Behavioural Decision Theory

How the way you frame your thinking affects your decision making.

Understanding Real Estate Investment Trusts

The John Templeton Way - Ben Graham Centre - Value Investing Conference

When to search for undervalued stocks?
1.  Neglected stocks
2.  Maximum pessimism - during crisis events

How worried are you when the stock market goes down 50%? Ask Charlie Munger who reveals the secrets to getting rich.

Published on 13 Jul 2012

http://www.charliemunger.net -- Charlie Munger, the long-time business partner of famed investor Warren Buffett, talks with the BBC. If you know anything about Charlie Munger, he's famous for his quick wit, plain spokeness and absolute genius. He has helped shareholders of Berkshire Hathaway amass untold forunes.

The Winning Investment Habits of Warren Buffett

WARREN BUFFETT'S MANAGEMENT SECRETS

Warren Buffett Documentary

What was Warren Buffett's First Investment? Interview on Economic Recover, Finance and Stock (2012)

Published on 14 Jun 2013

Buffett was born in 1930 in Omaha, Nebraska, the second of three children and only son of U.S. Representative Howard Buffett, a fierce critic of the interventionist New Deal domestic and foreign policy, and his wife Leila (née Stahl). Buffett began his education at Rose Hill Elementary School in Omaha. In 1942, his father was elected to the first of four terms in the United States Congress, and after moving with his family to Washington, D.C., Warren finished elementary school, attended Alice Deal Junior High School, and graduated from Woodrow Wilson High School in 1947, where his senior yearbook picture reads: "likes math; a future stockbroker".

Even as a child, Buffett displayed an interest in making and saving money. He went door to door selling chewing gum, Coca-Cola, or weekly magazines. For a while, he worked in his grandfather's grocery store. While still in high school he was successful in making money by delivering newspapers, selling golfballs and stamps, and detailing cars, among other means. Filing his first income tax return in 1944, Buffett took a $35 deduction for the use of his bicycle and watch on his paper route. In 1945, in his sophomore year of high school, Buffett and a friend spent $25 to purchase a used pinball machine, which they placed in the local barber shop. Within months, they owned several machines in different barber shops.

Buffett's interest in the stock market and investing also dated to his childhood, to the days he spent in the customers' lounge of a regional stock brokerage near the office of his father's own brokerage company. On a trip to New York City at the age of ten, he made a point to visit the New York Stock Exchange. At the age of 11, he bought three shares of Cities Service Preferred for himself, and three for his sister. While in high school he invested in a business owned by his father and bought a farm worked by a tenant farmer.

Buffett entered college as a freshman in 1947 at the Wharton Business School of the University of Pennsylvania and studied there for two years during which he also joined the Alpha Sigma Phi fraternity. In the year 1950, when he entered his junior year, he transferred to the University of Nebraska--Lincoln where at the age of nineteen, he graduated with a Bachelor of Science in business administration. After the completion of his undergraduate studies, Buffett enrolled at Columbia Business School after learning that Benjamin Graham (author of "The Intelligent Investor" -- one of his favorite books on investing) and David Dodd, two well-known securities analysts, taught there. He earned a Master of Science in economics from Columbia in 1951. Buffett also attended the New York Institute of Finance. In Buffett's own words:

"I'm 15 percent Fisher and 85 percent Benjamin Graham.
The basic ideas of investing are to look at stocks as business, use the market's fluctuations to your advantage, and seek a margin of safety. That's what Ben Graham taught us. A hundred years from now they will still be the cornerstones of investing."

http://en.wikipedia.org/wiki/Warren_B..

Security Analysis - Benjamin Graham and David Dodd

Security Analysis by Benjamin Graham and David Dodd 

Security Analysis, the revolutionary book on fundamental analysis and investing, was first published in 1934, following unprecedented losses on Wall Street.

Benjamin Graham and David Dodd chided Wall Street for its myopic focus on a company's reported earnings per share (eps), and were particularly harsh on the favored "earnings trends." They encouraged investors to take an entirely different approach by estimating the rough value of the operating business that lay behind the security. They have given actual examples of the market's tendency to irrationally under-value certain out-of-favor stocks.

The book is must read for any Stock Market Investor, fundamental analyst or equity research professional. 

Investment Policies (Based on Benjamin Graham)

Summary of Investment Policies

A. INVESTMENT FOR FIXED INCOME:
US Savings Bonds (FDs)

B. INVESTMENT FOR INCOME, MODERATE LONG-TERM APPRECIATION AND PROTECTION AGAINST INFLATION:
(1) INVESTMENT FUNDS bought at reasonable price.
(2) Diversified list of primary common stocks (BLUE CHIPS) bought at reasonable price. 

C. INVESTMENT CHIEFLY FOR PROFIT: 4 approaches are open to both the small and the large investors:
(1) Representative common stocks bought when the MARKET level is clearly LOW.
(2) GROWTH STOCKS, when these can be obtained at reasonable prices in relation to actual accomplishment – GROWTH INVESTING.
(3) Purchase of securities selling well BELOW INTRINSIC VALUE – VALUE INVESTING.
(4) Purchase of WELL-SECURED PRIVILEGED SENIOR ISSUES (bonds and preferred shares).
(5) SPECIAL SITUATIONS: Mergers, arbitrages, cash pay-outs.

D. SPECULATION:
(1) Buying stock in new or virtually new ventures (IPOs) .(2) TRADING in the market.
(3) Purchase of "GROWTH STOCKS" at GENEROUS PRICES.


_______________


For DEFENSIVE INVESTORS: Portfolio A & B
(Portfolio A: Cash, FDs, Bonds Portfolio B: Mutual funds, Blue chips)

For ENTERPRISING INVESTORS: Portfolio A & B & C
(Portfolio C: Buy in Low Market, Buy Growth stocks at fair value, Buy value stocks i.e. bargains, High grade bonds and preferred shares, Arbitrages)

For SPECULATORS: Portfolio D
(Should set aside a sum for this separate from their money in investing.)

________________
________________


Types of Investors

Graham felt that individual investors fell into two camps : "defensive" investorsand "aggressive" or "enterprising" investors.

These two groups are distinguished not by the amount of risk they are willing to take, but rather by the amount of "intelligent effort" they are "willing and able to bring to bear on the task."

Thus, for instance, he included in the defensive investor category professionals (his example--a doctor) unable to devote much time to the process and young investors (his example--a sharp young executive interested in finance) who are as-yet unfamiliar and inexperienced with investing.

Graham felt that the defensive investor should confine his holdings to the shares of important companies with a long record of profitable operations and that are in strong financial condition. By "important," he meant one of substantial size and with a leading position in the industry, ranking among the first quarter or first third in size within its industry group.

Aggressive investors, Graham felt, could expand their universe substantially,but purchases should be attractively priced as established by intelligent analysis. He also suggested that aggressive investors avoid new issues.


Click and read also:

****My Investment Philosophy, Strategy and various Valuation Methods

Are You an Intelligent Investor?

Knowing Yourself and Keep Investing Simple and Safe

Common Stocks and Uncommon Profits by Philip Fisher

Published on 6 Jun 2013

Widely respected and admired, Philip Fisher is among the most influential investors of all time. His investment philosophies, introduced almost forty years ago, are not only studied and applied by today's financiers and investors, but are also regarded by many as gospel. This book is invaluable reading and has been since it was first published in 1958. The updated paperback retains the investment wisdom of the original edition and includes the perspectives of the author's son Ken Fisher, an investment guru in his own right in an expanded preface and introduction
"I sought out Phil Fisher after reading his Common Stocks and Uncommon Profits...A thorough understanding of the business, obtained by using Phil's techniques...enables one to make intelligent investment commitments."
Warren Buffet

The legendary fund manager, Peter Lynch.

Published on 16 Oct 2012

In 1977, legendary fund manager Peter Lynch was named head of the then obscure Magellan Fund which had $18 million in assets. By the time Lynch resigned as a fund manager in 1990, the fund had grown to more than $14 billion in assets with more than 1,000 individual stock positions. From 1977 until 1990, the Magellan fund averaged a 29.2% return. This is exceptional considering how large the fund was. This video/audio is courtesy of Fedelity investments "The Stock Shop".

Are you too scared to invest? You might have missed out on huge gains and put your financial futures in jeopardy.

5 Reasons Most Investors Fail

By Sean Williams 
September 8, 2013 |

I've been actively investing money into the market now for the past 15 years. Over that time I've morphed through a number of investing styles -- day-trading, trading based on technical analysis, long-term investing, and in the late 1990s even throwing darts. If I've learned anything over these years, it's that investing in businesses and ideas, not a stock ticker, is where the big gains are to be had.

Source: Ryan Lawler, Wikimedia Commons.

So you can imagine how quickly my jaw dropped to the floor when I revisited a study conducted by Prudential Financial in June 2011 that surveyed 1,000 people and asked them two simple questions: Do you still believe in investing, or have you lost faith in the stock market; and when are you likely to put more money into the stock market (within a year, over a year from now, or never). The answers to these questions are an absolute head-banger! 

What is your current perception of the stock market?

There are still benefits to investing	42%
I've lost faith in the market	58%

Source: Prudential Financial.

When are you likely to put more money into the stock market?

Within a year	25%
Over a year from now	31%
Never	44%

Source: Prudential Financial.

Now keep in mind that when these respondents were surveyed, the stock market had already rebounded a full 100% from its lows! Based on these figures, a full 44% of respondents would have missed out on an additional 26% rally in the broad-based S&P 500 (SNPINDEX: ^GSPC  ) which is higher than the historical annual average return of the stock market. Based on the exact date of June 1, 2011, to June 1, 2012, the 31% who chose to wait a year and try to time the market would have come out slightly ahead -- but if you moved that date forward or backward by just a few days they, too, would have lost out.

Here are five reasons I've learned throughout my years of investing why most investors fail:

• They're trying to buy stocks, not businesses.
• They don't understand the concept of compounding gains.
• They don't feel they have enough money to begin investing.
• They're too scared to lose their money.
• They don't know how to get started.

And here are some of the ways you can overcome these flaws.

Buy businesses, not stocksAt The Motley Fool you'll hear us trumpet Warren Buffett, the CEO of Berkshire Hathaway(NYSE: BRK-A  ) (NYSE: BRK-B  ) a lot -- but with good reason. Warren Buffett invests with the mentality that he's buying into a company that he thinks would succeed if the stock market shut down for the next 10 years. He believes in the management team of every company he buys and focuses on buying businesses with brand and pricing power. You might refer to them as boring investments, but Buffett just sees these businesses as steady sources of cash flow that will increase shareholder value in almost any economic environment.

Therefore, it shouldn't come as a surprise that his holding company, Berkshire Hathaway, which just recently announced the purchase of its 58th subsidiary in NV Energy in May, has outpaced the S&P 500 in 39 of the past 48 years. That's not luck -- that's what happens when you invest in businesses instead of trading stocks.

Invest for the long term and let compounding gains work in your favorThe most abundant mistake often made is when investors attempt to become traders and time the market. While timing the market may work for a short period, it's been shown time and again that long-term compounding gains achieved through share price appreciation and dividends will outpace the nominal gains achieved through day-trading and short-term holds. According to ABC News, and as I noted last month, of the nominal gains achieved by the S&P 500 between 1910 to 2010, dividend yield and dividend growth comprised 90% of all gains.

The Fool's Brian Stoffel put this story in an even easier-to-understand context in February 2012, when, in his fictitious short story he undertook explaining how short-minded investors would have missed out on big gains in Coca-Cola (NYSE: KO  ) versus long-term investors. Had a short-term investor sold holdings after 10 years in Brian's story, he or she may have netted a 2,500% gain, but were the same investor to hold from 1920 through the present day, that person would be up well over 1,000,000%, inclusive of dividends and share price appreciation!

There is no such thing as a wrong amount to invest withOne of the more superfluous rumors that's been floating around for decades is that it's not worth investing in the stock market if you don't have enough money to get started. This is blatantly wrong! If you have $200,000 or $200, it's always in your best interests to put that money to work for you.

Last week, the Fool's macroeconomic guru, Morgan Housel, demonstrated this point to a "T" when he examined the effect of wealth building over time. According to his calculations, a person in his or her 20s could see each dollar saved and invested turn into $10-$18 in future value. Even if that only means $20 per week, that's possibly $200-$360 in future value based on the standard historical returns of the market! 

Source: Rafael Matsunaga, Flickr.

You have to invest to beat inflationPutting your money under the mattress might preserve your nominal money, but it won't help you over the long run as prices continue to rise and make what money you currently have less valuable. Anyone who hopes to stay ahead of the game needs to invest.

Keep in mind that there are multiple ways of beating inflation and retiring well without risking your entire nest egg. It's perfectly fine to be risk-averse, which is what investment-grade and government-issued bonds are for. However, other ways of investing safely do exist, including buying into basket ETFs that spread your assets, along with the assets of others, among a number of companies. One great idea here would the iShares MSCI USA Minimum Volatility ETF (NYSEMKT: USMV  ) . Composed of 134 large-cap, low-volatility names such as PepsiCo., Johnson & Johnson, and TJ Maxx parent TJX, the iShares Minimum Volatility ETF bears just a 0.15% annual expense, yields slightly better than 2% annually, and is only 78% as volatile as the S&P 500.

Getting started is easier than everOne of the often forgotten reasons investors fail is that many are simply too overwhelmed or worried about their lack of knowledge to even get started. Luckily for you, the Internet has made the ability to learn about the market and individual companies easier than it's ever been.

The Motley Fool's co-founders (and brothers), David and Tom Gardner, developed the 13 Steps to Investing Foolishly specifically with that skittish investor in mind who's always been curious about investing in the stock market but has been terrified of his or her lack of knowledge or been wary of how to get a foot in the door. My suggestion is, if you're one of the 44% who exclaimed they'd never invest in the market again, one of the 58% who's lost faith in the market, or one of the many on the outside looking in, read over and implement these 13 steps.

Obviously you aren't going to be right with every investment, but all it takes is a few big winners and a lot of time for you to be sitting pretty in an early retirement.

Put plainly, if you don't take the time to invest, you could wind up like the millions of Americans that have waited on the sidelines since the market meltdown in 2008 and 2009, too scared to invest, that have missed out on huge gains and put their financial futures in jeopardy. 

http://www.fool.com/investing/general/2013/09/08/5-reasons-most-investors-fail.aspx

How to approach international stocks?

The examination of these stocks for your international investing are the same.  Follow the QMV approach.

1.  Look at the QUALITY of the company (the existence of competitive advantages)
2.  Its MANAGEMENT must be of integrity and smart (and not suspicious management)
3.  The VALUATION of the company (and not an outrageously high valuation)

However, you need to add other risks to your due diligence process too.

1,  Country risk 
What's the political environment?
Is corruption a problem?
How is the country's debt structured?
What are its plans for economic development?

2.  Political risk
This is a subset of country risk.
Is there a real threat of nationalization?
Is there a real threat of rebellion or military action?

3.  Currency risk
This is a risk unique to foreign investing.
Pay attention to the level of exposure a company has to weak currencies.
Be reminded, Zimbabwe's insane inflation rate hit 66,000% in the early months of 2008.

4.  Investability risk
Are you able to buy shares of a company.
Do you have access to one of the exchanges it trades on?


So, to summarise, look for countries with:
1.  Respect for rule of law, strong rights of appeal, and low levels of corruption.
2.  Political stability and a government that doesn't dominate the local economy.
3.  A stable currency
4   Investability

Also, apply the bottom up search for the best companies with the brightest prospects.  

Be reminded once again.
-  Your top priority is to invest in your best ideas - ignoring country, sector, or number of vowels in the ticker.
-  Your secondary concern should be ensuing that you're not overexposed to any specific geographic region or industry sector.

With the U.S. market moving in lockstep with overseas markets (high correlation) - a trend that certainly doesn't seem to be reversing itself- diversification is no longer the reason to consider foreign equities for your portfolio.  

The reason to look overseas is much simpler:  opportunity.   

There are incredible opportunities in International Investing.

1. There are 16,000 public companies based in the United States.
2. There are 49,000 public companies listed outside of the United States.  
3. The American economy is the largest, most diverse on earth.  
4. The American legal and regulatory regimes offer the most protection for minority shareholders.  
5. Also, the U.S. market is less prone to wild swings than most foreign markets.
6. The refusal to consider international companies makes about as much sense today as investing only in companies with two syllables in their names. 
7. There are incredible opportunities in international investing.
8. Many overseas markets, including the growing monsters of China and India, have improved their regulatory oversight by leaps and bounds.
9. There are also markets with all the legal framework that are out dated, to be sure too.  Those tend to be obvious and better avoided.
10. Besides, the increasing globalization of markets, and the explosion in individual company cross-listings and exchange-traded funds (ETFs), have made buying foreign shares easier than ever before.
11. In fact, international investing can be as easy as picking a foreign country and buying an index fund based on the performance of its market.  Indonesia?  Check.  Brazil? Check.  Japanese small caps? Check.  European bonds?  You get the idea.
12. To buy foreign equities, you have to understand some additional considerations and challenges.
13. In the six months after October 2007, the Shanghai Composite Index lost nearly 50% of its value, wiping away $2 trillion in wealth for investors.
14. This wasn't suppose to happen - the ascendancy of China is considered inevitable.  
15. Only investors extremely familiar with the Chinese economy had a hope of knowing the right answer. 
16. Point being, an investing thesis constructed on a skin-deep understanding of a country is likely to end with a suboptimal outcome.  And we try to avoid suboptimal outcomes.
17. Investing overseas is not just a means of diversification.
18. The one and only purpose to invest in companies overseas is far less complicated:  the opportunities beyond our borders are too good to pass up.
19. You want your long-term savings tied to the best companies with the best prospects.  
20. You would miss out on many great stocks by imposing an arbitrary geographical limitation on your investments.
21. It's unlikely that the best investments are all going to be just in your own country.  
22. The U.S. has the potential to do quite well.
23. The U.S. represents 5% of the population of the world and 24% of its gross product.
24. The U.S. had her days as the greatest growth economy in the world.
25. In 2007, the U.S. economy grew at a rate of 2.2%.  
26. But, many other countries outside the U.S. have economies that grew at higher rates, and when these are measured in depreciating dollars, these economies are growing even faster.
27. Your approach to international investing remains the same:  bottoms-up, business-focused.
28. The only key difference is not the how, it's the where.
29. The approach encompasses small caps and fast growers and dividend payers and value stocks.
30. When we disregard borders in our search, there is almost no difference between international and domestic stocks.  
31. The scorecard for foreign stocks is still based on their ability to turn profits.  
32. Economies around the world are growing quickly.
33. That's why international investing works.
34. You have an opportunity to examine mature industries domestically and find those same industries in their high-growth phases elsewhere.
35. Diversification, while important, is not the goal of investing.  
36. The goal is you want 100% of your money invested in companies that don't suck, and 0% in companies that do - and that's regardless of where the company is located.  
37. International investing is not about exposure to a particular sector or style.
38. International investing is about opening up all the doors available for your portfolio: it broadens frontiers.

Intrinsic value of Great Businesses: What's the business actually worth? Think long-term.

Company OPX

52 week high:  $52.99  (April 2010)  Market cap $960 million
52 week low:  $33.33 (July 2010)  Market cap $ 625 million
Variance:  35.2%


1.  Is the market really suggesting that this business was worth $960 million in April 2010, but only $625 million the following July?

2.  Yes, this is exactly what the market is suggesting.

3.  What's the business actually worth?

4.  Because it ought to be obvious that a fast-growing company cannot be worth $625 million and $960 million at roughly the same time.  

5.  Our goal as investor is to buy $960 million businesses when the market's charging $625 million.
6.  If you think these things don't happen, be assured:  They happen all the time.

7.  It is even better when we can buy a $500 million business for $300 million and watch the company grow into a $3 billion business.  

8.  It is this effect - the fact that great businesses make themselves more valuable over time - that keeps us from selling a $500 million business when its market cap increases to $600 million.

9.  After all, the $500 million valuation is based on our own analysis, and mathematically speaking, it's our single point of highest confidence in a range of values we believe the company could be worth.

10.  It might be substantially more.  

11.  If you're disciplined enough to only buy companies when they are priced at the low end of your range of potential values, your returns over time are almost guaranteed to satisfy.

12.  Holding a company when it's in the higher end of your range of values leaves you somewhat susceptible to a stock drop, given the lower margin of safety.  

13.  But if you have properly identified the company as a superior generator of wealth, the biggest mistake you might ever make is selling it because its shares are a few dollars too high.

14.  If you bough company OPX back in December 1987, for example, your shares rose 75%, from $23 to $40 in about two months.

15.  That's great return - but over the next 20 years, the stock has risen another seven times in value - tax free.

16.  Ultimately, it is nearly impossible to manage superior long-term results by focusing on short-term aims.

17.  Company OPX has evolved from a regional small cap into one of the most important retailers in the world, generating spectacular returns for shareholders in the process.

The excitement of blue chip value investing

The excitement behind blue-chip value investing doesn't reside in life-changing tales of a stock that moved up 800% in a year or two.

Those stories were common during the late 1990s with Internet stocks, but as we saw in 2001 and 2002, what rises dramatically and rapidly often falls with equal fury.

The excitement of blue-chip value investing comes from looking at long-term charts of what value stocks do as a group over a period of decades - or what they have done for Warren Buffett.

That extra 2 % or 3% a year in returns, multiplied over a lifetime of investing, makes for some heart-pounding piles of cash down the line.  It will give you your million-dollar portfolio - and much more.

Why are there not more investors using the value investing approach?

The approach using value investing should be appealing, yet this strategy just doesn't take hold for some investors.

Warren Buffett put it this way:  "It is extraordinary to me that the idea of buying dollar bills for 40 cents takes immediately with people or it doesn't take at all.  It's like an inoculation.  If it doesn't grab a person right away, I find that you can talk to him for years and show him records, and it doesn't make any difference.  They just don't seem able to grasp the concept, simple as it is."

What Buffett means is that not everybody "gets" the concept of investing in companies at a deep discount if it means they have to wait a while, maybe even years, for the market to agree with their assessment.  Many people like the daily action the market provides, and enjoy guessing the next move - even though frequent trading has been shown to deliver very poor returns.  

More than anything else, the value approach demands patience and a willingness to stay disciplined without an upward move in share price to confirm your thinking.  You have to be willing to wait for as long as it takes for the market to recognize the value of your dollar, even as it stubbornly remains at "40 cents."

Simple business models are easier to comprehend. "Great stocks don't make you think."

Simple business models:  They're not necessarily better at making money than complicated business models. The reason to love them:  they're much easier to understand.

One exercise one can do is to try to describe a company in one sentence.  If you can - and can do so compellingly - then it has passed the test.

Can you describe Google and Wal-mart each in a sentence?  Google makes most of its money by selling targeted advertisements alongside its top-notch Internet search results.  Wal-Mart makes money by being the low-cost retailer of an incredible variety of goods.

Both sentences clearly explain how these companies make money and what their competitive advantage is in the space.  Google has the best technology; Wal-Mart has the best prices.

Those are simple business models, and you will know very quickly if either is faltering (Google ceases to have the best search capabilities or Wal-Mart ceases to have the best prices).

On the other hand, if the business is complicated and unclear, you likely won't enjoy following it.

Characteristics you will like in a company

What I like to see in a business:

1.  Consistent earnings growth
2.  Good return on equity
3.  Manageable or no debt
4.  Quality management that's committed to the company.
5.  A simple business model.

Always judge the success of your company by the proper metrics - sustained growth and good returns on equity - rather than by a company's stock price.

Stock price, is not always a reflection of a company's quality or value.

Insiders buying more of their own stock is a bullish signal

There are thousands of reasons for insiders to sell stock, but there's only one reason they'll buy:  They think the stock is going to go up.

After all, insiders know more about their company than outside investors ever could.  If they're buying, there's probably a pretty good reason for it.

Past studies bear this reasoning out.  They show that insider-buying is a bullish signal at both the company-specific and macro-market levels.