I would like to wish the readers of Buffettucation the happiest of holidays. I wish you all much love, prosperity and happiness during this season of giving and caring.
I would like to wish the readers of Buffettucation the happiest of holidays. I wish you all much love, prosperity and happiness during this season of giving and caring.
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"Do something you enjoy all your life and be associated with people you love"
Warren Buffett concludes this talk with the most important story that he refers to as the Ovarian Lottery. I believe this to be a great way to look at the society and your role in this world. I will do my best to transcribe the story so that it is clear and so that it impacts you as much as it did me. Enjoy.
The Ovarian Lottery
Twenty-four hours before you were born, a genie came to you.
Genie: "Herb, you look very promising and I have to design a world in which you are going to live and I have decided to allow you to design it because it is too difficult of a task. So you have 24 hours; you have to figure out what the social rule should be, the economic rule , the governmental rules and you are going to live under those. Your kids will live under them, and their kids will as well."
You: "I can design anything?"
Genie: "Yes, you can do it."
You: "There must be a catch."
Genie: "Well there is a catch. You don't know whether you are going to be born black or white, rich or poor, male or female, weak or able-bodied, bright or retarded. All you know is that you are going to take one ball out of a barrel that contains 5.8 billion. You are going to participate in what I call the Ovarian Lottery. You are going to get one ball out of there and that will be the most important thing to happen to you in your life because that will control whether you are born with an I.Q. of 130 or and I.Q. of 70. It's going to determine a whole lot. And you are going to go out in that world and have a ball. What kind of world do you want to design."
This is a good way to look at social questions because not knowing which ball you are going to get, you will want one [a world] that produces a lot of goods and services because you're going to want people on balance to live with. You will want it to produce more and more so that your kids will live better than you and their kids better than your kids.
And you will want a system, if it produces lots of goods and services, it does not leave behind a person accidentally got the wrong ball and is not well wired for this particular system.
I'm ideally wired for this system. I fell into here. I came out and I have something that allows me to allocate capital. Nothing's so wonderful about that. If all of us were stranded on a desert island. We all landed there and were never going to get off, the most valuable person would be the one that could raise the most rice over time. Bill Gates said that if I had been born a few years ago, I would have been some animal's lunch. You can't run very fast, you can't climb trees, you can't do anything. I'd just be chewed up on the 1st day. You were lucky to be born today.
Here's the question to ask yourself. Here is this barrel of 5.8 billion balls. If you could put your ball back and then take out, at random, 100 other balls and you had to pick one of those, would you put your ball back in? Your answer is most likely no, because you are in the luckiest 1% of the world by just being here right now.
Out of those100 balls that you get out, roughly 5 of them would be American. 50% would be men and women, 50% would be intelligent. So what you are saying is that you are in the top 1% of the world.
In this final clip of the MBA talk, Warren Buffett endorses probably the best book ever written about investing; The Intelligent Investor by Benjamin Graham. He refers to the two most important chapters in the book that framed the foundations of his investment philosophy; Chapter 8 - discusses Mr. Market; how one should view the market as a bipolar, manic-depressive individual that gives you a good deal on one day, and a bad deal the next and is totally irrational; Chapter 20 - discusses the idea of 'Margin of Safety', that Buffett says are the three most important words in investing, and still applies today. As always, a great way to end this MBA talk series. If you are new to investing, this is probably the best book to start off with.
See Buffettucation Bookstore to the right for the list of books.
The Ovarian Lottery provides the greatest lessons one can learn from life on this planet; compassion for others, humility for one's gifts, and gratitude for the life one was given. I think it really speaks for itself. It reminds me of the famous quote by Mahatma Ghandi; "Be the change you want to see in the world". In a sense, let your ideas of how you think the world should be, be applicable to everyone. A fair and just world that supports others that have drawn the short straws in life, and supports those that strive to make the world a better place.
Now that we have completed the MBA talk, I hope you got to learn a little bit about Warren Buffett's investing and life philosophy, I hope this will get you interested in his work. Most importantly, I hope it is the beginning of a great investment career for you. Keep reading and keep learning.
"It does not make any difference; large cap, small cap, giant cap, micro cap, medium cap. All that matters is that we understand the business, we like who is running it and it is selling at a price that is attractive."
This clip briefly talks about the prospects of large caps versus small caps. As the quote indicates above, Warren Buffett stated that they pay no attention to the market cap of the company with regards to one cap outperforming the other. It makes no difference. When they look at businesses, they ask three (3) questions:
1. Do we understand the business?
2. Do we like the people running it?
3. Is it selling at a price that is attractive?
As you can see, this is consistent with his basic investment philosophy.
"The cap does not make a difference; it is the certainty of the business that counts."
I thought it best to reiterate the basic principles upon which Warren Buffett's philosophy lies. Given the current conditions of the economy, we cannot hear the basics enough to keep us focused.
1. Buy a business you understand.
2. Buy a business with favorable long-term prospects.
3. Buy a business operated by honest and competent people.
4. Buy a business available at a very attractive price.
As another one of my favorite investers, Bruce Berkowitz, said "Ignore the crowd"; this is what we should do in this environment. We know that the market is driven by sentiment and emotions, therefore stick to your underlying philosophy and do not pay attention to the noise in the market. Like the ocean when the water is rough, it is difficult to see through clouded by sand; but when the water settles and the calm is restored, only then can you see things clearly. Focus on the business; ignore the extraneous details.
It was interesting how what I am about to write came about. I could not think of a way to relate this to life, but I know there is always a way. So I took a break and now the idea came through me. Have faith. You know how normally we have faith in our beliefs once everything is going well for us, but as soon as we encounter difficult times, we are tested. Why are we tested? Well, it is during those times we are the most vulnerable and there exists a high possibility of us changing or relinquishing our belief systems. Just as this very volatile market condition or challenging economic environment has impacted most of the investors out there, we are affected in life just the same. The message I deliver is when the times get tough, this is when you should focus even more on what you believe in, because ultimately, when the dust clears, your firm understanding will get you through and all those that panicked would have missed the opportunity.
"Wide diversification is only required when investors do not understand what they are doing."
In this clip, Warren Buffett talks mainly about diversification, therefore I will concentrate the content just on this topic. He also talks about the businesses of Proctor and Gamble and Coca-Cola and why they are great businesses.
Nevertheless, his response to the question on diversification was two-fold.
1. If you are not a professional investor and your goal is not to manage money so that you get a significantly better return than the world, then 98-99% of the people who invest should diversify. This is the only case where he firmly agrees with diversification. These type of investors should consider indexing.
2. However, if you want to bring intensity to the game; to make a decision and start evaluating businesses, then diversification is a bad idea. If you really know businesses, you shouldn't own more than six of them. Going into a seventh idea rather than adding to your best idea rarely makes sense.
"Diversification is insurance against ones own ignorance."
In an effort to stick to the simplicity of this idea, I will not dwell too much on it. I think it is self explanatory. If you are a sophisticated investor, then diversification may not be necessary. However, if you are not, you should diversify. The idea of diversification to minimize risk is what MBA students are taught in universities. Any finance course will tell you that unsystematic risk is reduced after owning about 15 stocks or so in a portfolio. However, this is dependent on your definition of risk. If you truly understand a business, then this whole philosophy of risk changes. You buy great businesses you understand with great economics, management at a very attractive price; what risk would there be? If you think volatility; well that only offers the opportunity to buy more at attractive prices.
"In the short run, the stock market is a voting machine, but in the long run, it is a weighing machine."
What does his philosophy on diversification teach us? I think it says that if you are absolutely certain about something, you should not fear putting a lot into it. For example, if I have studied a company, done all that I can to really understand the business, believe in the management, love the future economics of the company, then why should I hesitate to invest greatly in it. The returns will ultimately come. Consequently, if you truly believe in something, then give it your all, do not be afraid of risks or do not be tempted by what others may be doing, put your all in your best idea, in what you truly want to do with your life, and that is when you will be rewarded. If things do not work out the way you like, then at least you know that you did your best with it and that should be enough. Think about this greatly, diversification is almost another way of saying 'fear of failure or defeat'. Put your effort in what you truly want out of life, and chances are high that your desires will be fulfilled; you will see the returns. It just may not happen when you expect it to, but I assure you, it will happen in due time.
Check my blog posting on Napoleon Hill on The Power of the Mind.
"Wall Street makes its money on activity, you make your money on inactivity."
The opening quote for this clip of Warren Buffett's M.B.A. talk series was derived from his response when a student asked about the benefits of being an outsider of Wall Street. Buffett further states that he avoids environments that encourage too much activity, with Wall Street being the epitome of that. These environments cause over-stimulation. Ultimately, all that one needs is a single great investment a year.
Essentially, brokers make most of the money through activity. Therefore, they encourage investors to trade within their portfolios frequently. This is not needed to be a successful investor, however, being in an atmosphere like Wall Street, allows you to think otherwise.
Another student asked this question:
How can an investor value shares of Berkshire Hathaway if the company does not pay dividends?
"The question is if Berkshire can retain $1.00 in earnings and earn more than $1.00 at a decent rate. That's what they try to do."
"It is run for its owners, but not run to give them dividends because so far, every dollar we have earned and could have paid out, we have turned into more than a dollar; it is worth more than a dollar to keep it."
Many have questioned Warren Buffett on his dividend policy, or lack thereof. I think there is a misconception where many believe that all companies should pay dividends. In studying this in graduate school, dividend payout makes the most sense when a company is unable to earn a high rate of return on retained earnings and should therefore distribute this to shareholders, so that they can do so themselves. However, Berkshire shareholders have the world's greatest investor and capital allocator investing for them, so expecting a dividend at this point in time does not make sense. And as he said, the bigger the company gets, the more difficult it is for him to invest capital, so at some point in the future, dividends may be a possibility. I am happy to have Mr. Buffett working for me, and he continues to add value and measures themselves by performance. Can't get it any better than that.
A third student asked:
How do you know when a business has reached its full potential?
Buffett, consistent with his investing philosophy of buy and hold forever, says that they do not buy businesses with a price target in mind. The best businesses are the ones that you can hold on to forever.
"The way to look at a business is, is it going to produce more and more and more over time? If the answer to that question is yes, then you do not need to ask any more questions."
When you find great businesses with excellent future economics and able and honest management, he previously mentioned that there should not be an exit strategy. These are businesses that are so rare to be found, that it makes no sense to sell them once you find them. He speaks about this on many occasions at meetings with students and frequently says that it took him a long time to understand that concept. In an age where there is so much more access to information and a constant bombardment from all sorts of media, inactivity has really become a challenge to those 'patient' investors. However, these are the investors that are most successful.
I do believe in this strategy of inactivity, but one must have truly understood the business initially, for this to hold up. On the other hand, Buffett did mention that there were times where sales were necessary; for example, in the purchase of a more appealing deal, or something drastic occurs that changes the overall dynamics of the business.
This clip reminded me of another one of Warren Buffett's famous quotes.
"We don't get paid for activity, just for being right. As to how long we'll wait, we'll wait indefinitely."
This is really a lesson in understanding what you are doing, not swaying from those principles and being patient. For such an exciting field, investing, having a certain degree of temperament is very crucial to one's success. I suppose it makes a lot of sense to be because it suites my personality. However, I do believe that investing is way more simple that it is made out to be and Warren Buffett's philosophy resonates with me because of that fact. Beyond the betas, deltas, alphas, standard deviations, models, theories, there is an underlying strategy that is simple. I agree with the principle known as Occam's Razor: The simplest answer is often correct. The same with life; life is very simple, we just make it complicated. Live a simple life and it will be reflected in all your experiences.
"Biggest mistakes were mistakes of omission, not of commission"
Warren Buffett talks about a few ideas in this clip; timing of investments, investment mistakes and effects of macroeconomic factors. These are his comments in brief.
"You can always find a few reasons why a particular time is not ideal to buy a stock. If you are right about a business, you will make a lot of money; and the timing part of it is a very tricky thing, so I don't worry about any given event if I've got a wonderful business, what it does next year or something of the sort."
"The wonderful business you can figure out what will happen, you can't figure out when it will happen. You don't want to focus too much on when, you want to focus on what. If you're right about what, you don't have to focus on when too much."
A student then asked about his investment mistakes. He replied by stating his biggest mistakes were of omission, not of commission. He refers to mistakes of omissions as huge mistakes that G.A.A.P. does not detect. Also, buying into something where you like the terms and not the business. These usually turn out to be huge mistakes as well. Buffett tells the students that it is better to learn from other people's mistakes and also to stay within the circle of competence; stick to businesses they understand, where they will be knowledgeable about why they made the decision to purchase the stock in the first place.
The next question was on the effects of macroeconomic factors on his investment decisions. This was his response.
"When it comes to investments, you have to figure out what is important and knowable. The macroeconomic factors are important, but they are not knowable."
He says that passing up great investment opportunities based on interest rates or other macroeconomic factors is unwise. It does not make any difference if you have found a great business.
Warren Buffett has always maintained consistency in his investment principles. The same themes of circle of competence, underlying business economics and great businesses are always mentioned. What I would focus on here is the timing. I look to his philosophy for motivation through this tough economic period. I know that there is so much fear in the market right now, and stocks are being oversold. Great businesses are being sold for prices that were not seen in decades. Based on all that he teaches and his recent article in The New York Times, this is the time to be in equity and over time, a lot of money will be made. Consider two of his quotes:
"Be greedy when the market is fearful, and fearful when the market is greedy"
"In the short-term, the market is a voting machine, but in the long-term it is a weighing machine."
This is a clear indication of today being a buying opportunity of a lifetime. Dive in.
What life lesson can we learn from this part of the lecture? I think what is important is to stick to what you want to do and what you know given the conditions of the world. The most important thing you can do for the world is to improve yourself, therefore, if you focus on what is out there (macroeconomic trends), and not focus on what's inside of you, then you will get lost in the irrelevant. For example, I know many people today are concerned about the state of the economy and are scared of a recession. Does this really matter in the grand scheme of things? Pay attention to yourself and what you know and believe that you are an asset. The end of the world is not hear, things will revert to normal soon enough, therefore do not allow this tough period to control your life. There will always be ups and downs in the business cycle. What is most important is how one deals with these situations. James Allen said,
"Circumstances don't make a man, they reveal him."
Be strong and trust in yourself. Nothing else can have an impact on your underlying fundamentals.
"That is the key, defining your circle of competence. The important thing is not how big your circle is, but its staying inside the circle."
The first question that was asked in this segment was about Warren Buffett's qualitative and quantitative analysis of companies, and whether or not he has bought a company when the numbers tell him not to. This was his response.
"The best buys have been when the numbers almost tell you not to. Then you feel so strongly about the product and not just the fact you are getting a huge cigar butt for cheap."
If you have read Philip Fisher, you probably understand the analogy "cigar butt". A cigar butt is basically a company that has one last puff of profitability left in it that is highly undervalued, so you are able to make a one-time profit out of it.
Buffett then went on to explain why cigar butt investing is not a good strategy. These companies do not have repetitive profitability. Ultimately you want to own companies that has great future economics for a long time to come.
Buffett continues by saying that he understands qualitative as soon as he gets the phone call.
"If you don't know enough about the business instantly, you would not know enough in a month or two. You have to have a background of understanding and know what you do understand and what you don't understand. That is the key; defining your circle of competence. The important thing is not how big your circle is, but it is staying inside the circle."
This idea of circle of competence is very important in developing one's investment philosophy because it allows you to truly be comfortable with your investments. You will be fully knowledgeable about certain companies or industries. This will make the investment process much easier because you will fully understand your purchase, hence reducing the amount of work needed to evaluate companies. Right now, I am in the process of understanding certain companies and industries to improve my circle of competence. My goal is to sleep comfortably at night knowing my purchases were knowledgeable, informed and will ultimately earn me an above average return.
I have decided to incorporate how Warren Buffett's investment philosophy applies to life as well. It is very obvious that Warren Buffett's way of thinking is both consistent with his life and investing principles. I always thought it to be important to know what you enjoy doing and just do that; in a sense, stay within your circle of competence. There are many times where we are persuaded to do things that we know we are not comfortable doing, only to experience an unpleasant outcome. Don't misunderstand what I am saying. I am not saying avoid new experience or challenges; what I am saying is it is important to make wise, informed decisions based on your knowledge of a particular situation. Look at the upside versus the downside, or analyze the various outcomes if different choices are made and then decide. This way, at least you were aware of the different risks involved and you would be more prepared and comfortable with the outcome.
"You want to do everything in the world to ensure that the experience of giving that gift leads to a favorable reaction"
In Part 4, Warren Buffett responds to this question: How to determine a fair price to pay for a business? He responds by talking about great companies that create 'share of mind'. These are companies that create a positive perception in the minds of consumers. He then eludes to great businesses such as See's Candy, which he bought in 1972 for $25 million and Disney, which he knows has done a great job creating this moat.
These are some of his brief comments.
We will not buy into any business that we are not terribly sure of.
We do not expect extremely high returns.
We look for untapped pricing power. (See's Candy example)
The Walt Disney Company - He says it is difficult to compete with the brand that Disney has created around the world. These are the types of companies you want to own. Simple enough strategies. I think right now, it is at a bargain price. (Last Price: $20.16 @ November 12th, 2008.
"Investing is putting out money to be sure of getting more money back at an appropriate rate. And to do that, you have to understand the business."
In part three of this lecture, Warren talks about what constitutes a great company. He begins by briefly stating that one should take a job one loves, then describes what he looks for in businesses he buys. This is the basic approach to investment analysis by Warren Buffett and is the foundation upon which he begins choosing businesses for the long term.
These are some of the main points of part 3 of this lecture:
1. Only do work you would enjoy.
Take a job, that if you were independently wealthy, you would take. You will get a lot more out of it and will enjoy it more.
If you think you will be happier making 2X instead of X, you are making a mistake. You ought to find something you like and you will get in trouble if you think that making 10X or 20X is the answer to everything in life because then you will do things like borrow money when you shouldn't or cut corners on things your employers want you to cut corners on. It does not make any sense; you would not like it when you look back on it.
2. Warren Buffett's business criteria
What makes companies you like?
i. Go for businesses you understand.
ii. Simple businesses, but not easy businesses.
iii. Business must have a moat.
iv. Honest, hard-working and able management.
v. Good current and future economics.
Buffett goes on to discuss the idea of a moat being the competitive advantage of the company. He uses the example of car insurance. Insurers compete on service and price; since most of the insurers offer similar products, the price is what he must compete on. Therefore he must be the low-cost provider. Therefore, GEICO is the low-cost provider in this industry and therefore, he owns it.
A lot of emphasis is put on the moat. He mentions to the MBA students that the one request he has for his managers is to widen the moats of their respective businesses, that is, strengthen their competitive advantages; throw in alligators and crocodiles and snakes.
Moats can come across through patents, quality of product, service, cost or real estate location.
4. Buy a business you understand
If he is not able to tell what a business will be like 10+ years from now, he is not going to buy it.
I would not buy any stock, if they closed the stock exchange tomorrow for 5 years, I won't be happy owning it.
You're buying a piece of business.
You're not buying a stock; you're buying into a business and once the business does well, you will do well.
If I were teaching a class in business school and on the final exam, I would pass out information on an Internet company and tell the students to value it. Anyone that gave me an answer would flunk. You can't do it.
"To risk something that is important to you for something that is not important to you is foolish."
Part two of this MBA talk focuses on making the right decisions. He talks about his involvement in the Long Term Capital Management incident and how the very intelligent, high IQ guys running this hedge fund, made bad, risky decisions that ultimately led to a huge failure. He used this as an example of how high IQ is not needed to be successful and also one needs to truly understand the risks one takes and if it is worth it. These are some of his comments from this clip.
To risk something that is important to you for something that is not important to you is foolish. To make money they [partners in LTCM] did not have and didn't need, they risked what they did have and did need.
If you handed me a gun with one thousand chambers, or one million chambers in it and there was a bullet in one chamber. Then you said put it up to your temple and asked how much do you want to be paid to pull it once. I am not going to pull it. You can name any sum you want, but it does not do anything for me on the upside, and I think the downside is fairly clear.
History does not tell you the probabilities of future financial things happening.
The beta does not tell you a damn thing about the risk of the stock.
Sigmas do not tell you about the risk of a company going bankrupt either.
In this part of the lecture, he really emphasizes making the right decisions. It is totally unnecessary to take risks, especially when you risk things that are important to you for things you do not need. I see how this can be included in my investment philosophy. If you assumed that the money you are investing is not yours, but belong to shareholders, think if you would purchase a particular company. More importantly, think if the money was yours and you did not want to risk losing anything, consider how careful you should look at the investments. Buffett's rules should apply always:
1. Don't lose money,
2. Don't forget rule number 1.
Choose investments with minimal downside and a lot of upside. Very simple strategy. The same philosophy applies to your choices in life. Do you agree?
"Chains of habit are too light to be felt until they are too heavy to be broken."
These are some of the comments from this 10 minute video.
In determining whether you succeed, there is more to it than intellect and energy and I would like to talk about that for a while.
Look for three things when hiring someone; integrity, intelligence and energy. If the person did not have the first one, the latter two would kill him because if he doesn't have integrity, you want him dumb and lazy, you don't want him smart and energetic. He focuses on the first...Integrity.If I granted you the right to buy 10% of one of your classmates for the rest of their lifetime, what characteristics would you look for? He says if you thought about it for an hour, you would look for qualitative characteristics; the person with leadership abilities, generous, admirable etc.
If you had to go short on someone, you would not choose the person with the lowest IQ, but you would look for the person with qualities that you would not like; people who are greedy, egotistical, lazy, dishonest.
If you looked at the qualities of these two side by side, you can see that the ones that you admire are highly achievable. They are qualities of behavior, temperament and character. If you looked at the qualities on the right, the ones that you dislike, you do not have to exhibit this behavior. These are not qualities that you have to have, you can get rid of them. Most behaviors are habitual. You have a choice to behave any way you like.
Benjamin Graham looked around to people he admired. He wanted to be admired as well, so got the great idea to behave like them and soon realized there was nothing impossible about that. One can also do the same for people that exhibit qualities one dislikes and get rid of those behaviors in oneself.
All one needs to do is write down the qualities one admire and practice them until they become habitual.
The main idea of the first 10 minutes of his talk is about the qualities of a person. Warren Buffett is known to be a good judge of character and it is a major part of him selecting companies; he seeks management that are competent and honest. He understands that the integrity of management is ultimately one of the most important factors for a business to be successful. It is therefore important to understand what those kind of behaviors are. It is also equally important to have the right role models or mentors or people you admire before looking for qualities of behavior to exhibit. You can have an idea of what kind of person you will be by the people you consider your role models, so choose the right role model.
These are some of the people I admire:
1. Dr. Wayne Dyer - He assisted me greatly in changing my thoughts, which ultimately lead to a change in the way I view life. He is my spiritual mentor and I was honored to meet him a few weeks ago in New York.
2. Dr. David Hawkins - My teacher of Enlightenment, God and the Evolution of Human Consciousness.
3. Warren Buffett - My value investing and finance mentor.
- My inspiration and motivation to be the best I can be. I see 4. My parents, sisters and niece what I have become through my parents, where I am with my sisters and the need to prepare for the future through my niece. I have truly been blessed to have these people in my life.What are some of the qualities you admire in others and who are some of your role models?
"I am buying American companies"
I read this article written by Mr. Buffett himself this morning and couldn't help but comment on it. It is reassuring that the world's greatest investor has faith in the American economy, and at his age, is still able to see beyond the noise of today's financial markets.
What I have decided to do was go through his article and highlight some of the main points that teaches us about his investment philosophy. The bolded items are his ideas and my comments are the underlined statements that proceed. I hope it is as instructional for you as it was for me. ENJOY!!
THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.
So ... I’ve been buying American stocks. [It does not get any clearer than this.] This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.
A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. [ This is one of my favorite quotes. It allows me to stay focused in a time like this. It allows me to ignore the crowd and stick to the fundamentals of what he has taught.] And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. [He is advising to stay away from companies with debt, since these companies will be somewhat dependent on the capital markets. It is wise to focus on companies that are able to run their operations with cash they have generated internally. He also speaks of competitive advantages. It is also prudent to stick to the companies with wide moats as it is certain they will be able to survive this serious downturn.] But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. [Have faith in the American economy. There are very strong businesses here.] These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.
Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over. [ Do not try to read or time the market. All that matters is that the market tends to perform well over a long period of time. I love this quote. It will be my quote of the day "If you wait for the robins, spring will be over." ]
A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.
Over the long term, the stock market news will be good. [This statement reminds me of another of his quotes; "In the short-term, the market is a voting machine, but in the long-term it is a weighing machine.]In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.
You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.
Today people who hold cash equivalents feel comfortable. They shouldn’t. [Cash is good to have, but it must be put to good use in times like this. If not, it will be losing value with each day that passes. Especially with so many opportunities and bargains out there right now. Cash is king, but only if it is earning a royal return]. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.
Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”
I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities. [Ultimately, stocks outperform any other security over the long-term. With so much fear in the market today, this is a once-in-a-lifetime opportunity. We all know that the economy will return to normal, so look into the future and just be an observer and active participant now. My sole advice, with Buffett as my guide, is to Buy American now, Ignore the crowd and Think Long Term]
Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.
What do you think of his article? Do you have the temperament to follow? Or is it really different this time?
1:06 AM | Filed Under | 2 Comments
"Buy a business that is so good that any idiot could run it, because sooner or later, one will". ~ Peter Lynch
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[Image credit: Stephanie Kuykenal/Bloomberg News]
Source: Berkshire Hathaway
Net worth: $62.0 billion (as of first half of 2008)
Country of Citizenship: United States
Residence: Omaha, Nebraska
Marital Status: widowed, remarried, 3 children
Education: University of Nebraska Lincoln, Bachelor of Arts / Science
Columbia University, Master of Science
America's most beloved investor is now the world's richest man. Soared past friend and bridge partner Bill Gates as shares of Berkshire Hathaway climbed 25% since the middle of last July. Son of Nebraska politician delivered newspapers as a boy. Filed first tax return at age 13, claiming $35 deduction for bicycle. Studied under value investing guru Benjamin Graham at Columbia. Took over textile firm Berkshire Hathaway 1965. Today holding company invested in insurance (Geico, General Re), jewelry (Borsheim's), utilities (MidAmerican Energy), food (Dairy Queen, See's Candies). Also has noncontrolling stakes in Anheuser-Busch, Coca-Cola, Wells Fargo. Insurance operations flourished in 2007. "That party is over. It's a certainty that insurance-industry profit margins, including ours, will fall significantly in 2008." The Oracle of Omaha issued a challenge to members of The Forbes 400 in October; said he would donate $1 million to charity if the collective group of richest Americans would admit they pay less taxes, as a percentage of income, than their secretaries. Had long promised to give away his fortune posthumously. Irrevocably earmarked the majority of his Berkshire shares to charity in 2006, mostly to the Bill & Melinda Gates Foundation. Gift was valued at $31 billion on day of announcement; donation will far exceed that sum so long as Berkshire shares continue to rise.
Companies in Berkshire Hathaway's Portfolio: The Coca Cola Company, American Express, Wells Fargo, Burlington Northern Santa Fe, Union Pacific, Proctor and Gamble, US Bancorp, Wellpoint, Johnson and Johnson, Conocophillips, POSCO, Wal-Mart, Washington Post, Nike, General Electric, Goldman Sachs, Suntrust Bank, Iron Mountain, COSTCO, Sanofi-Aventis, United Healthcare, Ingersoll-Rand, Home Depot, Lowe's, Kraft, Carmax, Bank of America.
Recommended readings: Security Analysis, The Intelligent Investor, Common stocks and Uncommon profits, The Theory of Investment Value, The Essays of Warren Buffett, Berkshire Hathaway Chairman's Letters to shareholders, Beating the Street, One Up on Wall Street
4:06 PM | Filed Under | 2 Comments