My Investing Objective

My investing objective:  
To grow my whole portfolio by 15% per year over many years, that is, doubling the portfolio value every 5 years.











For every 5 stocks, expect 3 to do averagely, 1 to do exceptionally well and 1 to underperform.  Sell the underperformer and keep the winners.  By ensuring that you do not lose or lose small (not big), the modest gains from your stocks will translate into good gains for your overall portfolio.

For every 5 years in the stock market, expect 4 bull years and 1 bear year.  If you can avoid investing in a bubble market, you will often be safe with your carefully chosen and implemented philosophy and strategy.



There are many variables affecting the returns of your investing.

Choose a long term time horizon (>10 years) for your investing.  The reasoning is as below. 



You can see here why stocks are considered a good long-term investment, but a horrible short-term investment. This chart shows that for any 25-year period within 1950-2005, the very worst you would have done was +7.9% annually while the best was +17.2%. However, for a 1-year time horizon, the possible returns vary wildly.

"Invest to increase your wealth"

(68)

Reward-risk Chart

Everyone will fall on different parts of the below reward-risk graph.  

The goal is to get to the fourth quadrant (high reward, low risk; bottom right hand corner). 




Of course the ideal quadrant is the Low Risk, High Reward quadrant. 
Yet many times, investors end up in the High Risk, Low Reward quadrant.




Always understand the risk-reward relationship in your investments and your work.







     

The Ratio of Successful and Unsuccessful Traders

Multiple Streams of Income

QMV approach

QMV approach

Q = Quality of the Business
M = Integrity and Efficiency of the Management
V = Value or Valuation

To reach large sums, you only need to save smaller amounts early on.

For selected good quality growth/value stocks, over a 10 years investing horizon, the upside reward/downside risk 
= 100% upside gains / 0% downside loss.    
   

Investment Life Cycle versus Business Ownership Life Cycle

The three most important words in the books of Benjamin Graham

Yes, these are the three most important words in the books of Benjamin Graham.

If you have to take home a message from his thick books, it is knowing everything about "Margin of Safety".

Better still, tattoo these three words to your body, so that you can be reminded every minute of the day. 

The "Good Investment". Clarify your Investment Goals.

By pinpointing what you think represents value, you can now create your definition of a good investment.   You should be able to summarize it in one sentence.

Consider these examples:

Warren Buffett:  a good business that can be purchased for less than the discounted value of its future earnings.

George Soros:  an investment that can be purchased (or sold) prior to a reflexive shift in market psychology/fundamentals that will change its perceived value substantially.

Benjamin Graham:  a company that can be purchased for substantially less than its intrinsic value.

A few more examples:

The Corporate Raider:  companies whose parts are worth more than the whole.

The Technical Analyst:  an investment where technical indicators have identified a change in the price trend.

The Real Estate Fixer-Upper:  run-down properties that can be sold for much more than the investment required to purchase and renovate them.

The Arbitrageur:  an asset that can be bough low in one market and sold simultaneously in another at a higher price.

The Crisis Investor:  assets that can be bought at fire-sale prices after some panic has hammered a market down.


Coming to your definition of a good investment is easy - if you're clear about the kinds of investments that interest you and have clarified your beliefs about prices and values.

Choose Your Mentor

The fastest way to master anything is to study with a Master of the Art.

If someone has already perfected the method of investing that appeals to you, why reinvent the wheel? Seek him out.  If necessary, offer to work for him for nothing (as Buffett offered to Graham).

If that's not possible you can still adopt your mentor by long distance.  Read and study everything you can about him and his methods.  When you're thinking about making an investment always ask yourself:  "What would he do?"

Spending money is simple - anyone can do it. Making money is not.

Living below your means

Frugality is a natural aspect of Buffett's character.  As his wealth increased, he indulged in minor extravagances.  He bought an executive jet he named The Indefensible.  

But wealth didn't change his natural frugality.  It is easy to see how the consequence of living below your means is important when you're starting out.  It's the only way you can accumulate capital to invest.  What's less obvious is how this mental habit remains crucial to your investment success even after your net worth has soared into the billions.  

Very simply, without this attitude to money you won't keep what you have earned.  Spending money is simple - anyone can do it.  Making money is not.  That;s why living below your means is the attitude that underlies the foundation of the Master Investor's success:  Preservation of Capital.

Is it working? Always measure and monitor your investments.

You can't tell if something is working unless you measure it.

Set a return on investment for your projects to make a contribution, with a deadline.  Monitor the progress towards that at regular (monthly) intervals.

"It worked last time?"

How many of your decisions are based on "It worked last time?"  

Take another look, and you might see that some of those successful outcomes are random, or - even worse - lucky.

Don't panic more than you have to. Look at the return over years rather than days.

Don't panic more than you have to.  Decide measurable standards for what events are a concern, a worry and a big problem, and what you'll do when they happen.

If the value of your pension drops in a stock-market dip, for example, the best advice is often to do nothing, wait for a recovery and look at the return over years rather than days.

Always look at facts and the statistical basis first.

We like to hear good news, so sometimes we trust unreliable sources.  Don't make decisions based on what fits your preconceptions; look at facts and the statistical basis first.

Seek out and stay with the high probability events.

Make sure the majority of your portfolio is geared to offering long-term returns.

When you are investing, by all means look at the daily price shifts for entertainment and mild speculation, but make sure the majority of your portfolio is geared to offering long-term returns.  Over ten or twenty years of conservative investment is far more attractive than a meteoric stock.

Sometimes bad things happen to good people

When you review projects that went wrong, make it a search for the truth - not a search for someone to blame.

The greatest threat to your future financial security

The greatest threat to your future financial security is the loss, over time, in the purchasing power of power currencies.  A dollar today buys less than 5% of what a dollar bought 100 years ago.

Study the fascinating history and theory of money and use this knowledge as a basis in formulating and guiding your investment philosophy.

The world's investment markets are interconnected.

To be a successful investor it wasn't enough to understand a company's market and competitors on its home turf:  you need an appreciation of how foreign companies and economies might affect that company's destiny.

John Templeton 

Why I am interested in stocks?

Stock prices fluctuated wildly while the underlying value of the business was far more stable.  

To be a successful investor you need to have the time to stop and contemplate what's going on.  

MARKET FLUCTUATIONS OF INVESTOR'S PORTFOLIO

Note carefully what Graham is saying here. 

It is not just possible, but probable, that most of the stocks you own will gain at least 50% from their lowest price and lose at least 33% ("equivalent one-third") from their highest price -regardless of which stocks you own or whether the market as a whole goes up or down.

If you can't live with that - or you think your portfolio is somehow magically exempt from it - then you are not yet entitled to call yourself an investor.

Cash is a drag on your portfolio BUT it has a hidden embedded option value.

Cash is a drag on your portfolio, says the conventional wisdom.  Its returns are low and often negative after inflation and taxes.

But cash has a hidden embedded option value.  When markets crash, cash is king.  All of a sudden assets that were being traded at 5 and 10 times the money spent to build them can be had for a fraction of their replacement cost.

Highly leveraged competitors go bankrupt, leaving the field free for the cash-rich company.

Banks won't lend money except to people who don't need it  - such as the companies with AAA credit ratings and people with piles of money in the bank.

In times like these the marketplace is dominated by forced sellers who must turn assets into cash regardless of price.  This is when the investor who has protected his portfolio by being cash-rich is rewarded in spades:  people will literally be beating a path to his door to all but give away what they have in return for just a little bit of that scarce commodity called cash.


Additional note:
Buffett always has cash in Berkshire Hathaway.  In 2008 Global Financial Crisis, many companies approached Buffett as he has plenty of cash which they sought to have badly.

The Complete Investment System

A complete investment system has detailed rules covering these 12 elements:

1. What to buy
2. When to buy it
3. What price to pay
4. How to buy it
5. How much to buy as a percentage of your portfolio
6. Monitoring the progress of your investments
7. When to sell
8. Portfolio structure and the use of leverage
9. Search strategy
10. Protection against systemic shocks such as market crashes
11. Handling mistakes
12. What to do when the system doesn't work

The first test of your system is obviously whether or not it makes you money.  If your system is profitable, you'll be getting a return on your capital.

Buffett and Soros measure their performance against three benchmarks:

1. Have they preserved their capital?
2. Did they make a profit for the year?
3. Did they outperform the stock market as a whole?

The benchmarks you choose will depend on your financial goals.  When you have established your benchmark, you can then measure whether your system is working or not.

Tesco sales growth closer to rivals' levels - Kantar

Tue Aug 14, 2012 8:07am EDT

LONDON, Aug 14 (Reuters) - The rate of sales growth at Tesco
, Britain's biggest retailer, rose closer to the rates
of its rivals in the 12 weeks to Aug. 5, industry data showed on
Tuesday.
    Market researcher Kantar WorldPanel said Tesco's sales
growth accelerated to 3.4 percent in the 12-week period from a
rate of 0.7 percent in similar data from the prior month.
    Sales grew by 6.2 percent at Wal-Mart's Asda,
Britain's No. 2 supermarket chain; by 4.6 percent at J Sainsbury
, the No. 3 player; and by 1.8 percent at Wm Morrison
, the No. 4.
    Kantar said the overall grocery market grew 3.9 percent.
    Tesco's market share was 30.9 percent in the 12 weeks, up
from 30.7 percent reported in the prior month's data and 31.0
percent in the same period last year. 
    "Shoppers might not yet notice it at the tills, but they are
starting to benefit from lower grocery inflation, with prices
now rising at 3.2 percent - the slowest rate for 18 months and a
sign that things are starting to look up," said Kantar retail
analyst Fraser KcKevitt.
    
    Following is a summary of market share and sales. 
                  12 wks to     12 wks to     pct change
                  Aug 5 2012    Aug 7 2011    
                                              
 Total till roll  31,175,890    30,392,490    2.6
 Total grocers    23,797,410    22,909,250    3.9
 Total multiples  23,283,470    22,378,000    4.0
 
    Market share (percent) and change in sales (percent)
                  12 wks to     12 wks to     pct change
                  Aug 5 2012    Aug 7 2011    in sales
 Tesco            30.9          31.0          3.4
 Asda             17.4          17.0          6.2
 Sainsbury        16.5          16.4          4.6
 Morrison         11.7          11.9          1.8
 Co-operative     6.7           7.1           -1.3
 Waitrose         4.5           4.4           7.4
 Aldi             2.9           2.4           26.0
 Lidl             2.8           2.6           11.8
 Iceland          2.0           1.9           7.0

Tesco sales growth closer to rivals' levels - Kantar

How will you protect your portfolio against systemic shocks such as market panics?

The Master Investor has structured his portfolio and investment strategy so that he will survive even the most extreme market conditions.

If the market collapses overnight, will you live to invest another day?  You have to structure your system so that the answer to this question is "Yes!"

The first thing to do is to acknowledge that anything can and will happen in the markets.  Generate several worst-case scenarios in your mind.  Then ask yourself:  if any of these things happened, how would you be affected - and what would you do?

The Master Investor's primary protection is their judicious use of leverage.  Every time the market crashes we hear stories of people who lose their shirt because they were over-leveraged.  The Master Investor simply doesn't get himself into this position.  

See Them Here: What the Wealthy Are Driving

http://finance.yahoo.com/news/what-the-wealthy-are-driving.html
http://www.cnbc.com/id/48613807?slide=11

Your mental focus is: on YOUR INVESTMENT PROCESS

The Master Investor treats investing like a business: he doesn't focus on any single investment but on the overall outcome of the continual application of the same investment system over and over and over again.  He establishes procedures and systems so that he can compound his returns on a long-term basis.  And that's where his mental focus is:  on his investment process.  

Once you're clear what kind of investments you'll be buying, what your specific criteria are, and how you'll minimize risk, you need to establish the rules and procedures you'll follow to gain the Master Investor's long-term focus.


Bottom line:  Focus on your investment process  to compound your returns on a long-term basis

Warren Buffett's favourite pastime

One evening, Buffett and his wife Susan had dinner with friends.  Their hosts had just come back from Egypt.

After dinner, as their friends were setting up the slide projector to show him and Susan their pictures of the Pyramids, Buffett announced:

"I have a better idea.  Why don't you show the slides to Susie and I'll go into your bedroom and read an annual report."

Warren Buffett doesn't just enjoy reading annual reports.  It's his favourite pastime.  

"He just had a hobby that made him money.  That was relaxation to him."

A master investor lives and breathes investing 24 hours a day.

"Whatever you have, spend less." If compound interest isn't working for you, it's working against you.

By keeping what he has, and adding to it by living below his means, the Master Investor lets his money compound indefinitely.  And compound interest plus time is the foundation of every great fortune.  

Wealth is really a state of mind.  In the words of Charlie Munger:  "I had a considerable passion to get rich.  Not because I wanted Ferraris  -- I wanted the independence.  I desperately wanted it."  If you share this attitude, once you have gained that hard-fought independence the last thing you're going to do is jeopardize it by blowing all your money.

The alternative to living below your means is the debt-laden pattern of the middle class:  If compound interest isn't working for you, it's working against you, bleeding your money away just as a spurting artery drains your life-energy.




Additional notes:

Most people want to be rich so they can fly first class, live it up in the Ritz, feast on champagne and caviar, and go shopping at Tiffany's without giving a second though to their credit card bill.

The problem is that people who have this attitude to money don't wait until they're rich before they start indulging their fantasies, even if only on a small scale.  As a result they never accumulate any capital, or even worse go into debt so they can live beyond their means ... and remain poor or middle class.

Buffett can also be hard on himself. Sometimes, too hard.

In 1996, Buffett once again became a shareholder of Disney when it merged with Cap Cities/ABC, of which Berkshire was a major shareholder.  Buffett recalled how he had first become interested in Disney 30 years earlier.  Then,

"....its market valuation was less than $90 million, even though the company had earned around $21 million pre-tax in 1965 and was sitting with more cash than debt.  At Disneyland, the $17 million Pirates of the Caribbean ride would soon open.  Imagine my excitement - a company selling at only five times rides!"

"Duly impressed, Buffett Partnership Ltd. bought a significant amount of Disney stock at a split-adjusted price of 31 cents per share.  That decision may appear brilliant, given that the stock now sells for $66.  But your Chairman was up to the task of nullifying it:  In 1967 I sold out at 48 cents per share."

With 20/20 hindsight, it's easy to see that selling at 48 cents per share was a major blunder.  But in criticising himself for doing so, Buffett overlooks the fact that in 1967 he was still largely following Graham's investment model.  In that model the rule is to sell a stock once it reaches intrinsic value.

Nevertheless, he has clearly taken to heart Philip Fisher's observation that studying "mistakes can be more rewarding than reviewing past successes."

Buffett shows it is better to be overly critical than forgiving of your own mistakes.  As Buffett's partner Charlie Munger puts it:

"It is really useful to be reminded of your errors.  I think we're pretty good at that.  We do kind of mentally rub our own noses in our own mistakes.  And that is a very good mental habit."

Buffett's $2 Billion Mistake

Uniquely, Buffett also considers what could have been when he analyzes his mistakes.

In 1988 he wanted to buy 30 million (split-adjusted) shares in Federal National Mortgage Association (Fannie Mae), which would have cost around $350 million.

"After we bought about 7 million shares, the price began to climb.  In frustration, I stopped buying ...  In an even sillier move, I surrendered to my distaste for holding small positions and sold the 7 million shares we owned."

In October 1993, he told Forbes that "he left $2 billion on the table by selling Fannie Mae too early.  He bought too little and sold too early.  "It was easy to analyze.  It was within my circle of competence.  And for one reason or another, I quit.  I wish I could give you a good answer."

This was a mistake that, he wrote, "thankfully, I did not repeat when Coca-Cola stock rose similarly during our purchase program which began later the same year.

Learn from Your Mistakes

Always treats mistakes as learning experiences.

We're programmed to learn from our mistakes.  But what we learn depends on our reaction.  

A child goes to school, and what does he learn about mistakes there?  In too many schools, he is punished for making mistakes.  So he learns that making mistakes is WRONG; and that if you make mistakes you're a FAILURE.

Having graduated with this carefully ingrained attitude, what's his reaction when, as is inevitable in the real world, he makes a mistake?  Denial and evasion.  Blame his investment advisor for recommending the stock, or the market for going down.  Or justify his action:  "I followed the rules - it wasn't my fault!" just like the kid who screams "You made me do it."  The last thing he's going to do with that kind of education is to be dispassionate about his mistake and learn from it.  So, just as inevitably, he'll do it again.

When a master investor makes a mistake, his reaction is very different.  First, of course, he accepts his mistake and takes immediate action to neutralize its effect.  He can do this because he takes complete responsibility for his actions - and their consequences.

Buffett has no emotional hang-up about admitting his mistakes.  He makes it his policy to be frank and open about them.  According to Buffett, "The CEO who misleads others in public may eventually mislead himself in private."  To Buffett, admitting your mistakes is essential if you are to be honest with yourself.

There is no shame in being wrong, only in falling to correct our mistakes.  Having cleared the decks by getting rid of the offending investment, a master investor is free to analyze what went wrong.  And he always analyzes every mistake.  
-  First, he doesn't want to repeat it, so he has to know what went wrong and why.
-  Second, he knows that by making fewer errors he will strengthen his system and improve his performance.
-  Third, he knows that reality is the best teacher, and mistakes are its most rewarding lessons.




If you wanted to teach someone how to ride a bike, would you give him a book to read?  Or would you give him a few pointers, sit him on a bike, give him a gentle shove and let him keep falling off until he figures it out for himself?

"Can you really explain to a fish what it's like to walk on land?"  Buffett asks, "One day on land is worth a thousand years of talking about it."

"Understanding" versus "Knowledge"

You can put knowledge in a book and sell it.  But not understanding.

To understand is to combine knowledge with experience.  Not someone else's experience: your own.  Experience only comes from doing, not from reading about what someone else did (though that can add to your knowledge).

The meanings of these two statements are clearly different.

Mr. A has a good knowledge of investing.

Mr. A understands investing.

Knowledge usually means a collection of facts - a "persons's range of information," or the "sum of what is known."  But "understanding" implies Mastery - the ability to apply information and get the desired results.

Warren Buffett's favourite book.

It should be no surprise to learn that Warren Buffett's favourite book on his favourite pastime is reading annual reports.

Preservation of Capital is the first aim.

Since preservation of capital is Warren Buffett's first aim, his primary focus is, in fact, on avoiding mistakes and correcting any he makes and only secondarily on seeking profits.  

This doesn't mean he spends most of his day focusing on what mistakes to avoid.  By having carefully defined his circle of competence, he has already taken most possible mistakes out of the equation.  As Buffett says:

"Charlie and I have not learned how to solve difficult business problems.  What we have learned is to avoid them ....  Overall, we've done better by avoiding dragons than by slaying them."

\

A Penny Saved is a Dollar Earned

A penny saved can grow into a dollar through the power of compound interest.

"Go for the jugular"

When the opportunity presents itself, buy enough to make a real difference to your wealth.  Don't buy piddling amounts.  "Go for the jugular."

There are times when the stock markets are selling at a steep discount.  At such times, Buffett says he feels like an oversexed guy in a whorehouse, and his main complaint is that he doesn't have ENOUGH money to buy ALL the bargains he can see.  At other times, when he sees a stock he really likes (like Coke), he'll simply buy as much as he can.

 "Too much of a good thing can be wonderful."  -  Mae West

It is unwise to spread one's funds over too many different securities.

It is unwise to spread one's funds over too many different securities.  Time and energy are required to keep abreast of the forces that may change the value of a security.  While one can know all there is to know about a few issues, one cannot possibly know all one needs to know about a great many issues.  

Diversification - or concentration - of an investment portfolio directly correlates with the amount of time and energy put into making the selections.  The more diversification, the less time for each decision.  

"Diversification is a protection against ignorance.  It makes very little sense for those who know what they're doing."  -   Warren Buffett

Diversification and fear of risk

Fear of risk is a legitimate fear - it is the fear of losing money.

Master investors don't fear risk, because they passionately and actively avoid it.  Fear results from uncertainty about the outcome, and a master investor only makes an investment when he has strong reasons to believe he'll achieve the result he wants.

Those who follow the conventional advice to diversify simply don't understand the nature of risk, and they don't believe it is possible to avoid risk AND make money at the same time.  

While diversification is certainly a method for minimizing risk, it has one unfortunate side-effect: it also minimizes profit.