Three Generations of Buffetts

Piers Morgan interviewed Warren Buffett, Howard Buffett And Howard Jr in his show. The whole interview was extremely entertaining with Warren Buffett poking fun at his son. We learn a thing or two about the Buffett family as well.

Warren Buffett also shows what his wallet contains at the request of Piers Morgan, The videos can be seen from the link below:

http://www.gurufocus.com/news/232562/warren-buffett-howard-buffett-and-howard-jr-on-piers-morgan

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Don’t Fall for Scams

In this low-interest environment, ready cash is floating around to be deployed. Banks are giving a paltry 0.lousy% and the economy is not looking too good with problems in Europe, China and US. Alternative investments like land banking and wine are promoted rampantly nowadays. Recently, many investors who invested in a gold scheme were duped. How can investors protect themselves from squandering their money away?

Firstly, always research into the product you are investing in. Is it regulated by any governing body? How does the investment make you money? What are the exit strategies and is the investment liquid? Get everything in writing before investing your hard-earned cash. Many investors of alternative investments have tried to sell their investments but end up being unable to. It was reported in the Sunday Times yesterday of a wine investment that went sour. The investor in his 30s invested about $6,000 in investment-grade wines in 2009. The broker offered a minimum of 10% profit per annum. However, his gilt-edged investment turned bad and when the investor tried to sell his wine in 2011, emails to the firm went unanswered. They even asked him to buy more. His paper loss stands at more than 60%.

Secondly, if the product guarantees returns, such as 24% per annum (p.a.), it probably is too good to be true. No investment returns are guaranteed. Guaranteed 24% p.a. is better than stock market returns, without any effort. The returns are much better than Warren’s Buffett’s 19% annual returns from 1976-2011. Think about it.

Thirdly, if the sales manager encourages you to go into debt or pull equity from your homes, it is a major red flag. If the investment fails, you will hard time to finance the debt and this can derail your retirement plans, putting you into emotional turmoil.

Therefore, before investing, always do due diligence. Educate yourself on how to invest properly. Greed is not good. Sometimes, putting money in the bank is much safer than investing in such products that give “guaranteed returns”. If you are keen to educate yourself on proper investing, you can look into value investing, which is the Warren Buffett way of investing.

Judgement Clouded by Price of Stock?

The price of a stock does not determine how much it is actually worth. For example, Starbucks is trading at around $45 currently. Does it mean that a share of the business is really worth $45? One day the price can rise and the next day it can fall. Does it mean that the fundamentals of the business have changed drastically within the short span of a few days? The price of the stock does not equate to its value. The true worth of a stock is termed the “intrinsic value” and this value can be higher than, lower than or at the current stock price.

If we turn to the media, be it the newspapers or the television, the price of stocks are widely touted and very few talk about the true worth of a business. You also might have heard your friends or relatives talking about how cheap a stock is since it is currently priced at 50 cents, when it traded at $3 just a year ago. They entice you further by saying it is a screaming buy based on this fact alone and by buying, you can make five times your money if it goes back to $3!

However, focusing on stock price alone is not how investing should be done. We should approach investing from a business perspective and for us to do that, we have to cut off the stock price from the business when we are researching.  To help us in this, we can literally think of taking a scissors and cutting off the link between the business and the stock price. Also, thinking that the business is a private one instead of a public listed company will help us not to be focused on the stock price. This is because a private business can only be analysed as a whole without the daily fluctuations of stock price, which is characteristic of a public listed company. From my understanding, when Warren Buffett analyses a company, he looks at the fundamentals of the business first and looks at the stock price right at the end. This allows his judgement not to be clouded by the price of the stock.

How do we approach investing from a business perspective? One should analyse the competitive advantage of the business, the financial statements of the business, the competence of the management and whether the business is undervalued. (All these are covered in my other blog posts and they can be accessed from the “Value Investing” category on the right.) By having a business approach, the analysis of the business would not be hampered by the stock price and we are able to make a sound judgement. We will make lesser investing mistakes too.

On top of that, in investing, we need to have long-term view of five to 10 years. Businesses take time to grow and they do not flourish overnight. When we invest in a business, we have to think that the stock market will be closed for the next five years and that our entire family fortune depends on this company doing well. With this mindset, we will go rarely wrong when investing.

Personally, I too have had my judgement clouded by the price of the stock at times. When this happens, I need to remind myself that I am investing in a business and not speculating. Benjamin Graham, the father of value investing, once quipped, “Investment is most intelligent when it is most businesslike”. It is a powerful quote to reflect upon. Approach stock investing as investing in a business and half the battle is worn. The other half of the battle is analysing the business.

The Testosterone Index?!

I read with great interest an article in the Straits Times yesterday that linked the amount of testosterone in the body and the rise in the stock market. I managed to find the same article in the internet here.

In the article, it mentions that traders performed better when they had higher morning levels of testosterone. This finding intrigued me. The two researchers involved found that “when traders did well and made money, they didn’t do it solely through cleverness and cerebral dexterity.” You mean the years of experience of a trader doesn’t really matter? Does it mean that a newbie with higher morning levels of testosterone can whip apart an experienced trader? That’s what the experimental results are suggesting but I cannot quite agree with it. Experience does matter and the sample size of only 17 traders is just not large enough to warrant such a conclusion that more the morning levels of testosterone, the more money traders make.

I agree with something in the article though. When you keep on winning in the market, you get a “winner effect”. This winner effect boosts “confidence and risk appetite, testosterone priming makes that winner more likely to win again, and successive winning can push testosterone to counterproductive levels… The more markets rise, the more confident and risk-seeking traders and investors become. The ultimate outcome is a market of people largely convinced of their own invincibility and ready to take irrational risks confident in the outcome being yet another victory”. This is how bubbles are created. This creation of a bubble and the subsequent bursting creates tons of opportunities for those who are sane enough not to take part in the euphoria.

Now, where’s the testosterone index to replace the Straits Times Index?

Game Changing Breakthrough

I just received an advertisement through email and I feel it makes sense so I’m sharing it with you here. However, I have just reproduced the strong message below without any call-to-action as per original email:

“I just had a weird chat with John Assaraf.

My first reaction to it was ‘What the?’

But when I got what he was saying I felt charged with excitement.

That’s because John revealed a game changing breakthrough for anyone who feels frustrated….because financial results aren’t coming fast enough.

Here’s what John shared with me…

Imagine a rocket about to launch in Houston Texas.

Escape Velocity is the speed this rocket needs to go to break free of the earth’s gravitational pull.

It’s a staggering 40,000km an hour and requires up to 1.9 Million litres of fuel.

However, after the rocket has broken free of the earth’s gravitation field…it requires only about 20% of this amount of fuel to reach its destination.

That’s because taking off is the hardest bit.

After that the rocket has ‘momentum’. It soars.

And it’s the same with you achieving your goals in life.

Once you go past a certain point of struggle and effort…you get a new momentum… you take flight….you achieve your goals lightning fast.

Earl Nightingale – founder of the world’s biggest personal development publishing company – puts it like this:

“A time can come for each of us when more will happen for us in six months than has happened in the previous six years. Compound events in our lives can be compressed into remarkably short periods.”

John’s experienced this state of rapid results achievement.

He went from being a teenage street-kid to ‘escape velocity’….and earning a $510k plus yearly income…surprisingly quickly.

Talk soon,

Greg”

Emotions taking over during a crisis?

Many of us have heard that the best time to buy stocks is during a stock market crash or during a correction. However, how many can actually put this into practice? The sure way to make money is to buy low and sell high. However, how many of have done the exact opposite? They buy high and plan to sell higher but the stock price tumbles, they end up selling low due to fear. Buying high and selling low is the surest way to erode wealth. How, then, is one to have emotional stability to buy stocks during a crisis when stocks are on a mega sale?

Firstly, you have to research into the company you are buying into. Behind every stock price is a company. How does the company generate profits? Where is it operating in? Is it a simple business? Is it a prominent business? Is it a strong brand? Next, you have to look into the management and access if they are honest and competent. Then, the most important thing is that you have to know the right price to buy at. This is essential as it makes sure you don’t sell prematurely when there’s still room for growth in the company. This takes the emotions out during a crisis. For example, a company is selling at $2 and has been dropping for the past few months due to market sentiments. You have valued the share at $4. This is a 100% discount. Would you buy it? Of course you would load up on this company as the stock price is screaming “Buy!”. On the other hand, someone who does not know the value of the company is going to sell at $3 when the price has been dropping due to fear. He will be cashing out at $3 even though the company’s value is at $4. Remember, that behind every stock price is a business with value.

You also have to be convinced and believe in yourself and in the company you have researched into. Conviction is paramount as this allows you to buy more of the company during a crash when it’s selling at a huge discount. Buying more at a lower price allows you to average your buying price downwards. This is how you buy low, sell high and create wealth. You cannot buy at the absolute lowest but at least you can buy at a low price region.

Recessions create new millionaires. During the last financial crisis in 2008-2009, Straits Times reported that the number of millionaires in Singapore increased by 32.7%. Do you want to be like them? If you do, you have to take opportunity and buy when stocks are low and not when they are high. To do that, you need to have emotional stability and that comes when you know the right price to buy at and be convinced with your purchases. Take control of your emotions and take charge of your financial destiny!

Being Fixated on Stock Price Before Purchase

I have been guilty of this many times. I need to consciously tell myself to stop doing it. What it is, is that I usually become fixated on the stock price of a company I’m researching on and this makes me “afraid” that the price will rise quickly before I finish my research on the company. The problem with this mindset is that it causes my research to be hastened and not thorough.

Company analysis can be very time-consuming and it can span a number of market days. During this time, the stock price can rise very fast. (On the contrary, it can fall very fast too but my mind disregards this fact at times.) When I bought Dapai back in 2010, I was guilty of slip-shot research. I didn’t research into the company as thoroughly as I would want to. The reason being I didn’t want to miss the chance of buying the stock at a low price. This caused me to overlook some facts that I found during my research. I felt it will not affect the business overall and thus didn’t investigate into it further. My inadequate research suddenly became gleaming once I bought the business and had ownership in it. Luckily, I realised my mistake early and sold it off for a slight profit. I have blogged about my divestment of Dapai here.

To combat this problem of mine, I have come up with a few things. Whenever I research into a company, I imagine it’s a private business I’m researching into with no shares being traded. This allows me not to think of the price movement of the stock since it’s a “private business”. I have tried this with my latest research on a company and it works. By following this practice of “faking” my mind, it doesn’t allow me to let greed cloud my logic and judgement during research. Also when researching, I give myself one month to do a thorough research to prevent any undue pressure on myself.

I also tell myself not to be greedy and greed is not good unlike what Gordon Gekko says in the “Wall Street” movie. Another way that works for me is to ask myself, “How would I research if I were Warren Buffett?”

Lastly, I have also come up with a plan to research one company I like every one or two months (depending on the company) when the business is still overvalued. Doing this does not allow the price of the business to cloud my judgement as it is not attractive to buy at the current moment anyway.