mispriced stocks and bonds. Indeed, we first reported to you that we held such contracts in early 1998.

The dangers that derivatives pose for both participants and society – dangers of which we’ve long warned, and that can be dynamite – arise when these contracts lead

• to leverage and/or 
• counterparty risk that is extreme. 

At Berkshire nothing like that has occurred – nor will it.

It’s my job to keep Berkshire far away from such problems. Charlie and I believe that a CEO must not delegate risk control. It’s simply too important. At Berkshire, I both initiate and monitor every derivatives contract on our books, with the exception of operations-related contracts at a few of our subsidiaries, such as MidAmerican, and the minor runoff contracts at General Re. If Berkshire ever gets in trouble, it will be my fault.  It will not be because of misjudgments made by a Risk Committee or Chief Risk Officer.


http://www.berkshirehathaway.com/letters/2009ltr.pdf



Comment:

For those tracking their portfolio, the large swings in their portfolio values should be expected and should not excite them unduly.  For the long term investor, focusing on the operations of the businesses of the stocks in the portfolio is more important.  As was mentioned, the large swings do not affect his cash position or his investment holdings.

Berkshire's common stock investments

Investments

Below we show our common stock investments that at year end had a market value of more than $1 billion.

12/31/09

Shares
Company
Percentage of Company Owned
Cost *
Market
(in millions)

151,610,700
American Express Company . . . . . . . . . . . . . . . . . . . . . . . .
12.7
$ 1,287
$ 6,143

225,000,000
BYD Company, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9.9
232
1,986

200,000,000
The Coca-Cola Company . . . . . . . . . . . . . . . . . . . . . . . . . .
8.6
1,299
11,400

37,711,330
ConocoPhillips . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.5
2,741
1,926

28,530,467
Johnson & Johnson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.0
1,724
1,838

130,272,500
Kraft Foods Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8.8
4,330
3,541

3,947,554
POSCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.2
768
2,092

83,128,411
The Procter & Gamble Company . . . . . . . . . . . . . . . . . . . .
2.9
533
5,040

25,108,967
Sanofi-Aventis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.9
2,027
1,979

234,247,373
Tesco plc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.0
1,367
1,620

76,633,426
U.S. Bancorp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.0
2,371
1,725

39,037,142
Wal-Mart Stores, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.0
1,893
2,087

334,235,585
Wells Fargo & Company . . . . . . . . . . . . . . . . . . . . . . . . . .
6.5
7,394
9,021

Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,680
8,636

Total Common Stocks Carried at Market . . . . . . . . . . . . . .
$34,646
$59,034

*This is our actual purchase price and also our tax basis; GAAP “cost” differs in a few cases because of write-ups or write-downs that have been required.

In addition, we own positions in non-traded securities of Dow Chemical, General Electric, Goldman Sachs, Swiss Re and Wrigley with an aggregate cost of $21.1 billion and a carrying value of $26.0 billion. We purchased these five positions in the last 18 months. Setting aside the significant equity potential they provide us, these holdings deliver us an aggregate of $2.1 billion annually in dividends and interest. Finally, we owned 76,777,029 shares (22.5%) of BNSF at year end, which we then carried at $85.78 per share, but which have subsequently been melded into our purchase of the entire company.

In 2009, our largest sales were in ConocoPhillips, Moody’s, Procter & Gamble and Johnson & Johnson(sales of the latter occurring after we had built our position earlier in the year). Charlie and I believe that all of these stocks will likely trade higher in the future. We made some sales early in 2009 to raise cash for our Dow and Swiss Re purchases and late in the year made other sales in anticipation of our BNSF purchase.

We told you last year that very unusual conditions then existed in the corporate and municipal bond markets and that these securities were ridiculously cheap relative to U.S. Treasuries. We backed this view with some purchases, but I should have done far more. Big opportunities come infrequently. When it’s raining gold, reach for a bucket, not a thimble.

We entered 2008 with $44.3 billion of cash-equivalents, and we have since retained operating earnings of $17 billion. Nevertheless, at year end 2009, our cash was down to $30.6 billion (with $8 billion earmarked for the BNSF acquisition). We’ve put a lot of money to work during the chaos of the last two years. It’s been an ideal period for investors: A climate of fear is their best friend. Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance. In the end, what counts in investing is what you pay for a business – through the purchase of a small piece of it in the stock market – and what that business earns in the succeeding decade or two.

http://www.berkshirehathaway.com/letters/2009ltr.pdf

Why Buffett bought Burlington Northern Santa Fe Corp

In earlier days, Charlie and I shunned capital-intensive businesses such as public utilities. Indeed, the best businesses by far for owners continue to be those that have high returns on capital and that require little incremental investment to grow. We are fortunate to own a number of such businesses, and we would love to buy more. Anticipating, however, that Berkshire will generate ever-increasing amounts of cash, we are today quite willing to enter businesses that regularly require large capital expenditures. We expect only that these businesses have reasonable expectations of earning decent returns on the incremental sums they invest. If our expectations are met – and we believe that they will be – Berkshire’s ever-growing collection of good to great businesses should produce above-average, though certainly not spectacular, returns in the decades ahead.


Our BNSF operation, it should be noted, has certain important economic characteristics that resemble those of our electric utilities.

• In both cases we provide fundamental services that are, and will remain, essential to the economic well-being of our customers, the communities we serve, and indeed the nation. 
• Both will require heavy investment that greatly exceeds depreciation allowances for decades to come. 
• Both must also plan far ahead to satisfy demand that is expected to outstrip the needs of the past. 
• Finally, both require wise regulators who will provide certainty about allowable returns so that we can confidently make the huge investments required to maintain, replace and expand the plant.

We see a “social compact” existing between the public and our railroad business, just as is the case with our utilities. If either side shirks its obligations, both sides will inevitably suffer. Therefore, both parties to the compact should – and we believe will – understand the benefit of behaving in a way that encourages good
behavior by the other. It is inconceivable that our country will realize anything close to its full economic potential without its possessing first-class electricity and railroad systems. We will do our part to see that they exist.

In the future, BNSF results will be included in this “regulated utility” section. Aside from the two businesses having similar underlying economic characteristics, both are logical users of substantial amounts of debt that is not* guaranteed by Berkshire. Both will retain most of their earnings. Both will earn and invest large sums in good times or bad, though the railroad will display the greater cyclicality. Overall, we expect this regulated sector to deliver significantly increased earnings over time, albeit at the cost of our investing many tens – yes, tens – of billions of dollars of incremental equity capital.

http://www.berkshirehathaway.com/letters/2009ltr.pdf

Comment:

-  The best business are those that generate high return on capital with need for little incremental re-investments to grow, that is, those that generate large FCF.  It is increasingly difficult to find such companies to invest into due to the size of Berkshire generating ever increasing amounts of cash.

-  Berkshire is willing to invest into companies that require large capital expenditure to grow provided that these businesses have reasonable expectations of earning decent returns on the incremental sums they invest.  These businesses are expected to produce above-average, though certainly not spectacular, returns in the decades ahead.


-  *The major problem for Berkshire last year was NetJets, an aviation operation that offers fractional ownership of jets. Over the years, it has been enormously successful in establishing itself as the premier company in its industry, with the value of its fleet far exceeding that of its three major competitors combined. Overall, our dominance in the field remains unchallenged.


NetJets’ business operation, however, has been another story. In the eleven years that we have owned the company, it has recorded an aggregate pre-tax loss of $157 million. Moreover, the company’s debt has soared from $102 million at the time of purchase to $1.9 billion in April of last year. Without Berkshire’s guarantee of this debt, NetJets would have been out of business. It’s clear that I failed you in letting NetJets descend into this condition. But, luckily, I have been bailed out.


Dave Sokol, the enormously talented builder and operator of MidAmerican Energy, became CEO of NetJets in August. His leadership has been transforming: Debt has already been reduced to $1.4 billion, and, after suffering a staggering loss of $711 million in 2009, the company is now solidly profitable.

The Way The Stock Market Works.

The Way The Stock Market Works.

I have come to the conclusion that the market is (dare I say) generally being manipulated/influenced by firstly the large institutions, Secondly by full time professional traders and day traders.

The general public and the “Mum and Dad” investors are the last to know what is actually happening and invariably the ones that lose out in the long run.

The advantage the Institutions have is the “Millions” of dollars that they have available to use at any given time. This is usually obtained from the public in the first place, in the form of Insurance, Superannuation and Managed Funds etc.Which we (the general public) all contribute to on a daily basis.

The large advantage they have is the enormous amount of shares they are able to purchase at any given time.

What occurs is that even a small movement in share price means big profits for them, because of the volume/turnover of shares which occurs whenever a share transaction takes place.

Now Volume is the “Fuel” driving the market. An uptrend in share price to survive and to continue must be nourished by new buyers who are being fed by cautious, seemingly reluctant sellers.

Consistent volume is very important, if there is to be any change in the existing trend. There must be a surge of buyers or sellers capable of changing the current share price.

Remember for every “Seller” there has to be a “Buyer” and vice versa.

The seller thinks or knows the share price is going down and the buyer thinks the opposite.

Now too much selling will invariably force the price downwards as will too much buying forces the share price upwards. This is the law of “supply and demand”.

This “Law” is taken advantage of by the large Institutions who are well aware of what happens when they buy or sell huge volumes.


Some Reasons Why Share Prices Go Upwards.

It’s always a good idea to look at stocks that have jumped in price to see what clues where there beforehand. By gaining a greater understanding of what happened before stocks jump in price, it can give you a better chance of being on board some of the next ones.

When the share price increases, it means that the buyers (on average) want to buy larger parcels of shares. When people buy large parcels of shares it generally means that they are very confident in the stock and its future prospects.

A large increase in Smart Money (Traders in the know) and Buyer Demand can occur before a large jump in price happens. This information lets you know that other people are very interested in this stock and are prepared to spend big money on it. This can be another good clue.

When you see large spikes in Buyer Demand when the price is starting to rise upwards it often indicates that the stock is set for a much longer bull run. The rushes for stock are caused from either news or rumors and (as long as there is no bad news) this activity will then start attracting attention from other traders.

Another great clue is to be found when Directors are buying there own stock. It means that they must have confidence in their own company to invest money in it. You can find out when Directors are buying and selling by checking the ASX company announcements on a daily basis.

Companies are on strict instructions to notify the ASX when ever a Director buys or sell shares in his company. Directors buying are usually based on a profit motive.

Christopher Strudwick is a keen amateur share trader on the Australian Stock Market Visit his weblog for more free articles and useful information at http://www.asxnewbie.com


Read more about • The Way the Stock Market Works | My Stocks by mystocks.netai.net

http://mystocks.netai.net/5105/the-way-the-stock-market-works/

Wit And Wisdom Of Warren Buffett

Wit And Wisdom Of Warren Buffett

February 28, 2010 - 12:40 pm

Paul Maidment is Editor, Forbes Media 

Each year, Warren Buffett (right) writes a letter to the shareholders of Berkshire Hathaway, a letter that is now as famous for his down-home wit and wisdom about investment and the foibles of Wall Street as it is for his report on Berkshire's year. Here follows selected excerpts from his latest letter of his thoughts about bail-outs, bank bosses, risk management, real estate markets, M&A advisors, tap-dancing to work and more. Or click here to read them all in a picture gallery.

On Wall Street Bail-Outs

It has not been shareholders who have botched the operations of some of our country’s largest financial institutions. Yet they have borne the burden, with 90% or more of the value of their holdings wiped out in most cases of failure. Collectively, they have lost more than $500 billion in just the four largest financial fiascos of the last two years. To say these owners have been “bailed-out” is to make a mockery of the term.

On Wall Street Pay

The CEOs and directors of the failed companies..have largely gone unscathed…It is the behavior of these CEOs and directors that needs to be changed: If their institutions and the country are harmed by their recklessness, they should pay a heavy price – one not reimbursable by the companies they’ve damaged nor by insurance. CEOs and, in many cases, directors have long benefitted from oversized financial carrots; some meaningful sticks now need to be part of their employment picture as well.

On Risk Management

A CEO must not delegate risk control. It’s simply too important. At Berkshire, I both initiate and monitor every derivatives contract on our books, with the exception of operations-related contracts at a few of our subsidiaries… If Berkshire ever gets in trouble, it will be my fault. It will not be because of misjudgments made by a Risk Committee or Chief Risk Officer.

On Bank Governance

A board of directors of a huge financial institution is derelict if it does not insist that its CEO bear full responsibility for risk control. If he’s incapable of handling that job, he should look for other employment. And if he fails at it – with the government thereupon required to step in with funds or guarantees – the financial consequences for him and his board should be severe.

On Derivatives:

The dangers that derivatives pose for both participants and society – dangers of which we’ve long warned, and that can be dynamite – arise when these contracts lead to leverage and/or counterparty risk that is extreme. At Berkshire nothing like that has occurred – nor will it.

On Housing Markets:

There were three ways to cure this overhang [of too many houses]: (1) blow up a lot of houses, a tactic similar to the destruction of autos that occurred with the “cash-for-clunkers” program; (2) speed up household formations by, say, encouraging teenagers to cohabitate, a program not likely to suffer from a lack of volunteers or; (3) reduce new housing starts to a number far below the rate of household formations. Our country has wisely selected the third option, which means that within a year or so residential housing problems should largely be behind us.

On Commercial Real Estate:

At the end of 2009, we became a 50% owner of Berkadia Commercial Mortgage (formerly known as Capmark), the country’s third-largest servicer of commercial mortgages…Though commercial real estate will face major problems in the next few years, long-term opportunities for Berkadia are significant.

On Performance Metrics:

From the start, Charlie and I have believed in having a rational and unbending standard for measuring what we have – or have not – accomplished. That keeps us from the temptation of seeing where the arrow of performance lands and then painting the bull’s eye around it.

On Buying Businesses:

Charlie and I avoid businesses whose futures we can’t evaluate, no matter how exciting their products may be. In the past, it required no brilliance for people to foresee the fabulous growth that awaited such industries as autos (in 1910), aircraft (in 1930) and television sets (in 1950). But the future then also included competitive dynamics that would decimate almost all of the companies entering those industries. Even the survivors tended to come away bleeding.

On Owning A Business:

The best businesses by far for owners continue to be those that have high returns on capital and that require little incremental investment to grow.

On All-Stock Offers:

In evaluating a stock-for-stock offer, shareholders of the target company quite understandably focus on the market price of the acquirer’s shares that are to be given them. But they also expect the transaction to deliver them the intrinsic value of their own shares – the ones they are giving up. If shares of a prospective acquirer are selling below their intrinsic value, it’s impossible for that buyer to make a sensible deal in an all-stock deal. You simply can’t exchange an undervalued stock for a fully-valued one without hurting your shareholders.

On M&A Advisors:

I have been in dozens of board meetings in which acquisitions have been deliberated, often with the directors being instructed by high-priced investment bankers (are there any other kind?)...Directors should hire a second advisor to make the case against the proposed acquisition, with its fee contingent on the deal not going through. Absent this drastic remedy, our recommendation in respect to the use of advisors remains: “Don’t ask the barber whether you need a haircut.”

On Management Style:

We would rather suffer the visible costs of a few bad decisions than incur the many invisible costs that come from decisions made too slowly – or not at all – because of a stifling bureaucracy.

On Investors:

We make no attempt to woo Wall Street. Investors who buy and sell based upon media or analyst commentary are not for us. Instead we want partners who join us at Berkshire because they wish to make a long-term investment in a business they themselves understand and because it’s one that follows policies with which they concur.

On Joie de Vivre:

Now 66, (GEICO's Tony Nicely) still tap-dances to the office every day, just as I do at 79. We both feel lucky to work at a business we love.

On Opportunity:

Big opportunities come infrequently. When it’s raining gold, reach for a bucket, not a thimble.

On Berkshire Hathaway's Annual Meeting:

Come by rail.

Tags: berkshire hathaway, Warren Buffett, wit and wisdom

Buffet: On Derivatives

On Derivatives:

The dangers that derivatives pose for both participants and society – dangers of which we’ve long warned, and that can be dynamite – arise when these contracts lead to leverage and/or counterparty risk that is extreme. At Berkshire nothing like that has occurred – nor will it.

Berkshire Hathaway Book Value Up 20% in 2009; Portfolio Shuffle

Berkshire Hathaway Book Value Up 20% in 2009; Portfolio Shuffle

February 27, 2010 - 9:37 am

Robert Lenzner writes the StreeetTalk column for Forbes.com and anchors the StreetTalk video show. 

Berkshire Hathaway's book value rose 20% last year, but still underperformed the S&P 500 stock index, according to Warren Buffett's 2009 letter to shareholders. This is only the seventh time in historyBuffett (above) has underperformed the broad market averages.


Berkshire's book value per share rose from $70,530 to $84,487 in a recovering stock market and as a result of the $23.6 billion acquisition of Burlington Northern railroad. Berkshire's investment portfolio, which was valued at $49 billion at the close of 2008, is worth $59 billion as of Dec. 31, 2009.

• Buffett increased his position in Wal-Mart from 19.9 million shares to 39 million shares and added to his ownership of Wells Fargo, a bank battered by the financial crisis, as well as U.S. Bancorp, drug giant Sanofi-Aventis and Tesco, a British retail chain. 
• However, he massively reduced Berkshire's position in Conoco-Phillips from 5.7% of the company to 2.5%. 
• Other adjustments included the addition of 9.9% of BYD Co., the Chinese electric car manufacturer, and the reduction in holdings of Johnson & Johnson, and Procter & Gamble, both multinational consumer-product companies. (Full list of Berkshire Hathaway's $1B+ investment shareholdings.)

Berkshire is unlikely to make another big acquisition soon as its cash position is only $30 billion. Buffett emphasized that the BNSF railroad deal, like electric utilities, "will require heavy investment that exceeds depreciation allowances for decades to come."

As is his custom, Buffett was transparent about the problems facing some Berkshire operations. In the housing industry, for example, Buffett disclosed that output of modular homes has fallen in a decade from 382,000 units to 60,000 units. "The industry is in shambles," he wrote. Jokingly he suggests solutions for the overhang of unsold homes to be "blow up a lot of houses ... speed up household formations by encouraging teenagers to cohabitate ... or reduce new housing starts to a number far below the rate of household formations."

Tags: berkshire hathaway, buffett, BYD, Conoco-Phillips, Wal-Mart

Read Buffett's full letter to shareholders here.
http://www.berkshirehathaway.com/letters/2009ltr.pdf

Warren Buffett Shareholder Letter: His Words on the Markets

Warren Buffett Shareholder Letter: His Words on the Markets


By Matt Phillips

Associated Press

Warren Buffett rarely if ever gives market predictions. But here are some of his musings on market conditions over the last couple of years and his take on the economy.

We’ve put a lot of money to work during the chaos of the last two years. It’s been an ideal period for investors: A climate of fear is their best friend. Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance. In the end, what counts in investing is what you pay for a business – through the purchase of a small piece of it in the stock market – and what that business earns in the succeeding decade or two.

On opportunities:

We told you last year that very unusual conditions then existed in the corporate and municipal bondmarkets and that these securities were ridiculously cheap relative to U.S. Treasuries. We backed this view with some purchases, but I should have done far more. Big opportunities come infrequently. When it’s raining gold, reach for a bucket, not a thimble.

On his strategic investments:

We own positions in non-traded securities of Dow Chemical, General Electric, Goldman Sachs, Swiss Re and Wrigley with an aggregate cost of $21.1 billion and a carrying value of $26.0 billion. We purchased these five positions in the last 18 months. Setting aside the significant equity potential they provide us, these holdings deliver us an aggregate of $2.1 billion annually in dividends and interest.

On housing:

Within a year or so residential housing problems should largely be behind us, the exceptions being only high-value houses and those in certain localities where overbuilding was particularly egregious. Prices will remain far below “bubble” levels, of course, but for every seller (or lender) hurt by this there will be a buyer who benefits. Indeed, many families that couldn’t afford to buy an appropriate home a few years ago now find it well within their means because the bubble burst.

On shareholder pain:

It has not been shareholders who have botched the operations of some of our country’s largest financial institutions. Yet they have borne the burden, with 90% or more of the value of their holdings wiped out in most cases of failure. Collectively, they have lost more than $500 billion in just the four largest financial fiascos of the last two years. To say these owners have been “bailed-out” is to make a mockery of the term.

And the relative lack of it among CEOs and directors:

The CEOs and directors of the failed companies, however, have largely gone unscathed. Their fortunes may have been diminished by the disasters they oversaw, but they still live in grand style. It is the behavior of these CEOs and directors that needs to be changed: If their institutions and the country are harmed by their recklessness, they should pay a heavy price – one not reimbursable by the companies they’ve damaged nor by insurance. CEOs and, in many cases, directors have long benefitted from oversized financial carrots; some meaningful sticks now need to be part of their employment picture as well.

http://blogs.wsj.com/marketbeat/2010/02/27/buffett-on-the-markets-in-his-own-words/

Buffett: The Buck Stops Here

On Risk Management

A CEO must not delegate risk control.  It's simply too important.  At Berkshire, I both initiate and monitor every derivatives contract on our books, with the exception of operations-related contracts at a few of our subsidiaries.   ...If Berkshire ever gets in trouble, it will be my fault.  It will not be because of misjudgements made by a Risk Committee or Chief Risk Officer.

Buffett's Lesson to Merger: Don't give up more than you are getting

A Lesson From Warren Buffett
February 27, 2010


Paul Maidment is Editor, Forbes Media

A Warren Buffett letter to shareholders wouldn't be a Warren Buffett letter to shareholders without at least one self-depreciating but cautionary tale. This year's, which Berkshire Hathaway's chairman says is true but from long ago:


We owned stock in a large well-run bank that for decades had been statutorily prevented from acquisitions. Eventually, the law was changed and our bank immediately began looking for possible purchases. Its managers – fine people and able bankers – not unexpectedly began to behave like teenage boys who had just discovered girls.


They soon focused on a much smaller bank, also well-run and having similar financial characteristics in such areas as return on equity, interest margin, loan quality, etc. Our bank sold at a modest price (that’s why we had bought into it), hovering near book value and possessing a very low price/earnings ratio. Alongside, though, the small-bank owner was being wooed by other large banks in the state and was holding out for a price close to three times book value. Moreover, he wanted stock, not cash.

Naturally, our fellows caved in and agreed to this value-destroying deal. “We need to show that we are in the hunt. Besides, it’s only a small deal,” they said, as if only major harm to shareholders would have been a legitimate reason for holding back. Charlie’s reaction at the time: “Are we supposed to applaud because the dog that fouls our lawn is a Chihuahua rather than a Saint Bernard?”

The seller of the smaller bank – no fool – then delivered one final demand in his negotiations. “After the merger,” he in effect said, perhaps using words that were phrased more diplomatically than these, “I’m going to be a large shareholder of your bank, and it will represent a huge portion of my net worth. You have to promise me, therefore, that you’ll never again do a deal this dumb.”

Yes, the merger went through. The owner of the small bank became richer, we became poorer, and the managers of the big bank – newly bigger – lived happily ever after.

Lesson to merger mavens: Don't give up more than you are getting.


More wit and wisdom from Warren Buffett.
http://blogs.forbes.com/streettalk/2010/02/27/a-lesson-from-warren-buffett/

The Oracle's Tips for the Rest of Us

The Oracle's Tips for the Rest of Us

By BRETT ARENDS

Every few years, critics say Warren Buffett has lost his touch. He's too old and too old-fashioned, they claim. He doesn't get it anymore. This time he's wrong.

It happened during the dotcom bubble, when Mr. Buffett was mocked for refusing to join the party. And it happened again last year. As the Dow tumbled below 7,000, Mr. Buffett came under fire for having jumped into the crisis too early and too boldly, making big bets on Goldman Sachs and General Electric during the fall of 2008, and urging the public to plunge into shares.

Now it's time for those critics to sit down for their traditional three course meal: humble pie, their own words and crow.
STANDOUT INVESTMENTS

On Saturday, Mr. Buffett's Berkshire Hathaway reported that net earnings rocketed 61% last year to $5,193 per share, while book value jumped 20% to a record high. Berkshire's Class A shares, which slumped to nearly $70,000 last year, have rebounded to $120,000.

Those bets on GE and Goldman? They've made billions so far. And anyone who took Mr. Buffett's advice and invested in the stock market in October 2008, even through a simple index fund, is up about 25%.

This is nothing new, of course. Anyone who held a $10,000 stake in Berkshire Hathaway at the start of 1965 has about $80 million today.

How does he do it? Mr. Buffett explained his beliefs to new investors in his letter to stockholders Saturday:

Stay liquid. "We will never become dependent on the kindness of strangers," he wrote. "We will always arrange our affairs so that any requirements for cash we may conceivably have will be dwarfed by our own liquidity. Moreover, that liquidity will be constantly refreshed by a gusher of earnings from our many and diverse businesses."

Buy when everyone else is selling. "We've put a lot of money to work during the chaos of the last two years. It's been an ideal period for investors: A climate of fear is their best friend ... Big opportunities come infrequently. When it's raining gold, reach for a bucket, not a thimble."

Don't buy when everyone else is buying. "Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance," Mr. Buffett wrote. The obvious corollary is to be patient. You can only buy when everyone else is selling if you have held your fire when everyone was buying.

Value, value, value. "In the end, what counts in investing is what you pay for a business-through the purchase of a small piece of it in the stock market-and what that business earns in the succeeding decade or two."

Don't get suckered by big growth stories. Mr. Buffett reminded investors that he and Berkshire Vice Chairman Charlie Munger "avoid businesses whose futures we can't evaluate, no matter how exciting their products may be."

Most investors who bet on the auto industry in 1910, planes in 1930 or TV makers in 1950 ended up losing their shirts, even though the products really did change the world. "Dramatic growth" doesn't always lead to high profit margins and returns on capital. China, anyone?

Understand what you own. "Investors who buy and sell based upon media or analyst commentary are not for us," Mr. Buffett wrote.

"We want partners who join us at Berkshire because they wish to make a long-term investment in a business they themselves understand and because it's one that follows policies with which they concur."

Defense beats offense. "Though we have lagged the S&P in some years that were positive for the market, we have consistently done better than the S&P in the eleven years during which it delivered negative results. In other words, our defense has been better than our offense, and that's likely to continue." All timely advice from Mr. Buffett for turbulent times.


—Brett Arends writes R.O.I., or Return On Investment, on WSJ.com.

Write to Brett Arends at brett.arends@wsj.com

http://online.wsj.com/article/SB10001424052748704089904575093603081648166.html?mod=WSJ-earnings-LEFTTopHeadlines

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

To achieve a 100% gain in your investment over 5 years, the initial capital has to grow at a compound rate of 15% per year. This means that an initial $100 investment will be worth:

$1.15 at end of year 1,
$1.33 at end of year 2,
$1.52 at end of year 3,
$1.75 at end of year 4, and
$2.01 at end of year 5.

Though the fund managers usually benchmark their fund performances to a certain index, most individual investors should look at the absolute return.

The return on your investment is unlikely to rise in a straight-line upwards. Volatility in the return is to be expected. The return spurts over certain times, declines over certain times, and remains unmoved over certain times.  However, the return over a long time is less volatile and generally relates to the earnings of the business of the invested stock.

What does 15% per year looks like in real-time? Excluding the dividend yield from the calculation, it is actually an average of 1.25% per month appreciation in the share price. The 15% may be returned in a consistent manner or there maybe periods of spurts delivering part or all the returns over many short periods. Do not get disheartened if a stock moves only 1% or 2% per month, it is the consistency in its return that adds to a big return. On the other hand, do not be overly excited by the big returns over a short period. For the long-term investors, it is more important that over a long time, the price of the stock reflects the improving earnings fundamentals of your selected stocks.

To double your initial investment in a stock in 5 years means also selecting a stock that will double its earnings in 5 years. For those who are directly in business, to grow a business consistently over many years is indeed very challenging. The matured large companies are less likely to deliver such growths. Therefore, for those investors seeking such growth rates in the earnings of their stocks, they will need to look at mid-cap stocks or smaller companies where growths can be faster in the early stages of their business life.

It is not difficult to make 7 or 8% returns yearly in your investment in stocks.  However, to grow at 15% or more, this can be very challenging indeed, but not impossible even for the non-professional investors.

Singapore: Property developers, Wilmar, UOB, Cerebos, Raffles Medical, Midas

March 1: Property developers, Wilmar, UOB, Cerebos, Raffles Medical, Midas


Written by The Edge
Monday, 01 March 2010 08:46


Wilmar International (WLIL.SI), the world’s largest palm oil planter, is likely to be in the spotlight on Monday after reporting a better-than-expected 18% rise in its fourth-quarter results.

Benchmark Straits Times Index (.FTSTI) inched 0.06% higher to end at 2,750.86 points last Friday.

US stocks rose last Friday, capping their best monthly advance since November as data showed the economy grew a tad better than expected in the fourth quarter.

Property developers: The government said it will raise the cost of residential land development starting March 1. Non-landed residential charges will rise 8% on average, while charges for landed homes will increase 12% on average, it said in an e-mailed statement today. Charges for commercial land development will decline an average of 2%.

Wilmar International (WLIL.SI), the world’s largest palm oil planter reported on Sunday a better-than-expected 18% rise in fourth-quarter net profit as a global economic recovery drove commodities prices higher. It also said it would continue to seek attractive investment opportunities to support future growth.

United Overseas Bank (UOBH.SI) , Singapore’s third-biggest bank, expects high single-digit loan growth in 2010 and is trying to maintain loan margins for corporate customers, CEO Wee Ee Cheong told a news conference.

Singapore-listed health supplement manufacturer Cerebos Pacific (CERE.SI) said last week it is aiming for a 10–20% revenue growth over the next three years as it steps up its presence in China, Indonesia and Vietnam.

Raffles Medical Group, the private healthcare provider in Singapore and the region, says profit after tax for the group increased 20.1% from $31.7 million in 2008 to $38 million in 2009.

Midas Holdings, the manufacturer of aluminium alloy extrusion products for China’s railway sector, announced a 14.9% rise in net profit to $37.5 million for the financial year ended December 31, 2009 (FY2009).

Abterra, the supply chain manager of resources and minerals, managed to swing back into the black with a net profit of $13.3 million for the financial year ended 31 December 2009 (FY2009) largely due to a gain from the revaluation of a mining asset.

Yongnam Holdings, the structural steel contractor and specialist civil engineering solutions provider, announced a record profit before tax of $48.8 million for its full year ended December 31, 2009 (FY2009) on the back of a 2.7% increase in revenue to $346.8 million.

China Sports International, the sports fashion footwear and apparel company based in China, reported net profit decreased by 33.7% to RMB122.6 million ($25.3 million) for the full year ended 31 December 2009 (FY09) from RMB184.9 million in FY08 as the result of lower average selling prices for footwear products.

Delong Holdings, the manufacturer of hot-rolled steel coils (HRC) in China, says it posted a net profit after tax of RMB 248.4 million and RMB 416.9 million ($86 million) for the fourth quarter (4Q2009) and full year (FY2009) respectively, reversing net losses of RMB 637 million and RMB 370.4 million recorded in 4Q2008 and FY2008 respectively.

Synear Food Holdings, the China-based producer of quick freeze food, today posted a more than two-fold surge in net profit to RMB40.7 million ($8.4 million) for the three months ended December 31, 2009 (4Q09), due mainly to lower selling and distribution expenses and lower income tax expense. Revenue for the quarter rose 1.1% to RMB507.1 million.

Food Empire Holdings, the manufacturer of instant beverage products, frozen convenience food, confectionery and snack food, says profit before tax fell 86.2% to US$3.2 million ($4.5 million) while revenue fell 39.3% to US$134 million and for the year ended 31 December 2009.

Apex-Pal International, which operates the global chain of Sakae Sushi restaurants, today reported a net profit before tax of $3.3 million for the fiscal full year ending on 31 December 2009.

Techcomp (Holdings), the China manufacturer and distributor for analytical and life science instruments, posted a 139.4% year-on-year rise in net profit attributable to shareholders to US$7.4 million ($10.4 million) for the 12 months ended 31 December 2009 (FY2009). Revenue increased 29.3% to US$104.8 million fuelled by Asia’s increasing demand for analytical and life science equipment.

http://www.theedgesingapore.com/the-daily-edge/business/13008-march-1-property-developers-wilmar-uob-cerebos-raffles-medical-midas.html

Wilmar says Q4 net profit up 18% to US$442m

Wilmar says Q4 net profit up 18% to US$442m

Tags: Wilmar | Wilmar International
Written by Thomson Reuters
Sunday, 28 February 2010 18:05


Wilmar International (WLIL.SI), the world’s largest palm oil producer, reported today a better-than-expected 18 percent rise in fourth quarter net profit as a global economic recovery drove commodities prices higher.

The company, which has a presence in 20 countries across Southeast Asia, China, India, Europe and Africa, said it would continue to seek attractive investment opportunities to support future growth.

Malaysia’s benchmark palm oil price (KPOc3) rose nearly 60% in the quarter compared with the previous year.

The firm derives about half of its total sales from China, and owns oil palm plantations and runs crushing and refining plants in Indonesia and Malaysia.

“We will persist with on-going efforts to further improve our operational efficiency through greater integration and economies of scale, and seek attractive investment opportunities to continue growing our group,” said Chief Executive Kuok Khoon Hong in a statement.

The company did not elaborate on its future investment plans, but it has previously said it was planning to invest at least US$1 billion ($1.4 billion) in Indonesia, China, and Africa.

Wilmar posted a net profit of US$442 million, up from US$373.6 million a year earlier, ahead analysts forecasts of US$333.5 million.

The quarterly results took the full year net profit to US$1.88 billion, higher than ThomsonReuters I/B/E/S estimates of US$1.65 billion.

On the outlook, Wilmar, which has a market capitalisation of $41.5 billion, said that although economic recovery appeared to have started, the global business environment is expected to be volatile.

However, the company said Asian economic activity would continue to remain robust, especially in China, India and Indonesia.

Wilmar’s shares have risen around 1% since the start of the year, outpacing a 5% drop in the broader Straits Times index (.FTSTI).

http://www.theedgesingapore.com/the-daily-edge/business/13007-wilmar-says-q4-net-profit-up-18-to-us442m.html

Golden Agri-Resources price target raised

Golden Agri-Resources price target raised to 68 cents by OSK

Tags: Golden Agri-Resources
Written by The Edge
Monday, 01 March 2010 17:03

OSK has raised Golden Agri-Resources’ (E5H.SG) target price to 68 cents from 63.5 cents, based on 15x FY10 P/E, after increasing FY10 earnings forecast 8.3% to assume higher palm oil prices on back of lower fertiliser costs.

The broker says the change to bottomline estimate also reflects lower corporate tax rate of 25% vs 30% previously. Cites high fertiliser cost as one key factor weighing on FY09 profitability (earnings down 56.1% at US$607 million ($854 million)), but notes highly-priced fertiliser has since been used up.

It adds that production is also back on track, rising 13% last year after being hit by adverse weather in previous three years.

Tips production to grow 10% in 2010 on back of improving age profile.

Keeps “trading buy” call.

Shares +1.9% at 54 cents.


http://www.theedgesingapore.com/the-daily-edge/business/13045-golden-agri-resources-price-target-raised-to-68-cents-by-osk.html

Warren Buffett: A climate of fear is their best friend. When it's raining gold, reach for a bucket, not a thimble.

Buffett’s Bargain Shopping Spree


By GRAHAM BOWLEY
Published: February 27, 2010

America’s most famous investor, Warren E. Buffett, struck a confident note in his annual letter to the shareholders of his holding company on Saturday, as he described in characteristically colorful terms how his businesses had largely ridden out the calamity of the financial crisis.

Warren Buffett told investors, “When it's raining gold, reach for a bucket, not a thimble.”


The tone of the letter contrasted sharply with Mr. Buffett’s report last year, in which he took himself to task for the company’s decline in book value, only the second such decline since he took control in 1965. This time he described how he had used the last 18 months to scoop up a string of assets — a buying spree that culminated at the end of last year with the agreement to buy the Burlington Northern Santa Fe Railway, his biggest bet yet.

Mr. Buffett wrote that his company, Berkshire Hathaway, had net income of $8.1 billion last year, or about $5,200 a share, 61 percent higher than in 2008. The company also reported a 19.8 percent rise in book value.

The crisis of 2007-8 led to the company’s first operating loss in the first quarter of last year, raising questions about Mr. Buffett’s exposure to consumer spending and the housing market. The company recovered strongly later in the year, however, helped by the rebound in the stock market, which strengthened his derivatives holdings.

In his letter, which accompanied the company’s annual report, Mr. Buffett laid out in detail how many of his holdings still depended on the vagaries of housing demand and consumer spending. But shares of the company, which peaked late in 2007 around $148,220 and fell to lows of around $73,195, have since rallied to close at $119,800 on Friday.

“We’ve put a lot of money to work during the chaos of the last two years,” he wrote. “It’s been an ideal period for investors: A climate of fear is their best friend.”

Mr. Buffett used his letter to crack jokes and issue more of his trademark aphorisms. The so-called Sage of Omaha, he is America’s most listened-to investor, and his annual letter is watched closely by investors for his assessment of his businesses and of the economy.

It has, however, taken on somewhat less importance in recent years as Mr. Buffett, 79, has raised his profile with more public speaking and interviews.

In characteristically blunt terms, he had harsh words for unnamed chief executives and directors who oversaw disasters at their companies during the crisis but “still live in a grand style.”

He said, “They should pay a heavy price,” and that there must be a reform of the way executives are rewarded for their performance. “C.E.O.’s, and in many cases, directors, have long benefited from oversized financial carrots; some meaningful sticks now need to be part of their employment picture as well.”

He also admitted mistakes of his own, saying he had closed a troubled credit card business, which had been his idea, and had given too much time to turn around the NetJets business, long a burden.

But he dwelt also on the lucrative positions he took in a string of companies over the last year and a half, pouring $15.5 billion into shares of companies like Goldman Sachs, General Electric and Wm. Wrigley Jr. Wishing he had taken greater advantage of the opportunities offered, he said, “When it’s raining gold, reach for a bucket, not a thimble.”

Burlington Northern Santa Fe was Mr. Buffett’s biggest purchase to date. Addressing that company’s 65,000 shareholders, he offered them a primer in his investment rules. But he warned all shareholders that the bigger size of Berkshire Hathaway would probably mean slower growth in the future.

“Huge sums forge their own anchor and our future advantage, if any, will be a small fraction of our historical edge,” he said.

Justin Fuller, the author of a blog about Mr. Buffett and a principal at Midway Capital Research in Chicago, said this company size was an important theme of the letter: “There was a lot of talk about size and maintaining a business and how size and bureaucracy can really hurt a business over time.”

Mr. Fuller said Mr. Buffett had also given insights into his investing strategy — many of his businesses are now in monopoly or near-monopoly industries like railroads and utilities.

Mr. Buffett told a long story about the wisdom of using a company’s own shares to buy another company — which was a veiled criticism of Kraft’s takeover of Cadbury, Mr. Fuller said, but also a justification of Mr. Buffett’s decision to issue shares to buy Burlington Northern Santa Fe. Mr. Buffett is a major investor in Kraft but has opposed its pending acquisition of Cadbury.

Mr. Buffett’s letter is watched closely for hints about when he may retire, but this year’s offered none. Talking of a time when he would be long gone, he said he was still tap-dancing to work at the end of his eighth decade.

He said he had sold shares in ConocoPhillips, Moody’s, Procter & Gamble and Johnson & Johnson, mainly to finance his railroad purchase. The shares of these companies were still likely to trade higher, he said.

Closing the letter, Mr. Buffett, ever the cheeky salesman, invited shareholders to his company’s annual meeting on May 1 in Omaha — promising to play table tennis for spectators and urging them to buy goods and services from his companies, and ending, “P.S. Come by rail.”


http://www.nytimes.com/2010/02/28/business/economy/28buffett.html?em

Your Money

Preparing for the Inevitable Bursting Bubble

By RON LIEBER

Published: February 26, 2010

Financial bubbles are a way of life now. They can upend your industry, send your portfolio into spasms and leave you with whiplash. And then, once you’ve recovered, the next one will hit.

 
How are you preparing for the next bubble?

Or so you might think, as a veteran of two gut-wrenching market declines and a housing bubble over the last decade. 


There’s plenty of reason to expect more surprises, given the number of hedge funds moving large amounts of money quickly around the world and the big banks making their own trades. 


Individuals, as always, may be tempted to make their own financial bets, too. Last time, they bought overpriced homes with too much borrowed money. Next time, who knows what the bubble will be? And that’s the problem, as it always is. How do you identify the next thing that will pop? Is it China? Or Greece? Or Treasury bonds? It is difficult to predict and make the right defensive (or offensive) moves at the correct moment to save or make money.


Still, if you want to better insulate yourself from bubbles — however often they may inflate — there are plenty of things you can do. Your debt levels matter, and you may want to consider a more flexible investment strategy. But perhaps most important, this is a mental exercise that begins and ends with an honest assessment of your long-term goals and how you handle the emotional jolts that come from the bubbles that burst along the way.


FIXED EXPENSES
Start with the basics. The less you have to pay toward monthly obligations, the better off you are, and that’s especially true at a time of economic disruption. You certainly wouldn’t want any bills increasing, so now’s a good time to refinance to a fixed-rate mortgage.


Whittle down student loan and credit card debt, too, and pay cash for your car if possible. “Flexibility is priceless in a time of panic,” said Lucas Hail, a financial planner with Foster & Motley in Cincinnati.


SELF-RELIANCE 
Then take a hard look at how much you should rely on promises from the government. Social Security and Medicare may not fit the traditional definition of bubbles, but that hasn’t stopped Rick Brooks from advising his financial planning clients to expect less from both programs. “Something that is not sustainable will not continue. It just can’t,” he said of Medicare.


Mr. Brooks, the vice president for investment management with Blankinship & Foster in Solana Beach, Calif., said anyone under 50 should assume that Medicare will look nothing like it does now and examine private health insurance premiums for guidance as to what may need to be spent on health care in retirement. Meanwhile, the firm advises current retirees to assume a 20 percent cut in Social Security benefits at some point.


Bedda D’Angelo, president of Fiduciary Solutions in Durham, N.C., has an equally stark outlook on long-term employment risk. If there are two adults in the household, your goal should probably be to have two incomes instead of one. “I do believe that unemployment is inevitable,” she said, adding that people who think they are going to retire at 65 should save for retirement as if they will be forced out of the work force in their mid-50s.


PORTFOLIO TACTICS
Perhaps you did what you thought you were supposed to during the last decade. You got religion and stopped trading stocks. Then, you split your assets among various low-cost mutual funds and added money regularly. And the results weren’t quite what you hoped.


Tempted to make big bets on emerging markets or short Treasury bills? You’ve landed in the middle of the debate between those who favor a more passive asset allocation and those who prefer something called tactical allocation.
The first camp sets up a practical mix of investments, according to a target level of risk, and then readjusts back to that mix every year or so.

• They frown on the hubris of the tactical practitioners. To make a tactical approach work, they note, you need to know what the right signals will be to buy and sell everything from stocks to gold, during every future market cycle. Then, these tacticians need to have the discipline to act each and every time. This is extraordinarily hard.

The tacticians, however, believe they have no choice. 

• “What consumers need to know is that no matter how comforting it is to believe a formulaic approach or prepackaged investment product will allow them to put their financial future on autopilot, our current and future financial environment will require advice, diligence, education and responsiveness, which takes into account strategic consideration of geopolitical and economic relationships,” as Ryan Darwish, a financial planner in Eugene, Ore., put it to me this week.

Mr. Darwish scoffed at the notion of mere bubbles and said he thought that more fundamental and far-reaching shifts were under way, like the transfer of economic power from the United States to China and other nations.

A growing number of financial planners are embracing a middle, more measured approach: If diversification across stocks, bonds and other asset classes has proved to be a good thing in most investing environments, why not diversification around investment approaches?

“I am not a financial genius, but the geniuses are even worse off because they’re anchored on one philosophy,” said David O’Brien, a financial planner in Midlothian, Va. So he and a growing number of his peers have added some strategies to their baseline portfolios aimed at losing less during bubbles while still gaining in better times. “We’re not trying to shoot for the moon,” he added.

These tactics can include managed futures, absolute return funds, merger arbitrage and other approaches that will get their own column someday.

The embrace of all this even led one investment professional I spoke with this week to express the ultimate sacrilege: It really is different this time.

Thomas C. Meyer of Meyer Capital Group in Marlton, N.J., noted that many of these alternative strategies were not even available in mutual-fund form three to four years ago. So that’s different. He’s now putting 30 percent of his clients’ equity portfolios into such investments.

The big change, however, is that the baby boomer money is getting older. People are further along in their careers than they were during the market crash in 1987, and they can’t rely on pensions as so many more near retirees could in the 1980s (while shrugging off stock market volatility). And the boomers don’t have as much time to make up lost ground, especially if they’re already retired.

“Losing less means a lot right now,” Mr. Meyer said. “So we want to suck volatility out where we can.”

MATTER OF THE MIND  
But can you live with less volatility — and the permanent end of occasional portfoliowide returns in the teens or higher? Markets run on greed and fear; bubbles expand and deflate thanks to outsize versions of each. One of the few things you can predict about bubbles is that they will test your conviction on where you sit along the fear-greed continuum. 

And once they pop, you’ll know a bit more about how your mind works than you did before.

This last downturn was severe enough that about 10 percent of Steven A. Weydert’s clients realized that they had overestimated their own risk tolerance. “Ideally, with an asset allocation, you never want to look back and say you’re sorry,” said Mr. Weydert of Bowyer, Weydert Wealth Planning Partners in Park Ridge, Ill.

So rather than trying to predict the number and type of bubbles, it may make more sense to look inward when trying to predict the future. Bob Goldman, a financial planner in Sausalito, Calif., said that clients often looked at him blankly when he asked them what it was they imagined for themselves in the future. Sometimes, they need to go home and figure out what sort of life it is that they’re saving for — and how much (or little) it might cost.

“People come in and talk about how we all know that inflation is going to explode next year,” Mr. Goldman said. “Well, we don’t all know that. We don’t know anything. But we can know something about our own lives, and there is a person we can talk to about that. A person in the mirror.”

• STRATEGIES; What The Past Can't Tell Investors (January 3, 2010)

****Select A Good Stock Market Strategy For Good Returns

Select A Good Stock Market Strategy For Good Returns

Sunday, February 28th, 2010

Stock market can be a good money maker if you know how to play the stock market correctly. A lot of people get into the stock market thinking they can make big money but then lose money by making some rash decisions.

These decisions most often are based on gut feel and not on solid research. Stock market research is the key to making money in the stock market. There are two types of stock market research that can be done in the stock market. Each of the types of research can lead to good amount of money if proper investing discipline is followed.

The two types of research that can be done is

• the fundamental research and 
• the technical analysis research. 

 Both of these styles are very different and require different kind of discipline and methodology while buying the stocks.
In fundamental research you research a stock which has a long term potential and then keep on accumulating this stock for future gains.

• The time horizon for this type of investment strategy can be really long like say two years to four five years. 
• This type of style requires the art of stock picking to be perfected in terms of their fundamental strengths. 
• Also the attributes of this kind of a stock trader are that they are patient and have immense amount of perseverance. 
• They know the art of stock picking and can wait for some time to pick a good stock.

In the Technical research the main emphasis is on trending and the traders thrive on the volatility of the market.

• Based on the trending they buy and sell stocks. 
• Stock quality is important but not to the extent as in fundamental research. 
• Also the main aim here is to make money on a short term basis and do not hold the stock for long. 
• They exploit the inefficiencies in the system as a tool for buying and then selling or offloading the stock once they reach a threshold profit percentage or the stock reaches a particular trend. 
• These traders can also make money in a bearish market.

So if you are investing in the market you will need to enough discipline to follow any approach. There is no middle path and the middle path will not make you enough of profits. So make sure that you follow one strategy and make money from it. Remember patience is a virtue in any business.

New stock market for beginners need to learn about trading strategies. The author recommends stock market for beginners strategies for getting to know how to select a good stock.