Warren Buffett Quotes

• You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.
• We do not view the company itself as the ultimate owner of our business assets but instead view the company as a conduit through which our shareholders own assets.
• When Berkshire buys common stock, we approach the transaction as if we were buying into a private business.
• Wide diversification is only required when investors do not understand what they are doing.
• Accounting consequences do not influence our operating or capital-allocation decisions. When acquisition costs are similar, we much prefer to purchase $2 of earnings that is not reportable by us under standard accounting principles than to purchase $1 of earnings that is reportable.
• Never invest in a business you cannot understand.
• Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.
• Why not invest your assets in the companies you really like? As Mae West said, "Too much of a good thing can be wonderful".
• (When speaking of managers and executive compensation) The .350 hitter expects, and also deserves, a big payoff for his performance - even if he plays for a cellar-dwelling team. And a .150 hitter should get no reward - even if he plays for a pennant winner.
• The critical investment factor is determining the intrinsic value of a business and paying a fair orbargain price.
• Risk can be greatly reduced by concentrating on only a few holdings.
• Stop trying to predict the direction of the stock market, the economy, interest rates, or elections.
• Many stock options in the corporate world have worked in exactly that fashion: they have gained in value simply because management retained earnings, not because it did well with the capital in its hands.
• Buy companies with strong histories of profitability and with a dominant business franchise.
• Be fearful when others are greedy and greedy only when others are fearful.
• It is optimism that is the enemy of the rational buyer.
• As far as you are concerned, the stock market does not exist. Ignore it.
• The ability to say "no" is a tremendous advantage for an investor.
• Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell.
• Lethargy, bordering on sloth should remain the cornerstone of an investment style.
• An investor should act as though he had a lifetime decision card with just twenty punches on it.
• Wild swings in share prices have more to do with the "lemming- like" behaviour of institutional investors than with the aggregate returns of the company they own.
• As a group, lemmings have a rotten image, but no individual lemming has ever received bad press.
• An investor needs to do very few things right as long as he or she avoids big mistakes.
• "Turn-arounds" seldom turn.
• Is management rational?
• Is management candid with the shareholders?
• Does management resist the institutional imperative?
• Do not take yearly results too seriously. Instead, focus on four or five-year averages.
• Focus on return on equity, not earnings per share.
• Calculate "owner earnings" to get a true reflection of value.
• Look for companies with high profit margins.
• Growth and value investing are joined at the hip.
• The advice "you never go broke taking a profit" is foolish.
• It is more important to say "no" to an opportunity, than to say "yes".
• Always invest for the long term.
• Does the business have favourable long term prospects?
• It is not necessary to do extraordinary things to get extraordinary results.
• Remember that the stock market is manic-depressive.
• Buy a business, don't rent stocks.
• Does the business have a consistent operating history?
• An investor should ordinarily hold a small piece of an outstanding business with the same tenacity that an owner would exhibit if he owned all of that business.

http://beginnersinvest.about.com/cs/warrenbuffett/a/aawarrenquotes.htm

Buffettology: Value Investing Strategy

Buffettology: Warren Buffett Quotes & Value Investment Strategy for Stock Picks

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While it may be tempting to throw yourself into the dramatic highs and lows of investing in the stock market in search of instant gratification, it’s not necessarily the most profitable choice. Warren Buffet has spent his career watching investors pounce on “hot” companies, only to flounder when the market takes a plunge. All the while, he’s been steadily accumulating wealth by taking an entirely different approach.

You may be thinking, “OK, the guy’s successful, why should I care?” Well, in 2008, Warren Buffett was the richest man in the world with an estimated worth of over 62 billion dollars. This kind of wealth is not a result of sheer luck. He’s gained his enormous fortune using a very specific investment strategy, developed on a basis of long term investing. The great news is that, by learning a little about the way Warren Buffett thinks, you too can enjoy greater success in the stock market.

So what exactly is Warren Buffett’s investment strategy and how can you emulate him? Read on and find out.

Secrets to Investing Success

Since Warren Buffett has never personally penned an investment book for the masses, how does one go about learning his secrets? Luckily, many of his letters to shareholders, books that compile such letters, and insights from those close to him are readily available to the public.

There’s a lot to be gained from his quotes alone. Here are a few sayings that have been attributed to him.

Warren Buffett Quotes on Investing

• “Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.”
• “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
• “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
• “Investors making purchases in an overheated market need to recognize that it may often take an extended period for the value of even an outstanding company to catch up with the price they paid.”
• “If a business does well, the stock eventually follows.”
• “Price is what you pay. Value is what you get.”
• “Time is the friend of the wonderful company, the enemy of the mediocre.”

Clearly, Warren Buffet is a value investor. He looks for great companies, or “wonderful” ones as he puts it. He is not looking at hot sectors or stocks that may shoot up now, only to cool and fall later. He wants an efficient running business that has favorable long-term prospects.

Additionally, although he wants great stocks, he does not want to pay a premium price. Warren uses a specific calculation to arrive at a fair valuation, then waits until a market correction or crash puts those prices on his doorstep.

Now that you know a little about his basic investing philosophy, let’s take a more in-depth look at how he makes investment choices.

Buffettology and Stock Selection

The book, Buffettology, is a fantastic resource, primarily written by Warren Buffett’s former daughter-in-law, Mary Buffett. The co-author, David Clark, is a long-time friend of the Buffett family. Since these authors probably have some special insight into how Warren Buffet privately analyzes stocks, it’s worth hearing what they have to say. Here are a few of the major points they focus on:

Best Stock Industries

The authors of Buffettology recommend looking for promising companies in 3 broad categories:

1. Consumables
Buffett’s choice businesses include those that make products which are consumed or quickly wear out such as:

• Snacks
• Pop
• Gum
• Toothpaste
• Pens
• Razor blades

Why? Because higher product turnover implies more revenue for the company. If you can also find a leading name brand that people gravitate towards, you have a good starting point.

2. Communications
Another major category of companies that Warren likes is communications. Advertising agencies are a major part of this group as they expand into new platforms like cell phones and tablet computers, in addition to the old standbys of TV, radio, and newspapers.

This is an area where you will need to be careful because what is new today can be discarded as waste tomorrow. Be aware that advertising may go down with the economy as businesses prune costs during tough times. Also, as people turn from print to web, some forms of advertising will increase at the expense of others.

3. Boring Services
The last category is for repetitive and boring services. A few examples of these highly profitable companies doing the same job over and over might be:

• Lawn care companies
• Janitorial services
• Basic tax filing services

“Boring” itself is not enough to warrant an investment. However, if something is both boring and essential, there’s a good chance it’s a stable, efficient, easy-to-operate business that will have a long-lasting life.

What Characteristics in a Company to Look For

Once you know where to look, it’s important to know who you should turn your attention to. The book cites the following factors for determining which companies to watch closely.

1. Existence and Value
Warren Buffett analyzes considerable historical financial data on a stock. In general, this would exclude new companies where only a few years of financial data exist. He picks stocks based on their intrinsic value and the ability of the company to continually increase that value, often wanting a minimum of 15% annually over many years. This kind of regular increase can be considered a High Annual Rate of Return.

2. Market EdgeThis includes companies that have a monopoly, where no other alternative exists. Think of a toll-bridge as one example. Other market edges could include companies that sell a unique product. Buffett is not as keen on commodity-based companies where the price is set by the market, competition is stiff, and the company has no ability to freely adjust for inflation.

3. Finances
Warren looks for these financial traits in companies:

• Increasing Earnings. It is especially important that a large amount of this money is being retained and used for further growth. Sitting on a big pile of cash, or giving earnings back as dividends, is not viewed as desirable since extra tax may need to be paid on dividends, and the burden of re-investing is placed on the shareholder.
• Reasonable Financing. The financing for the company should be reasonable, without a high debt-load.
• Simple Business Model. The company model should be simple with few moving parts, and not a lot of money needed to maintain the business model. It should be a lean, mean, and profitable operation.

But when you find such a wonderful company, how will you know if it is a good buy? For that we need to learn how to value a stock the Buffett way.

Valuing a Company Buffett-style

Buffettology also outlines a few different methods to determine the value of a stock and whether or not it is a good buy. Two of the most popular methods revolve around “Earnings Yield” and “Future Price Based on Past Growth.”

1. Earnings Yield

The concept behind this is elementary and rooted firmly in the price-to-earnings ratio, or more correctly, the opposite, which is called the earnings yield. When you divide the annual earnings by the current share price, you find your rate of return. Therefore, the lower the stock price is in relation to its earnings, the higher the earnings yield. Here are three examples for comparison:

• Aeropostale Inc. (NYSE: ARO) has a share price of around $25 and an annual earnings of $2.59. If you divide $2.59 by $25 you get the earnings yield of 10.36%.
• Hansen Natural Corporation (NASDAQ:HANS) has a share price of $56 and an annual earnings per share of $2.39 and only 4.2% of the share price is annual earnings.
• McDonald’s is trading at a $75 with annual earnings of  $4.62 per share, which gives us an earnings yield 6.2%.

Warren would use this formula to compare similar stocks with steady earnings to see which would provide a higher earnings yield based on share price. Based on these examples, Aeropostale has the most attractive earnings yield.

Keep in mind, this is only to be used as a very quick and crude method of comparing similar stocks, or to compare yields to bond rates. As you will see in the next two valuation methods, the earnings yield is far from accurate in giving us a long-term growth rate.

2. Future Price Based on Past Growth

For this, Buffett would analyze the long-term growth trend to determine how it might perform over the next 10 years. Depending on the company and the industry, it may make sense to use any of a variety of metrics, including both the PE ratio and the Enterprise Value/Revenue multiple.

Let’s use the PE ratio to illustrate how this strategy works. To guess what growth might be like over the next 10 years, you first need to determine what the average earnings growth rate has been on the stock over the past 5 to 10 years.

I will use McDonald’s as an example. They are a big name brand, they aggressively opened up in new markets, and McDonald’s provides a consumable product that has a loyal following. Let’s say the EPS growth over the past 5 years averages 17.6%. Using an EPS of$4.62 EPS in year 0, and a growth rate of 17.6% per year, will yield the following 10-year forecast:

• Year 0, EPS: 4.62
• Year 1, EPS: 5.43
• Year 2, EPS: 6.39
• Year 3, EPS: 7.51
• Year 4, EPS: 8.84
• Year 5, EPS: 10.39
• Year 6, EPS: 12.22
• Year 7, EPS: 14.37
• Year 8, EPS: 16.90
• Year 9, EPS: 19.88
• Year 10, EPS: 23.37

Now you have an estimated total earnings per share by the end of year 10. Today, the EPS is $4.62 and in a decade that should appreciate to $23.37.

Now, you must determine what this means for the share price. To do this, you simply look to a long-term average of P/E, or the price-to-earnings ratio. The 5 year P/E average in this example is 17.7. Multiply this by the future expected earnings rate of $23.37, and you get an estimated price of $413.65.

If the price right now is $75, what is the rate of return over the next 10 years?

You can simply use an online rate-of-return calculator to calculate annual profits of 18.62%. Remember, this is a basic estimate that doesn’t include dividends, which can boost your yield by 3% every year, or almost 22% when using capital gains and dividend yield together. Moreover, it is based on the assumption that the PE ratio will remain constant, which is unlikely, but still serves as a good example

For those of you who find all of this a little overwhelming, that doesn’t mean that Buffett-style investing isn’t for you. There is a simpler option.

Berkshire Hathaway

If you want to utilize his strategies without actually having to learn them, you can buy shares in Warren Buffett’s company. He is the Chairman and CEO of the publicly owned investment managing company, Berkshire Hathaway. Take advantage of his success by choosing from the following:

• Class A Shares with a current sticker price of $127,630 each.
• Class B Shares which currently sell for $85.04 each.

As you can probably tell from the price discrepancy, it takes 1,500 Class B shares to have equivalent ownership of one Class A share. They are similar except that Class A shares have proportionally more voting rights per dollar of worth.

How have the shares of Berkshire Hathaway performed over the past 46 years? The cumulative gain is 490,409% which works out to an average of 20.2% per year. This is an average annual 10.8% excess of the market as tracked by the S&P 500 index (including dividends). If in 1965, you invested a whopping $1,900 with Warren Buffett, this would be worth $9,545,300 by the end of 2010.

Effects Of Success

With those numbers, you may be wondering why anyone would choose to attempt Warren’s strategy on their own. Unfortunately, this kind of incredible growth is becoming harder for Berkshire Hathaway to attain. When a company has hundreds of billions of dollars in revenue, achieving significant growth is far more difficult.

Buying up smaller companies did not impact Warren Buffett’s Berkshire’s financials as much as when his company was smaller. He has become an elephant stomping around the market in search of increasingly elusive good buys.

Final Word

The simplest way to invest Warren Buffet style is to buy shares of Berkshire Hathaway and forget about them for the next 10 or 20 years. But, as his company has reached astronomical heights, this strategy has become less and less valuable.

Thus, many people who love the “Warren Buffett investing style” choose to invest on their own. If you are excited by due diligence, scanning thousands of stocks for that highly profitable (and oftentimes mundane) business, forecasting company earnings, and monitoring the company’s progress, then the “Warren Buffett investment method” may be a perfect fit for you. Remember, perhaps above all else, to have guts of steel when the market drops so that you can buy undervalued and profitable stocks.

What are your thoughts on Warren Buffett and his investing style? Do you try to replicate his strategies and success? Share your experiences in the comments below.

http://www.moneycrashers.com/buffettology-warren-buffet-quotes-investment-strategy-stock-picks/

You should seek companies that can create the equivalent market value for each $1 of retained earnings, for the shareholders

Guinness Anchor

Year    DPS   EPS

2001    27.4    19.4
2002    27.4    24.0
2003    28.1    25.8
2004    30.4    32.6
2005    30.1    35.7
2006    30.2    42.4
2007     32.9   37.3
2008     36.4   41.7
2009     41.0   47.0
2010     45.0   50.5
Total    328.9  356.4

From the year 2001 to 2010
Total dividend paid out  328.9 sen
Total earnings 356.4 sen
Total retained earnings  27.5 sen



Price Range of each Guinness Share
2001  Low $ 2.75 -  High $ 3.58
2010  Low $ 6.60 -  High $ 10.16

Subtracting the highest price of 2001 from the lowest price of 2010, the gain in the share price of Guinness from 2001 to 2010 was $3.02  ($6.60 - $3.58 = $3.02 )

The change market price of Guinness from 2001 to 2010 was a minimum of $3.02.

Therefore, for every $1.00 of retained earnings, Guinness has created at least $3.02/ $0.275 = $10.98 in market value, that is, for every 10 sen retained earnings, Guinness has created a market value of a minimum of $1.098.



How does the company use the retained earnings?  Do the retained earnings reflect in the stock price?


When the management of a company invests earnings back into the business, that investment should yield a higher return because of those retained earnings.  When the management does a great job using retained earnings, it will increase the earnings of that company, and , in turn, earnings per share will increase.

Market price does not always reflect the true value of the company during the short term.  But, if you are looking at 10 years or more, market price reflects the true value of the company.

In the above example, using Guinness, the last 10 years of EPS were added and compared with the market price of the stock in those years.

Warren Buffett teaches that you should seek out those companies that can grow at least the equivalent $1.00 of market value for each $1.00 of retained earnings.  To not do so, the company is destroying value.

The Individual Investor Advantage

This weekend, as I was driving back from picking up groceries, I was listening to a financial radio talk show. I wasn’t particularly impressed with the host to start with, but then he offered some advice that was so horrible it nearly caused me to veer off the road and into a ditch. He suggested that a caller not invest in stocks, because when you buy a stock, someone smarter than you is the person who is selling it.

Instead, he suggested only investing in mutual funds. Keep in mind; he’s a financial adviser who specializes in mutual funds, so we know where his bias is.

After a few minutes more of listening to the program, I had to turn it off in favor of my daughter’s insipid Kidz Bop CDs. Anyone who followed the host’s advice might as well just flush their money down the toilet.

Here’s why.

Most mutual funds underperform the market. In 2011, 84% of stock mutual funds did not beat the broad market or their benchmark index (if a fund is focused on a particular sector like technology or a region like Europe, it will have a different index that it’s expected to beat other than the S&P 500).Last year was a particularly bad one for mutual fund managers. Normally, the results aren’t quite as dismal. Over the past 10 years, 57% of funds underperformed their benchmark.

To make the radio host’s argument even more laughable, he said those “smart” traders on the other side of the stock trades included many mutual fund managers who did this for a living.

So you should be scared of buying stock from people who are bad at their jobs? Forget that. Where do I sign up to buy from them?

The weak performance of mutual funds doesn’t mean you should avoid all mutual funds. They’re appropriate for investors who don’t like to pick their own stocks and don’t want to put much effort into their portfolio other than asset allocation. But be sure you don’t chase a hot mutual fund because it posted strong performance numbers or has a popular manager.

Instead, invest in index funds with low expense ratios. If you’re investing in index funds, you’re basically just trying to match the market averages. There’s nothing wrong with that. The market goes up over the long haul and if you’re matching the market’s performance, you’ll make money.

If you’re investing in mutual funds, consider the funds in Alexander Green’s Gone Fishin’ Portfolio. These are funds like the Vanguard Emerging Markets Index Fund (VEIEX). The fund has a very low 0.33% expense ratio and has returned an average of 13.11% per year over the past 10 years.The key to the funds in The Gone Fishin’ Portfolio are the very low fees. Many actively managed funds have significantly higher costs — usually at least 1%, and sometimes much more. That means each year 1% or more of your money is going to the mutual fund company to pay for salaries, toner and Christmas parties. That money is better off in your pocket and the lower fees will improve your returns over the years.

This doesn’t mean that there are no quality mutual funds or managers who will generate solid returns for you — but with six out of 10 fund managers underperforming the market every year, are you really good enough to pick the right one every year? I’m not. That’s why most of my mutual fund holdings are in the funds recommended in The Gone Fishin’ Portfolio — inexpensive funds that are designed to simply match the market returns.

But I don’t put all of my money in those funds. I pick stocks, too. And I’ll match wits with those fund managers any day of the week. It’s not that I’m so smart and they’re so dumb. But as an individual investor, I have opportunities that they don’t.

Individual investor advantagesFor example, a stock I like that’s currently in The Oxford Club’s Perpetual Income Portfolio is Community Bank System (NYSE: CBU). It’s a small bank located in upstate New York and Pennsylvania. It has a market cap of just over $1 billion and trades an average of 244,000 shares a day.

I like it because it never took a dime of TARP money, pays a 3.6% dividend yield (4.7% based on our entry price in September) and has raised the dividend every year for 19 years.With just 244,000 shares traded per day, a large mutual fund would have difficulty buying large blocks of stock without moving the share price significantly. As an individual investor, you would have no problem picking up a few thousand shares on any given day.

Also, as an individual investor, you don’t have to worry about marketing. You’re not trying to impress anyone with which stocks you own or trying hard to beat a benchmark. However, a mutual fund, particularly one that isn’t outperforming, better have some of the hottest stocks in its portfolio at the end of the quarter, when its portfolio is revealed, otherwise, as Ricky Ricardo used to say, they’ll have some “’splainin’ to do.”Additionally, they’ll get rid of their dogs. The fund companies don’t want investors pulling their money (which reduces fees collected) because investors think the fund managers are asleep on the job. But buying hot stocks and dumping beaten up ones is usually the wrong thing to do.

If the fund manager has done his homework and likes a stock because of its prospects and/or value, selling it because it sold off and is cheap isn’t going to help investors in the long run. He should be buying. And similarly, if a stock is hot and is a momentum trade, buying it after it is popular is also misguided, as it may be difficult to sell so many shares from a big fund when the music stops.

Individual investors have more flexibility than the big guys. You don’t have to publish quarterly reports that will be scrutinized and you can get in and out of stocks whenever you want, without fear of moving the price. You can also switch your strategy at any given time.

If you decide small caps look more attractive than large caps, you can move some of your assets between the two groups, whereas a large cap fund manager is stuck in large caps, no matter how the group is performing.

Even if you’re an investor who doesn’t want to actively manage your money, don’t be lazy and hand it over to a mutual fund manager who will likely not do as good a job as you or a passive index fund will. Pick some great stocks that you expect to hold for the long term, or buy the funds mentioned in The Gone Fishin’ Portfolio. You’ll save a ton of money in fees and likely do a better job than the fund managers do. It would be hard to do worse.

Marc Lichtenfeld is the Senior Analyst at InvestmentU.com

http://www.investmentu.com/investment-experts/marc-lichtenfeld.html

Warrant poser, cash settlement calculation unfair say some

Monday April 30, 2012

By TEE LIN SAY 

linsay@thestar.com.my

PETALING JAYA: The calculation of cash settlement for call warrants has come under the spotlight as some investors argue that the current method is unfair.

They argue that the calculation of cash settlement for call warrants should not be determined based on the average closing price of the last five days, but instead be based on the volume weighted average price of the last five days.

Currently under Bursa Malaysia's listing requirements, issuers of structured warrants are able to determine for themselves the calculation of cash settlement based on three options:

(i) The volume weighted average price; or

(ii) The average closing price; or

(iii) The closing price of the underlying share or exchange-traded fund on the market day immediately before the exercise or expiry date.

However, most issuers presently use the average closing price as the method to determine cash settlement. Some dealers feel that this may be unfair because if the closing price of the mother share gets depressed on the last five days, then the cash settlement figure drops. “This has happened in a few instances, so it raises the question of whether a more dynamic price determination ought to be considered,” said one dealer.

He cited examples of Malaysia Building Society Bhd's (MBSB) call warrants which expired on April 18 and the DRB-Hicom-CH which expired on April 26.

“For the last five days where the price of the mother share was being used to determine the cash settlement, the price of MBSB's mother share was depressed at the close of four out of the five days,” said the dealer.

MBSB-CA expired at 5pm on April 18. Looking at the intraday charts of MBSB on April 11, 12, 13, 16, and 17, the share prices closed at the low of its day for April 11, 12, 16 and 17. The share prices started dropping towards 4.30pm.

For example on April 17, MBSB opened at RM2.19 and reached an intraday high of RM2.25. By 4.30pm, however, the share price had started dropping and it eventually closed (at 5pm) at RM2.17.

Basically, the higher the mother share, the higher the cash settlement for the warrant holder.

The exercise ratio was 3 MBSB-CA for every one MBSB mother share at an exercise price of RM1.48.

MBSB's closing price of RM2.18 was the average of the closing prices for the shares on each of the five market days immediately before the expiry date.

In the case of DRB-Hicom-CH, it expired on April 26. On the last five days of its closing before expiry, which were April 20, 23, 24, 25 and 26, its share price also dipped lower from the RM2.60-RM2.68 range it was trading in the last three weeks. For those five settlement days, the stock closed at an average price of RM2.45.

While it only closed at its intra-day low on April 23, it did close near to its day's low for the other four days.

A Bursa official said that Bursa's current rules were in line with those of other exchanges such as Singapore Stock Exchange (SGX) and the Hong Kong Stock Exchange (HKEX).

“However, in the discharge of our obligation to ensure a fair and orderly market, Bursa Malaysia has and will continue to review the effectiveness of its rules to ensure they meet their intended objectives,” said the Bursa official.

He added that SGX and HKEX allowed for options (ii) and (iii) .

http://biz.thestar.com.my/news/story.asp?file=/2012/4/30/business/11174530&sec=business