Philip Fisher and Walter Schloss

A Dozen Things I’ve Learned from Philip Fisher and Walter Schloss About Investing

1. “I had made what I believe was one of the more valuable decisions of my business life. This was to confine all efforts solely to making major gains in the long-run…. There are two fundamental approaches to  investment.  There’s the approach Ben Graham pioneered, which is to find  something intrinsically so cheap that there is little chance of it having a big  decline. He’s got financial safeguards to that. It isn’t going to go down much,  and sooner or later value will come into it.  Then there is my approach, which is to find  something so good–if you don’t pay too much for it–that it will have very,  very large growth. The advantage is that a bigger percentage of my stocks is apt  to perform in a smaller period of time–although it has taken several years for  some of these to even start, and you’re bound to make some mistakes at it. [But]  when a stock is really unusual, it makes the bulk of its moves in a relatively  short period of time.”  Phil Fisher understood (1) trying to predict the direction  of a market or stock in the short-term is not a game where one can have an advantage versus the house (especially after fees); and (2) his approach was different from Ben Graham.

2. “I don’t want a lot of good investments; I want a few outstanding ones…. I believe that the greatest long-range investment profits are never obtained by investing in marginal companies.”  Warren Buffett once said: “I’m 15%  Fisher and 85% Benjamin Graham.”  Warren Buffett is much more like Fisher in 2013 than the 15% he once specified, but only he knows how much. It was the influence of Charlie Munger which moved Buffet away from a Benjamin Graham approach and their investment in See’s Candy  was an early example in which Berkshire paid up for a “quality” company.  Part of the reason this shift happened is that the sorts of companies that Benjamin Graham liked no longer existed the further way the time period was from the depression.

3. “The wise investor can profit if he can think independently of the crowd and reach the rich answer when the majority of financial opinion is leaning the other way. This matter of training oneself not to go with the crowd but to  be able to zig when the crowd zags, in my opinion, is one of the most important fundamentals of investment success.” The inevitable math is that you can’t beat the crowd if you are the crowd, especially after fees are deducted.

4. “Usually a very long list of securities is not a sign of the brilliant investor, but of one who is unsure of himself. … Investors have been so oversold on diversification that fear of having too many eggs in one basket has caused  them to put far too little into companies they thoroughly know and far too much in others which they know nothing about.” For the “know-something” active investor like Phil Fisher, wide diversification is a form of closet indexing.  A “know-something”  active investor must focus on a relatively small number of stocks if he or she expects to outperform a market.  By contrast, “know-nothing” investors (i.e., muppets) should buy a low fee index fund.

5. “If the job has been correctly done when a common stock is purchased, the time to sell it is almost never.” Phil Fisher preferred a holding period of almost forever (e.g., Fisher bought Motorola in 1955 and held it until 2004). The word “almost” is important since every company is in danger of losing its moat.

6. “Great stocks are extremely hard to find. If they weren’t, then everyone would own them.  The record is crystal clear that fortune – producing growth stocks can be found. However, they cannot be found without hard work and they  cannot be found every day.” Fisher believed that the “fat pitch” investment opportunity is delivered rarely and only to those investors who are willing to patiently work to find them.

7. “Focus on buying these companies when they are out of favor, that is when, either because of general market conditions or because the financial community at the moment has misconceptions of its true worth, the stock is selling  at prices well under what it will be when it’s true merit is better understood.” Like Howard Marks, Fisher believed that (1) business cycles and (2) changes in Mr. Market’s attitude are inevitable.  By focusing on the value of individual stocks (rather than just price) the  investor can best profit from these inevitable swings.

8. “The successful investor is usually an individual who is inherently interested in business problems.” A stock is a part ownership of a business. If you do not understand the business you do not understand that stock.  If you  do not understand the business you are investing in you are a speculator, not an investor.

9. “The stock market is filled with individuals who know the price of everything, but the value of nothing.” Price is what you pay and value is what you get.  By focusing on value Fisher was able to outperform as an investor even  though he did not look for cigar butts.

10. “It is not the profit margins of the past but those of the future that are basically important to the investor.” Too often people believe that the best prediction about the future is that it is an extension of the recent past.

11. “There is a complicating factor that makes the handling of investment mistakes more difficult. This is the ego in each of us. None of us likes to admit to himself that he has been wrong. If we have made a mistake in buying a stock  but can sell the stock at a small profit, we have somehow lost any sense of having been foolish. On the other hand, if we sell at a small loss we are quite unhappy about the whole matter. This reaction, while completely natural and normal, is probably one  of the most dangerous in which we can indulge ourselves in the entire investment process. More money has probably been lost by investors holding a stock they really did not want until they could ‘at least come out even’ than from any other single reason. If  to these actual losses are added the profits that might have been made through the proper reinvestment of these funds if such reinvestment had been made when the mistake was first realized, the cost of self-indulgence becomes truly tremendous.”  Fisher  was very aware of the problems that loss aversion bias can cause.

12. “Conservative investors sleep well.”  If you are having trouble sleeping due to worrying about your portfolio, reducing risk is wise. Life is too short to not sleep well, but also fear can result in mistakes.

Walter Schloss

1. “I think investing is an art, and we tried to be as logical and unemotional as possible. Because we understood that investors are usually affected by the market, we could take advantage of the market by being rational. As [Benjamin]  Graham said, ‘The market is there to serve you, not to guide you!’.”  Walter Schloss was the closest possible match to the investing style of Benjamin Graham.  No one else more closely followed the “cigar butt” style of investing of Benjamin Graham.  In  other words, if being like Benjamin Graham was a game of golf, Walter Schloss was “closest to the pin.”  He was a man of his times and those times included the depression which had a profound impact on him.  While his exact style of investing is not possible  today, today’s investor’s still can learn from Walter Schloss.  It is by combining the best of investors like Phil Fisher and Walter Schloss and matching it to their unique skills and personality that investors will find the best results.  Warren  Buffet once wrote in a letter:  “Walter outperforms managers who work in temples filled with paintings, staff and computers… by rummaging among the cigar butts on the floor of capitalism.”   When Walter’s son told him no such cigar butt companies existed any  longer Walter told his son it was time to close the firm.  The other focus of Walter Schloos was low fees and costs. When it came to keeping overhead and investing expenses low, Walter Schloss was a zealot.

2. “I try to establish the value of the company.  Remember that a share of stock represents a part of a business and is not just a piece of paper. … Price is the most important factor to use in relation to value…. I believe stocks  should be evaluated based on intrinsic worth, NOT on whether they are under or over priced in relationship with each other…. The key to the purchase of an undervalued stock is its price COMPARED to its intrinsic worth.”

3.”I like Ben’s analogy that one should buy stocks the way you buy groceries not the way you buy perfume… keep it simple and try not to use higher mathematics in you analysis.”Keeping emotion out of the picture was a key part of  the Schloss style. Like Ben Graham he as first and foremost rational.

4. “If a stock is cheap, I start buying. I never put a stop loss on my holdings because if I like a stock in the first place, I like it more if it goes down. Somehow I find it difficult to buy a stock that has gone up.” 

5. “I don’t like stress and prefer to avoid it, I never focus too much on market news and economic data. They always worry investors!” Like all great investors in this series, the focus of Schloss was on individual companies not  the macro economy.  Simpler systems are orders of magnitude easier to understand for an investor.

6. “The key to successful investing is to relate value to price today.” Not only did Schloss not try to forecast the macro market, he did not really focus forecasting the future prospects of the company.  This was very different  than the Phil Fisher approach which was focused on future earnings.

7. “I like the idea of owning a number of stocks. Warren Buffet is happy owning a few stocks, and he is right if he is Warren….” Schloss was a value investor who also practiced diversification.  Because of his focus on obscure  companies and the period in which he was investing, Walter was able to avoid closet indexing.

8. “We don’t own stocks that we’d never sell.  I guess we are a kind of store that buys goods for inventory (stocks) and we’d like to sell them at a profit within 4 years if possible.”  This is very different from a Phil Fisher  approach where his favorite holding period is almost forever. Schloss once said in a Colombia Business school talk that he owned “some 60-75 stocks”.

9.  “Remember the word compounding.  For example, if you can make 12% a year and reinvest the money back, you will double your money in 6 years, taxes excluded.  Remember the rule of 72.  Your rate of return into 72 will tell you  the number of years to double your money.” Schloss felt that “compounding could offset [any advantage created by] the fellow who was running around visiting managements.”

10.  “The ability to think clearly in the investment field without the emotions that are attached to it is not an easy undertaking. Fear and greed tend to affect one’s judgment.” Schloss was very self-aware and matched his investment  style to his personality. He said once” We try to do what is comfortable for us.”

11. “Don’t buy on tips or for a quick move.”

12.  “In thinking about how one should invest, it is important to look at you strengths and weaknesses. …I’m not very good at judging people. So I found that it was much better to look at the figures rather than people.” Schloss knew  that Warren Buffett was a better judge of people than he was so Walter’s approach was almost completely quantitative.  Schloss knew to stay within his “circle of competence”.  Schloss said once: “Ben Graham didn’t visit management because he thought figure told  the story.”

http://25iq.com/2013/10/27/a-dozen-things-ive-learned-from-philip-fisher-and-walter-schloss-about-investing/

Common Stocks and Uncommon Profits by Philip Fisher (Summary)

Common Stocks and Uncommon Profits 
by Philip Fisher 
 
INTRODUCTION
By Kenneth L. Fisher (Philip Fisher’s Son)
Ken Fisher credits his father for teaching him the "craft" of investing. He writes that, "It’s the difference between learning to play the piano (craft) and then composing (art)." Indeed Ken’s own investment practice—his art— deviates from his father’s preference for growth stocks; Ken prefers value-oriented investments. But the process Ken uses to arrive upon investment decisions is largely based on his father’s tenets of "scuttlebutt" and "the fifteen points." As the son now runs a large investment management company he uses these principles en mass. He also believes his father’s ideas about undue diversification, in particular, influenced Buffett. 
Phil Fisher went to Stanford and started work as a security analyst in San Francisco in 1928. He formed his own firm, Fisher & Co., in 1931. After some years in the game he decided to write this book, "In studying the investment record of both myself and others, two matters were significant influences in causing this book to be written. One, which I mention several times elsewhere, is the need for patience if big profits are to be made from investment. Put another way, it is often easier to tell what will happen to the price of a stock than how much time will elapse before it happens. The other is the inherently deceptive nature of the stock market. Doing what everybody else is doing at the moment, and therefore what you have an almost irresistible urge to do, is often the wrong thing to do at all."   


1:  CLUES FROM THE PAST
Fisher summarizes his conclusions from the past in the following paragraph, "Such a study indicates that the greatest investment reward comes to those who by good luck or good sense find the occasional company that over the years can grow in sales and profits far more than industry as a whole. It further shows that when we believe we have found such a company we had better stick with it for a long period of time. It gives us a strong hint that such companies need not necessarily be young and small. Instead, regardless of size, what really counts is a management having both a determination to attain further important growth and an ability to bring its plans to completion…It makes clear to us that a general characteristic of such companies is a management that does not let its preoccupation with long-range planning prevent it from exerting constant vigilance in performing the day-to-day tasks of ordinary business outstandingly well."


2:  WHAT SCUTTLEBUTT CAN DO
Merriam-Webster defines "scuttlebutt" as:
1, a : a cask on shipboard to contain freshwater for a day's use, b : a drinking fountain on a ship or at a naval or marine installation 
2 : RUMOR, GOSSIP
Fisher makes use of definition 2 here in the second chapter. "It is amazing what an accurate picture of the relative points of strength and weakness of each company in an industry can be obtained from a representative cross-section of the opinions of those who in one way or another are concerned with any particular company." Though he writes only three pages about scuttlebutt here, Fisher assures us the concept will be discussed in great detail all throughout the book.   


3:  WHAT TO BUY, THE FIFTEEN POINTS…
Below you will find "The Fifteen points to look for in a common stock," Fisher’s famous checklist for the inquiring investor.
1. Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?
2. Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?
3. How effective are the company’s research and development efforts in relation to its size?
4. Does the company have an above average sales organization?
5. Does the company have a worthwhile profit margin?
6. What is the company doing to maintain or improve profit margins?
7. Does the company have outstanding labor and personnel relations?
8. Does the company have outstanding executive relations?
9. Does the company have depth to its management?
10. How good are the company’s cost analysis and accounting methods?
11. Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition?
12. Does the company have a short-range or long-range outlook in regards to profits?
13. In the foreseeable future will the growth of the company require sufficient equity financing so that the large number of shares then outstanding will largely cancel the existing benefit from this anticipated growth?
14. Does the management talk freely to investors about its affairs when things are going well but "clam up" when troubles and disappointments occur?
15. Does the company have a management of unquestionable integrity?   


4:  APPLYING THIS TO YOUR OWN NEEDS
"The typical investor has usually gathered a good deal of the half-truths, misconceptions, and just plain bunk that the general public has gradually accumulated about successful investing." Fisher posits that the average investor believes only a bookish genius is capable of superior returns. He doesn’t agree with this mean mentality. "The most skilled statistical bargain hunter ends up with a profit which is but a small part of the profit attained by those using reasonable intelligence in appraising the business characteristics of superbly managed growth companies," he further expounds upon his view of apparent expertise, "Even among some of the so-called authorities on investment, there is still enough lack of agreement on the basic principles involved that it is as yet impossible to have schools for training investment experts…"


5:  WHEN TO BUY
Contrary to Buffett, Fisher is looking for companies that "will have spectacular growth in their per-share earnings." (Buffett is primarily concerned with consistent and handsome returns on equity.) Buffett and Fisher do agree on the worthlessness of macroeconomic forecasting. Fisher writes, "The conventional method of timing when to buy stocks is, I believe, just as silly as it appears on the surface to be sensible. This method is to marshal a vast mass of economic data…I believe that the economics which deal with the forecasting business trends may be considered to be about as far along as was the science of chemistry during the days of alchemy in the Middle Ages." Fisher prefers to buy into outstanding companies when their earnings are temporarily depressed, and so consequently is the share price, because of a new product or process launch. "In contrast to guessing which way general business or the stock market may go, he should be able to judge with only a small probability of error what the company into which he wants to buy is going to do in relation to business in general."


6:  WHEN TO SELL
Fisher is very precise about when to sell. "I believe there are three reasons, and three reasons only, for the sale of any common stock which has been originally selected according to the investment principles already discussed." They are: 
1.) Upon realizing a mistake, 
2.) When a stock no longer meets the 15 points, and
3.) If a substantially attractive investment arises and stock needs to be sold to finance that investment.
Interestingly, Buffett’s commonly told parable about investing in your classmates seems to have originated out of this chapter. Both describe a hypothetical scenario of buying a percentage of the future earnings of a classmate. The point being that we should rationally select people on the basis of their character rather than purely on their intellect. Fisher notes how foolish it would be to sell your lucrative future contract on classmate’s earnings for the sake of buying another, less proven, classmate’s earnings, simply because somebody offered to buy your original classmate investment at a high price.   


7:  THE HULLABALOO ABOUT DIVIDENDS
Fisher warns us to be wary of two scenarios when earnings are retained and no dividends are paid. 
The first is when executives pile up liquid assets for a sense of security. 
The second occurs when "substandard managements can get only a subnormal return on the capital already in the business, yet use the retained earnings merely to enlarge the inefficient operation rather than to make it better."
Fisher posits that "regularity or dependability" is the most important characteristic of dividends. He illustrates his claim using the restaurant parable that Buffett so often cites. "There is perhaps a close parallel between setting policy in regard to dividends and setting policy on opening a restaurant. A good restaurant man might build up a splendid business with a high priced venture. He might also build up a splendid business with an attractive place selling the best possible meals at the lowest possible prices. Or he could make a success of Hungarian, Chinese, or Italian cuisine. Each would attract a following. People would come there expecting a certain kind of meal. However, with all his skill, he could not possibly build up a clientele if one day he served the costliest meals, the next day low-priced ones, and then without warning served nothing but exotic dishes. The corporation that keeps shifting its dividend policies becomes as unsuccessful in attracting a permanent shareholder following. Its shares do not make the best long-range investments."   


8:  FIVE DON’TS FOR INVESTORS
"1. Don’t buy into promotional companies." 
"When a company is in a promotional stage…all an investor or anyone else can do is look at a blueprint and guess what the problems and strong points may be." 
"There are enough spectacular opportunities among established companies that ordinary individual investors should make it a rule never to buy into a promotional enterprise." 
Fisher wants to see a firm with at least one year of operational profit and two to the three years of business before investing.
"2. Don’t ignore a good stock just because it is traded ‘over the counter.’" 
"3. Don’t buy a stock just because you like the ‘tone’ of its annual report." 
"The annual report may…reflect little more than the skill of the company’s public relations department in creating an impression about the company in the public mind." 
"4. Don’t assume that the high price at which a stock may be selling in relation to earnings is necessarily an indication that further growth in those earnings has largely been discounted already in the price." 
"…why shouldn’t this stock sell five years from now for twice the price-earnings ratio of these more ordinary stocks just as it is doing now and has done for many years past?" 
"5. Don’t quibble over eights and quarters." 
"If the stock seems the right one and the price seems reasonably attractive at current levels, buy ‘at the market.’"   


9:  FIVE MORE DON’TS FOR INVESTORS
Given the recent terror and talk of war, we will focus on point two in this chapter.
"2. Don’t be afraid of buying on a war scare." 
"At the conclusion of all actual fighting—regardless of whether it was World War I, World War II, or Korea—most stocks were selling at levels vastly higher than prevailed before there was any thought of war at all. Furthermore, at least ten times in the last twenty-two years, news has come of other international crises which gave threat of major war. In every instance, stocks dipped sharply on the fear of war and rebounded sharply as the war scare subsided." 
"War is always bearish on money. To sell a stock at the threatened or actual outbreak of hostilities so as to get into cash is extreme financial lunacy. Actually just the opposite should be done. If an investor has about decided to buy a particular common stock and the arrival of a full-blown war scare starts knocking down the price, he should ignore the scare psychology of the moment and definitely begin buying." 
The other four points… 
1. Don’t overstress diversification. 
3. Don’t forget your Gilbert and Sullivan. 
4. Don’t fail to consider time as well as price in buying a true growth stock. 
5. Don’t follow the crowd.   


10:  HOW I GO ABOUT FINDING A GROWTH STOCK
"Possibly one-fifth of my first investigations start from ideas gleaned from friends in industry and four-fifths from culling what I believe are the more attractive selections of a small number of able investment men. These decisions are frankly a fast snap judgment on which companies I should spend my time investigating and which I should ignore. Then after a brief scrutiny of a few key points in an SEC prospectus, I will seek ‘scuttlebutt’ aggressively, constantly working toward how close to our fifteen-point standard the company comes. I will discard one respective investment after another along the way. Some because the evidence piles up that they are just run of the mill. Others because I cannot get enough evidence to be reasonably sure one way or the other. Only in the occasional case when I have a great amount of favorable data do I then go to the final step of contacting the management. Then if after meeting with management I find my prior hopes pretty well confirmed and some of my previous fears eased by answers that to me make sense, at last I am ready to feel I may be rewarded for all my efforts."
Fisher also notes that he’ll invest in one stock out of two hundred fifty that he initially considers. For every two to two and a half visits he’ll buy into the company—this points to the fact that most of his work is done beforehand.   


11:  SUMMARY AND CONCLUSION
Chapter eleven concludes the first part of Fisher’s book; it and the chapters leading to it comprise a book within a book. "This book has attempted to show what these basic principles are, what type of stock to buy, when to buy it, and most particularly, never to sell it—as long as the company behind the common stock maintains the characteristics of an unusually successful enterprise."



Here are the points, abbreviated, Fisher gives as his conclusion:
1. Buy into companies that have disciplined plans for achieving dramatic long-range growth in profits and that have inherent qualities making it difficult for newcomers to share in that growth.
2. Focus on buying these companies when they are out of favor.
3. Hold the stock until either (a) there has been a fundamental change in its nature (such as a weakening of management through changed personal), or (b) it has grown to a point where it no longer will be growing faster than the economy as a whole.
4. For those primarily seeking major appreciation of their capital, de-emphasize the importance of dividends.
5. Taking small profits in good investments and letting losses grow in bad ones is a sign of abominable investment judgment. A profit should never be taken just for the satisfaction of taking it.
6. There are a relatively small number of truly outstanding companies. Their shares frequently can’t be bought at attractive prices. Therefore, when favorable prices exist, full advantage should be taken of the situation.
7. A basic ingredient of outstanding common stock management is the ability to neither accept blindly whatever may be the dominant opinion in the financial community at the moment nor to reject the prevailing view just to be contrary for the sake of being contrary.
8. In handling common stocks, as in most other fields of human activity, success depends greatly on a combination of hard work, intelligence, and honesty.

The 15 points of Philip Fisher in picking Common Stocks

The Fifteen Points to Look for in a Common Stock

1. Does the company have products or services with sufficient market potential to make possible a sizeable increase in sales for at least several years?
2. Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?
3. How effective are the company's research and development efforts in relation to its size?
4. Does the company have an above-average sales organization?
5. Does the company have worthwhile profit margin?
6. What is the company doing to maintain or improve profit margins?
7. Does the company have outstanding labor and personnel relations?
8. Does the company have outstanding executive relations?
9. Does the company have depth to its management?
10. How good are the company's cost analysis and accounting controls?
11. Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition?
12. Does the company have a short-range or long-range outlook in regard to profits?
13. In the foreseeable future will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholders' benefit from this anticipated growth?
14. Does the management talk freely to investors about its affairs when things are going well but "clam up" when troubles and disappointments occur?
15. Does the company have a management of unquestionable integrity?
    
    
    
    
    
    
    Ref:  Common Stocks and Uncommon Profits by Philip Fisher
    
    
    
    
    http://www.valueinvestingstock.com/#!A-Legendary-Investor-To-Learn-From/cour/569909000cf2e94e3fb94388

Year 2008 - Buffett Calls The Market Again...And He's Never Been Wrong

Henry Blodget

Dec. 4, 2008

Follow Business Insider:

Warren Buffett recently wrote an editorial in the New York Times explaining why he was starting to buy stocks. The bottom line?

If you wait for the robins, spring will be over.

But who is Buffett, anyway? How do we know he isn't one of these jokers who is never in doubt and usually wrong?

Fund manager Whitney Tilson of the Tilson Fundsrecently addressed this issue. We've done some cutting and pasting, but mostly we'll let Whitney and Warren take it away:

Whitney Tilson: Starting in 1974, Buffett has written four articles in which he's expressed a strong opinion about the market -- he was bullish in 1974, 1979 and 2008, and was bearish in 1999.  I've posted all four articles here [pdf]. Note that he'snever once been wrong -- important to consider when reading his recent NY Times article [in which Buffett announced that he was starting to buy stocks]. 

We've added some of these article excerpts at the bottom of this post. We've also added a scrollable slide presentation below.  To make it easier to read, click the "full screen" button in the bottom right-hand corner of the player (then click "ESC" to return to your screen).  If you're only going to read one of the articles, read the third one--the one Buffett wrote for Fortune in 1999. It's the best short synopsis of markets and investing we've ever read.  Enjoy!

Warren Buffett Makes 4 Market Calls

View SlideShare document or Upload your own.

---

Excerpt of Forbes article on Buffett, 1974:

What good, though, is a bargain if the market never recognizes it as a bargain? What if the stock market never comes back? Buffett replies: “When I worked for Graham-Newman, I asked Ben Graham, who then was my boss, about that. He just shrugged and replied that the market always eventually does. He was right--in the short run, it’s a voting machine; in the long run, it’s a weighing machine. Today on Wall Street they say, ‘Yes, it’s cheap, but it’s not going to go up.’ That’s silly. People have been successful investors because they’ve stuck with successful companies. Sooner or later the market mirrors the business.” Such classic advice is likely to remain sound in the future when they write musical comedies about the go-go boys.

    We reminded Buffett of the old play on the Kipling lines: “If you can keep your head when all about you are losing theirs … maybe they know something you don’t.”

    Buffett responded that, yes, he was well aware that the world is in a mess. “What the DeBeers did with diamonds, the Arabs are doing with oil; the trouble is we need oil more than diamonds.” And there is the population explosion, resource scarcity, nuclear proliferation. But, he went on, you can’t invest in the anticipation of calamity; gold coins and art collections can’t protect you against Doomsday. If the world really is burning up, “you might as well be like Nero and say, ‘It’s only burning on the south side.’”

    “Look, I can’t construct a disaster-proof portfolio. But if you’re only worried about corporate profits, panic or depression, these things don’t bother me at these prices.

Buffett’s final word: “Now is the time to invest and get rich.

---

Excerpt of Forbes article BY Buffett in 1979:

---

Excerpt of Fortune article by Buffett in 1999. This is one of the single best short synopses of the stock market and investing we have ever read.

Mr. Buffett on the Stock Market
Fortune, 11/22/99

Investors in stocks these days are expecting far too much, and I’m going to explain why. That will inevitably set me to talking about the general stock market, a subject I’m usually unwilling to discuss. But I want to make one thing clear going in: Though I will be talking about the level of the market, I will not be predicting its next moves. At Berkshire we focus almost exclusively on the valuations of individual companies, looking only to a very limited extent at the valuation of the overall market. Even then, valuing the market has nothing to do with where it’s going to go next week or next month or next year, a line of thought we never get into. The fact is that markets behave in ways, sometimes for a very long stretch, that are not linked to value. Sooner or later, though, value counts. So what I am going to be saying--assuming it’s correct--will have implications for the long-term results to be realized by American stockholders.

Let’s start by defining “investing.” The definition is simple but often forgotten: Investing is laying out money now to get more money back in the future--more money in real terms, after taking inflation into account.

Now, to get some historical perspective, let’s look back at the 34 years before this one--and here we are going to see an almost Biblical kind of symmetry, in the sense of lean years and fat years--to observe what happened in the stock market. Take, to begin with, the first 17 years of the period, from the end of 1964 through 1981. Here’s what took place in that interval:

Dow Jones Industrial Average
Dec. 31, 1964: 874.12
Dec. 31, 1981: 875.00

Now I’m known as a long-term investor and a patient guy, but that is not my idea of a big move.

And here’s a major and very opposite fact: During that same 17 years, the GDP of the U.S.--that is, the business being done in this country--almost quintupled, rising by 370%. Or, if we look at another measure, the sales of the FORTUNE 500 (a changing mix of companies, of course) more than sextupled. And yet the Dow went exactly nowhere.

To understand why that happened, we need first to look at one of the two important variables that affect investment results: interest rates. These act on financial valuations the way gravity acts on matter: The higher the rate, the greater the downward pull. That’s because the rates of return that investors need from any kind of investment are directly tied to the risk-free rate that they can earn from government securities. So if the government rate rises, the prices of all other investments must adjust downward, to a level that brings their expected rates of return into line. Conversely, if government interest rates fall, the move pushes the prices of all other investments upward. The basic proposition is this: What an investor should pay today for a dollar to be received tomorrow can only be determined by first looking at the risk-free interest rate.

Consequently, every time the risk-free rate moves by one basis point--by 0.01%--the value of every investment in the country changes. People can see this easily in the case of bonds, whose value is normally affected only by interest rates. In the case of equities or real estate or farms or whatever, other very important variables are almost always at work, and that means the effect of interest rate changes is usually obscured. Nonetheless, the effect--like the invisible pull of gravity--is constantly there. 

In the 1964-81 period, there was a tremendous increase in the rates on long-term government bonds, which moved from just over 4% at year-end 1964 to more than 15% by late 1981. That rise in rates had a huge depressing effect on the value of all investments, but the one we noticed, of course, was the price of equities. So there--in that tripling of the gravitational pull of interest rates--lies the major explanation of why tremendous growth in the economy was accompanied by a stock market going nowhere.

Then, in the early 1980s, the situation reversed itself. You will remember Paul Volcker coming in as chairman of the Fed and remember also how unpopular he was. But the heroic things he did--his taking a two-by-four to the economy and breaking the back of inflation--caused the interest rate trend to reverse, with some rather spectacular results. Let’s say you put $1 million into the 14% 30-year U.S. bond issued Nov. 16, 1981, and reinvested the coupons. That is, every time you got an interest payment, you used it to buy more of that same bond. At the end of 1998, with long-term governments by then selling at 5%, you would have had $8,181,219 and would have earned an annual return of more than 13%.

That 13% annual return is better than stocks have done in a great many 17-year periods in history--in most 17-year periods, in fact. It was a helluva result, and from none other than a stodgy bond.

The power of interest rates had the effect of pushing up equities as well, though other things that we will get to pushed additionally. And so here’s what equities did in that same 17 years: If you’d invested $1 million in the Dow on Nov. 16, 1981, and reinvested all dividends, you’d have had $19,720,112 on Dec. 31, 1998. And your annual return would have been 19%.

The increase in equity values since 1981 beats anything you can find in history. This increase even surpasses what you would have realized if you’d bought stocks in 1932, at their Depression bottom--on its lowest day, July 8, 1932, the Dow closed at 41.22--and held them for 17 years.

The second thing bearing on stock prices during this 17 years was after-tax corporate profits, which the chart, After-Tax Corporate Profits as a Percentage of GDP, displays as a percentage of GDP. In effect, what this chart tells you is what portion of the GDP ended up every year with the shareholders of American business.

The chart, as you will see, starts in 1929. I’m quite fond of 1929, since that’s when it all began for me. My dad was a stock salesman at the time, and after the Crash came, in the fall, he was afraid to call anyone--all those people who’d been burned. So he just stayed home in the afternoons. And there wasn’t television then. Soooo ... I was conceived on or about Nov. 30, 1929 (and born nine months later, on Aug. 30, 1930), and I’ve forever had a kind of warm feeling about the Crash...

---

Excerpt of Warren's recent New York Times article from October:

Buy American. I Am. 
By WARREN E. BUFFETT
Published: October 16, 2008


THE financial world is a mess, both in the United States and abroad. Its problems,
moreover, have been leaking into the general economy, and the leaks are now turning
into a gusher. In the near term, unemployment will rise, business activity will falter and
headlines will continue to be scary.

So ... I’ve been buying American stocks. This is my personal account I’m talking about,
in which I previously owned nothing but United States government bonds. (This
description leaves aside my Berkshire Hathaway holdings, which are all committed to
philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be
100 percent in United States equities.

Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when
others are fearful. And most certainly, fear is now widespread, gripping even seasoned
investors. To be sure, investors are right to be wary of highly leveraged entities or
businesses in weak competitive positions. But fears regarding the long-term prosperity of
the nation’s many sound companies make no sense. These businesses will indeed suffer
earnings hiccups, as they always have. But most major companies will be setting new
profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock
market. I haven’t the faintest idea as to whether stocks will be higher or lower a month —
or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you
wait for the robins, spring will be over.

What is in the detail of the equity section of the balance sheet?

Share capital and the share premium account together relates to the amount that investors actually have invested into the business.

Retained earnings relate to the total amount of profit that the company has made ever since it started trading and that has not yet been given back to the shareholders.  This is the profit that has been reinvested back into the business on behalf of the shareholders.

Other equity reserves relate to amounts owed to the shareholders, but that cannot be classified as profit or investment - an example of another reserve might be a revaluation reserve.

The balance sheet of a company may be titled "Consolidated statement of financial position".  This means that the balance sheet is the combined balance sheets of all the different companies through which it conducts its business.  It is quite possible that it does not own 100% of all of its subsidiary companies.  If another party owns a very small part of the business, for example, 2% of one of the subsidiaries, then this share will be shown under equity as non-controlling or minority interests.



What is the difference between share capital and share premium?

The share capital is the nominal value of all investments in the business by shareholders.

The sale of additional shares at a premium to the original or nominal value at which the initial shares were issued would be accounted for as shown:

Nominal value $450 per share
Additional shares sold at $500 per share.
For each share sold for $500 each, $50 would be accounted for as share premium and the remaining $450 would be accounted for as share capital.

Share premium is the premium over and above the nominal value of the share.  



What is a revaluation reserve?

Company A bought a building for $1 million and that building was now worth $2 million.  The company might decide to increase the property, plant and equipment on the balance sheet by $1 million.

In order for the balance sheet to continue to balance, the equity section of the balance sheet must, therefore, also increase by $1 million.

Company A cannot increase the called up share capital or share premium accounts, as there has been no additional investment in the company.

It cannot increase the retained earnings figure because it has not made a profit on the building (Company A can recognise a profit on the building only when it actually sells the asset).

It may, therefore, choose to set up a revaluation reserve to account for the increase in the value of the building.  This would appear in the equity section as other reserves.

In effect, an increase in the value of the building is merely an increase in the amount that Company A now owes to the shareholders.

What are provisions in accounting?

A provision is accounting for a future expected loss.

Some examples of provisions are:

• Car companies will establish a warranty provision - on the basis that cars sold with a warranty may need to be fixed.
• If a company is being sued, and there is a reasonable expectation that they will lose the case, they may need to raise a provision.

The provisions merely book the loss in the current period (or the existence of the provision shows that the loss has been accounted for).  

It does not reflect whether or not any money has been set aside to pay out costs.

A provision for non-payment of an amount owed (called a provision for bad and doubtful debts) merely reduces the asset (debtor) and appears as a loss in the P&L account - this is booked in the period in which the debtor is expected not to pay.

When it becomes clear that they will definitely not pay, the amount is written off as a bad debt - note, it has already hit the P&L account when it was provided for, so writing off a bad debt that has already been provided for has no further impact on the P&L account.

Depreciation, Amortisation and Impairment Charge

Depreciation is actually focussed on matching the cost of an asset over its useful economic life.

Tangible assets are depreciated.

Intangible assets are amortised.

An impairment charge is a one-off reduction in the value of an asset.

Accruals, prepayments, accrued income and deferred income.

The accruals or matching concept states that we recognize an income or expense in the income statement in the period in which it is earned or incurred, not in the period in which payment is received or made.

In order to ensure that costs (and revenues) are allocated to the correct period, we use prepayments, accruals, accrued income and deferred income.

An accrual is where you have received a service, but not yet paid.

A prepayment is where you have paid for a service, but not yet received that service.

Deferred income is where you have been paid, but have not yet provided the service.

Accrued income is where you have provided a service, but not yet been paid.



Accrual =  liability
Accrued Income = Asset

Prepayment = Asset
Deferred Income = Liability


Balance Sheet

Assets
     Cash
     Prepayments
     Accrued income


Liabilities
     Accruals
     Deferred income