5 Retirement Lessons From Warren Buffett

When you think of great investors, the name at the top of the list is Warren Buffett. The Oracle of Omaha's insights and ideas can guide you in your own efforts to build wealth. As you consider your retirement future, here are five takeaways from the Oracle of Omaha:

1. Invest for the long term. Many of us are short-sighted. We panic at every market crash or try to chase a quick buck. However, Buffett teaches us to invest for the long term. When Buffett buys a company, he thinks of the long-term value. He doesn't look for something that offers splashy returns in the short term. He looks for something with staying power.

When investing for retirement, you need to think the same way. You won't be able to buy up whole companies, but you can invest for the long term by buying the market through index funds, and then staying in for the long haul. Your future self will thank you.

2. Have a purpose. Buffett has talked about the importance of having a purpose. You need to have an idea of what you want to do that gives meaning to your life. Studies show that retirees often lose their health shortly after quitting, when they don't have something to look forward to each day. Think about what you want to do with your life during retirement, and make it a new stage, rather than an end.

3. Learn from the mistakes of others. There is no reason to repeat the mistakes of others. Instead, learn from them. Many people sold at the bottom of the market in early 2009. Those folks locked in their losses. If they had been willing to wait a few years, they would have seen tremendous gains instead. Don't panic just because everyone else is panicking, and pay attention to the mistakes that bring others down. When you learn from the mistakes of others, you are less likely to fall victim to them.

4. Don't invest in the exotic. Buffett has talked about how he keeps enough cash on hand to meet his upcoming needs, but other than that, he keeps his money working for him. But that doesn't mean that he's investing in exotic assets. Buffett stays away from gold and currencies, and he also avoided the complicated credit default swaps that he famously referred to as instruments of mass financial destruction.

You can be the same boring investor. Focus on stocks, using index funds, and you will be likely to build wealth over time, without the stomach-churning volatility and risk that comes with more exotic assets.

5. Don't worry too much about leaving wealth to your children. While Buffett has said publicly that he wants his children and grandchildren to live fulfilling lives, he isn't taking care of everything for them. Indeed, a large portion of his wealth is going to charity, not his posterity, when he dies.

You can learn a similar lesson. Don't be so worried about providing everything for your children that you neglect your own retirement. And don't be so concerned about leaving them a pile of money that you don't enjoy your retirement when it comes.

Jeff Rose is a certified financial planner, U.S. combat veteran and the founder of GoodFinancialCents.com . 


http://finance.yahoo.com/news/5-retirement-lessons-warren-buffett-141437202.html

Chinese Stocks Tumble, Heads for Biggest Loss Since 2007

By Amy Li

Chinese stocks sank the most in five months, leaving the benchmark index on the cusp of a bear market, after leveraged investors cut holdings and Morgan Stanley joined a chorus of analysts warning that valuations have climbed too far.

The Shanghai Composite Index fell 7.4 percent to 4,192.87 at the close, bringing its drop from this year’s high to 19 percent. Chinese stock-index futures tumbled by the 10 percent daily limit as investors rushed to hedge their positions, while the benchmark index in China’s smaller exchange in Shenzhen sank 20 percent from this year’s peak. A gauge of equity volatility jumped to the highest level since 2009.

More from Bloomberg.com: China Stock Rout Leaves Xinhua Speechless as State Support Fades

China’s $8.8 trillion stock market has plunged from first to worst on global performance rankings, threatening to bring an end to the longest bull market since the ruling Communist Party introduced equity trading to the world’s largest population in 1990. Morgan Stanley advised clients to refrain from purchasing mainland shares in a report on Friday, saying the Shanghai Composite’s June 12 high likely marked the top of the rally.

“This is probably not a dip to buy,” wrote Jonathan Garner, the head of Asia and emerging-market strategy at Morgan Stanley in Hong Kong. “In fact, we think the balance of probabilities is that the top for the cycle on Shanghai, Shenzhen and the ChiNext has now taken place.”

More from Bloomberg.com: Obamacare Tax Subsidies Upheld by Top U.S. Court in 6-3 Vote

The Shanghai gauge has surged 106 percent over the past year as margin debt climbed to a record and investors speculated monetary stimulus will revive the weakest economic expansion in more than two decades. The bull market, which turned 935 days old Friday, is more than five times the average lifespan of previous rallies.

Black Friday

Friday’s rout was led by technology and smaller companies, the leaders of China’s world-beating rally through mid-June. The ChiNext index slid 8.9 percent, extending losses to 27 percent since hitting a high on June 3. The Shenzhen Composite Index also entered a bear market after falling a further 7.9 percent.

More from Bloomberg.com: Roberts Fought Back Against Scalia in Sharply Worded Footnotes

The Shanghai Composite’s losses were broad-based with 44 stocks falling for every one that gained. The index slid 6.4 percent this week, adding to a 13 percent plunge last week that was the steepest since the global financial crisis.

The CSI 300 Index of China’s largest companies slumped 7.9 percent on Friday. The Hang Seng China Enterprises Index of mainland companies in Hong Kong fell 2.8 percent and the Hang Seng Index lost 1.8 percent.

With little in the way of economic data or corporate announcements to spark the plunge on Friday, some investors pointed to signs of a pullback by leveraged traders. Outstanding margin debt on the Shanghai Stock Exchange dropped for a fourth day on Thursday to 1.42 trillion yuan ($229 billion).

“The correction is basically margin selling,” said Francis Lun, the chief executive officer at Geo Securities Ltd. in Hong Kong.

Heading Lower

The stocks favored most by margin traders at the height of China’s boom in mid-June have since tumbled 26 percent. The benchmark index has had nine straight sessions of intraday swings exceeding 2 percent.

PetroChina Co., the biggest stock in the mainland, slumped 7 percent on Friday. East Money Information Co., the most heavily weighted stock in the ChiNext, dropped by the 10 percent daily limit. Poly Real Estate Group and Gemdale Corp. led declines for developers, tumbling 10 percent.

Bubble Warnings

The stock market is experiencing a “self-correction,” Zhang Xiaojun, a spokesman at the China Securities Regulatory Commission, said at a weekly briefing after the market close. The benefits of reforms haven’t changed and liquidity will remain ample, Zhang said.

Concern over a shortage of liquidity has helped fuel losses this week as investor funds got tied up in new share sales and the People’s Bank of China refrained from easing monetary policy, disappointing some analysts who had anticipated a cut in interest rates or banks’ reserve requirement ratios.

Guotai Junan Securities Co., China’s largest brokerage by revenue, surged 44 percent on its first day of trading in Shanghai on Friday after it completed the nation’s biggest domestic initial share sale since 2010.

“The Shanghai Composite may fall to the 4,000 level in the next five to eight weeks as the government tightens margin lending, new share sales sap liquidity and concern grows the central bank won’t cut lenders’ reserve-requirement ratios,” said Hou Yingmin, an analyst at AJ Securities in Shanghai.

Morgan Stanley cited increased equity supply, weak earnings growth, high valuations and the surge in margin debt for its pessimistic stance, saying the Shanghai Composite may fall as much as 30 percent through mid-2016.

Strategists at BlackRock Inc., Credit Suisse Group AG and Bank of America Corp. all said last week that Chinese equities are in a bubble, while the median stock on mainland exchanges is valued at 85 times earnings -- higher than when the market peaked in October 2007.

More from Bloomberg.com

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"The 4 Diseases" of Investing - Evenitis (holding to losers), Taking profits (selling winners), Over-trading and FOMO

Teaminvest Co-founder Professor John Price, recently recorded an informative 4.5 minute video about the behavioural biases that often block rational decision-making about investments.

It’s titled “The 4 Diseases”. In the video he explains the four common behavioural biases and fuzzy thinking affecting the way we assess investments. He calls them:

• Get even-itus
• Consolidatus-profitus
• Trade-a-filia
• FOMO

Watch the video and see if you suffer from any of them? - Self awareness will improve your investment decision-making!

Click on John's pic

https://lr220.infusionsoft.com/app/hostedEmail/21336/90e5395442506435?inf_contact_key=bfe1f769afcc1ca46d38151bc79936d7f17975b54721e97cab312e8b684f90d3

Regards

Mark Moreland Co-Founder NOTES: Stock selection - Read the annual reports - Read all the analysts reports - Visit the stores or use their products and services If you find that at the end of the day, the performance of the portfolio is not that good, or mediocre at best, in many cases there are various reasons. They often have not taken into account behavioural biases, the sort of fuzzy thinking that is automatically in their mind that blocks out their rational decision. These are the 4 behavioural biases, which we refer to them as:

• Get even-itus
• Consolidatus-profitus
• Trade-a-filia
• FOMO

Get even-itus

The disease of hanging onto a stock when the price has gone down until you can get even.  "Don't worry dear, it is going to come up back again."   The problem is, if the stock has gone down, the chances are it is going to continue to go down and best it is going to be a mediocre investment.  It is much better to face the fact that you have a loser, you lost money and to move on.

Consolidatus-profitus

This is the opposite to get even-itus.  This is the disease of always taking a profit when the price goes up.  It looks great and you can tell your friend at the dinner party that your stock went up 20%, 40% or 50% and you sold it.   The problem is what you are going to do with that money.  Studies have shown, on average, people who sell just to take a profit end up putting their money back into the market in a stock that underperforms the one they got out of.  #

Get even-itus and Consolidatus-profitus are two sides of the one coin; generally hang on to losers and sell winners.  The opposite would be better, that is, sell your losers and hold on to your winners.  They water the weeds and cut the flowers.  It would be better they  water the flowers and cut the weeds.

Trade-a-filia

This is the disease of just loving to trade. Most people who would never dream of going to casino betting on roulette or any of the casino games or machines,yet when they are on their internet and looking at their stocks, they trade far too often.  It is so simple to trade on the internet and they get drawn into it.  But studies have shown that on average, the more a person trades they worse they do. I am not referring to their transaction costs but actually their performance diminishes.  Instead of looking for great companies that are going to make you money year after year, they think they can get a short term profit.   In the short term, the share prices are much more random than most people believe.  So this is a disease of trading too often.  In this regard, women are better investors than men, because overall, women trade less than men.  

FOMO

This is the 4th disease, the FEAR OF MISSING OUT.  You read about a particular stock and its price is going up and you think, if I don't get in now, I am going to miss out, instead of taking your time and evaluating the stock properly.   

These 4 diseases really work together and at best give you a mediocre performance that is far far below you optimal performance.  

You should work to eliminate these 4 investing biases or diseases, consciously.  Use tight filters to filter out the best companies to concentrate in.  

Be alert that you are not slipping into these investment biases.  Eliminate these investing biases and your performance will be much better. 

# Reinvestment risk.

The Perfect Moment to Buy a Stock

Hi, 

I hope you've been enjoying my newsletter so far! 

You've been a subscriber for about a month now, so I would like to take this moment to really thank you for your support! I truly appreciate it, and I'm hoping I can continue to provide you with some excellent content that you can't get anywhere else, and keep you as a loyal subscriber for even longer. 

Today I will share with you how to identify the perfect moment to buy a stock, and it's probably different from what you expect. Why? Because it has little to do with timing, and more to do with the stock price in relation to the intrinsic value of a company. Let me explain. 

"Price is what you pay, value is what you get." 

There is a crucial difference between price and value, and the above quote by Warren Buffett captures this perfectly. If you want to sell your desk chair on eBay, you can ask any price for it you like. However, the value the buyer receives in return, a desk chair, remains exactly the same, regardless of the price you decide to ask. 

It's the same with stocks. A stock price says little about how much a stock, which is essentially a tiny slice of a business, is actually worth. Investors can ask any price they like, but this doesn't change the underlying business. This means it is possible for stock prices to deviate significantly from their intrinsic value, which is great, because exploiting mispriced stocks is what value investing is all about!

So what is the perfect time to buy a stock? 

Well, you first have to determine whether you are dealing with a financially healthy company. Secondly, using conservative inputs, you need to estimate the intrinsic value of a company to determine what a stock should realistically be worth. Is the stock trading at a price way below the intrinsic value you calculated? Sweet! Then this is the perfect time to buy. If not, put it on your watch list until it is finally cheap enough to get in. 

Timing the market, or trying to predict when a stock will move up or down in the short run, is impossible. You might get lucky a few times, but this strategy is doomed to fail in the long run, since prices can be extremely volatile, highly irrational and therefore 100% unpredictable. The only sound way to determine when to buy is to look at the stock price in relation to the intrinsic value of the underlying company. 

Don't worry if the price declines further after your initial investment, because now you can buy more of a wonderful company at an even lower price! You don't have to buy at the absolute bottom. You just have to buy it for a cheap enough price to make a more than handsome return. 

Now that you know when to buy a stock, you might be interested in learning when to sell. In episode #18 of my value investing podcast I cover the only three reasons to ever sell a stock. Here is a link for you below:
https://www.valuespreadsheet.com/investing-podcasts

Cheers, and all the best to you! 

Nick

CEO of Tesco - Customers are buying more things, more often, at Tesco

26 June 2015

First Quarter Trading Statement

Tesco PLC’s First Quarter Trading Statement 2015/16 was announced today at7.00am. To view the full announcement, please go to: www.tescoplc.com/1Q2015.

Highlights

- UK like-for-like sales performance improved to (1.3)% despite significant deflation and the impact of reduced couponing

- UK like-for-like volumes up 1.4%; transactions up 1.3%; 180,000 more customers shopping with us*

- Like-for-like sales growth in Central Europe and Turkey; Central European restructure largely complete

- Some improvement in performance in Asia, in challenging market conditions

- Short-term volatility remains; transformation programme progressing


Dave Lewis – Chief Executive

“We set out to serve our customers a little better every day and the improvements we are making are starting to have an effect.  We are fixing the fundamentals of shopping to win back customers and relying less on short-term couponing.  Customers are experiencing better service, better availability and lower, more stable prices and are buying more things, more often, at Tesco.

These improvements have come during the restructuring of our office and store management teams, which testifies to the focus, skill and commitment of colleagues across the business.  We have also seen an improved performance in our international markets, as we continue to focus on serving customers better.

Whilst the market is still challenging and volatility is likely to remain a feature of short-term performance, these first quarter results represent another step in the right direction.”

To view the full announcement, please go to: www.tescoplc.com/1Q2015.

Contacts

Investor Relations:
Chris Griffith: 01992 644 800

Press:
Tom Hoskin: 01992 644 645
Brunswick: 0207 404 5959

We are a team of over 500,000 people in 12 markets dedicated to providing the most compelling offer to our customers.

China Margin Trades Buckle Leaving $364 Billion at Risk

by Fox HuKana Nishizawa

The biggest tumble in Chinese shares since 2008 is proving especially painful for margin traders as their favorite stocks sink faster than the benchmark index, raising the risk of forced liquidations.

The 30 equities in Shanghai with the highest levels of margin debt relative to tradable shares have dropped 17 percent on average since the market peaked on June 12, versus a 13 percent decline for the Shanghai Composite Index. Margin positions on the city’s bourse fell for the first time in a month on Friday, a sign that leveraged investors are unwinding bets after they grew more than five-fold in the past year.

With at least $364 billion of borrowed money riding on stocks in Shanghai and Shenzhen, losses on those positions threaten to magnify market declines as traders sell shares to meet margin calls. China’s benchmark index tumbled at the fastest pace among global equity gauges last week, after a world-beating 152 percent gain in the previous 12 months.

“It’s a self-fulfilling prophecy,” Roshan Padamadan, the founder and manager of Luminance Global Fund, said in an interview on Bloomberg Television from Singapore. “As people try to book profits, they’ll find out that there’s nobody on the other side of the trade.”

EGing Photovoltaic Technology Co., a Chinese solar-equipment maker in eastern Jiangsu province, dropped 21 percent since June 12 after outstanding margin bets climbed to 44 percent of the company’s free-float adjusted market capitalization, the highest level among more than 480 equities tracked by Bloomberg and the Shanghai Stock Exchange.

Margin Call

Shanghai Construction Group Co., with a margin trade ratio of about 34 percent, has retreated 19 percent, paring gains over the past year to 243 percent. Shenzhen-based Joincare Pharmaceutical Group Industry Co. declined 20 percent after margin bets reached almost 27 percent of free float.

In a margin trade, investors use their own money for just a portion of the stock purchase, borrowing the rest from a brokerage. The loans are backed by the investors’ equity holdings, meaning they may be compelled to sell to repay their debt when prices fall.

“You can see from Friday’s sharp decline that people are already cutting losses on margin trading,” said Mari Oshidari, a Hong Kong-based strategist at Okasan Securities Group Inc. “This is still ongoing, so we should watch out for further selling pressure.”

While margin debt has surged in recent months, it’s still at manageable levels relative to the size of China’s $8.8 trillion stock market, according to Aaron Boesky, the chief executive officer at Marco Polo Pure Asset Management, which runs a China-focused hedge fund.

Rally Forecast

Investors should take advantage of market declines to increase holdings, Boesky said, anticipating the Shanghai Composite may rally another 36 percent to surpass its all-time high in October 2007.

“It is best to buy the dips,” he said in an e-mail on June 21. “Consolidation allows for those already high returns to sell and take profit, and those who have resisted jumping into the market to now have an appetizing entry point.”

Margin traders have been such an important source of demand for Chinese shares that any pullback, particularly one caused by regulatory efforts to curb the use of leverage, will weigh on the market, according to Ronald Wan, the chief executive officer of Partners Capital International in Hong Kong.

Almost all of this year’s biggest declines in the Shanghai Composite, including a 6.5 percent slump on May 28, were sparked by investor concerns over margin-trading restrictions.

The China Securities Regulatory Commission is planning to curb the amount of margin trades and short sales financed by brokerages to no more than four times their net capital, according to draft rules posted on its website June 12. Brokerages including GF Securities Co. and Haitong Securities Co. have already tightened lending requirements to limit their exposure to any market downturn.

Chinese stocks have been “heavily reliant on margin financing,” Wan said in an interview on Bloomberg Television. “If the government actually cracks down on certain forms of financing, a correction is unavoidable.”

http://www.bloomberg.com/news/articles/2015-06-22/china-margin-trades-buckle-as-selloff-puts-364-billion-at-risk

Interest rates rise likely to increase market volatility

Question:  Interest rates are expected to rise at some point this year, and with that increase, there’s likely to be increased volatility in the equity market.

Given that environment, what types of investments should individual investors consider if they’re seeking a return greater than what a CD or money market account would offer? 

Answer:   Typically, fixed income prices (e.g. bonds, treasuries, etc.) tend to decrease as overall interest rates rise.

However, there are certain kinds of income-producing investments whose prices may not be as volatile should rates begin to rise and could potentially offer higher current income (e.g. floating rate bonds, high yield bonds, and Treasury Inflation Protected Securities “TIPS”, etc.) 

While typically more volatile than bonds, there are many stocks whose dividends (income stream), have risen faster than inflation. 

Question:   Many sophisticated investors make investments in riskier asset classes to generate returns that outpace those of the stock market and traditional investments. What is your view on alternative investments, and do they have a place in the individual investor's portfolio?  

Answer:   Often, when one asset class (i.e. one kind of investment) increases, another decreases. Stocks and bonds, for example, often behave this way. 

Because of this relationship, allocating a certain percentage of one’s portfolio to stocks and a certain percentage to bonds, potentially reduces volatility of the overall portfolio. 

Sometimes—like in 2008—stocks and bonds can both decline together. 

Alternative investments are those that do not necessarily increase or decrease in relation to stocks or bonds. 

For example, some alternative investments increased in value during the financial crisis. 

Adding alternatives to a portfolio may help create additional diversification. This in turn could potentially give the portfolio a “smoother ride”. Alternative Investments can be complex, so it’s important to match the right investment with an investor’s specific objectives. 

Question: What type of alternative investments are easiest for individual investors to invest in and which may also offer some risk mitigation?

Answer: All these alternatives fall into their own specific framework. There are specific rules governing who is allowed to invest in them. Typically they are for higher net worth investors with extensive portfolios in need of additional diversification.


Securing a comfortable retirement is a ubiquitous goal for many investors. 

Inflation risk, interest rate risk and principal risk

Typically, investors think of 3 basic risk types—inflation risk, interest rate risk, and principal risk. 


In fact, there’s no such thing as a riskless investment. 

While US Treasuries guarantee a return of your principal, they are subject to inflation risk (the risk that a dollar today may be worth less than a dollar tomorrow). 

If you keep cash under your mattress, you not only have inflation risk but you also have risk of fire and theft. 

Stocks may potentially reduce inflation risk but have a higher level of capital risk (i.e. if you invest in stocks, you can lose money).

When you substitute one kind of risk, you open yourself up to another. 


There are ways to eliminate or at least diminish certain kinds of risks while maintaining long-term objectives. 

An investor could simply not invest as much in vehicles that have risk to principal, like stocks. 

Or, they could allocate more money to principal-protected investments. 

Since investment returns are typically a function of how much risk you are willing to assume, the lower the risk, the lower the returns. 

That said, there are investments designed to give an investor some exposure to the stock market, while guaranteeing a stream of income during retirement. These typically have liquidity risk.  In other words, you might not be able to access your money for a certain period of time. 


 

Does the Magic Formula Really Work?

What You Will Learn

• Understanding what the Magic Formula is and how to use it
• Performance of the Magic Formula and whether it is achievable
• Whether the Magic Formula is worth using going forward

Magic.

That’s what you need to beat the market and that’s what the Magic Formula is supposed to do.

As a result of brilliant marketing, promotion and becoming a New York Times bestseller in 2005, Joel Greenblatt has turned the Magic Formula into a key strategy for many in the value investing and mechanical investing community.

Buy at least 20 stocks from the Magic Formula screening tooland then rebalance at the end of the year. Do this and you will beat the market, the book says.

The Little Book that Beats the Market

Greenblatt wrote The Little Book that Beats the Market for his children who were aged between 6-15 at the time.

It’s written in plain English and 6th grade math to make it easy to follow along. This is the strong point of the Magic Formula theme.

Everything is very easy to understand. The concept is simple, the explanation is simple, but most important of all, the execution for investors is simple enough to do on their own.

In it’s most naked form, the Magic Formula is described by Greenblatt as

a long-term investment strategy designed to help investors buy a group of above-average companies but only when they are available at below-average prices.

The Ingredients to the Magic Formula

Here is the formula courtesy of wikipedia. From beginning to end, it consists of 9 steps.

1. Establish a minimum market capitalization (usually greater than $50 million).
2. Exclude utility and financial stocks
3. Exclude foreign companies (American Depositary Receipts)
4. Determine company’s earnings yield = EBIT / enterprise value.
5. Determine company’s return on capital = ebit / (net fixed assets + working capital)
6. Rank all companies above chosen market capitalization by highest earnings yield and highest return on capital (ranked as percentages).
7. Invest in 20–30 highest ranked companies, accumulating 2–3 positions per month over a 12-month period.
8. Re-balance portfolio once per year, selling losers one week before the year-mark and winners one week after the year mark.
9. Continue over a long-term (3–5+ year) period.

Pay close attention to step 4 and 5 because they are the key driving formulas for it all to work.

• Earnings Yield = EBIT / Enterprise Value
• Return on Capital = EBIT / (Net Fixed Assets + Working Capital)

Earnings Yield is used because it targets companies with below-average prices. The idea behind of Return on Capital is to select good companies that are outperforming. This fits in line with what Greenblatt said

a long-term investment strategy designed to help investors buy a group of above-average companies but only when they are available at below-average prices.

The Magical Performance

So how magic is this Magic Formula in terms of performance? This table of values is from the revised 2010 version of the book.

and a better representation.

Starting with $10,000 the Magic Formula would have made you a millionaire by 2009.

The Magic Formula is famous for returning a 30% CAGR. From 1988 to 2004, it did achieve a 30.8% return, but the CAGR has declined significantly. No strategy can sustain a CAGR of 30%. Although the backtest in the book only provides data up to 2009, I wouldn’t count on 2010-2012 results showing vast out-performance.

The Magic Formula is a Fraud?

By popular demand, the Magic Formula will soon be added to the list of value stock screens, but the one thing that has held it back is the reliability of the backtest performed by Greenblatt.

I just don’t believe the results are as good as it seems.

What’s more, other blogs have tried to simulate the Magic Formula performance from the book, but none of them  have come close.

• Magic Formula that JUST beats the market
• Turnkey Analyst tests the Magic Formula
• Another article suggesting that the Magic Formula beats the market by 4.5%

Read more: http://www.oldschoolvalue.com/blog/investing-strategy/the-magic-formula-investing/#ixzz3cvbPJIfM

Warren Buffett’s Greatest Competition

There’s no disputing that Warren Buffett is the best investor of all time. His net worth speaks for itself. In fact, there is only one person in history worthy of comparison.

That person is young Warren Buffett.

Let’s take a look at the numbers Buffett achieved in the 1950s and 1960s compared to his performance thereafter.

From 1957 to 1969, Buffett achieved an average return of 29.5% and a cumulative return of 2794.9%!

In this timeframe, the Dow had a negative return in 5 out 12 years. Buffett had a positive return in all 12 years, with his most successful year, 1968, reaching a remarkable 58.8%. That beat the Dow by more than 50 percentage points.

This was the pinnacle of Buffett utilizing the strategies of Benjamin Graham and investing in net net stocks. He focused on the best possible NCAV investments, such as Western Insurance Securities Company, and often chose fairly concentrated portfolios. Once he found the stocks, he simply puffed the cigar and celebrated his victories.

Back then, finding these valuable, cheap companies was difficult. Young Warren Buffett had to do his own research and put in relentless man-hours. He spent months combing through Moody's stock manuals to find a handful of available net nets. Today, you can find a good selection of high-quality international net net stocks by signing up for free net net stock picks or, even better, opting for full access to Net Net Hunter.

For comparison, between the years of 1965 and 2014 when Warren Buffett became a behemoth, Berkshire achieved a compounded annual return of 19.4%, over 10% less than the best years of his investment life. And, these numbers were heavily boosted by the returns young Warren Buffett achieved in the late 1960s. During this timespan, he also had a few negative years and a few more in which the S&P 500 outperformed his portfolio.

A return of 19.4% annually is nothing to sneeze at. Most investors do worse. Still, 84-year-old billionaire Warren Buffett wouldn’t last a round in the ring with his agile, quick-footed 30-year-old self. At a Berkshire Hathaway annual meeting, he admitted it:

"Yeah, if I were working with small sums, I certainly would be much more inclined to look among what you might call classic Graham stocks, very low PEs and maybe below working capital and all that. Although -- and incidentally I would do far better percentage wise if I were working with small sums -- there are just way more opportunities. If you're working with a small sum you have thousands and thousands of potential opportunities and when we work with large sums, we just -- we have relatively few possibilities in the investment world which can make a real difference in our net worth. So, you have a huge advantage over me if you're working with very little money." – Warren Buffett

You have thousands and thousands of potential opportunities that Buffett does not! By being able to invest in net net stocks, classic Graham stocks, you have a huge advantage over the Oracle of Omaha.

Following Benjamin Graham and a Young Warren Buffett

So, this brings us back to the beginning. A young Warren Buffett risked everything and hopped on a train to Washington D.C. to work for Benjamin Graham, the father of value investing.

In 1954, he accepted a job at Graham’s partnership for a starting salary of $12,000 a year. Under Graham’s tutelage, he fine-tuned his ability to spot promising net net stocks, as opposed to merely cheap stocks.

Both are obviously value stocks, but cheap stocks can be any stock where the current price is lower than the underlying intrinsic value. Net net stocks are valued purely on their net current assets. That’s cash, accounts receivable, and inventory minus total liabilities, preferred shares, and various off-balance sheet liabilities. Working capital. This is better known as the NCAV, or Net Current Asset Value.

If the stock price was 2/3 of the NCAV, Graham would buy. When the stock price returned to the full NCAV, Graham would sell. Assuming he found a good net net stock, his downside is protected by the discount to net liquid assets, providing a huge margin of safety. It’s such a solid strategy that you, as a small investor, don’t really have to know a thing about the industry. By comparison, Buffett went into textiles in a major way and lost his shirt.

There have been multiple studies that show Graham’s strategy consistently shows returns of a basket of net net stocks in the 20-35% range. From 1970 to 1983, an investor could have earned an average return of 29.4% by purchasing stocks that fulfilled Graham’s requirements and holding them for at least a year.

Buffett himself, using Graham’s strategy, stated that he would see returns within a 2-year timeframe 70 to 80% of the time. He would take a puff and sell instead of collecting boxes of cigars and waiting for them to appreciate in value.

Despite the simplicity of his approach, it seems most investors ignore the stocks that Graham would have most coveted. Investors nowadays want to invest as if they’re billionaires, choosing a wide range of large cap stocks and holding on to them until retirement, death, or the next big market crash.

Going against the market takes conviction and faith in your approach, something both Graham and Buffett had in spades. Smart value investors don’t brag about owning Apple or Google. They talk about small wholesale electronics factories and unknown retail companies. They are excited about international microcap stocks in Japan or Australia.

If you’ve read this far, you’re not Warren Buffett, the immobile billionaire. You’re young Warren Buffett, the wide-eyed investor hopping on a train heading toward immeasurable wealth.

Read more here:

http://www.netnethunter.com/how-young-warren-buffett-started-his-fortune/

Is Benjamin Graham Still Relevant in 2015?

 Benjamin Graham in the Shadow of Buffettology?

Part of the question of whether Benjamin Graham is still relevant today arises from the popularity and success of Warren Buffett. During the course of his career, Buffett has essential blazed a trail away from the core strategies of Benjamin Graham. He's been quite successful, too, recording returns much higher than Benjamin Graham ever did.

Buffett's most recent plain vanilla approach to investing involves buying good companies at good prices and not looking for the statistical bargains that Graham advocated. Instead of buying bargains and selling them when they rise back to fair value, Buffett mostly holds onto his stocks forever.

Buffett has also spent a lot of time talking to the press and students about investing and business, which has lead many people to adopt the contemporary Buffett approach to investing.

Investors should definitely keep two things in mind when it comes to Buffettology, however. First, Buffett's investment philosophy is still rooted in the philosophy of Benjamin Graham and, second, Buffett racked up his biggest returns in the 1950s and 1960s when he was still using Benjamin Graham's investment philosophy.

Buffett still uses significant aspects of Graham's approach -- specifically the focus on valuation. All of his investment decisions involve judging the value of the business and then using that value as the bedrock from which he assesses the investment's merit. Bad things can happen to your net worth when you buy great companies at expensive prices. He also recognizes that reversion to the mean is nearly a fundamental law in business so looks to ways to protect himself by buying firms with strong competitive advantages.

Despite Buffett's great long term track record, his Buffett Partnership letters reveal that he was achieving his highest returns while he was using Benjamin Graham's classic value investing approach -- the cornerstone of which was Graham's net net stock strategy. During the 1950s and 1960s he earned returns of roughly 30%, and only changed his strategy when his portfolio became to large to continue buying net net stocks.

Warren Buffett had the best results of his career during his partnership days. His later returns had to be much lower to drag down his average returns to 20%.

After the change, while Buffett still earned outstanding results, they were not nearly as good as they were before the change in investment strategy. It's worth noting that even now Buffett would chose to use a classic Benjamin Graham approach to value investing if he was managing a portfolio under $10 million.

Read more here:

http://www.netnethunter.com/benjamin-graham-still-relevant-or-a-complete-waste-of-time/