Sunday, 19 April 2015

Seth Klarman: Investors Downplaying Risk “Never Turns Out Well.” Markets don't exist simply to enrich people.

Posted By: Mark Melin

Seth Klarman Baupost Group
Noting that stock markets have risk and are not guaranteed investments may seem like an obvious notation, but against today’s backdrop of never before witnessed manipulated markets Seth Klarman sagely notes “Someday, financial markets will again decline. Someday, rising stock and bond markets will no longer be government policy. Someday, QE will end and money won’t be free. Someday, corporate failure will be permitted. Someday, the economy will turn down again, and someday, somewhere, somehow, investors will lose money and once again come to favor capital preservation over speculation. Someday, interest rates will be higher, bond prices lower, and the prospective return from owning fixed-income instruments will again be roughly commensurate with the risk.”
When will this happen? “Maybe not today or tomorrow, but someday,” he writes, then starts to consider what a collapse might look like.  “When the markets reverse, everything investors thought they knew will be turned upside down and inside out. ‘Buy the dips’ will be replaced with ‘what was I thinking?’ Just when investors become convinced that it can’t get any worse, it will. They will be painfully reminded of why it’s always a good time to be risk-averse, and that the pain of investment loss is considerably more unpleasant than the pleasure from any gain. They will be reminded that it’s easier to buy than to sell, and that in bear markets, all to many investments turn into roach motels: ‘You can get in but you can’t get out.’ Correlations of otherwise uncorrelated investments will temporarily be extremely high. Investors in bear markets are always tested and retested. Anyone who is poorly positioned and ill-prepared will find there’s a long way to fall. Few, if any, will escape unscathed.”

Seth Klarman’s focus on Fed

Seth Klarman then once again turned his sharp rhetorical knife to the academics that run the US Federal Reserve who seem to think that controlling free markets is a matter of communications policy.
“The Fed, in its ongoing attempt to tamp down market volatility as much as possible decided in 2013 that its real problem was communication,” Seth Klarman dryly wrote. “If only it could find a way to communicate to the financial markets the clarity and predictability of policy actions, it could be even more effective in its machinations. No longer would markets react abruptly to Fed pronouncements. Investors and markets would be tamed.”  The Fed has been harshly criticized by professional traders for its lack of understanding of real world market mechanics.
given that the Fed is taking the economy into uncharted territory with unprecedented stimulus.  “As experienced travelers who watch the markets and the Fed with considerable skepticism (and occasional amusement), we can assure you that the Fed’s itinerary is bound to be exceptional, each stop more exciting than the one before,” Seth Klarman wrote, sounding a common theme among professional market watchers. “Weather can suddenly turn foul, the navigation faulty, and the deckhands hard to understand. In short, the Fed captain and crew are proficient in theory but lack real world experience. This is an adventure into unexplored terrain, to parts unknown; the Fed has no map, because no one has ever been here before. Most such journeys end badly.”
While the mainstream media is loaded with flattering articles of the Fed’s brilliance in quantitative easing and its stimulus program, the real beneficiaries of such a policy are the largest banks.  Here Seth Klarman notes they have placed the economy at great risk without achieving much reward.  “Before 2009, the Fed had never bought a single mortgage bond in its nearly 100-year history,” Seth Klarman writes of the key component of the Fed’s policy that took risky assets off the bank’s balance sheets.  “By 2013, the Fed was by far the largest holder of those bonds, holding over $4 trillion and counting. For that hefty sum, GDP was apparently raised as little as 25 basis points in the aggregate. In other words, the policy has been a near-total failure. Bernanke is left arguing that some action was better than none. QE in effect, had become Wall Street’s new ‘too big to fail’ policy.”

Seth Klarman: What do economists know?

There has been considerable discussion that the academic side of the economics profession has little clue how markets really work.  Economic academics, who now make up the majority of the Fed governors, often look at the world from the standpoint of a game of chess, where one can explore different options and there is now a “right” or “wrong” approach to market manipulation.
“The 2013 Nobel Memorial Prize in economics was shared by three academics: two were proponents of the efficient market hypothesis and the third was a behavioral economist, who believes in market inefficiency,” Seth Klarman wrote. “We suppose that could be considered a hedged position for the awards committee, one that would never occur in the hard sciences such as physics and chemistry, where a prize shared among three with divergent views would be an embarrassing mistake or a bad joke. While a Nobel Prize might well be the culmination of a life’s work, shouldn’t the work accurately describe the real world?”
Another interesting insight on the topic was to come from David Rosenberg, Chief Economist and Strategist atGluskinSheff, who recently wondered “[A]m I the only one to find some humour, if not irony, in the fact that the three U.S. economists who won the Nobel Prize for Economics did so because they ‘laid the foundation for the current understanding of asset prices’ at the same time that these asset prices are being determined less today by market-determined forces but rather by the distorting effects of the unprecedented central bank manipulation?”




http://www.businessinsider.my/seth-klarman-warns-of-2007-like-bubble-2014-9/#1o3rHk3Zl6DJzhzi.97

SETH KLARMAN: ‘Investors Have Been Seduced Into Feeling Good’


Sun Valley Seth Klarman
Getty / Scott Olson
Seth Klarman.
The market is making Seth Klarman nervous.
On Wednesday night, Zero Hedge posted an excerpt from Klarman’s latest letter to investors. Klarman said, among other things, that we are marching towards a re-creation of the 2007 market.
Klarman writes:
“It’s not hard to reach the conclusion that so many investors feel good not because things are good but because investors have been seduced into feeling good—otherwise known as ‘the wealth effect.’ We really are far along in re-creating the markets of 2007, which felt great but were deeply unstable when shocks started to pile up.”
And Klarman doesn’t think the Fed is doing enough to keep markets in check.
“Even Janet Yellen sees ‘pockets of increasing risk-taking’ in the markets, yet she has made clear that she won’t raise rates to fight incipient bubbles. For all of our sakes, we really wish she would.”
Klarman also notes that in the current low-rate environment, investors have increased risk taking as the need for greater returns requires greater risk-taking with a shrinking potential payoff:
“The pressure to reach for return virtually ensures that many investors will take greater and greater risk for less and less potential reward at market peaks… A recent brokerage report excitedly touted the new HoldCo PIK Toggle notes of a Croatian consumer goods retailer. Nearly every word of that description is a flashing red light to seasoned investors.” 
On Wednesday, Bill Fleckenstein of Fleckenstein Capital got into a shouting match on CNBC while defending his stand against the Fed’s monetary policy.
And recently we’ve seen noted bears, like Gina Martin Adams and Bob Janjuah turn less-bearish, and Klarman says that, “Investors have clearly grown weary of worrying about risky scenarios that never seem to materialize or, when they do, don’t seem to matter to anyone else.” 
On Wednesday the Fed released its latest monetary policy decision, which indicated little change in the Fed’s language.
On Thursday, the S&P 500 and Dow Jones Industrial Average hit new all-time highs

Read more at http://www.businessinsider.my/seth-klarman-warns-of-2007-like-bubble-2014-9/#oqqrKGY4dYRwVrwi.99

Analyzing One Of Seth Klarman’s Best Quotes. What unsuccessful investors do is exactly what we should avoid..

I was reading Margin of Safety and ran into one of the most shocking quotes I have read in value investing. I have wrote about Seth Klarman(TradesPortfolio) before, and I always highlight his raw comments that are both intelligent and concise. This is the complete quote:

“Unsuccesful investors are dominated by emotion. Rather than responding coolly and rationally to market fluctuations, they respond emotionally with greed and fear. We all know people who act responsibly and deliberately most of the time but go beserk when investing money. It may take them many months, even years, of hard work and disciplined saving to accumulate the money but only a few minutes to invest it. The same people would read several consumer publications and visit numerous stores before purchasing a stereo or a camera yet spend little or no time investigating the stock the just heard about from a friend. Rationality that is applied to the purchase of electronic and photographic equipment is absent when it comes to investing.”



“Many unsuccessful investors regard the stock market as a way to make money without working rather than as a way to invest capital in order to earn a decent return. Anyone would enjoy a quick and easy profit, and the prospect of an effortless gain incites greed in investors. Greed leads many investors to seek shortcuts to investment success. Rather than allowing returns to compound over time, they attempt to turn quick profits by acting on hot tips. They do not stop to consider how the tipster could possibly be in possession of valuable information that is not illegally obtained or why, if it is so valuable, it is being made available to them. Greed also manifests itself as undue optimism or, more subtly, as complacency in the face of bad news. Finally greed can cause investors to shift their focus away from the achievement of long-term investment goals in favor of short-term speculation.”

I loved this quote because as Munger says: Tell me where I am going to die so that I don’t go there. The quote begins by saying what unsuccessful investors do, which is exactly what he would like us to avoid. Overall, we know that the market is going to fluctuate and change, however, not all of us are able to respond in the same way.

The approach that Klarman takes in this quote is similar to Buffett’s, when he provides a daily-life example so that it is clear for us readers. Many times when we shop around, we go online and dig deeply into the characteristics of our potential purchase. Not only that, but we compare across a wide sample of retailers to find the best value for our money. When it comes to investing, however, we become blinded by our greed and fear, causing us to buy (or continue buying) at very high prices, regardless of intrinsic value, or to sell at very low prices, even when we know that we are not getting what we deserve. (Or perhaps that is exactly what we deserve for not applying rationality).

Emotions are part of our nature as human beings, but we are also entitled with the ability to think rationally. While getting a hold of our emotions is difficult, it can be done as shown by many successful value investors such as Klarman, Munger and Buffett. Greed, as Klarman mentions, it reflected in undue optimism, which makes us overpay and dampen our returns, without mentioning putting our capital at risk of permanent loss.

What are your thoughts on this quote?



http://www.gurufocus.com/news/331087/analyzing-one-of-seth-klarmans-best-quotes

Saturday, 18 April 2015

Investing Lessons of Warren Buffett

Warren Buffett is arguably the greatest investor of all time. But more importantly, he’s also one of the best teachers of investing. In his annual reports and countless interviews, he freely offers priceless wisdom that helped him become a billionaire, and that you can use to invest better and reach your financial goals sooner. Here are some of the lessons I’ve learned from him that have helped me achieve more success in investing, business, and life.

1   Stockpicking isn’t a hobby.
Everyone should be an investor. But not everyone should choose their own investments. To be a successful investor requires thousands of hours of deliberate effortful study to master the necessary skills, and then thousands more (or in Buffett’s case, tens of thousands) to use those skills to find worthwhile investments. Buffett read every investing book in his local library, many of them multiple times… by the time he was eleven years old. If you aren’t willing to put in the time and effort that stockpicking requires, the person on the other side of your trades is likely to know more than you, which is a recipe for underperformance. In that case, you’re better off simply buying a low-fee index fund which passively tracks the market, like VFINX, which tries to match the S&P 500. All of the lessons below are relevant for active investing, but many of them also apply to passive investing, so I encourage you to read on regardless of whether you decide to pick stocks yourself or just buy the entire market.

[Extra for experts: market-weighted index mutual funds like VFINX hold more in stocks that have already risen and less in stocks that have already fallen, which reduces returns because stocks that are up tend to slightly underperform those that are down. As an alternative, consider RSP, the equal-weight S&P ETF from Rydex, which has historically outperformed market-weighted S&P index funds by 1-2% per year.]

2  Invest unemotionally.
It’s human nature to be emotional, and life is richer for it. But it reduces investment returns. Many people make systematic errors in their investment thinking, due to their emotions, egos and innate cognitive biases. They suffer from confirmation bias, tending to seek out and find evidence to support their position rather than evidence that might refute it. They think about risk more when things are already going badly and less when prices are already up. They resist admitting mistakes and hold their losers too long. They think about how they’ll spend the money they’re expecting to make from investing, and this can cloud their judgment and encourage excessive risk-taking. They’re overly optimistic and overly confident about their investment abilities, which is dangerous. By contrast, Buffett is a paragon of rationality. His investment decisions are insulated from such emotionality. He has said he’d never give up a good night’s sleep for a chance at a slightly better return. He thinks long term and so he doesn’t panic when the market falls; instead, he sees drops as buying opportunities. To invest better, become a student of human psychology. Learn how emotions lead to cognitive errors, so that you can avoid those errors and benefit when others make them.

3  Ignore modern financial theory.
Buffett says modern financial theory is fundamentally flawed. His consistent long term success is evidence that the efficient market hypothesis is wrong. He says beta is a silly way to measure risk. He thinks diversification is counterproductive for anyone skilled at investment selection. He says financial models oversimplify things, underestimating the frequency of black swans and assuming that what hasn’t happen can’t happen. Markets are more dependent on behavioral science than physical science, but the models don’t adequately factor in human behavior. Investing is part art and part science, and the models don’t capture the artistic side of the process. Buffett says you’re better off ignoring most of modern financial theory.

4  Invest in what you understand.
Buffett stresses the importance of having a circle of competence, a clearly defined industry, business model, asset class, investment style, or other area that you are an expert at, and investing only within that circle. You should continue to learn and thereby expand your circle of competence, but until you do, you shouldn’t invest where you aren’t yet skilled. Buffett has said that an investor needs to do very few things right as long as he or she avoids big mistakes, and staying within your circle of competence is one of them. This is closely related to Buffett’s suggestion of investing only in what you understand. He has three mailboxes on his desk, labelled “In”, “Out”, and “Too Hard”. Every business has factors which are knowable, unknowable, important, and unimportant; he recommends investing in businesses for which the important factors are knowable. He wants understandable businesses because he intends to hold long-term and wants to be able to predict roughly what the business will look like in five or ten years. He puts most technology companies in the too-hard pile. Tech changes so fast that there are only a handful of people in the world with the expertise to tell which will be spectacular successes and which will be spectacular failures. If you aren’t in that elite group, it’s best to look elsewhere. Buffett has said that investing isn’t like Olympic diving, where you get more points for a difficult dive than a simple one. Or to use another sports analogy, he doesn’t try to jump over seven-foot bars, he looks around for one-foot bars he can step over.

5   Stock ownership is business ownership.
When you buy a stock, don’t think of it as a line on a chart that you hope will move up. Think of it as partial ownership in the underlying business. Unlike collectibles or precious metals, stocks have intrinsic value because your ownership gives you a proportional claim on the company’s future earnings, in the form of dividends. If a business does well over time, the stock price eventually follows. Buffett sees himself not as a market analyst, or a macroeconomic analyst, or even a security analyst, but as a business analyst. He likes managers who think like owners, and especially ones who actually are owners. He has said that he’s a better businessman because he’s an investor, and a better investor because he’s a businessman. This leads directly into the next point…

6   Know what a good company looks like.
The list of essential characteristics Buffett looks for in an investment is surprisingly short. He wants a business that’s easy to understand, with a consistent operating history; good long term prospects, possibly due to some durable competitive advantages, or “moats”; a trustworthy, high-quality management team; and solid financials: high margins, high return on equity, and high free cash flow. He does like growth, but less so than investors who are focused on the short term, since it’s the nature of capitalism for growth not to last more than a few years as outsize profits attract fierce competition. When asked what metrics he uses in his investment decisions, his response is that if a computer could do valuation then everyone could do it, and if everyone could do it then the market would be efficient and there would be no bargains. Number geeks want math to provide easy answers, but it doesn’t. Buffett’s style of investing is at least as much art as science.

[Extra for experts: To be precise, rather than free cash flow, Buffett uses what he calls “owner earnings”. This is defined as net income from operations, plus depreciation, depletion, and amortization, minus your best estimate of the average annual capitalized expenditures that the business requires to fully maintain its long-term competitive position and its unit volume. In other words, money the business is generating that doesn’t need to be spent just to avoid falling behind.]

7   Be cheap.
OK, now you know what a good company looks like. But you shouldn’t simply buy every good company you find, because good companies tend to be more expensive. The key to Buffett’s strategy is to find good companies at good prices. Price is what you pay; value is what you get. When value exceeds price, the difference is what Buffett’s mentor Ben Graham called a margin of safety. A large margin of safety enables you to be successful even if your valuation is slightly off or if things play out slightly differently than expected. Early in his career, Buffett preferred good companies at great prices. Later, perhaps because he had too much capital to deploy every year on finding new bargains and he began holding investments much longer, he shifted to preferring great companies at good prices. Both approaches are valid.

8   Be patient.
Above I mentioned the importance of not letting emotions impact your investment decisions. A closely related point is the value of patience. Buffett has said that investing differs from baseball in that there are no called strikes. You can stand at the plate all day and not swing if you don’t see any pitches you like. This can be difficult because the financial system encourages frequent trading, since its revenues grow as transaction volume grows. But great investment opportunities are rare; at most times and for most stocks, the market is pretty good at keeping price roughly in line with value. To resist the temptation to trade in and out of positions, Buffett suggests pretending you can only make twenty trades your whole life. Under this restriction, you’d be much more likely to do detailed research, and only move forward on a trade if you were very confident in it. This would force you to be patient both when buying and while holding. Another dimension of patience relates to time horizon. The right mentality is get rich slow, not get rich fast. Too many investors can’t wait to reach their financial goals, and focus on quarterly performance and keeping up with benchmarks. This encourages them to sell whatever has recently underperformed (at a loss) and buy more of whatever has recently outperformed (after it’s already risen), which usually doesn’t work. Even investment professionals feel short-term pressure, justifiably fearing that one bad quarter or year could cause their clients to pull their assets. It’s dangerous to try to outperform the market in the short term. You don’t need to, and you’re better off not trying. Others feel the need to, and you can use this to your advantage as well.

9   Be loss-averse.
Too many on Wall Street measure performance based solely on return. A better measure is risk-adjusted return. Don’t strive to make every last dollar of potential profit; doing so exposes you to too much risk. Instead, make preservation of capital your top goal. By staying focused on loss avoidance, you’ll naturally gravitate toward investments with more upside potential than downside potential, which will help your returns. And by always looking for a margin of safety, your returns will still be adequate even if events don’t play out quite as expected. It’s not necessary to do extraordinary things to get extraordinary results, it just requires avoiding big mistakes, and letting compounding work its magic over long periods of time. Buffett says it like this: Rule One, do not lose money. Rule Two, see Rule One.

10   Volatility is your friend.
Many investors think volatility is the same thing as risk, but it’s not. Being risk-averse doesn’t mean avoiding volatility. Berkshire Hathaway stock has suffered a quotational loss of 50% or more three times in its history. But remarkably, Buffett has never lost more than 2% of his personal worth on any single position. He achieved this not by diversifying; indeed, he tends to be heavily concentrated, and at one point early in his career, he had 75% of his net worth in Geico. (Kids, don’t try this at home!) He achieved it by buying good companies at good prices, and then buying more shares if prices fell. Don’t fear the market’s gyrations. Volatility is the best friend of the unemotional, patient, debt-free investor. A wildly fluctuating market means that solid businesses will occasionally be available for you to buy at irrationally low prices. Ben Graham said that the market is a voting machine in the short run and a weighing machine in the long run. If you buy good companies at good prices and the prices fall, you can be confident that eventually the market will realize the companies deserve to be priced higher, and in the unlikely event that they don’t, you can wait and collect an ever-growing stream of dividends.

[Extra for experts: To further clarify the difference between risk and volatility… You can have risk without volatility: for example, selling far out of the money options, you’ll have very nice returns until the tail event occurs, and then you’ll get crushed. And you can have volatility without risk: for example, when Kyle Bass bought twenty million nickels, which had a metal value of seven cents each and a floor of (obviously) five cents.]

11   The market is there to serve you, not to inform you.
Ben Graham had a thought experiment that Buffett frequently used. Imagine the stock market as a single person, Mr. Market, who’s willing and able to buy any stock from you or sell any stock to you. Mr. Market is often rational and the prices he sets are often reasonable, but occasionally he gets emotional or irrational and the prices swing wildly in one direction or the other. When he’s rational and offers no great deals, you are free to ignore him. (Hence the importance of patience.) When he’s greedy, you can sell to him at a premium. When he’s fearful, you can buy from him at a discount. Don’t underestimate his intelligence, because he’s usually approximately right, which is why deep research and a solid investment framework are essential. But don’t look to him for guidance about the actual value of things; instead, look to him for opportunities when his prices diverge from underlying value.

12   Think for yourself.
Investment noise is everywhere. Financial news programs are more about speculation than investing, their pundits always ready with a superficial one-minute analysis of whatever stock is in the news that day. Brokerage reports are more about promotion than investing; buy recommendations greatly exceed sell recommendations because buy recommendations generate underwriting business for the brokerages and sell recommendations get them cut out of earnings calls. Wall Street is remarkably innovative. But financial innovation is more about selling than about value creation. If someone is actively trying to sell something to you, you probably shouldn’t buy it. Berkshire Hathaway has not bought an IPO in thirty years; Buffett says it’s exceedingly unlikely that out of all the thousands of stocks on the market, the most attractively priced one will be one being sold by highly knowledgeable insiders who control the timing and price of the sale. Living in Omaha has made it easier for Buffett to ignore the noise; he says that when he lived in New York City he had fifty people whispering in his ear before noon. There are great investment opportunities, but they won’t be featured on CNBC, they won’t be in brokerage reports, and your friend won’t know about them. You’ll need to do your own digging. Optimism and pessimism are both contagious, as are greed and fear, so if you don’t tune out the noise, you’re likely to get swept up in it. In a market bubble, skeptics look like idiots and lemmings look like geniuses, until the bubble bursts. Don’t care if you look like an idiot. Ignore the crowd.

13   Be selectively contrarian.
This is closely related to the prior point. Sometimes it’s best not to merely ignore the crowd, but to see which way they’re going and explore whether it’s worth going the other way. Buffett often buys when the lemmings are selling, and vice versa. It’s hard to buy what’s popular and do well; speculation is most dangerous when it looks easiest, and as Buffett says, the market pays a high price for a cheery consensus. He recommends being fearful when others are greedy, and greedy when others are fearful. The single best-performing mutual fund for the decade of the 2000s was up an average of 18% a year, but the average investor in the fund lost 11%. Incredible, but true. How is this possible? The fund did well, and investors piled in (after it was already up). Then the fund did poorly, and investors stampeded for the exits (after it was already down). So on the balance it’s beneficial to have a contrarian mindset, to buy when others are selling and sell when they’re buying. But don’t be contrarian just to be contrarian. Sometimes the market is right, which is why you need to do your homework. The key is to be both contrarian and correct.

[Extra for experts: A secondary reason for this fund’s underperformance when AUM was high and outperformance when AUM was low is that as with any large fund, when assets balloon, it tends to hurt performance for a variety of reasons: excess cash; style creep; forced diversification; etc. By the way, in case you’re curious, the fund in question is CGM Focus.]

14   Learn from the masters.
Above I suggested tuning out the noise. But if you tune out everything, it will be hard to keep learning, and continued learning is essential to investment success. So find some experts who have a proven record of outstanding risk-adjusted performance in good times and bad, and who openly and honestly share their lessons, and then listen only to them. Buffett is a good place to start, but there are many others. Buffett himself saw the wisdom of this strategy at an early age, and straight out of school he specifically wanted to work for Ben Graham, the one person in the world he thought he could learn the most from. You probably can’t work directly for Buffett, even if you offer to do it for free, as Buffett did to Graham: Berkshire Hathaway is so efficient that although its companies employ over a quarter of a million people, only about two dozen people work in Berkshire headquarters. And you probably can’t get 1-on-1 time with Buffett either; when he auctions off charity lunches they generally cost a couple million dollars. But you can still learn a lot from him, indirectly. This article is just a small fraction of what he has to teach. I recommend starting with his annual reports, which are not just informative, but entertaining as well. And you can learn directly from other great investors. Try to find the next Buffett, and see if he or she is willing to mentor you. This applies not just to investing, but to whatever your career might be. Identify the experts in the field, the ones with the most to teach, the ones you admire most, and start building relationships with them.

15   Avoid taxes.
Like all billionaires, Buffett has always been obsessed with tax efficiency. When he was thirteen he filed his first tax return, claiming a $35 deduction for the bike he used to deliver newspapers. Over the years his assets grew, and the size of potential tax benefits grew, so he became increasingly tax savvy. Know the tax laws and use them to your advantage. Know how an investment will be taxed before you buy it. Avoid highly taxed short-term capital gains, or use short-term losses tactically to offset them. If possible, structure your assets or your business or your career to emphasize capital gains rather than income, which generally has higher tax rates. If you have enough money for it to be worthwhile, get professional tax assistance, because some easily avoidable mistakes are very expensive. Note that I said avoid, not evade. Pay all the taxes you are legally required to, but no more than that.

16   Invest in yourself.
Buffett often speaks to business school students, and when he does he sometimes gives them the following thought experiment. Imagine that you can invest in one of your classmates, and be entitled to 10% of their future earnings. Who would you choose? What are the characteristics that person would possess? He says that most people wouldn’t simply choose the student with the highest IQ. There’s often a big difference between potential and actual. They’d be more likely to choose someone not satisfied with mediocrity, someone who is driven to excel. They would probably also have a lot of other positive characteristics, like generosity, integrity, and sociability. The point of the exercise is to show the students that the skills they’d be looking for aren’t innate for some people and not others, but are skills that anyone cultivate. Everyone has the potential to be the person worth investing in. So consciously choose to develop those positive traits, to realize your full potential, to become the kind of person others would want to invest in. Best of all, when you invest in yourself, you won’t just get 10% of the benefit, you’ll get the full 100%.

17   Do what makes you happy.
Buffett’s lessons extend beyond investing and business. One of his best suggestions is to do what you love. He’s certainly not the first to give this advice, but he definitely practices what he preaches. One of Buffett’s biographies is entitled “Tap Dancing to Work.” Buffett would rather read quarterly earnings reports than chill on the beach or hang out with celebrities. And this is why he’s such a good investor. To invest well requires mastery; to achieve mastery requires tremendous effort; and to be willing to put in the effort requires lifelong passion. He’s living exactly the life he wants to, because investing is his calling. If you don’t love investing, then just dollar cost average into a low-cost index fund and spend as much time as possible on the things in life that you love.


by Thomas Murcko, CEO of BusinessDictionary.com

http://www.businessdictionary.com/article/896/investing-lessons-of-warren-buffett/


Focus on What is Knowable and Important





It is useful to think about the world in terms of a four-quadrant matrix where the horizontal dimension comprises what is knowable and unknowable and the vertical dimension comprises what is important and unimportant.


                             Knowable    Unknownable


Important

Unimportant

It should be obvious that you should not spend any time on what is unknowable and unimportant.

The trick is steering clear of the Unknowable/Important box and the Knowable/Unimportant box.

The trick is to focus on what is important and knowable. For example, it is very important to try to understand where a prospective business investment will be in ten years, even if it cannot be done with precision. It’s equally important to limit the time you invest thinking about investments to those businesses where this is actually possible. You can’t do this very often, but this is what you should be looking for.

Focus on spending your day in this quadrant. This is where meaningful decisions are made. This is where you can gain an edge over those who are unwittingly wasting time on the unknowable and the unimportant.



http://gregspeicher.com/?p=3299


Comment:  Peter Lynch - If you spent 13 seconds contemplating the macroeconomic factors affecting your investment prospect, you would have wasted 10 seconds of your time.  This time is better spent learning more of the company.

Want to invest like Warren Buffett?

It's about quality investing

Ask Buffett, who he thinks is the greatest investor in the world, and he will probably tell you his teacher: Benjamin Graham.

Having studied economics at Columbia Business School, Warren Buffett was taught by Benjamin Graham, and if that was not enough of a head start in his investment career, Buffett was fortunate enough to work with Graham, too. Both are seen as value investors – buying companies that trade less than their intrinsic values.

However, there is a school of thought that sees value as a bit of a misnomer. Clyde Rossouw, manager of the Investec Global Franchise Fund, argues that while Graham is known as the father of value investing, in truth he should probably be known as the father of quality investing, as most of the characteristics he speaks about in terms of the companies he looks for references 'quality' attributes, rather than value.

Value investing by definition involves buying bargains.

However, given the choice between buying a good-quality company rated on a higher price, or a lower-quality company attractively priced, Buffett, like Graham will opt for the former. 
That's because investors are more inclined to pay up for quality companies. In turn this offers potential for the share prices of good-quality companies to recover to (and above) their long-term average earnings multiple.


The "challenge" of too much cash

Besides gearing up for 'Investor Woodstock', what is the Sage of Omaha doing now? Sitting on a lot of cash – according to media reports Berkshire currently has around $25 billion in excess cash.

This 'challenge' of too much cash, some argue, is changing Buffett's investment approach.

Rossouw points to Buffett's investment in Burlington Northern Santa Fe Railroad operator, as an example of the investor trying to shed some of this cash. 'Yes, this investment has a strong 'moat' but it is highly capital intensive – keeping a railway maintained requires you to spend a lot of money consistently over time. It helps Buffett deal with a key problem which is the largess of excess cash generated by his insurance businesses each year.'

Buffett's cash pile could mean many things. 

  • It could be, as some believe, a problem of too much money, and not enough investment opportunities. 
  • It could be a precautionary measure to make sure his company is well positioned to cope in an increasingly uncertain environment. 
  • It could be that Buffett is positioning himself to make another big deal.


Or it could be all of the above. But then we can't know everything about the most glorified and respected investor of our time.


Read more: http://www.thisismoney.co.uk/money/diyinvesting/article-2957271/Four-things-not-know-Warren-Buffett-probably-should.html#ixzz3XeBaAw4y

Being fearfully greedy: Why I buy in bear markets

To conclude, because we don’t know what will happen to prices in the short-term, we can only buy with a long-term goal in mind and hope we’re not hit by some true wealth destroying phenomena like nuclear war or a return to communism.


Greed and fear

Say you’re a young-ish investor like me, with 30 years of earnings ahead, yet already holding a reasonable portfolio.
If you’re fearfully greedy, then when markets are rising – as they did since 2003 – you’re glad your money was invested instead of spent on holidays and TVs.
That’s greed taken care of. (Greed is the easy bit!)
However, you should also be fearful of sudden reversals that rob you as quick as a pickpocket.
In the stock market, money disappears like in Tommy Cooper‘s magic tricks: “Just like that!”
Of course nobody is complacent when markets are consistently falling. Instead, the fear often gets overdone.
Yet if you’re young and well-positioned, you should be glad you’ve got the chance to buy the same shares you were buying last month for 10%, 20%, or even 50% less than before.
You’ll be scared, too. Your new ‘bargain’ shares could halve again in a truly vicious bear market.
The greedy bit is thinking about your future long-term gains. The fearful bit is not over-doing it in the short-term.




http://monevator.com/being-fearfully-greedy-why-i-buy-in-bear-markets/

Seven surprising things you may not know about Warren Buffett

by THE INVESTOR on DECEMBER 4, 2008


Ihave just finished the The Snowball, the first biography Warren Buffett has cooperated with. It’s full of surprises, such as how Buffett had three leading ladies for two decades, and how his 1960s home was an accidental outpost of the counterculture.
But I’m more interested in how Buffett made his money. And while there’s few new facts about Buffett’s deals in The Snowball, the biographical format does put them into context. You get to see what makes him tick.
Here are seven interesting things I learned about Warren Buffettfrom The Snowball, and some ideas on how they can help your investing:

1. Buffett set goals young. (He really started, really young)

Buffet began obsessing over numbers as a child. He raced marbles with a stopwatch and calculated the lifespan of hymn composers when six-years old. He sold chewing gum at seven and Coca Cola when he was eight: the same year he began wearing a money-changer on his belt.
  • His dad was a stockbroker. This gave him an early view of the markets
  • At ten he was chalking stock prices at a local broker’s office
  • The same year he visited the New York Stock Exchange, and was asked for a tip by senior Goldman Sachs partner Sidney Weinberg – an experience he never forgot
  • His favourite childhood book was One Thousand Ways to Make $1,000
  • At 11 he announced he was going to be a millionaire at 35, a seemingly crazy goal in 1941 (when a million really was a million)
  • He filed his first tax return aged 14, having already made $1,000 (equivalent to around $12,500 in today’s money)
The takeaway: The power of compound interest takes years to work its magic. None of us has a time machine, so the main lesson is not to delay a day when investing for the future.

2. Buffett bought his first stock when he was 12-years old

Warren put everything his schemes had earned him into a stock, Cities Service Preferred, when he was 12. He also enrolled his sister, Doris.
Buffet was already learning how to hold shares through a slump
He paid $114.75 dollars for three shares, and watched the stock price fall from $38.25 to $27 a share. His sister Doris was not happy. When Cities Service went back up to $40, he sold. He made $5 a share profit, and got Doris off his back. After he sold, the stock rose to $202 a share.
Takeaway: We all learn the same lessons. Buffett’s business partner Charlie Munger says that because Warren started thinking about odds, stocks, and goals before he was a teenager, he’s years ahead of the rest of us.
I used to watch share prices rise and fall on the Teletext TV service when I was 11 or 12. At the same age Buffett was learning real-world lessons on holding shares through a slump and selling too soon.
You’ll only discover whether you have the stomach to invest through a bear market or whether you’ll be sucked up by the next property bubble by being an active investor. Start with small sums, sure, but don’t delay that start.

3. Buffet lied, shoplifted, and played truant as a kid

This one was a real surprise. As a teenager Buffett revealed a wild streak. He says:
“We’d steal stuff for which we had no use. We’d steal golf bags and golf clubs. I walked out of the lower level where the sporting goods were, up the stairway to the street, carrying a golf bag and golf clubs, and the club was stolen and so were the bags. I stole hundreds of golf balls.
“I made up this crazy story for my parents – I told them I had this friend, and his father had died. He kept finding more of these golf balls that his father had bought. Who knows what my parents talked about at night.”
Takeaway: Even Buffett had to learn to be Buffett. I don’t know about you, but I found this heartening to read. Together with discovering that Buffett was a shy child who enrolled himself in Dale Carnegie’s public speaking course, it made him seem more human.
It’s easy to feel you haven’t got what it takes to make money. Some are born special, you might conclude. But Buffett’s history shows that even the world’s richest and most admired investor had to iron out his kinks.
Buffett’s history also makes me proud to be an outsider. Many of my college classmates entered the city or became management consultants, and have earned six-figure salaries for a decade. When property prices were booming, I’d sometimes wonder if I’d made the wrong decision by deciding to go it alone – even though I know that working a nine-to-five in an office and answering to some buffoon of a manager would kill me.
Discovering Buffett made being his own boss a top priority puts me in good company. I also suspect the unusual structure of Berkshire Hathaway grew out of Buffett’s non-confirming mentality.

4. Buffett is a businessman first, investor second

You’ll often read that Buffett evaluates stocks as if he’s buying the whole business. What I realised after reading The Snowball was Buffett doesn’t do this because he’s an investor who thinks like a businessman. Buffett is a businessman who is also an investor.
  • Buffett ran multiple businesses while still a student: He sold refurbished golf balls, peddled stamps to collectors, ran a network of pinball machines when he was 17, owned a tenanted farm, and managed a 50-strong paperboy route
  • He dealt hands-on with strikes and turf wars at newspapers from The Washington Post to the Omaha Sun
  • Buffett didn’t just buy, hold and drink Coca-Cola – he engineered the replacement of its CEO
  • With all the new businesses, from See’s Candies to GEICO, he added everything from their stock level reports to weekly sales projections to his endless daily reading
  • Berkshire Hathaway is far from a simple holding pen for Buffett’s investments. He’s used his business acumen to produce an intricate money-making machine which takes cash from its subsidiaries and the float from its insurance businesses and reinvests it at higher rates of return, multiplying his returns
Takeway: Buffett’s success will never boil down to filters or ratios. Investors who try to ape him simply by reducing his methods to dubious cashflow projections or buying any old listed household name when its stock price falls 20 per cent will never replicate Buffett’s success. (Okay, rounding down roughly nobody is ever going to replicate Buffett’s success, but you know what I mean).
Buffett’s record suggests investors should spend as much time reading about business and management as they do calculating P/E ratios. The trouble is, all manner of financial ratios are available at a touch of a button. Buffett’s sense of business value is far harder to emulate.

5. Buffet makes mistakes

He really does! I was even more heartened by Buffett’s stinkers than by his golf ball robbery.
Some classic Buffett cock-ups include:
  • Him and his friends spending $25,000 in 1957 on four-cent Blue Eagle stamps that the US government was about to take out of circulation. By securing and controlling the supply, they destroyed any chance of the stamps becoming valuable. His partners in the caper were still mailing him with postage paid for by sheets of the stamps decades later.
  • He bought The Buffalo Evening News in 1977 and had lost $10 million within three years by becoming embroiled in a price war and a fight with the unions (though it later became very profitable)
  • Buffett’s firm Berkshire Hathaway is living testament to his biggest mistake – spending millions to gain control of a doomed textile manufacturer
  • Buying into Salomon Brothers in 1987 for $700 million eventually plunged him neck-deep into the Wall Street culture he so despised, when its rogue traders and poor management threatened his reputation and fortune
Takeaway: Mistakes happen even to the best of us. Sadly, having read The Snowball cover-to-cover I haven’t found a Buffett blunder to rank with my own worst investment (an iffy company called Homebuy that went bust overnight). But I saw plenty of examples where Buffett dusted himself down after an investment misfired and tried to learn from what went wrong.
Virtually all Buffett’s purchases of major insurance companies seem to have gone awry in the early years, for instance, and yet it’s by reinvesting all the cash thrown off by these companies that Buffett has maintained Berkshire Hathaway’s incredible growth rate.
The moral is to not despair when an investment turns out badly, but try to figure out what you can takeaway from it, as well as what you can salvage the situation.

6. Buffett considered quitting investing in his early 30s

In 1969 Buffett wrote to his investors that he was going to close their partnerships:
“I know I don’t want to be totally occupied with outpacing an investment rabbit all my life. The only way to slow down is to stop. I am not attuned to this market environment, and I don’t want to spoil a decent record by trying to play a game I don’t understand just so I can go out a hero.
“I do know that when I am sixty, I should be attempting to achieve different personals goals than those which had priority at twenty.”
Takeaway: What can anyone learn from this but humility? I already knew before reading The Snowball that Buffett wound down his partnerships in 1970 because he thought the market too over-valued to deliver an adequate return for his investors. That move alone would seal Buffett’s place in history among value investors, even if he had retired.
Of course, Buffett didn’t retire. He is still compounding his investments at an average rate of over 20% a year, nearly four decades later.

7. Buffett treats becoming the world’s richest man as a game

I couldn’t even begin to quote examples from The Snowball showing how Warren Buffett is in it for the scorecard, not for the payday: the entire biography is a testament to it.
No sports cars or private islands for Warren Buffett – even when he eventually bought a corporate jet he called it ‘The Indefensible’. For decades he bought suits from the everyman outfitter nearest his office, and his biography frequently mentions (and has photographic evidence of) his favourite threadbare jumper. And famously, his main residence is the first house he bought in 1961.
From setting that goal aged 11 of becoming a millionaire by 35, Buffett seems to treat investing as an intellectual challenge. He probably learned this from his great mentor Benjaman Graham, who seemed more bothered by being right than being rich, and for whom investing was just one of several high-end hobbies.
Buffett’s ‘inner scorecard’ helped him save and reinvest his money early on
Unlike Graham, however, Buffett really cares about every penny. From ‘Buffetting’ a few cents off the price he paid for stocks to demanding his friends sell him shares they’d bought in companies he was interested in, right up to his close personal friendship with his rival for the title of world’s richest man, Bill Gates, Buffett really wants to have the biggest snowball.
If you were to say there’s something rather peculiar about chasing money as a means to an end, I could certainly see your point. But when the recipient chooses to leave virtually all $62 billion of his winnings to charity, it’s hard to complain. I’d rather have Buffett as the world’s richest man than the Salomon traders who almost destroyed his reputation.
Takeaway: Spend less than you earn and reinvest the difference in the stock market. Buffett may have lived a remarkable life, but that central practice is something we can all aspire to.
Beyond that, I don’t want to get too moral. I’m happy to live below my means, but can I honestly say I’d be happy with Cherry Coke and a steak from the local shop if my means were sufficient to buy up The Maldives or launch me into space? Unfortunately I’m not qualified to comment.
I do think my attitude is closer to Buffett’s than to the more visible of the cityboys I’ve seen in London over the past few years, for whom cash is flash. Also, Buffett’s self-containment from materialism – he calls it his ‘inner scorecard’– undoubtedly helped him save and reinvest his money early on, and got his investing career off to a flying start in his 20s. You have to accumulate before you can speculate. Good luck rolling your own snowball.
I can’t recommend The Snowball enough for anyone interested in business and investing. Obviously, anyone interested in Warren Buffett should buy it too, but I imagine you’ve all got two copies already (one for your library and one for your bathroom). The book is seemingly always discounted at Amazon (click through for the latest price at Amazon US or at Amazon UK) so there’s no excuse. Except, perhaps, it weighs a tonne, so you might put your back out while reading it.