Are you scared to invest? FEAR is your friend

Monday March 18, 2013

Are you scared to invest? Billionaire Warren Buffett's tips on how to overcome it

Financial Snacks - By Joyce Chuah

“If you’re going to be this way each time your shares drop by one sen, you might as well just sell them off!”

Fear is a common emotion in our lives and in many instances, it protects us from danger.

However, investors' fear may be more punishing than protective, writes JOYCE CHUAH.

I HAVE often said this in my seminars: “Many of us want to invest but a few of us are NOT prepared to be investors.”

The common question among investors is often “How much are we making?” True, profits are after all the benchmark we set for a successful investment plan. However, many often choose to forget that in the process of seeking profits, there will be times of unrealised losses and times of unfavourable returns due to events beyond anyone's control.

Even if it is an event which one tries to predict (such as the general election date!), many forget that such events are just temporary and not catastrophic, where total and irrecoverable loss cannot happen. The test of a successful investor is when the rubber hits the road' − that is, when faced with a loss position, can you prevent yourself from reacting and allowing fear to push you to sell your loss positions?

Fear protects us from danger, as in a fight or flight situation. But investors' fear may be more punishing than protective because it prepares us to react and changes our perspective of the external events.

Joyce Chuah

I have often said that the acronym F.E.A.R. stands for “False Evidences Appearing Real”, as fear deletes, distorts and generalises events which may are not as adverse as they seem or as we are told.

It is no wonder that Warren Buffett is one of most successful investors in the world. He practises what he termed as “inactivity” as an investor. Instead of reacting to fear, Buffett says, investors should learn to be calm and inactive.

His thoughts are best summed up in four of his famous wise quotes:

“The stock market is designed to transfer money from the active to the patient.”

“Stop trying to predict the direction of the stock market, the economy, interest rates, or elections.”

“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for 10 years.”

“My success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell.”

http://biz.thestar.com.my/news/story.asp?file=/2013/3/18/business/12815616&sec=business

Eurozone officials decided levy to be imposed on all deposits in Cyprus

On Saturday, Eurozone officials decided that a 6.75% levy would be imposed on all deposits under €100,000. Accounts over €100,000 would have a levy of 9.9%. The intention is to bring down the bailout cost. Although Eurozone officials insisted that this measure of imposing levies on deposit is limited to Cyprus. There are genuine fear among investors regarding Italy and Spain.

The global anxiety due to Cyprus are now heightened.

Santa Claus politics underscore Malaysia’s elections - the "sweeteners" will be paid for by the same voters who thought they got them for free

Santa Claus politics underscore Malaysia’s elections, says Singapore paper

MARCH 17, 2013

As Election 2013 fever spurs Malaysian politicians from both sides to serve up expensive sweets to boost their bid. - file picKUALA LUMPUR, March 17 — As Election 2013 fever spurs Malaysian politicians from both sides to serve up expensive sweets to boost their bid, a Singapore paper reminded voters today that they would be the ones to pick up the tab. 

“The intense fight for votes has led both the administration of Prime Minister Najib Razak and the opposition PR to promise more and more populist measures. 

“You could call it Santa Claus politics,” Reme Ahmad, assistant foreign news editor in the widely-read Straits Times, wrote in an opinion piece for the paper’s Sunday edition. 

He noted that Najib who leads the ruling Barisan Nasional (BN) has been dishing out more cash “gifts” to offset rising living costs that are the main concerns of a significant 40 per cent of the 13.3 million voters struggling with bread-and-butter issues; and signal there may be more to come if the coalition maintains power. 

Among the billions of ringgit worth of sweeteners he listed were the second round of RM500 cash aid for each household, RM200 smartphone rebates for the hundreds of thousands of youths, the RM250 student book vouchers and just last week, pay hikes for the country’s 230,000 policemen and soldiers who are seen to form a core deposit in the coalition’s vote bank. 

The writer noted that the Pakatan Rakyat (PR) opposition, which is seen to be a viable contender to take federal power for the first time, has also promised many goodies. 

Among them, he listed free university education, cheaper utility bills, lower transport costs through cuts in car and petrol prices and highway tolls that formed the key proposals in PR’s manifesto launched last month. 

“But here is one worry the politicians are downplaying. 

“With all the goodies disbursed or promised, will the next government shift more public money towards productive activities such as upgrading ports and boosting worker education, or will it be forced to give yet more sugar and spice to voters fattened by everything nice?” the writer asked. 

Reme said that the reality was that sugary deals and promises of more handouts will not necessarily reel in the votes, as several political observers here have said. 

“The harsh reality is that the more you give, the more people want. 

“A second point is that the freebies have to be paid for by somebody down the line,” Reme said. 

He pointed that Malaysia is already into its 16th year of a budget deficit since the 1997 Asian financial crisis that the money to pay for the government’s spending came from taxes and “other piggy banks, such as national oil firm Petronas”. 

He reminded that tax revenue that could have been spent to build new roads may instead be funnelled for other purposes to keep the political election pledges, like petrol price subsidies or compensating highway companies to remove their toll booths. 

“In other words, they will be paid for by the same voters who thought they got them for free.”

http://www.themalaysianinsider.com/malaysia/article/santa-claus-politics-underscore-malaysias-elections-says-singapore-paper

Words of Wisdom on Dividend Policy From Big Tesco Backer Warren Buffett

By G. A. Chester 

March 7, 2013 

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If you're a U.K. investor just starting out, U.S. investing legend Buffett may be new to you -- perhaps your interest in the man has been piqued by reading about how he's taken a big stake in Tesco  (LSE: TSCO  ) (NASDAQOTH:TSCDY  ) .LONDON -- Last week, Berkshire Hathaway  (NYSE: BRK-A  ) (NYSE: BRK-B  ) boss Warren Buffett released his annual letter to shareholders.

I can tell you that Buffett's annual letters never fail to educate, amuse, and enrich. You'll find abundant pearls of wisdom in his witty, colourful, and incisive commentaries -- as, indeed, will old hands.

586,817% and countingLet's start with why Buffett has captured the attention of millions of investors around the world. The bottom line is, his Berkshire Hathaway group has an outstanding record of increasing shareholder value over the best part of five decades.

Between 1965 and 2012, Berkshire's book value per share has increased by a mind-boggling 586,817%, representing a compound annual growth rate of close to 20%. Such gains over such a long period are unparalleled.

Successful businessesBuffett's strategy of wealth creation for Berkshire is something ordinary investors like us can learn from in weighing up companies we may want to invest in.

Successful businesses generate cash. Buffett is clear about what a company should do with that cash, in the following order of priority:

• First, examine reinvestment possibilities offered by its current business for increasing the competitive advantage over rivals.
• Second, look at acquisitions that are likely to make shareholders wealthier on a per-share basis than they were prior to the acquisition.
• Third, consider repurchasing the company's own shares to enhance each investor's share of future earnings.
• Fourth, by default, pay dividends to shareholders.

Reinvestment and acquisitionsBy reinvestment in the business, Buffett is referring to spending on projects "to become more efficient, expand territorially, extend and improve product lines or to otherwise widen the economic moat separating the company from its competitors."

When we, ourselves, are considering companies to invest in, we can check how intelligently management is reinvesting in the business by looking at such things as whether market share is being maintained/increased, and whether margins are being maintained/grown relative to rivals.

Buffett considers small bolt-on acquisitions that can easily be integrated into existing operations as part of the reinvestment in the business. The acquisitions referred to in stage two of his four steps are those that add something new to the company -- some form of diversification.

When we are considering companies to invest in, we can check whether management has a good track record of adding shareholder value through making such acquisitions.

Repurchasing sharesBuffett is strict about when it's right for a company to repurchase its own shares. Again and again over the years, he has stressed that the only time to do share buybacks is when the shares are available "far below," "well below," or "at a meaningful discount from" intrinsic value -- and "conservatively calculated" intrinsic value at that.

Last year, Berkshire spent $1.3bn repurchasing its own shares. At the moment, Buffett is prepared to pay up to 120% of Berkshire's book value for the shares.

So, if you're interested in buying shares in Berkshire yourself, you have it from the horse's mouth that 120% of book value represents a meaningful discount to conservatively calculated intrinsic value at the present time.

DividendsBerkshire doesn't pay dividends, but not because Buffett is against them per se. It's simply that he has always seen opportunities in steps one to three for employing Berkshire's cash flows more fruitfully for shareholders.

At the moment, the discount to intrinsic value is such that share buybacks are an efficient way for Berkshire to employ excess cash, but Buffett says that if things change materially "we will re-examine our actions."

Buffett is perfectly happy for the quoted companies in Berkshire's portfolio -- American Express, Coca-Cola, IBM, and Wells Fargo are his "Big Four" -- to use excess cash to make share repurchases "at appropriate prices," or to otherwise pay him dividends. He says: "We applaud their actions and hope they continue on their present paths."

Buffett no doubt feels the same about his big U.K. investment in Tesco, whose shares -- at 380p -- are currently trading on an historically low earnings multiple, and offer investors a healthy 4% dividend yield.

Berkshire's 415,510,889 shareholding in Tesco (5.2% of the company) should net Buffett a dividend payout of something over £60m this year alone.

http://www.fool.com/investing/international/2013/03/07/words-of-wisdom-from-big-tesco-backer-warren-buffe.aspx

Investors’ Quandary: Get In Now?

By JEFF SOMMER

So is it too late for investors to join the party?

The stock market has already more than doubled since the dark days of 2009. Records are being set, and most indexes have risen nearly every week this year.

Nearly all strategists point out that it is much better to buy at a market bottom than to invest after a record has been set. Nonetheless, for those willing to accept the risk, there are strong arguments, based on history and on market fundamentals, for believing that the bull market may still have room to run.

Chief among them is the expansive monetary policy of the Federal Reserve. “The old song on Wall Street is ‘Don’t fight the Fed,’ and that certainly has been the case in this market,” said Byron Wien of the Blackstone Group, who is a veteran of many market rallies and slumps. “The Fed and other central banks have been driving the market, and there’s no sign that’s going to stop.”

Another critical factor is the flow of funds into the stock market, said Laszlo Birinyi, who runs a stock research firm in Westport, Conn. “There is still a lot of money sitting on the sidelines — and there are a lot of people who are still jumping in, and that, in itself, is a good thing for the market,” he said.

According to his calculations, the net inflow into domestic stocks over the last 12 months has totaled $76.7 billion, which helps to explain why the Standard & Poor’s 500-stock index has risen more than 13 percent in that period. Net inflows to stocks amount to $27.75 billion this calendar year, he said, and barring a big shock, they are likely to continue. “We’re in the fourth and last stage of a long-running bull market,” he said. “We think there’s a lot more to come.”

No one really knows whether history is a reliable guide, but the pattern of past bull markets also suggests that this one could continue to flourish. At the moment, according to the Bespoke Investment Group, the nearly four-year run of the United States stock market is the eighth-longest in the last 100 years, and it is the sixth-strongest in terms of the return of the S.& P.’s 500 index. And since 1900, when the Dow Jones industrial average reached a nominal high, as it did on Tuesday, the Dow has averaged a 7.1 percent rise over the next 12 months.

“We believe stock valuations are still reasonable, and that the momentum of the market will keep moving it upward,” said Paul Hickey, co-founder of Bespoke.

Because of the intervention of the Fed, even some longtime market bears are reluctant to bet against the current rally. “This is impressive, no doubt about it,” said David A. Rosenberg, the former chief North American economist at Merrill Lynch and now chief strategist of Gluskin Sheff in Toronto. “There are many major risks out there, but at the moment the central banks are doing a spectacular job of buffering them.”

Mr. Rosenberg has a reputation for being a “permabear,” and he has recently emphasized investing in high-yield bonds and corporate credit instruments over stocks. As far as the immediate future of the stock market goes, he said, “I think we’re overdue for a correction.”

Major problems on the horizon, he said, include a weak economy that is being hobbled further by the recent payroll tax increase and the indiscriminate federal budget cuts that have just been put in place. And the troubles in the euro zone, which flared last month in Italy, are far from over, he said, “There are problems everywhere you look.”

Yet he is reluctant to predict a sustained stock market decline. Precisely because the economy is weak, he said, the central banks will be forced to keep short-term interest rates low. “People seeking income have been fleeing other asset classes,” he said, “and they have been moving their money into the stock market.”

For the short term, problems in Europe may actually be helping the United States, said Michael G. Thompson, managing director of S&P Capital IQ’s Global Markets Intelligence. “The gridlock produced by the Italian election has been a catalyst for the United States market,” he said in a telephone interview from London. “It seems to have reminded people that Europe is unstable — and so it has given them another reason to move money into the United States.”

Mr. Thompson said that while earnings growth for the S.& P. 500 had slowed, a combination of low rates and “canny management by C.E.O.’s of big companies” made it likely that corporate profits would hit a record this year. “As long as the Fed keeps its foot on the gas and as long as we stay out of a recession, I think there’s a good chance this market will continue.”

Not everyone is sanguine, however. “It’s getting downright embarrassing to be bearish with all this exuberance around,” said Rob Arnott, the chairman of Research Affiliates, an asset management firm in Newport Beach, Calif. “With so many people eager to buy stocks, it’s a wonderful time for us to take some risk off the table.”

Mr. Arnott, who manages the Pimco All Asset Fund, said the economy was weak enough that there was a reasonable chance the United States was already back in an undeclared recession. An economic or financial shock could induce a sharp market decline, he said.

“My view is simple,” he said. “Could this rally continue? Absolutely. But do I want to take a risk on a rally that will at some point certainly reverse and leave a lot of people helplessly trying to de-risk in an unliquid market decline? No. I don’t want to be part of that crowd.”

In the logic of contrarian investing, this kind of pessimism encourages Mr. Birinyi. “Market sentiment has not reached irrationally positive levels yet,” he said. “That implies to me that the market is still grounded, and that it can keep on rising.”

http://www.nytimes.com/2013/03/06/business/investors-quandary-get-in-now.html?_r=0

A Conversation With Warren Buffett (Extended) on Philanthrophy

Warren Buffett speaks to UGA students

Uncovering the best value stocks****

Dow Hits All-Time High: What’s Next?

Dow Jones Industrial Average (^DJI) burst higher in early trading today, eclipsing the previous closing high of 14,164 set on October 9, 2007. As it stands, the DJIA is also trading above the record intraday high of 14,198.

These breakouts have the ability to run for a while and don't necessarily trigger an instant sell-0ff.

For now, the new record will usher in a moment of euphoria, a brief round of hand shakes, and a boatload of analysis as to which stocks and sectors will lead the way now and how much further this four-year old bull run can go.

http://finance.yahoo.com/blogs/breakout/dow-hits-time-high-next-lofty-stock-market-161851791.html

Warren Buffett Intrinsic Value Calculation

How do we determine the intrinsic value of a company?

"Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life." - Warren Buffett

"As our definition suggests, intrinsic value is an estimate rather than a precise figure, and it is additionally an estimate that must be changed if interest rates move or forecasts of future cash flows are revised. Two people looking at the same set of facts, will almost inevitably come up with at least slightly different intrinsic value figures." - Warren Buffett

Warren Buffett Stock Basics

Warren Buffett on Investing Small Sums

Buffett Explains The Three Types of Investments

Sucker Rally

Sucker Rally

A temporary rise in a specific stock or the market as a whole. A sucker rally occurs with little fundamental information to back the movement in price. This rally may continue just long enough for the "suckers" to get on board, after which the market or specific stock falls.

Also known as a "dead cat bounce" or a "bull trap."

Investopedia Says: 
A sucker rally is a buzz word describing a rise in price that does not reflect the true value of the stock. For example, suppose that two high-tech companies, "A" and "B", see an increase in stock price due to reporting strong financial statements, and a separate high-tech, company "C," sees a rise in stock price. If the real reason for the rally turns out to be because of potential acquisitions of A and B, then C will have had a sucker rally, rising along with A and B. 

What most schools don't teach

Learn computer programming, you would benefit from knowing about code.  
Computer programming is an empowering skill to learn.

Singapore to raise property tax rates for luxury homeowners

WRITTEN BY BLOOMBERG

TUESDAY, 26 FEBRUARY 2013 17:54

Singapore plans to raise taxes for luxury homeowners and investment properties, widening a four- year campaign to curb speculation after prices in Asia’s second- most expensive housing market rose to a record. The higher tax will apply to the top 1% of homeowners who live in their own residences, or 12,000 properties, Singapore Finance Minister Tharman Shanmugaratnam said in his budget speech yesterday, without giving a definition of what constitutes a high-end home. The government will also raise tax rates for vacant investment properties or those that are rented out, he said. Singapore joins Hong Kong in extending anti-speculation measures as low interest rates and capital inflows drive up demand and make housing unaffordable. Residential prices in Singapore climbed to a record in the fourth quarter as an increase in the number of millionaires drove up demand. “The graduated property tax on luxury properties may impact investors, particularly corporates and high-net-worth investors,” Petra Blazkova, head of CBRE Research for Singapore and Southeast Asia said in a statement. “It may put pressure on the holding cost of investment properties held by developers and investors.” The property index tracking 39 developers fell 1.2% to a one-month low at the close in Singapore. CapitaLand, Singapore’s biggest developer by assets, declined 1.5% to $3.86. City Developments, the second largest, slid 1.8% to $11.15. HONG KONG Singapore’s latest efforts were announced three days after Hong Kong increased property taxes. The Hong Kong government last week doubled sales taxes on property costing more than HK$2 million ($319,900) and targeted commercial real estate for the first time as bubble risks spread in the world’s most expensive place to buy an apartment. “The property tax is a wealth tax and is applied irrespective of whether lived in, vacant or rented out,” Shanmugaratnam said. “Those who live in the most expensive homes should pay more property tax than others.” For a condominium occupied by the owner in Singapore’s central region with an assessed annual rental value of $70,000, the tax will rise 5% to $2,780, according to the budget statement. If that home is rented out, the tax will climb 21% to $8,500, according to an example highlighted in the statement. Based on a 3% rental yield, that property is worth $2.3 million. Gains in levies for properties assessed at higher rental values will also increase at a faster pace, it said. For a house with an assessed rental value of S$150,000, worth $5 million based on the same yield assumption, the tax will rise 60% to $24,000. The revised taxes will take full effect from January 2015, according to the statement. Singapore is Asia’s most-expensive housing market after Hong Kong, according to a Knight Frank LLP and Citi Private Bank report released last year that compared 63 locations globally. http://www.theedgesingapore.com/the-daily-edge/business/42916-singapore-to-raise-property-tax-rates-for-luxury-homeowners-updated.html

While stocks are certainly getting pricier, they do not appear to be irrationally overvalued.

Nine reasons to smile about the stock market

By John Wasik

CHICAGO | Mon Feb 25, 2013 5:51pm EST

(Reuters) - Over the past few months, it has been much easier to make a case that widespread financial anxiety is easing, although trying to quantify the upsurge can be like trying to catch a frog. As soon as you grab for it, it jumps.

At the beginning of last year, investors were grouchy about nearly everything and kept putting money into bond funds, while the stock market slipped. Then numerous economic indicators started pointing north and sour global financial news became less prevalent, and the tide turned as money started flowing out of bonds and into stocks.

As financial anxiety eases, investors feel they can take more risk and worry less about the worst-case scenario. This is good news for the overall economic picture in the United States.

While there are sure to be bumps in coming months, the prevailing trend is for a sluggish recovery in the United States and abroad and the current stock rally - the S&P 500 index is up more than 6 percent year to date through February 22 - might continue to be bolstered by the Fed's easing policy.

For sure, it seems brighter days lie ahead and here is why:

* The tide seems to be turning on the major fears: The euro zone probably won't collapse, the U.S. is continuing to rebound and hyperinflation is not around the corner. Meager inflation and interest rates combined with less global anxiety will give legs to the current stock rally. It's as if the mass psychology of pessimism has turned a corner.

* Although the U.S. economy is not adding enough jobs to fuel a robust recovery, that is still a positive for stocks since it means the Federal Reserve will keep its quantitative easing policy in place in some form. Interest rates held at nearly zero translate into low financing costs for nearly every company.

While low interest is still a losing game for savers in search of yields, those willing to take more risk will return to the stock market and find it there. Just keep in mind that once the jobless rate reaches 6.5 percent, the Fed might change its mind and raise rates. But that doesn't appear on anybody's radar screen at the moment.

* Consumer optimism is also building, although it is more like a slow dripping faucet than a geyser. According to the National Association of Business Economists (NABE) outlook released on Monday, consumer spending is forecast to rise to 2.4 percent next year from just under 2 percent this year.

* Business spending is turning around. Companies spend money when they sense an improving economic climate. A Thomson Reuters survey released on Friday found that spending plans by S&P 500 companies are exceeding analyst estimates. That translates into more capital expenditures and hiring.

* The U.S. real estate market continues to mend. Even more important in the NABE forecast is its forecast that residential investment is expected to grow nearly 15 percent over the next year along with higher home prices and housing starts. That will stoke the wealth effect as homeowners feel more of a cushion from real estate and invest more discretionary income in stocks.

* Low inflation - and the diminished expectation of hyper-inflation - also plays well on Wall Street. One signal that inflation angst is easing is the price of gold and investors who trade in it. Money management company PIMCO, the world's largest bond-fund manager; and leading hedge-fund managers George Soros and Julian Robertson all reduced their stakes in the SPDR Gold Shares ETF, the largest exchange-traded fund that holds pure bullion, according to regulatory filings.

All of this signals that these influential investors are perhaps less worried about the financial climate in the West and inflation in particular. Since the SPDR ETF is a direct investor in gold, it is one of my favorite proxy anxiety indexes. When its price rises, it is a sign of skittishness about economic health, the dollar's value and inflation. When it drops, it shows that nervousness is abating.

* Money flowing out of gold probably is not heading into bond funds. Sanguine investors are more at ease with higher stock risk premiums. In the past year, the SPDR fund has dropped nearly 5 percent (through January 30), with losses in the past one and three months. Its volume on February 20 was more than six times what it was November 20 of last year, so there a lot of dollars moving in and out of the fund.

Bullion prices have been steadily falling since last October. During the same period that gold has been declining in value, U.S. stocks have been on a steady rise. The SPDR S&P 500 ETF, which tracks the largest American stocks, has gained 16.5 percent year-to-date through January 30. When investors are optimistic, that is a sign that overall anxiety has possibly dropped.

* Investors are generally upbeat. While overall consumer confidence is not entirely robust, according to the Conference Board and Rasmussen Indexes, investors are still favoring the stock market. A one-year stock confidence index tracked by the Yale School of Management's International Center for Finance shows that some 72 percent of individuals and institutions think the stock market will rise in the coming year.

* Stocks might not be overvalued. The CAPE index prepared by Yale professor Robert Shiller, which shows a "cyclically adjusted price-earnings" ratio reflecting inflation-adjusted earnings from the previous decade, indicates an above-average valuation for stocks, although they are not anywhere near where they were in 2000, just before the dot-com crash. The CAPE ratio is currently at 23 and the average is 16.46. In 2000, the index was at 44, when stocks were incredibly overvalued. While stocks are certainly getting pricier, they do not appear to be irrationally overvalued.

One caveat is what happens with the U.S. budget sequester, which will trigger some $85 billion in federal spending cuts, beginning on March 1. If it is not resolved soon, the budget cuts might roil the U.S. economy and markets.

http://www.reuters.com/article/2013/02/25/us-column-wasik-anxiety-idUSBRE91O17M20130225

Comment:  

Faith in equities was at an all-time low as equity markets collapsed in 2008 and continued to do so during the start of 2009.

It is moments of maximum pessimism that the seeds of fantastic investment performance are sown.  

Mr. Market, in his usual modus operandi, is not discriminating between healthy, solid businesses, versus severely impaired businesses during these times.

For the true value investor, this historic market sell-off has created investment opportunities of historic proportions.  

As Buffett said in October 2008, "If you wait for robbins, spring will be over."

Benjamin Graham and his profound investment principles

Graham had become well known during the 1920's.  At a time when the rest of the world was approaching the investment arena as a giant game of roulette, he searched for stocks that were so inexpensive they were almost completely devoid of risk.  

One of his best known calls was the Northern Pipe Line, an oil transportation company managed by the Rockefellers.  The stock was trading at $65 a share, but after studying the balance sheet, Graham realized that the company had bond holdings worth $95 for every share.  The value investor tried to convince management to sell the portfolio off, but they refused.  Shortly thereafter, he waged a proxy war and secured a spot on the Board of Directors.  The company sold its bonds off and paid a dividend in the amount of $70 per share.

When he was 40 years old, Graham published "Security Analysis", one of the greatest works ever penned on the stock market.  At the time, it was risky; investing in equities had become a joke [the Dow Jones had fallen from 381.17 to 41.22 over the course of three to four short years following the crash of 1929]. It was around this time that Graham came up with the principle of "intrinsic" business value - a measure of a businesses' true worth that was completely and totally independent of the stock price. Using this 'intrinsic value', investors could decide what a company was worth paying for - and make investment decisions accordingly.  His subsequent book, "The Intelligent Investor" [which Warren celebrates as "the greatest book on investing ever written"] introduced the world to Mr. Market - the greatest investment analogy in history.

Through his simple yet profound investment principles, Graham became an idyllic figure to the twenty-one year old Buffett. 

http://beginnersinvest.about.com/library/titans/nwarrenbio.htm

For Buffett, the Long Run Still Trumps the Quick Return

DECEMBER 3, 2012

BY ANDREW ROSS SORKIN

Donald Bowers/Getty Images for FortuneWarren Buffett at a New York book party for “Tap Dancing to Work,” by Carol Loomis.

“If somebody bought Berkshire Hathaway in 1965 and they held it, they made a great investment — and their broker would have starved to death.”

Warren E. Buffett was sitting across from me over lunch at a private club in Midtown Manhattan last week, lamenting the current state of Wall Street, which promotes a trading culture over an investing culture and offers incentives for brokers and traders to generate fees and fast profits.

“The emphasis on trading has increased. Just look at the turnover in all of the stocks,” he said, adding with a smile: “Sales people have forever gotten paid by selling people something. Generally, you pay a doctor for how often he gets you to change prescriptions.”

“You can’t buy 10 percent of the farmland in Nebraska in three years if you set out to do it,” he said. Yet, he pointed out, he was able to buy the equivalent of 10 percent of I.B.M. in six to eight months as a result of the market’s liquidity. “The idea that people look at their holdings in such a way that that kind of volume exists means that to a great extent, it’s a casino game,” he said. Of course, unlike many investors, he plans to hold his stake in I.B.M. for years.Mr. Buffett, 82, is famous for investing in companies that he sees as solid operations and essential to the economy, like railroads, utilities and financial companies, and holds his stakes for the long run. The argument that the markets are better off today because of the enormous amount of liquidity in the stock market, a function of quick flipping and electronic trading, is a fallacy, he said.

Mr. Buffett was in a reminiscing mood about a bygone era, in part because he was in New York to make the rounds on television to discuss a new book chronicling his 61-year career, which began in 1951 at Buffett-Falk & Company in Omaha. (After lunch, he was going to visit “The Daily Show With Jon Stewart.”)

The book, “Tap Dancing to Work,” by a longtime journalist and good friend of his, Carol Loomis of Fortune magazine, is a compendium of articles that she and others wrote in Fortune that creates a series of narratives spanning the arc of his career.

Ms. Loomis, who first met Mr. Buffett in 1967 — and whose long career is a story unto itself — also came to our lunch. Ms. Loomis may know more about Mr. Buffett than he knows about himself. (“There’s nothing here you’re going to like,” she said, after surveying the various pies when the dessert cart came around. She was right: he took a quick look and asked if they served ice cream. They did.)

As we talked about the “good old days” — he spoke of some of his early friends who were successful hedge fund investors, like Julian Robertson, who founded Tiger Management — it became clear that he was less enamored of the investor class of the next generation.

When I asked, for example, if there were any private equity investors that he admired, he flatly replied: “No.”

When I asked if he followed any hedge fund managers, he struggled to name any, before saying that he liked Seth Klarman, a low-key value investor who runs the Baupost Group, based in Boston.

“They’re not as good as the old ones generally. The field has gotten swamped, so there’s so much money playing and people have been able to raise money by just saying ‘hedge fund,’” he said. “That was not the case earlier on; you really had to have some performance for some time before people would put money with you. It’s a marketing thing.”

For a moment, he paused, and then posited that if he started a hedge fund today, “I’d probably grow faster, because a record now would attract money a lot faster,” speculating that his record of returns would attract billions of dollars from pension funds and others. But he then acknowledged a truism of investing that he knows all too well, as the manager of an enterprise that is now worth some $220 billion: “Then money starts getting self-defeating at a point, too.”

Until 1969, Mr. Buffett operated a private partnership that was akin in some ways to a modern hedge fund, except the fee structure was decidedly different. Instead of charging “2 and 20” — a 2 percent management fee and 20 percent of profits — Mr. Buffett’s investors “keep all of the annual gains up to 6 percent; above that level Buffett takes a one-quarter cut,” Ms. Loomis wrote. However, in 1969, he announced he would shutter his partnership. “This is a market I don’t understand,” he said, according to Ms. Loomis.

He believed that the stock market of 1968 had become wildly overpriced — and he was right. By the end of 1974, the market took a tumble. Instead, he remained the chief executive of Berkshire Hathaway, one of his early investments.

“If you want to make a lot of money and you own a hedge fund or a private equity fund, there’s nothing like 2 and 20 and a lot of leverage,” he said over a lunch of Cobb salad. “If I kept my partnership and owned Berkshire through that, I would have made even more money.”

Mr. Buffett says he now considered himself as much a business manager as an investor. “The main thing I’m doing is trying to build a business, and now we built one. Investing is part of it but it is not the main thing.”

Today, Mr. Buffett is particularly circumspect about the investment strategies that hedge funds employ, like shorting, or betting against, a company’s stock. He used to short companies as part of a hedging strategy when he ran his partnership, but now he says that he and Charlie Munger, his longtime friend and vice chairman of Berkshire, see it as too hard.

“Charlie and I both have talked about it, we probably had a hundred ideas of things that would be good short sales. Probably 95 percent of them at least turned out to be, and I don’t think we would have made a dime out of it if we had been engaged in the activity. It’s too difficult,” he explained, suggesting that the timing of short investments is crucial. “The whole thing about ‘longs’ is, if you know you’re right, you can just keep buying, and the lower it goes, the better you like it, and you can’t do that with shorts.”

One of his big worries these days is about what’s going to happen to all the pension money that is being invested in the markets, often with little success, in part because investors are constantly buying and selling securities on the advice of brokers and advisers, rather than holding them for the long term. “Most institutional investors, whoever is in charge — whether it’s the college treasurer or the trustees of the pension fund of some state — they’re buying what they’re sold.”

Most pension funds probably didn’t buy Berkshire in 1965 and hold it, but if they had, they would have far fewer problems today. At the end of her book, Ms. Loomis notes that when she mentioned Mr. Buffett’s name for the first time in Fortune magazine in 1966 — accidentally spelling Buffett with only one “t” — Berkshire was trading at $22 a share. Today it is almost $133,000 a share.

http://dealbook.nytimes.com/2012/12/03/for-buffett-the-long-run-still-trumps-the-quick-return/

Million Dollar Traders (Full Series 1 of 3)

Bruce Greenwald on Value Investing

Do not miss his comments @ 9 minutes on Buffett's buying of Washington Post in Summer of 1972.  The share price of Washington Post dropped 45% after he bought; and it was still a great investment.

If you behave the way such as Graham and Dodds prescribe, there are no bad days in the market.  When the market is down, you got bargains and it is lovely to think of what you are buying at low prices. When the market is up, the bargains are gone, but you are rich.

Bruce Greenwald on Intelligent Investing - Forbes Interview - June 2010

Bruce Greenwald on Value Investing

What Do Investors Do in Volatile Stock Market?

What Do Investors Do in Volatile Stock Market?
Volatile Markets Increase Risk for Long-Term Investors



The stock market is volatile.

Sometimes it is more volatile than others. I think it is safe to assume the stock market will be more volatile in the future than it has been in the past.

What does this mean for long-term investors?

It means, among other things, that you should be careful about when you buy and when you sell.

If that seems simplistic, it is still the best advice for long-term investors.

On the sell side, plan on reducing your exposure in stocks at least five years before you need the money.

If the stock market zooms up, don’t be afraid to sell sooner than you planned.

The reason is in volatile markets the danger of a horrendous fall is greater now than it probably ever has been.

High frequency trading and other automated buy/sell systems can turn a small decline into to a free-fall (or light a fire under a small push up).

There’s no way to predict when prices will return after a dramatic rise or fall – they could come back quickly or not.

Likewise, if you are still more than five years away from needing the cash (typically at retirement) and the market does a nose-dive, don’t be afraid to pickup some bargains.

As market volatility increases, long-term investors must ask themselves if they have the risk tolerance to see five, even ten percent daily losses or gains.

Volatility simply makes investing in stocks more risky. If you have time to wait out extreme dips, you will probably be OK.

Traders may (or more likely, may not) make money in volatile markets, however long-term investors face disaster if they wait until the last moment to cash out of stocks.

Don’t put yourself in the position of needing the cash out of your investments in the near term (less than five years).


http://stocks.about.com/od/advancedtrading/a/051010volatilestocks.htm

If the stock market is so volatile, why would I want to put my money into it?

Question:   If the stock market is so volatile, why would I want to put my money into it?

In this question, volatility refers to the upward and downward movement of price. The more prices fluctuate, the more volatile the market is, and vice versa. Now, to answer this question, we must ask another one: is the stock market really volatile?

The answer is, "Yes, it is … sometimes." The market is volatile, but the degree of its volatility adjusts over time. Over the short term, stock prices tend not to climb in nice straight lines. A chart of day-to-day stock prices looks like a mountain range with plenty of peaks and valleys, formed by the daily highs and lows. However, over months and years, the mountain range flattens into more of a gradual slope. What this implies is that if you are planning to hold a stock for the long term (more than a few years), the market instantly becomes less volatile for you than for someone who is trading stocks on a daily basis.

And in some cases, short-term volatility is seen as a good thing, especially for active traders. The reason for this is that active traders look to profit from short term movements in the market and individual securites, the greater the movement or volatility the greater the potential for quick gains. Of course, there is the real possibility of the quick losses, but active traders are willing to take on this risk of loss to make quick gains.

A long-term investor, on the other hand, doesn't have to worry about this day-to-day volatility of the market. As long as the market continues to climb over time, as it has historically, your good investments will appreciate and you'll have nothing to worry about. Because of this long-term appreciation, many choose to invest in the stock market.


Read more: http://www.investopedia.com/ask/answers/03/070403.asp#ixzz2KBrWomXz