Thursday, July 12, 2007

Investment Strategies

Yesterday i was just browsing through some random message boards and i came across a really good article, where a group of people had mentioned their opinions about Warren Buffet and his strategies. I have collated whatever i felt useful.

Investment Rules from Warren:

Rule No 1: Never lose money (Never forget rule No 1)
2) It is easier to stay out of trouble than it is to get out of trouble.
3) The market behaves like the God, helps those who help themselves. But unlike the God, the market does not forgive those who don't know what they do.
4) Don't try to jump over seven-foot bars; look around for one-foot bars that can step over.
5) The chains of habit are too light to be felt until they are too heavy to be broken.
6) It is not necessary to do extraordinary things to get extraordinary results.
7) Look at stocks as small pieces of a business.
8) Invest in a business that even a fool can run,because someday a fool will.
9) With investment you make,You should have the courage and the conviction to place at least 10% of your networth in that stock.
10) If a business does well, the stock eventually follows.
11) The reaction of weak management to weak operations is often weak accounting.
12) In a difficult business,no sooner one problem is solved than another surfaces-never is there just one cockroach in the kitchen.
13) You don't have to make money the same way you lost it.
14) With enough insider information and a million dollars,you can go broke in a year.
15) If principles become dated,they are no longer principles.
16) If calculus or algebra were required to be a great investor,I would have to go back to delivering newspapers.
17) It is only when the tide goes out that you learn who has been swimming naked.
18) If you hit a hole in one on every hole,you would not play golf for very long.
19)Never ask a barber if you need a haircut.
20) Forecasts usually tells us more of the forecaster than of the forecasts.
21) There seems to be some perverse human characteristic that likes to make easy things difficult.
22)Diversification is a protection against ignorance.
23) Brokers make money on activity,You make your money on inactivity.
24) You only have to do a few things right in your life so long as you don't do too many things wrong.
25) If you let yourself be undisciplined on the small things,you will probably be undisciplined on the large things as well.
26)When proper temperament joins up with the proper intellectual framework, then you get rational behaviour.
27) The fact that people are full of greed or folly is predictable.The sequence is unpredictable.
28) Be fearful when others are greedy and be greedy only when others are fearful.
29) The most important thing to do when you are in a hole is to stop digging.
30) If at first you do succeed,quit trying.
31) Most people get interested in stocks when everyone else is.The time to get interested is when no one else is. You can't buy what is popular and do well.
32) Risk comes from not knowing what you are doing.
33) If you can't make mistakes,you can't make decisions.
34) Investment must be rational,If you don't understand it,don't do it.
35) In the business world,the rear view mirror is always clearer than the windshield.
36) For some reason people take their cues from price action rather than from values. Price is what you pay. Value is what you get.
37) At the beginning, prices are driven by fundamentals and at some point, speculation drives them. It is the old story: what the wise man does in the beginning the fool does in the end.
38) A pin lies in wait for a bubble and when the two eventually meet,a new wave of investors learn some very old lessons.
39) 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 5 years.
40) What we learn from history is that people don't learn from history.
41) Look at stock market fluctuations as your friend rather than your enemy-profit from folly rather than participate in it.
42) Uncertainty actually is the friend of the buyer of long-term values.
43) No matter how great the talent or effort,some things just take time: You can't produce a baby in a month by getting nine women pregnant.
44) If the past history was all there was to the game, the richest people would be librarians.
45) I would be a bum on the street with a tin cup, if the markets were efficient.

Making profits is obviously the objective of each investor.Possibility of maximising returns increases with better understanding of market forces and what drives them.Information being the only tool available,one can never have enough of it,be it stock and sector specific,or the general market trend.Since Buffetology is all about Long term investment,it is important to understand and differentiate between 'Long Term and Short Term Investment'. Mr.K Vijayan,CEO,JP Morgan,has said in The Economic Times of 10/7/07, and I quote,'----
short-term is not a function of time but of intention, displayed by the reasons you choose to exit an investment. If you exit an investment because you have hit an arbitrary target price (up or down), it is short-term regardless of when it happens. If you exit because the reason for the decision appears to have developed some flaws, or there is need for the money, one would consider it longterm' Yes,indeed,it is nearly impossible particularly for an ordinary investor, to collect relevant and reliable data,about Indian cos. Numbers available are invariably historic,and hide more than they reveal. Shareholders meetings are more a Tamasha, than serious deliberations. Annual reports highlight achievements but lack transparency. Media and analyst's buy/sell recommendations are arbitrary and sometimes biased.

After this, one fellow had given certain checks to be performed, before entering any script:

1. Is the business simple and understandable ?
2. Does the business have a consistent operating history ?
3. Does the business have favourable long term prospects ?
4.Is management rational ?
5.Is management candid with shareholders ?
6.Does the management resist the institutional imperative ?
7.Focus on RONW not EPS.
8.Calculate owner's earnings to get the true reflection of business value.
9.Look for the companies with high profit margins.
10.For every dollar retained, make sure the company has created at least one dollar of market value.
11.What is the value of the business?
12. Can the business be purchased at a significant discount to its value ?
This is the most important conclusion. If you buy a great a company for unrealistic value (overpriced). you are not going to make money.( Don't confuse the terms business value and market value. Both are not same). Example Wipro , it is tough to make money if you buy wipro when it is selling at 400 p/e.

For more info please follow the link:

http://chinese-school.netfirms.com/Warren-Buffett-interview.html

-- Mishra

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