Archive for the 'Investing Wisdom' Category

An article to print and read often

This article, titled Rich Man, Poor Man, and written by Richard Russell has been available for quite some time but I came across it for the first time today. The article espouses the benefits of compound interest, in fact, its his Big Moat. But don’t worry, his Rule #2 is (and yes, it’s in all caps) DON’T LOSE MONEY. Of special interest are these few paragraphs:

The wealthy investor tends to be an expert on values. When bonds are cheap and bond yields are irresistibly high, he buys bonds. When stocks are on the bargain table and stock yields are attractive, he buys stocks. When real estate is a great value, he buys real estate. When great art or fine jewelry or gold is on the “give away” table, he buys art or diamonds or gold. In other words, the wealthy investor puts his money where the great values are.

And if no outstanding values are available, the wealthy investors waits. He can afford to wait. He has money coming in daily, weekly, monthly. The wealthy investor knows what he is looking for, and he doesn’t mind waiting months or even years for his next investment (they call that patience).

But what about the little guy? This fellow always feels pressured to “make money.” And in return he’s always pressuring the market to “do something” for him. But sadly, the market isn’t interested. When the little guy isn’t buying stocks offering 1% or 2% yields, he’s off to Las Vegas or Atlantic City trying to beat the house at roulette. Or he’s spending 20 bucks a week on lottery tickets, or he’s “investing” in some crackpot scheme that his neighbor told him about (in strictest confidence, of course).

And because the little guy is trying to force the market to do something for him, he’s a guaranteed loser. The little guy doesn’t understand values so he constantly overpays. He doesn’t comprehend the power of compounding, and he doesn’t understand money. He’s never heard the adage, “He who understands interest — earns it. He who doesn’t understand interest — pays it.” The little guy is the typical American, and he’s deeply in debt.

The lesson here is to not be the little guy.

Investing Wisdom: Warren Buffett in his 1996 Chaiman’s Letter

Your goal as an investor should simply be to purchase, at a rational
price, a part interest in an easily-understandable business whose
earnings are virtually certain to be materially higher five, ten and
twenty years from now. Over time, you will find only a few companies
that meet these standards – so when you see one that qualifies, you
should buy a meaningful amount of stock. You must also resist the
temptation to stray from your guidelines: If you aren’t willing to own a
stock for ten years, don’t even think about owning it for ten minutes.
Put together a portfolio of companies whose aggregate earnings march
upward over the years, and so also will the portfolio’s market value.

1996 Chairman’s Letter

200 million reasons not to trade against the trend

Last week was interesting in that I was sitting in a tire store to have a tire replaced on my car and I met someone who had an interesting rags to riches story. He was a general contractor who ended up broke and lost his homebuilding business because he couldn’t pay his creditors. Once this happened, many banks wouldn’t even open a checking account for him so he opened an account with an online broker with checkwriting privileges. After opening this account he started researching stock trading and purchasing options. After paper trading for six months, he began trading options. He’s now in his 40’s, semi-retired and was in the tire store to have new tires put on his car that he was giving to a single mother.

The most interesting thing from our conversation is the very first thing he told me when I asked him what strategy he used. His response was, “the trend is your friend“.

Apparently professional investors don’t remember this rule all the time either as this article from points out. It says:

…MotherRock, a two-year-old fund that once had nearly $450 million in assets, shut its doors in late July after losing nearly half of its value. Led by former New York Mercantile Exchange President J. Robert “Bo” Collins, MotherRock also bet wrong on natural gas prices.

…MotherRock got caught betting that natural gas would fall at a time that the commodity was soaring to new heights. The irony is that if MotherRock could have held on for another few months, it might have recovered much of its losses.

Series on Warren Buffett

Zen Personal Finance is running a series on How to Think Like Warren Buffett by examining his letters to the shareholders of Berkshire Hathaway in past annual reports. Part 6 was recently posted and is well worth the read.

Warren Buffet: The Importance of the Moat

Every day, in countless ways, the competitive position of each of our businesses grows either
weaker or stronger. If we are delighting customers, eliminating unnecessary costs and improving our
products and services, we gain strength. But if we treat customers with indifference or tolerate bloat, our
businesses will wither. On a daily basis, the effects of our actions are imperceptible; cumulatively, though,
their consequences are enormous.

When our long-term competitive position improves as a result of these almost unnoticeable
actions, we describe the phenomenon as “widening the moat.” And doing that is essential if we are to have
the kind of business we want a decade or two from now. We always, of course, hope to earn more money
in the short-term. But when short-term and long-term conflict, widening the moat must take precedence.

Warren Buffet in the 2005 Berkshire Hathaway Annual Report

Investing Wisdom: Warren Buffett

My goal in writing this report is to give you the information you need to estimate Berkshire’s intrinsic value. I say “estimate” because calculations of intrinsic value, though all-important, are necessarily imprecise and often seriously wrong. The more uncertain the future of a business, the more possibility there is that the calculation will be wildly off-base.

-Warren Buffet in his letter to the Shareholders of Berkshire Hathaway in the 2005 Annual Report