The Great, Good and Gruesome Businesses of Buffett

Buy good quality companies with durable competitive advantage and trustworthy managers and holding them for the long term. Just buy them at fair or bargain prices and never at high prices.

"It is better to own the great companies at good prices, than the good companies at great prices."

Here is a nice table summarizing the great, good and gruesome companies according to Buffett.

Let me give you some pointers:

1. Select a small cap stock.

2. The one that you have the confidence that it will grow its revenues and earnings for many many years to come.

3. The one with some durable competitive advantage (it can be difficult in early years to notice or identify this).

4. Get into this early.

5. Continue to monitor its performance.










Yes, you can hold for the long term too.

For this you need to assess its quality (both qualitative and quantitative, and the management).

Don't be too focus on the price of the shares (the least important in your assessment).

The Magic of Compounding - Buffett's story

Wealth takes time.

Charlie Munger, Warren Buffett's investing partner, put it best: "You don't have to be brilliant, only a little bit wiser than the other guys, on average, for a long, long time."
 
Warren Buffett is a great investor, but what makes him rich is that he's been a great investor for seven decades. Of his current $60 billion net worth, $59.7 billion was added after his 50th birthday, and $57 billion came after his 60th. If Buffett started saving in his 30s and retired in his 60s, you would have never heard of him. His skill is investing, but his secret is time.
 
Understanding the value of time is the most important lesson in all of finance. The single best thing we can do to improve the financial state of Americans is encourage people to save from as early an age as possible.




Buffett's wealth

For this discussion:  1 billion = 1,000 million.

He was born on 30th August 1930.

2014  Age 83  - $60 billion net worth

1990  Age 60 -  $ 3 billion net worth.

1980  Age 50 -  $0.3 billion or $300 million net worth



1980 - 1990
CAGR 25.89% over 10 years


1990 - 2014
CAGR 13.29% over 24 years

A billion is equal to how many million?

Answer:

In the 'short scale' a billion is 1000 million. The short scale is the system officially used in the USA, the UK and most English-speaking countries. 

In the 'long scale' it is a million million. More or less the rest of the world supposedly uses this terminology.

One million (1,000,000) or one thousand thousand.
One billion (1,000,000,000) or one million thousand.    

1. The cardinal number equal to 10⁹.
2. Chiefly British The cardinal number equal to 10¹²

.http://wiki.answers.com/Q/A_billion_is_equal_to_how_many_million

The Most Successful Dividend Investors of all time

Dividend investing is as sexy as watching paint dry on the wall. Defining an entry criteria that selects quality dividend stocks with rising dividends over time and then patiently reinvesting these dividends while sitting on your hands is not exciting. While active traders have a plethora of hedge fund managers on the covers of Forbes magazine there are not many well-publicized successful dividend investors. Even value investing has its own superstars – Ben Graham and Warren Buffett.

I did some research and uncovered several successful dividend investors, whose stories provide reassurance that the traits of successful dividend investing I outlined in a previous post are indeed accurate.

The first investor is Anne Scheiber, who turned a $5,000 investment in 1944 into $22 million by the time of her death at the age of 101 in 1995. Anne Scheiber worked as an IRS auditor for 23 years, never earning more than $3150/year. The one important lesson she learned auditing tax returns was that the surest way to become rich in America is by accumulating stocks. She accumulated stocks in brand name companies she understood and then reinvested dividends for decades. She never sold, in order to avoid paying taxes and commissions. She also never sold even during the 1972-1974 bear market as well as the 1987 market crash because she had high conviction in her stocks picks. She also held a diversified portfolio of almost 100 individual securities in brand names such as Coca-Cola (KO), PepsiCo (PEP), Bristol-Myers (BMY), Schering Plough (acquired by Pfizer in 2009). She read annual reports with the same inquisitive mind she audited tax returns during her tenure at the IRS and also attended annual shareholders meetings. Anne Scheiber did her own research on stocks, and was focusing her attention on strong franchises which have the opportunity to increase earnings and pay higher dividends over time.

In her later years she reinvested her dividends into tax free municipal bonds, which is why her portfolio had a 30% allocation to fixed income at the time of her death. At the time of her death, her portfolio was throwing off $750,000 in dividend and interest income annually. She donated her whole fortune to Yeshiva University, even though she never attended it herself.

The second investor is Grace Groner, who turned a small $180 investment in 1935 into $7 million by the time of her death in 2010. Ms Groner, who worked as a secretary at Abbott Laboratories for 43 years invested $180 in 3 shares of Abbott Laboratories (ABT) in 1935. She then simply reinvested the dividends for the next 75 years. She never sold, but just held on to her shares.

She was frugal, having grown up in the depression era, and was the classical millionaire next door type of person who was not interested in keeping up with the Joneses. Grace Groner left her entire fortune to her Alma Mater. Her $7 million donation is generating approximately $250,000 in annual dividend income.

The reason why dividend investors are not highly publicized is because dividend investing is not sexy enough to be featured in the financial mainstream media. In addition to that, it is not profitable for Wall Street to sell you into the idea that ordinary investors can invest on their own. Compare this to mutual funds, annuities and other products which generate billions in commissions for Wall Street, despite the fact that they might not be in the best interest of small investors.

The third dividend investor is Warren Buffett, the Oracle of Omaha himself. In a previous article I have outlined the reasoning behind my belief that Buffett is a closet dividend investor. He explicitly noted in his 2009 letter that "the best businesses by far for owners continue to be those that have high returns on capital and that require little incremental investment to grow". His investment in See's Candy is the best example of that.

Some of Buffett's best companies/stock that he has owned such as Geico, Coca Cola , See's Candy are exactly the types of investments mentioned above. He has mentioned that at Berkshire he tries to stick with businesses whose profit picture for decades to come seems reasonably predictable. Per Buffett the best businesses by far for owners continue to be those that have high returns on capital and that require little incremental investment to grow. In addition, his 2011 letter discussed his dividend income from all of Berkshire Hathaway investments, including his prediction that Coca Cola dividends will keep on increasing, based on the pattern of historical dividend increases.

In this article I outlined three dividend investors, who managed to turn small investments into cash machines that generated large amounts of dividends. They were able to accomplish this through identifying quality dividend growth companies at attractive valuations, patiently reinvesting distributions and in two out of three cases maintaining a diversified portfolio of stocks. These are the lessons that all investors could profit from.

http://www.dividendgrowthinvestor.com/2012/06/most-successful-dividend-investors-of.html

Temporary Price Fluctuations is to be expected. It is not possible to avoid random short-term market volatility.

Relevance of Temporary Price Fluctuations 

In addition to the probability of permanent loss attached to an investment, there is also the possibility of interim price fluctuations that are unrelated to underlying value. 

Many investors consider price fluctuations to be a significant risk: if the price goes down, the investment is seen as risky regardless of the fundamentals.


But are temporary price fluctuations really a risk?  

-  Not in the way that permanent value impairments are and then only for certain investors in specific situations. 

-  It is, of course, not always easy for investors to distinguish temporary price volatility, related to the short-term forces of supply and demand, from price movements related to business fundamentals.

-  The reality may only become apparent after the fact. 

-  While investors should obviously try to avoid overpaying for investments or buying into businesses that subsequently decline in value due to deteriorating results, it is not possible to avoid random short-term market volatility.

-  Indeed, investors should expect prices to fluctuate and should not invest in securities if they cannot tolerate some volatility. 



If you are buying sound value at a discount, do short-term price fluctuations matter? 

-  In the long run they do not matter much; value will ultimately be reflected in the price of a security.

-  Indeed, ironically, the long-term investment implication of price fluctuations is in the opposite direction from the near-term market impact. 

-  For example, short-term price declines actually enhance the returns of long-term investors.



There are,however, several eventualities in which near-term price fluctuations do matter to investors. 

1. Security holders who need to sell in a hurry are at the mercy of market prices. 

- The trick of successful investors is to sell when they want to, not when they have to.


2.  Near-term security prices also matter to investors in a troubled company. 

-  If a business must raise additional capital in the near term to survive, investors in its securities may have their fate determined, at least in part, by the prevailing market price of the company's stock and bonds.


3. The third reason long-term-oriented investors are interested in short-term price fluctuations is that Mr. Market can create very attractive opportunities to buy and sell. 

-  If you hold cash, you are able to take advantage of such opportunities. 

-  If you are fully invested when the market declines, your portfolio will likely drop in value, depriving you of the benefits arising from the opportunity to buy in at lower levels.

-  This creates an opportunity cost, the necessity to forego future opportunities that arise
.
-  If what you hold is illiquid or unmarketable, the opportunity cost increases further; the illiquidity precludes your switching to better bargains.



www.safalniveshak.com

Buffett investment thought process

Answering the following questions will guide you through the Buffett investment thought process.

QUALITY AND MANAGEMENT ANALYSIS

1.  Does the company have an identifiable durable competitive advantage?

2.  Do you understand how the product works?

3.  If the company in question does have a durable competitive advantage and you understand how it works, then what is the chance that it will become obsolete in the next twenty years?

4.  Does the company allocate capital exclusively in the realm of its expertise?

5.  What is the company's per share earnings history and growth rate?

6.  Is the company consistently earning a high return on equity?

7.  Does the company earn a high return on total capital?

8.  Is the company conservatively financed?

9.  Is the company actively buying back its shares?

10.  Is the company free to raise prices with inflation?

11.  Are large capital expenditures required to update plant and equipment?

PRICE ANALYSIS

12.  Is the company's stock price suffering from a market panic, a business recession, or an individual calamity that is curable?

13.  What is the initial rate of return on the investment and how does it compare to the return on risk free Treasury Bonds?

14.  What is the company's projected annual compounding return as an equity/bond?

15.  What is the projected annual compounding return using the historical annual per share earnings growth?

Making investing enjoyable, understandable and profitable… A Simple and Obvious Approach

Making investing enjoyable, understandable and profitable…

Is it not true, that the really big fortunes from common stocks have been garnered by those 

• who made a substantial commitment in the early years of a company in whose future they had great confidence and who held their original shares unwaveringly while they increased 10-fold or 100-fold or more in value?

The answer is "Yes."

Most valuations (even good ones) are wrong

Now this can be shocking to you if you spend a lot of time arriving at that magical number (intrinsic value) that helps you ascertain whether you must buy a stock or not.

Damodaran talks about three kinds of errors that cause most valuations – even the ones “meticulously” calculated – to go wrong:

1. Estimation error…that occurs while converting raw information into forecasts.
2. Firm-specific uncertainty…as the firm may do much better or worse than you expected it to perform, resulting in earnings and cash flows to be quite different from your estimates.
3. Macro uncertainty…which can be a result of drastic shifts in the macro-economic conditions that can also impact your company.

The year 2008 is one classic example when most valuations – even the good ones – went horribly wrong owing to the last two factors – firm-specific and macro uncertainties.

As Damodaran writes…

While precision is a good measure of process in mathematics or physics, it is a poor measure of quality in valuation.

So, to value or not value?
Knowing that your valuation could be wrong (and in most cases, it would be) despite any kind of precision you employ in your calculations, it should not lead you to a refusal to value a business at all.

This makes no sense, since everyone else looking at the business faces the same uncertainty.

Instead what you must do to increase the probability of getting your valuations right is…

1. Stay within your circle of competence and study businesses you understand. Simply exclude everything that you can’t understand in 30 minutes.
2. Write down your initial view on the business – what you like and not like about it – even before you start your analysis. This should help you in dealing with the “I love this company” bias.
3. Run your analysis through your investment checklist. A checklist saves life…during surgery and in investing.
4. Avoid “analysis paralysis”. If you are looking for a lot of reasons to support your argument for the company, you are anyways suffering from the bias mentioned above.
5. Calculate your intrinsic values using simple models, and avoid using too many input variables. In fact, use the simplest model that you can while valuing a stock. If you can value a stock with three inputs, don’t use five. Remember, less is more.
6. Use the most important concept in value investing – ‘margin of safety’. Without this, any valuation calculation you perform will be useless.

At the end of it, Damodaran writes…

Will you be wrong sometimes? Of course, but so will everyone else. Success in investing comes not from being right but from being wrong less often than everyone else.

So don’t justify the purchase of a company just because it fits your valuation. Don’t fool yourself into believing that every cheap stock will yield good returns. A bad company is a bad investment no matter what price it is.

Charlie Munger explains that – “a piece of turd in a bowl of raisins is still a piece of turd”…and…“there is no greater fool than yourself, and you are the easiest person to fool.”

So, get going on valuing stocks…but when you find that the business is bad, exercise your options.

Not a call or a put option, but a “No” option.

Have you ever avoided buying a stock you “loved” because its valuations were not right? 

http://www.safalniveshak.com/avoid-2-bitter-truths-of-stock-valuations/

2 Bitter Truths of Stock Valuation

1. All valuations are biased

2. Most valuations (even good ones) are wrong

How to find “conservative” investments? The ones with the greatest probability of preserving your purchasing power and with the least amount of risk.

Buffett resisted buying large and popular companies because he thought this category was valued irrationally by investors. But then, he was not in favour of buying small, unproven companies as well. As he wrote in his 2010 letter…

At Berkshire, we make no attempt to pick the few winners that will emerge from an ocean of unproven enterprises. We’re not smart enough to do that, and we know it.

Instead, we try to apply Aesop’s 2,600-year-old equation to opportunities in which we have reasonable confidence as to how many birds are in the bush and when they will emerge (a formulation that my grandsons would probably update to “A girl in a convertible is worth five in the phonebook.”).

Obviously, we can never precisely predict the timing of cash flows in and out of a business or their exact amount. We try, therefore, to keep our estimates conservative and to focus on industries where business surprises are unlikely to wreak havoc on owners.

Even so, we make many mistakes: I’m the fellow, remember, who thought he understood the future economics of trading stamps, textiles, shoes and second-tier department stores.

This reiterates Buffett’s key definition of conservatism over these years – conservatism depends on how you choose and not what you choose.

In other words, investing conservatively is not about simply identifying large well-known businesses, but going through a process that identifies why a particular company qualifies as a conservative investment.

As Buffett would want you to understand, there is one simple way to look at a conservative investment.

Conservative investment = Preservation of capital

A conservative investment is one that has the greatest probability of preserving your purchasing power and with the least amount of risk.

This probability can in turn arise from the process that you follow to identify such opportunities that will preserve your purchasing power in the future.

So, where most investors fail in attempting to invest “conservatively” is blindly assuming that by purchasing any security that qualifies as a conservative investment, they are in fact, conservative investors.

In other words, such investors are thinking conservatively, but not acting conservatively.

If you indulge in such things, it could prove to be a costly affair.

Here is what Buffett wrote in 1965…

Truly conservative actions arise from intelligent hypotheses, correct facts and sound reasoning. These qualities may lead to conventional acts, but there have been many times when they have led to unorthodoxy. In some corner of the world they are probably still holding regular meetings of the Flat Earth Society.

We derive no comfort because important people, vocal people, or great numbers of people agree with us. Nor do we derive comfort if they don’t. A public opinion poll is no substitute for thought. When we really sit back with a smile on our face is when we run into a situation we can understand, where the facts are ascertainable and clear, and the course of action obvious. In that case – whether other conventional or unconventional – whether others agree or disagree – we feel – we are progressing in a conservative manner.

The above may seem highly subjective. It is. You should prefer an objective approach to the question. I do. My suggestion as to one rational way to evaluate the conservativeness of past policies is to study performance in declining markets.

http://www.safalniveshak.com/wit-wisdom-warren-part5/

Emotional Intelligence

You don’t need to be a rocket scientist. 

Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.

This is also what Buffett says. 

Of course, some knowledge about finance is important before investing in the stock markets, but this knowledge alone won’t be of any help to you.

What you also need is emotional intelligence while investing in stock.

Emotional intelligence is the ability to identify, assess, and control your own emotions.

A true value investor is likely to perform better in a bear market than in a bull market.

Patience is a virtue for value investors

The last part of Buffett’s 1957 letter carries a very important lesson in patience for value investor. Here is what he wrote…

To some extent our better than average performance in 1957 was due to the fact that it was a generally poor year for most stocks. Our performance, relatively, is likely to be better in a bear market than in a bull market so that deductions made from the above results should be tempered by the fact that it was the type of year when we should have done relatively well. In a year when the general market had a substantial advance I would be well satisfied to match the advance of the Averages.

Despite calling ourselves “value investors”, a lot of us lose patience when stock prices are falling and get elated when they are rising.

But as Buffett wrote, a true value investor is likely to perform better in a bear market than in a bull market.

This is simply because when you are value investor, you buy good quality stocks and that too only at reasonable margin of safety (around 30-50%).

So when stock prices fall in a bear market, your good quality stocks bought at reasonable margin of safety may earn you lesser losses than the broader markets.

On the other hand, in a bull market, when even garbage is considered a dessert, and people are lapping up everything that’s rising in price, Mr. Market usually ignores good quality “boring” businesses which you hold in your portfolio…

…and thus you must be happy to earn just as much as the broader markets. That’s when you must not try to ride the bull but instead tell those riding it – “I’ll see you in the next bear market!”

This wouldn’t be arrogance on your part. This would be sensibility, as Buffett has proved over the past six decades.

http://www.safalniveshak.com/wit-wisdom-warren-part1/

Unlocking value. Sooner or later, a stock will rise to its value (Benjamin Graham)

 “But I am no Buffett!”

You might wonder – “Buffett was able to unlock value in Sanborn simply because he earned a seat on the board and then spun off the investment portfolio. I can’t buy enough shares to get on the board of a company that I think holds a value unlocking potential! So how could I profit like Buffett did?”

Well, what if I say that you are more empowered than Buffett of 1960?

Yes it’s true! The Information Age empowers you, dear investor.

If you can find a value unlocking potential like Sanborn (though it’s difficult to find such a bargain in a period when information spreads so fast…but just in case), all you need to do is own the stock and then spread the word around.

Sure, nobody may notice your analysis or even care about it at first, but then have faith in what Graham said, “Sooner or later a stock would rise to value.”

As long as your intention is not to find a greater fool to unload your junk upon (which means you are not trying to create a fake market in a junk stock), go out and tell the world about your analysis.

Your (genuine) story will spread, sooner than later. That will lead to value unlocking.

There have been several cases of value unlocking in various markets that have earned investors a good amount of money.

So there’s a potential to earn good returns in this space of value unlocking through special situations. 

http://www.safalniveshak.com/wit-wisdom-warren-part4/

Property - London’s lure dimmed by capital gains tax

London’s lure dimmed by capital gains tax
Published: 2013/12/10


LONDON: London’s status as a magnet for foreign property investment was burnished in the years after the financial crisis by an investor-friendly tax regime and the falling value of the pound. That may be changing.

A new capital-gains tax on homes sold by people living abroad and a growing British economy that’s lifting the currency may dull the capital city’s appeal to property buyers from abroad.

The government “will put people off by changing the rules constantly and making it less tax-friendly for buyers,” Andrew Sneddon, head of tax law at Trowers & Hamlins, said by phone. “If these wealthy buyers choose to go to Monaco, Paris or New York to spend their summers and their money, what’s that going to cost the U.K. economy?”

Investors from the Middle East to Asia have been splurging on London homes, buying everything from multi million-pound mansions to apartments in Battersea and the City of London. That’s driving prices beyond the reach of many British buyers and sparking a development surge that’s increasingly dependent on non-U.K. investors buying homes before they’re completed.

South Asian buyers account for two-thirds of new London homes sold before completion, according to Land Securities Group Plc, the largest U.K. real estate investment trust. The high-end market is dependent on pre-sales to overseas buyers to help get development finance and deal with rising land costs, Michael Lister, a lecturer at University of Westminster, said in a Nov. 22 interview.


‘International Hiccup’


The market “only needs a bit of an international hiccup for the buyers to hold back, and then you’re really stuck,” said Lister, a former head of U.K. property lending at Bank of Ireland Plc. “You can’t possibly afford to sell to the domestic buyers because they can’t afford to pay those figures.”

Battersea Power Station Holding Co. raised a 790 million- pound ($1.3 billion) syndicated loan to develop and refurbish the first phase of the site after it pre-sold about $1 billion of apartments and townhouses in May, the company said in a Nov. 21 statement. The record of pre-sales was reflected in the terms of the financing, it said.

Chancellor of the Exchequer George Osborne announced the new capital-gains tax in a statement to Parliament on Dec. 5. It will apply to “future gains” after the tax goes into effect in April 2015, he said without specifying the size of the levy. Capital-gains tax rates for second homes of U.K. residents currently range from 18 percent to 28 percent.


Building Luxury


Luxury-home developers plan to build more than 20,000 properties in London with a value of about 50 billion pounds in the next decade, Mark Farmer, head of residential property at consulting firm EC Harris LLP wrote in a Nov. 25 report. As well as a strengthening pound, the developers face rising building costs and a risk that investors will grow weary of repeated sales exhibitions, he said.

“You’ll see softening in pricing, at the bottom end of the luxury-housing market,” Farmer said. Investors will remain interested though they will “drive a harder deal.” EC Harris defines the lower-end of the luxury homes market as 1,250 pounds to 1,700 pounds a square foot.

In central London, about 28 percent of home buyers in the two years to June didn’t live in the U.K., according to broker Knight Frank LLP. That rises to about 49 percent for new homes. In Greater London, 10 percent to 15 percent of new homes are bought by non-residents, Knight Frank estimated in October.


Moving Goalposts


Singapore and Hong Kong, two destinations also favored by south Asian buyers, have introduced measures to cool property prices and curb speculation. Singapore linked borrowers’ maximum debt levels to their incomes and raised transaction and capital- gains taxes. Hong Kong has increased minimum down payments six times in fewer than three years and in February doubled stamp- duty taxes for all properties over HK$2 million ($258,000).

Transactions in Hong Kong will probably drop as much as a third this year compared with 2012, Knight Frank estimated. In Singapore, home-price declines accelerated in October from a month earlier to 1.2 percent.

The frequency of changes to U.K. property-tax law and the possibility of further levies are also seen as a hindrance to homebuyers from abroad. Osborne raised a transaction tax known as stamp duty to 7 percent from 5 percent for properties priced at more than 2 million pounds in March 2012.

Labour Party leader Ed Miliband and Nick Clegg, head of the Liberal Democrats, which govern in a coalition with Prime Minister David Cameron’s Conservative Party, support an annual levy on houses valued at more than 2 million pounds known as the mansion tax. Cameron opposes the idea.


Missed Opportunity


“The government had a chance to review property taxes in 2012 and they fudged it,” Rob Perrins, managing director of U.K. homebuilder Berkeley Group Holdings Plc said in a telephone interview. “Our real concern is that the government will keep playing around and changing the tax every six months. Property is a long-term acquisition and people deserve to know where they stand.”

About 30 percent of Berkeley’s customers are foreign, Perrins said.

The capital-gains tax will affect prices at the lower-end of the prime central London homes market where “speculators” who didn’t intend to live in the properties are more involved said Alex Michelin, a founder of luxury developer Finchatton Ltd. “It’s not going to switch off the tide. The marginal investor will say ‘this no longer makes it as attractive for me and I will stop doing it.’”


Top End


The tax won’t affect the superprime market, he said, as buyers there are more likely to live in their homes. Superprime homes are valued at 5 million pounds or more, according to broker Savills Plc.

“It’s not an unfair tax. It brings London in line with Paris and New York,” he said. “This is just trying to say we want to make it fair for everyone.”

U.K. economic growth is increasing more rapidly than previously expected, Osborne said last week. That may affect property investors from abroad more than the new tax as it puts pressure on the Bank of England to raise interest rates, boosting a pound that has already been rising.

The pound plummeted against a basket of major currencies after the collapse of Lehman Brothers Holdings Inc., making London homes a relative bargain for wealthy investors and buyers from emerging Asian economies. The Singapore dollar gained 60 percent against the pound from September 2007 to June this year and the Malaysian ringgit climbed by 50 percent. Since then, the pound has risen 6.8 percent and 12 percent respectively against the Asian currencies.

“One of the key drivers around demand in that market, particularly from the Far East, has been the relative weakness of sterling over the last three or four years,” said Farmer of EC Harris. “The improving economy is good for U.K. Plc but it might make residential investment slightly less competitive or good value in the eyes of the international community.” -- BLOOMBERG


Read more: London’s lure dimmed by capital gains tax http://www.btimes.com.my/Current_News/BTIMES/articles/20131210163205/Article/index_html#ixzz2n4ff9sPr

Investing heavily in your best ideas

While this may be a scary choice to make – concentrating your investments in a few stocks – that is what the young Buffett was doing in 1960s.

Sanborn, for instance, formed about 35% of Buffett’s portfolio in 1960. Plus it was a small company with an illiquid stock (just 105,000 shares outstanding).

Despite these attributes that can scare any investor, Buffett saw a great opportunity and invested heavily in Sanborn. He later did the same thing with See’s Candy in the 1970s.

Let’s me be clear here. I am not suggesting that you put 30-40% of your money in any one stock or investment. However, if you really believe in an idea, you may be willing to take it to around 10-15% of your portfolio.

Too many people over-diversify – allocating the same amount of money to their best ideas as to their worst ones. But then, as they say, “Concentrate to grow your wealth and diversify to preserve it.

So while you may buy a number of stocks for your portfolio, it pays in the long run to put most of your money in your best ideas.

http://www.safalniveshak.com/wit-wisdom-warren-part4/

Margin of safety: from basic tenet to most of the strategy

Main points:

1.  Investors should not target a rate of return, but rather make the goal simply one of acquiring undervalued assets.

2.  Klarman suggests always moving on to new assets so as to always hold the most undervalued securities available. No investment is considered sacred when a better one comes along.

3.  Valuation should always be performed conservatively, giving considerable weight to worst-case liquidation value as well as to other methods.

4.   Investors must be aware that the world can change unexpectedly and sometimes dramatically; the future may be very different from the present or recent past. Investors must be prepared for any eventuality.  

5.  Buying with an optimal margin of safety should be your primary, and in some sense your only, investment goal.  

6.  Most investment approaches do not focus on loss avoidance or on an assessment of the real risks of an investment compared with its return. Only one that I know does: value investing.

8 Nov 2011 by Jim Fickett.

While all value investors claim “buy below true worth” as a basic principle, Klarman turns this into most of a strategy. For example, he advocates always holding the most undervalued assets, even if this means selling other things “too soon”. And he makes the intriguing proposal that one should not target a rate of return, but rather make the goal simply one of acquiring undervalued assets.

As illustrated in the recent post Margin of safety, the idea of buying well below true worth is fundamental to value investing as implemented by a number of famous practitioners. Klarman, however, takes this principle to a new level. Whereas Grantham discussed waiting until full value was realized before selling, and Buffett buys companies to hold them forever, Klarman suggests always moving on to new assets so as to always hold the most undervalued securities available:

Value investors continually compare potential new investments with their current holdings in order to ensure that they own only the most undervalued opportunities available. Investors should never be afraid to reexamine current holdings as new opportunities appear, even if that means realizing losses on the sale of current holdings. In other words, no investment should be considered sacred when a better one comes along.

He admits that buying with the best possible margin of safety is a challenge:

If you cannot be certain of value, after all, then how can you be certain that you are buying at a discount? The truth is that you cannot. …

Should investors worry about the possibility that business value may decline? Absolutely. … First, since investors cannot predict when values will rise or fall, valuation should always be performed conservatively, giving considerable weight to worst-case liquidation value as well as to other methods. …

Value investing is simple to understand but difficult to implement. Value investors are not supersophisticated analytical wizards who create and apply intricate computer models to find attractive opportunities or assess underlying value. The hard part is discipline, patience, and judgment. Investors need discipline to avoid the many unattractive pitches that are thrown, patience to wait for the right pitch, and judgment to know when it is time to swing.

Nevertheless, he suggests that buying with an optimal margin of safety should be your primary, and in some sense your only, investment goal:

One of the recurrent themes of this book is that the future is unpredictable. No one knows whether the economy will shrink or grow (or how fast), what the rate of inflation will be, and whether interest rates and share prices will rise or fall. Investors intent on avoiding loss consequently must position themselves to survive and even prosper under any circumstances. Bad luck can befall you; mistakes happen. The river may overflow its banks only once or twice in a century, but you still buy flood insurance on your house each year. Similarly we may only have one or two economic depressions or financial panics in a century and hyperinflation may never ruin the U.S. economy, but the prudent, farsighted investor manages his or her portfolio with the knowledge that financial catastrophes can and do occur. Investors must be willing to forego some near-term return, if necessary, as an insurance premium against unexpected and unpredictable adversity.

Choosing to avoid loss is not a complete investment strategy; it says nothing about what to buy and sell, about which risks are acceptable and which are not. A loss-avoidance strategy does not mean that investors should hold all or even half of their portfolios in U.S. Treasury bills or own sizable caches of gold bullion. Rather, investors must be aware that the world can change unexpectedly and sometimes dramatically; the future may be very different from the present or recent past. Investors must be prepared for any eventuality.

Many investors mistakenly establish an investment goal of achieving a specific rate of return. …

Rather than targeting a desired rate of return, even an eminently reasonable one, investors should target risk. Treasury bills are the closest thing to a riskless investment; hence the interest rate on Treasury bills is considered the risk-free rate. Since investors always have the option of holding all of their money in T-bills, investments that involve risk should only be made if they hold the promise of considerably higher returns than those available without risk. This does not express an investment preference for T-bills; to the contrary, you would rather be fully invested in superior alternatives. But alternatives with some risk attached are superior only if the return more than fully compensates for the risk.

Most investment approaches do not focus on loss avoidance or on an assessment of the real risks of an investment compared with its return. Only one that I know does: value investing.

Klarmsn's success is a strong argument for these views. But each person has to find his own way, and there are two areas where I have a hard time reconciling this strategy with my own view of the world.

http://www.clearonmoney.com/dw/doku.php?id=investment:commentary:2011:11:08-margin_of_safety_from_basic_tenet_to_most_of_the_strategy

The LONGER a stock remains seriously UNDERVALUED and the LONGER they DONT' RETURN TO NORMAL VALUE, the BETTER it is for the investor

A Margin of Safety BOOSTS Returns Rather than Just Providing Protection


The longer the stock remains undervalued, the better it is for shareholders, because their reinvested dividends, or their new purchases, or management’s share buybacks, continue to accumulate undervalued shares.    

It actually becomes a demonstrably negative scenario for a long term investor when their stocks go up above fair value.    


That’s how Buffett made 30-50% returns in his early days. 

He wasn’t investing in companies that were growing earnings by 30-50% per year; he was investing in companies that were seriously undervalued.

Eventually, those stocks will return to normal values, and the longer they don’t, the better it is for the investor.    



Comments:  
A most important point.
As a value investor, you should be happy for the stock market to be down.
It is only then, you can find the bargains you wish.
As you will be a net investor in stocks for the future and for the long term, you should welcome a down market, so that you can buy stocks at bargain prices.
Yet, in many forums, everyone is cheering for the prices of stocks to rise. 

Lessons from a Secret Multi-Millionaire

Lessons from a Secret Multi-Millionaire
How Anne Scheiber Amassed $22 Million From Her Apartment



By Joshua Kennon


In the mid 1940’s, Anne Scheiber retired from the IRS where she worked as an auditor. Using a $5,000 lump sum she had saved, and a pension of roughly $3,150, over the next 50+ years, she built a fortune from her tiny New York apartment that exceeded $22,000,000 upon her death in 1995 when she left the funds to Yeshiva University for a scholarship designed to help support deserving women. Here are some of the lessons we can learn from this ordinary woman that achieved extraordinary wealth.

1. Do your own research

Sheiber was burnt by brokers during the 1930’s so she resolved to never rely on anyone for her own financial future. Using her experience with the Internal Revenue Service, she analyzed stocks, bonds, and other assets. The result: She owned only companies with which she was comfortable. When markets collapse, one of the best ways to stay the course and maintain your investment program is to know why you own a stock, how much you think it is worth, and if the market is undervaluing it in your opinion.

2. Buy shares of excellent companies

When you’re really in this for the long-haul, you want to own excellent businesses that have durable competitive advantages, generate lots of cash, high returns on capital, have owner-oriented management, and strong balance sheets. Think about everything that has changed in the past one hundred years! We went from horse and buggies to cars to space travel, the Internet, nuclear knowledge, and a whole lot more. Yet, people still drink Coca-Cola. They still shave with Gillette razors. They still chew Wrigley gum. They still buy Johnson & Johnson products.

3. Reinvest your dividends

One of the biggest flaws with both professional and amateur investors is that they focus on changes in market capitalization or share price only. With most mature, stable companies, a substantial part of the profits are returned to shareholders in the form of cash dividends. That means you cannot measure the ultimate wealth created for investors by looking at increases in the stock price.

Famed finance professor Jeremy Siegel called reinvested dividends the “bear market protector” and “return accelerator” as they allow you to buy more shares of the company when markets crash. Over time, this drastically increases the equity you own in the company and the dividends you receive as those shares pay dividends; it’s a virtuous cycle. In most cases, the fees or costs for reinvesting dividends are either free or a nominal few dollars. This means that more of your return goes to compounding and less to frictional expenses.

4. Don’t be afraid of asset allocation

According to some sources, Anne Scheiber died with 60% of her money invested in stocks, 30% in bonds, and 10% in cash. For those of you who are unfamiliar with the concept of asset allocation, the basic idea is that it is wise for non-professional investors to keep their money divided between different types of securities such as stocks, bonds, mutual funds, international, cash, and real estate. The premise is that changes in one market won’t ripple through your entire net worth.

5. Add to your investments regularly

Regular saving and investing is important because it allows you to pick up additional stocks that fit your criteria. In addition to the first investment Scheiber made, she regularly contributed to her portfolio from the small pension she received.

6. Let your money compound uninterrupted for a very long time

Probably the biggest reason Anne Scheiber was able to amass such as substantial fortune was that she allowed the money to compound for of half a century. No, that doesn’t mean you have to live the life of a monk or deny yourself the things you want. What it means is that you learn to let your money work for you instead of constantly striving to scrape by, barely meeting expenses and maintaining your standard of living.



To learn about the power of compounding, read Pay for Retirement with a Cup of Coffee and an Egg McMuffin. With only small amounts, time can turn even the smallest sums into princely treasures.

http://beginnersinvest.about.com/od/investorsmoneymanagers/a/Anne_Scheiber.htm

http://www.philanthropyroundtable.org/almanac/great_men_and_women/hall_of_fame/oseola_mccarty

Pay for Retirement with a Cup of Coffee and an Egg McMuffin

Pay for Retirement with a Cup of Coffee and an Egg McMuffin
$3 a Day Can Add Up to a Serious Nest Egg

By Joshua Kennon

How many times have you swung by McDonalds on your way to work for a cup of coffee and an Egg McMuffin? It may seem like small change, but the $3 a day it is costing you to buy your breakfast can fund your retirement. Don't believe it? Let's take a look at the numbers.

The stock market has historically averaged a return of around twelve percent. If you began investing $3 a day at twenty five years old and earned the same rate of return, by the day you reached sixty-five, you would have saved a total of $381,437 before taxes. That's a pretty substantial nest egg by anyone's standards. The results are even more spectacular if you start younger (a sixteen year old would save $789,896 pretax by retirement).

Why such the drastic difference between the 16 and the 25 year old? Compounding. When you invest or save, your money earns more money in the form of interest or dividends. If you reinvest these, you earn interest on your interest. Here's how it works: You put $100 in a savings account that earns 4% annually. At the end of the first year, you earn $4 in interest. Let's say you keep that $4 in the savings account. At the end of the second year, you would earn 4% on the $104 (instead of the original $100). This would result in your interest payments higher each subsequent year as you kept reinvesting your interest.

For those of you who are thinking, "Well, I'm 30, 40, 50, or 60+ years old. What can I do?", don't worry! No matter when you start, if you are diligent and intelligent in your investing, you will end up with more money than you would have had otherwise. A fifty year old could still put aside more than $36,013 by following the three-dollar-a-day plan.

The next time you bite into that sausage egg and cheese breakfast sandwich, keep in mind you may be eating your retirement.

http://beginnersinvest.about.com/cs/retirementcenter/a/040302a.htm

Warren Buffett Market-Beating Skills Revealed: Cutting Research

Warren Buffett Market-Beating Skills Revealed: Cutting Research
By Simon Kennedy - Dec 6, 2013


Warren Buffett isn’t just a great investor. He’s the best investor, an economic study has found.

An index measuring returns adjusted by price fluctuations shows the billionaire chairman and chief executive officer of Berkshire Hathaway Inc. has done better than every long-lived U.S. stock and mutual fund.

The study said Warren Buffett, chief executive officer of Berkshire Hathaway Inc., is willing to take on borrowing to finance investment, then picks stocks that have low volatility, are cheap -- with low price-to-book ratios -- and are high quality, meaning they are profitable and have high payouts.

Looking at all U.S. stocks from 1926 to 2011 that have been traded for more than 30 years, a paper published this week by the National Bureau of Economic Research calculated that Buffett’s so-called Sharpe ratio is 0.76 since 1976. That was about twice the stock market’s 0.39.

The ratio is also larger than all 196 U.S. mutual funds that have been around for 30 years. The median Sharpe ratio for them is 0.37.

The review of Buffett’s investments concluded he has been rewarded for his use of leverage, coupled with a focus on cheap, safe, quality shares.

The study said Buffett is willing to take on borrowing to finance investment, then picks stocks that have low volatility, are cheap -- with low price-to-book ratios -- and are high quality, meaning they are profitable and have high payouts.

By breaking down Berkshire Hathaway’s portfolio into ownership of publicly traded stocks versus wholly owned private companies, the authors also found the tradable equities performed best. That suggested to them that Buffett’s returns are due more to stock selection than to the pressure he puts on companies he has stakes in to improve their management.

“Buffett’s performance appears not to be luck, but an expression that value and quality investing can be implemented,” said Andrea Frazzini and David Kabiller of AQR Capital Management LLC and Lasse H. Pedersen of Copenhagen Business School. “If you travel back in time and pick one stock in 1976, Berkshire would be your pick.”

http://www.bloomberg.com/news/2013-12-06/warren-buffett-market-beating-skills-revealed-cutting-research.html