Warren Buffet -- Investing Mantra

"We want to be right on something that will work right now, not something that might work in the future." - Warren Buffett

Q & A with Warren Buffet

 

Dear Investors,

Warren Buffet's speech - please do read - it will take 10 minutes of your time well spent.

THE FOLLOWING IS A MAIL SENT TO ME BY A GENTLEMAN WHO HAD THE PLEASURE OF LISTENING TO WARREN BUFFET RECENTLY.

I had the good fortune to attend the 2008- Berkshire Hathaway Shareholders meeting at Omaha, Nebraska a few weeks back.It was a wonderful experience listening to and learning from the Master Investor- Warren Buffett himself and all I can say is that he stands alone as the reigning deity of financial world's Mt Olympus !The degree of humility and composure he exhibited, although he is the richest and most well respected human is stunning!

I tried to take some notes and would like to share with you some of the best questions and answers which came across during the conversation between we mortals and God.
Having read about him, observed him and worshipped him for a few years now, I think it is reasonable to believe that this guy is exactly what he seems: a plain-speaking, tee totaling man of uncrackable integrity who works really, really hard and sticks to his investing and management principles through boom and bust which makes him a freak of nature since he is above normal human tendencies. He is like a comet streaking through the heavens every 75 years or so.

The questions the shareholders threw at him for 7 continuous hours ranged from finances, life, religion, career, politics, sports and several other streams. And he answered everything with a Zen like calm and confidence.

Even if you are least bothered about investments and finances, I insist, Pl read on.
=========================================================================
What does it take to become a successful investor? Brilliance or Smartness?

Neither, Success in investing doesn't correlate with I.Q. Once you have ordinary intelligence, what you need is the temperament to control the urges that gets other people into trouble in investing.

When do you deicide to invest in a firm?

The best thing that happens to us is when a great company gets into temporary trouble. We want to buy them when they're on the operating table. (Mr. Buffett bought Coke when it had its biggest fiasco after launching New Coke; he bought American Express when it went through a loss making phase in the early 60's)

What do you look for in people when they come to sell their firms to you?

I don't look for the usual credentials such as an MBA, a pedigree (Harvard, Wharton), or cash reserves or market cap of their firm. What I look for is just a passion in their eyes; I think that's the key. A person who is hungry will always do well. I prefer it when people even after selling stay on and work for the firm; they are people who can't wait to get off their bed to get to work. Passion is everything; there is no replacement for innate interest.

Mr. Buffett, you told us that Berkshire Hathaway has $ 45 Billion in cash. Why aren't you investing?

Up until a few years back I had more ideas than money. Now I have more money than ideas.

When do you plan to retire?

I love my job; I love it so much that I tap dance to work. Mrs. B, the founder of Nebraska Furniture Mark worked until she was 104, she died within 6 months of her retirement, that's a lesson to all my managers, don't retire! I personally am going to work 6-7 years after I die, probably that's what they mean when they say- "Thinking out of the Box"!!

Why do stock market crashes happen?

Because of human nature for greed and insecurity. The 1970s were unbelievable. The world wasn't going to end, but businesses were being given away. Human nature has not changed. People will always behave in a manic-depressive way over time. They will offer great values to you."

What are the things that are taught wrong in Business school and the corporate world?

I like such open ended questions, I think Business schools should refrain from teaching their wards about profit making and profit making alone, it gives a sense of 1 dimensional outlook to the young students that loss is a curse. In reality, in the corporate world, failure and loss making are inevitable. The capital market without loss is like Christianity without hell. I think they should teach the student on how to buy a business, how to value a business? Not just on how to determine the price of a business. Because price is what you pay, value is what you get.

Do you still hate Technology stocks?

With Coke I can come up with a very rational figure for the cash it will generate in the future. But with the top 10 Internet companies, how much cash will they produce over the next 25 years? If you say you don't know, then you don't know what it is worth and you are speculating, not investing. All I know is that I don't know, and if I don't know, I don't invest."

How to think about Investing?

The first investment primer was written by Aesop in 600 B.C. He said, 'A bird in the hand is worth two in the bush.' Aesop forgot to say when you get the two in the bush and what interest rates are; investing is simply figuring out your cash outlay (the bird in the hand) and comparing it to how many birds are in the bush and when you get them."

How do you feel after donating $ 40 Billion to the Bill and Melinda Gates foundation? You are a hero to us!

I feel nothing. I haven't sacrificed anything in life. I have had a good life. I donated after I turned 75. I think I admire those people who sacrifice their time, share their food and home, as the people to be emulated not me. Besides, what is money before a man's life?

What do you think are the pitfalls in donation?

I have never donated a dime to churches or other such organizations; I need to believe in something before I end up doing that. I have been observing the Bill & Melinda Gates foundation for years now and I am confident they will do a fantastic job of making use of the money. I am a big believer in Outsourcing, others believed in me as an Investor and gave their hard earned money to invest. I believe in Bill Gates, he is a better donor than me.

Why do you work from Omaha and not Wall Street, New York?

Wall Street is the only place where people alight from Rolls Royce to get advised by people who use the Public transportation system.

You seem to be so well read, tell us how it all started.

My father was a stock broker, so we had all these financial books in our library. He introduced me to those classics and I got into them. I am lucky that my father was not a fan of Playboy! Reading is the best habit you can get. Well, you can learn from teachers too, and have mentors but there are so many constraints attached- they will talk fast, talk slow, they might talk like a pro or they might be terrible communicators. Books are a different animal altogether, I love reading! The beauty about reading and learning is that the more you learn the more you want to learn.

People who join Berkshire Hathaway seldom leave. How do you get along well with all your executives?

I try to get quality people. I always say - Hire someone in your organization who is better than you are. If you do that, you build a company of giants. If you get people worse than yourself, you build a company of dwarfs. And do not try to do everything yourself. Delegate the jobs and look out of the window. The results will come. That's how you build institutions. It happens only when you empower others, believe in others. Iam an investor, Iam very secured at that, I have no clue how to make Coca-Cola or how to dole out credit cards (Mr. Buffett owns 8% of Coca-Cola and 13 % of American Express). I understand the wisdom of the aphorism that you cannot please all the people all the time. Of Course, you will always find qualities that you don't like in people around you, but if you observe carefully the love of the work unites you both. There is no point in being obsessive about a bad quality in a person, whom you otherwise respect.

I am a small time businessman from Dallas, Texas, what do I need to do to hit big time?

Be patient, Achieving your financial goals and dreams will not happen overnight. As much as we would all really love to accomplish our goals in a few years, this is an ongoing process. Defining your financial goals is not a one-time task; you need to keep adding new plans at different stages in your life. We all admire the skills of Olympic ice skaters, pro golfers, and concert pianists. But do we remember that they didn't acquire their skills overnight? They had to practice hours on end for years to achieve their dreams. The key to success is to continue learning throughout your life with a voracious appetite.

I think it is marvelous that you have had a golden run with investing, how did you do that ?

My rule is to be fearful when others are greedy, and be greedy when others are fearful. Besides, I call investing the greatest job in the world because you never have to swing. You stand at the plate; the pitcher throws you General Motors at 47! U.S. Steel at 39! And nobody calls a strike on you. There's no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it. Stay dispassionate and be patient. You're dealing with a lot of silly people in the marketplace; it's like a great big casino and everyone else is boozing. If you can stick with drinking Coke, you should be OK. First the crowd is boozy on optimism and buying every new issue in sight. The next moment it is boozy on pessimism, buying gold bars and predicting another Great Depression, 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.

Mr. Buffett you have seen so many crashes and recessions, your take on facing recessions and stock market crashes ?

If past history was all there was to the game, the richest people would be librarians. Every scenario is different. But always remember, Tough times do not last. Tough people do.

What is the biggest advice you would impart to a young investor like me ?

Think for a moment that you are given a car and told this is the only car you would get for the rest of your life. Then you would make sure that you car is taken care of well, it is oiled and detailed every now and then. You would make sure that it never gets rusted, and you would garage it. Think of yourself as that car. You just get 1 body, 1 mind and 1 soul. Take care of it well. Invest in yourself that would be my advice.

You personally know many of the Financial executives who are engineers of the current turmoil in the financial world, surprisingly even after record losses, those executives receive astronomical salaries and bonuses and arrogantly declare that they deserve it, why dint you advice them from making such decisions and what's your view on their justification for their pay ?

I like sharing my ideas but don't like imposing my ideas on anybody. It doesn't make sense and is a waste of time. If somebody has decided that they know everything that is there to know, nobody can help them. The best way to learn and succeed is to know that we know nothing. There is an entire universe out there and still some of us think we can know everything. In the world of investing a few people after making some money tend to imagine they are invincible and great. This is the worst thing that could happen to any investor, because it surely means that the investor will end up taking unnecessary risks and end up losing everything - arrogance, ego and overconfidence are very lethal. Personally I don't feel too comfortable with too much extravagance, because I always think like an investor. My thought process doesn't see a lot of value in a fancy car or a designer suit. Thinking like an investor always is very important to bring in a sense of discipline and focus. Before reading balance sheets and investing you need to make sure your outlook and mindset is that of an investor. Never let ego, arrogance and over-confidence control you - not just as an investor but also as a human being. You will never have internal peace if you are unable to look at everybody around you with love, compassion and understanding. Irrespective of who the person is, he or she can teach you something you don't know. I have learnt so much from people all around me and I wouldn't have been able to learn all these wonderful things if I had not spoken to them with a smile. To quote Sir Isaac Newton- If I have seen farther than others, it is because I have stood on the shoulders of giants.

"A man has to learn that he cannot command things, but that he can command himself; that he cannot coerce the wills of others, but that he can mold and master his own will: and things serve him who serves truth; people seek guidance of him who is master of himself"

Happy Investing

__._,_.___

__,_._,___

Investment Idea from Legend Warren Buffett

"It's true, of course, that, in the long run, the scoreboard for investment decisions is market price. But prices will be determined by future earnings. In investing, just as in baseball, to put runs on the scoreboard one must watch the playing field, not the scoreboard." - Warren Buffett

Inspiring quotes

"The way to get ahead is to start now. If you start now, you will know a lot next year that you don't know and that you would not have known next year if you had waited." William Feather

"People are not against you; they are merely for themselves." Gene Fowler

Action may not always bring happiness… but there's no happiness without action." – Benjamin Disraeli

Talent alone won't make you a success. Neither will being in the right place at the right time, unless you are ready. The most important question is always: "Are you ready?" – Johnny Carson

"Have patience. All things are difficult before they become easy." Saadi

"It is in the moment of your decision and action that your life is shaped." – Anthony Robbins

"The greatest mistake one can make in life is to continually fearing you will make one."

"You can give without loving, but you cannot love without giving." Amy Carmichael

Warren Buffett Style of Investing

"If your actions are sensible, you are certain to get good results; in most such cases, leverage just moves things along faster. Charlie and I have never been in a big hurry: We enjoy the process far more than the proceeds - though we have learned to live with those also." - Warren Buffett

Guru Advice - Warren Buffet

"You have to segregate businesses you can understand and reasonably predict from those you don't understand and can't reasonably predict. An example is chewing gum versus software" - Warren Buffett

9 investment mantras of Warren Buffet

 

Widely considered the most successful investor of all time, Warren Buffett is a shining disciple of the school of value investing. Starting with an initial fund of $105,000 in 1956, Buffet grew it to $45 billion over the next fifty years, making him the second richest man in the world. Though he is widely recognized as being an investor, the bulk of Buffet's wealth was built through intelligent use of leverage offered by his insurance companies. Since most individual investors do not have access to the type of capital that Buffet does, it is not easy to replicate his astounding wealth building feat. However, by understanding and applying the basic guidelines of Buffett's investment approach their own investing decisions, most investors can comfortably beat the long term returns of all but the best mutual fund managers.

Born in 1930, Buffett began to show an inclination towards the stock market at a very early age. He bought his first stock at age 11. He later went on to study at Columbia University under Benjamin Graham, who is called the "father of value investing". Until 1956, Buffett worked closely with Graham and then returned to Omaha to start his own fund and developed his own, more qualitative style of evaluating investments, and became far more successful than Graham.

One of the greatest attractions of Buffett for investors is that his investment methodology is easy to understand. The key to its application, however, is that it calls for great patience and calm when your stocks move against you. It also requires an orientation towards research and the ability to grasp some essential concepts of accounting and finance. But for those willing to invest time and effort into mastering this approach, superlative investment performance over the long term is guaranteed. Here are the 9 investing mantras of this legendary investor . . .

1. Invest in Businesses, not in Stocks

"Whenever Charlie and I buy common stocks for Berkshire's insurance companies (leaving aside arbitrage purchases) we approach the transaction as if we were buying into a private business. We look at the economic prospects of the business, the people in charge of running it, and the price must pay."

This is the cornerstone of Buffett's investment style. Whenever he evaluates an investment opportunity he analyses it as a business and not as a stock. This makes him look closely at the company's fundamentals, earnings prospects, financial health and management. Conversely, this style of evaluating a business prevents him from buying a stock just because it is going up even though it has dubious prospects. A lot of investors tend to buy stocks on tips from friends, acquaintances or brokers. By adopting Buffett's approach, readers are likely to save themselves a lot of grief later on.

2. Only Buy Businesses that You Understand

"Did we foresee thirty years ago what would transpire in the television-manufacturing or computer industries? Of course not. When, then, should we now think we can predict the future of other rapidly-evolving business? We'll stick instead with the easy cases. Why search for a needle buried in a haystack when one is sitting in plain sight?"

Buffett has a track record of generating 21% returns over a 50-year time frame, a feat matched by very few other investment managers. Though technology companies delivered some of the best returns during this period, he has never owned one for the simple reason that he could not understand the long term prospects of these companies and evaluate them thoroughly. So the next time you get a tip to buy a hot company that you do not understand, you should ask yourself: "If the greatest investor in the world will not invest in something he doesn't understand, should I?"

3. Buy Companies with Defensible "Franchise"

"As Peter Lynch says, stocks of companies selling commodity-like products should come with a warning label: 'Competition may prove hazardous to human wealth'."

Most of Buffett's portfolio companies such as Coca Cola, Gillette (now Procter and Gamble), American Express and Washington Post, are businesses which have a significant hold over their market because they have inherent competitive advantages, such as a highly recognizable brand, or near-monopoly status in a geographic area. Such companies can typically raise their prices without fear that customers will walk away. This in turn produces fantastic earnings growth and, consequently, great investment performance. Before you make an investment in the future, try to understand whether the company you are investing in has a strong and defensible market position and whether it can raise prices if it needs to.

4. Hold for the Long Term

"We are willing to hold a stock indefinitely so long as we expect the business to increase in intrinsic value at a satisfactory rate . . . we do not sell our holdings just because they have appreciated or because we have held them for a long time."

Buffett's companies have generated enormous returns for him. For example, his investment of $10 million in 1973 in the Washington Post Company (WPC), had grown to greater than $1 billion in 2003. While a lot of us may be able to do this occasionally, Buffett has generated such returns with startling regularity. One of the reasons he is able to do so is because he holds for the long term and is not quick to enter or exit businesses. In fact, he stuck with WPC for two years even though its price fell below his purchase price because he understood the fundamentals of the business and believed that it was undervalued. Even once it became profitable, he was not quick to exit because he believed that it had great potential. He held it through several bull and bear markets and no greater proof is needed than the return be achieved to show that he was right in holding it for so long.

5. Ignore short-term fluctuations in price

"Charlie and I let our marketable equities tell us by their operating results–not by their daily, or even yearly, price quotations–whether our investments are successful. The market may ignore business success for a while, but eventually will confirm it."

The stock market has a tendency to overreact on both the upside and downside. Often, the market ignores the fundamentals of a business and reacts sharply to news-flow. Sometimes entire sectors become either depressed or overpriced. One of the key pillars of Buffett's approach is to ignore short-term fluctuations in price. He does not sell a stock because the market suddenly falls. Neither does he buy a one because it is going up. Once he has calmly evaluated the fundamentals, if prices are down he will buy the stock. If the stock dips after he has purchased it, he does not worry as long as the fundamentals are good. Had he gotten jittery due to short-term price fluctuations, he would have been a lot less rich than he his currently.

6. Buy Good Businesses When Prices are Down

"If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they feel elated when stock prices rise and depressed when they fall. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices."

On 19 October 1987, all global stock markets crashed. The Dow Jones Industrial Average actually suffered a decline of 22%, the greatest single-day drop in its history. Every stock on the market fell. Most people were selling their holdings in a panic that day. Buffett, however, was buying. He made one single largest stock purchase of his life that day. While all others around him hit the panic button, Buffet bought 10% of Coca Cola for $1 billion. Not only was it his largest stock purchase, he also became the single largest shareholder in the company. In his analysis, Coca Cola had a great business, great long-term prospects and the ability to expand because of globalisation. If the market was willing to sell it at an unreasonably cheap price, he wanted to scoop it up with both hands. And scoop he did! Coca Cola is one of the most successful investments in Berkshire's portfolio. Buffett has made over $11 billion on Coke since he bought it.

7. Do Not Actively Trade

"Indeed, we believe that according the name 'investors' to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a romantic."

Buffett is an atypical investor not only because he is highly successful, but also because he does not even look at stock tickers. He believes that trading too much is a tax-inefficient and costly approach to investing. Consequently, he has a very low turnover portfolio, very low brokerage charges and has not paid very much in the nature of capital gains taxes.

8. Do Not Over-Diversify

"If you are a know-something investor, able to understand business economics and to find five to ten sensibly priced companies that possess important long-term competitive advantage, conventional diversification makes no sense for you."

Check out more Vision Book stories

A striking aspect of Buffett's portfolio at Berkshire is the small number of stocks in it. It has rarely exceeded 10 stocks. Buffett believes that there are very few outstanding investment opportunities at any given point of time and that one should invest enough in each of those to make a substantial difference. In contrast, most people fill up their portfolios with more than fifty stocks. As a result, even if a stock appreciates 100%, the impact on their net worth will only be 2%. Investors who want to truly generate outstanding returns should identify a small number of great businesses at the right prices and invest a significant amount of their money in each of them.

9. Invest only When There is a Margin of Safety

'Margin of safety' is a slightly difficult concept to understand. It can be loosely defined as the difference between value and price. If the value of what you buy is higher than the price you pay, you have a high margin of safety. If the price you pay is greater than value, you have a low margin of safety. When the margin of safety is high, the investor need not worry about short-term fluctuations in price and can buy more if he or she has the resources to do so. Also, if you are investing in a situation with a significant margin of safety, you are likely to make a higher return because you are buying at a relatively low price.

However, how does one quantify this margin of safety? It is an admittedly grey area. There are seemingly scientific approaches such as the discounted cash flow (DCF), which are taught in most corporate finance textbooks. This method tries to project what the cash flows of a company will be indefinitely into the future and, using a formula, arrive at its present value. Even though this approach seems highly scientific, in practice it is very subjective, and very difficult for an individual investor. However, there are other short cuts which are more approachable but equally unscientific. Since the discounted cash flow ultimately crystallizes into the Price/Earnings (P/E) ratio, one way to estimate the margin of safety is to look at the P/E ratio. A low P/E could mean there is a margin of safety, but there are pitfalls. Slow-growing, lousy companies often tend to have low P/E ratios. And sometimes, very promising companies have high P/E multiples. So, one way around this problem is to divide the P/E ratio by the growth rate of the company's profits to arrive at its Price-Earnings to Growth (PEG) ratio. Thus, if a company's P/E is 20 and the growth rate of its profits 20%, its PEG is 1). Oftentimes, a PEG of less than 1 implies that there is a significant margin of safety. A PEG of greater than one means that the margin of safety is not very high. That said, the PEG is not the holy grail of valuation and there are several ways to value a company – and all these approaches have their flaws. You can consider your time well invested if you spend some time researching valuation by reading a corporate finance textbook.