DraNoel Passive Income

'I Probably Wouldn't Raise Interest Rates Right Now' – Warren Buffett

2015-09-15T22:46:00.000-07:00

Berkshire Hathaway Chairman and CEO Warren Buffett discusses the U.S. economy, the housing market, the Fed and the markets.
Watch Liz Claman talk about Management, US Markets, and Wall Street on Closing Bell.

Top 8 Ways to Create Passive Income

2015-09-02T23:33:00.000-07:00

Wouldn't it be great if you could have a continuous stream of income deposited into your savings and/or checking account? Think about it. You wouldn't have to worry about paying the bills on time or having money to buy groceries for your family. An extra $500, $1,000 or more in your bank account will reduce your money worries and stress.

While having multiple streams of income is ideal, you need to choose the right one for you. For example, if you want to earn money from a blog, you need to pay for web hosting, choose the right niche, design your website (or have someone design it for you), create a blogging schedule, share your posts, develop a community, guest blog, and choose the best affiliates for your blog niche. Blogging is work, but it is fun!

If you want to earn additional monthly income and start saving for retirement (or add to a fund), college, vacation, etc., check out the top eight ways to create passive income listed below. Some require more work than others. But all of them will put extra cash into your pocket.

8 Ways to Create Passive Income

1. Affiliate marketing.

Affiliate marketing means you sign up with a company and/or entrepreneur and sell their products. For example, if you start a tech website, you could become an affiliate of a web hosting or anti-virus software company. You can earn hundreds or even thousands of dollars each month if your website receives a decent amount of web traffic and you have thousands of email subscribers. Being an affiliate marketer takes dedication and time. You need to build traffic via your website, email marketing and social media. Is this for you? You be the judge.

2. Start a freelance business.

Have you always wanted to own your own business? You could start a side business while you work a full-time or part-time job. For example, if you're a graphic or web designer, you could start your own graphic or web design business on the side. If you like to make jewelry, you could sell at craft fairs and online. Starting a business may be daunting, but if you believe in you and your work, you could earn a decent living, maybe even quit your day job. Search out those who are doing what you want to do and interview them. Find out the mistakes they made and ask for guidance.

3. Network marketing.

Network marketing or multi-level marketing is one of the most popular passive income streams. When you join a network marketing company, you become part of a team. The goal, for some, is to become a leader, such as a district manager of your area, because you can earn more money. The drawback to network marketing is poor leadership and the emphasis on building teams quickly. If you join a team with a weak leader, you won't like network marketing. But if your leader knows how to build and develop people and teams, you could be successful, earning $5,000 or more per month. A word of caution: read the fine print when you sign up. Make sure you have ample time to quit if you decide the opportunity is not for you.

4. Flea markets.

Do you have stuff in your basement, attic or garage that's collecting dust? If you do, pack up the SUV or car and kids and go to a flea market. You could make a couple of hundred, even thousands, of dollars, depending on what you're selling. You'll want to go to flea markets every weekend or at least every other weekend. Make an event out of it, and show your kids how easy it is to earn money selling their stuff.

5. Investments.

Stocks, bonds, 401(k)s, annuities, etc. are great ways to earn passive income. If you're not financially savvy, you'll want to hire a financial advisor who'll help you choose the right investments for you. You may want to take a couple of finance classes to understand what your advisor is speaking about when he/she recommends an investment strategy. Done right, investments can pay off for years.

6. Real estate.

Do you watch real estate reality shows? Have you dreamed of fixing and flipping houses? What about being a landlord? Believe it or not, real estate is a good way to earn extra income. Real estate investing includes fixing and flipping houses. This requires capital in the form of cash and/or credit. If you can partner with someone, do it. You'll attend housing auctions and bid on houses; you can get them for a good price. Hire a contractor to fix up the inside and outside (could cost anywhere from $10,000 and up), have the house appraised, sell it, make a profit and split the profits between you and your partner(s). Of course, you could buy properties (e.g., houses and apartment buildings), and become a landlord. Another alternative is to become a real estate agent. Speak with seasoned investors and realtors to find out if this passive income strategy is right for you.

7. Royalties.

Earn royalties from writing books, songs or developing products. You can even buy someone else's share of a song via a writer's auction. For example, if a songwriter dies, his/her heirs have the right to auction off a percentage of their songs during an estate sale. You bid on a song, and if it's accepted, you own a piece of it and receive a royalty check each month, which can be deposited into your savings or checking account or a special savings account like a financial freedom account.

8. Participate in surveys and paid focus groups.

Get paid to take surveys at home by signing up with one or more survey websites. All you do is answer questions and voilà, you get paid. Another way to earn extra income is to participate in focus groups. Companies hire focus groups as a way to test out a new product before it hits the market. Why? Because they need to make sure it will make money; they want a high return on their investment. Surveys and focus groups may not make you a millionaire overnight, but you can earn hundreds of dollars each month by giving your opinion on products and services.

Passive income is a good way to get onto the road to financial freedom. Some money making avenues require more work than others, but the return on your time and minimal investment can pay off for years to come. You can have a secure financial future for you and/or you and your family.

From huffingtonpost.com

The Best Way To Improve Investment Skills: 'One Case Study After Another'

2013-09-27T22:05:00.001-07:00

I do a lot of case studies. I recommend that any burgeoning value investor do as many case studies as they can, sprinkled in among reading annual reports and other filings. I'll explain what I mean by this in a moment... first I thought the best investor/teacher of all time could explain the importance of this exercise better than me:

"To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets. You may, in fact, be better off knowing nothing of these. That, of course, is not the prevailing view at most business schools, whose finance curriculum tends to be dominated by such subjects. In our view, though, investment students need only two well-taught courses - How to Value a Business, and How to Think About Market Prices."

Buffett has mentioned these "two courses" numerous times since this letter. He later mentioned that in the How to Value a Business course, he would simply "do one case study after another."

What Are Case Studies?

My short definition: A case study is reading about a specific investment result and then attempting to reverse engineer the thesis and the thought process that the investor had when he or she made the decision to buy the stock, and then taking note of how that thesis played out during the course of the investment.

In other words, find a particularly good or bad investment result and ask, "Why?"

What was the outcome? (note: you can learn from both good and bad results, but often times more from the ones that resulted in losses). This can be your own investments (the best case studies), or another investor's investments.
Why did the investor decide to buy the stock?
Why did the result turn out the way it did?

In case studies, you're trying to learn by asking questions. Why did the investor buy it? What were they thinking? How did it turn out and why? Was their thought process correct? If not, what went wrong? Could anything have been done differently to prevent or avoid the outcome? What are my takeaways that I can apply to my own investment process?

For starters, reading and studying Buffett's letters are probably the greatest things you can do to improve as an investor. I've read through them a few times, but I continue to review them and probably will do so throughout my career. I still learn something new each time. The great thing about reading Buffett's (and other fund managers') letters is that they often lay out their logic for us in a very clear and concise manner. They basically say "Here's why I did this, and here's why it worked (or didn't work)". So sometimes case studies are simply listening when other great investors are doing their own post-analysis.

Other times it's more complicated. I often read through old letters from various funds I follow and come across an investment that did extraordinarily well or extraordinarily poorly, but without further commentary. In this case, I might be inclined to dive deeper and read some old annual reports and try to really reverse engineer the investor's thought process.

All Knowledge Is Cumulative

Our investment decisions are partly based on the framework of our experience and each time I read Buffett's letters, I learn something or see something in a different way because over time my thought process and learning experience evolve. It's a latticework of various bits and pieces of experience and knowledge all coming together, and building on itself overtime.

Buffett likens this learning process to compound interest. And as Pabrai says, "All knowledge is cumulative." So these case studies compound on themselves over time, improving our investment skill set and streamlining our ability to make decisions. Our filters get stronger, our risk management process becomes more robust.. As Buffett did, we get faster at saying no. It becomes easier to identify problems that might harm the investment, etc.

A Blueprint for Success

And it's not just filtering negatives. Studying past successful investments provide us with blueprints for what to look for in future ideas. Studying what Henry Singleton did at Teledyne gives us ablueprint for successful capital allocation strategies. Eddie Lampert gave us a similar blueprint atAutoZone (AZO). Studying Schloss' investment in the Penn Central bonds gives us a blueprint for all the great things that can happen by simply buying things cheap: A "dollar for 40 cents." Buffett's investment in See's Candy (or his most famous investment of all: Coke) give us blueprints for what can happen when you buy great businesses that have pricing power and durable competitive advantages (moats).

LeBron James Game-Winning Layup: A Great Case Study

It's just like procedural memory in sports. I thought the 2013 NBA playoffs were the most exciting NBA playoffs since the Jordan days... Other than game 6 of the finals, I thought the most exciting game was Game 1 of the Eastern Conference Finals. Lebron James won the game for the Heat with a game winning layup as time expired.

I found the sequence of events that transpired during that play interesting. There were only two seconds left. The play was clearly designed for James to receive the inbound pass and take a jumpshot. If he didn't have a clear jump shot, his likely alternative would have been a quick head fake, maybe a dribble, and then a jumpshot. Either way, the likely outcome would be a James jumpshot as time expires.

However, the play developed in such a way that James' defender Paul George got caught low as James' received the inbound pass. This meant George had to hustle out to the top of the key to try and defend an open James' jumpshot. LeBron saw this developing and as George sprinted toward him, James took the opportunity to blow by him toward the basket. George couldn't stop his momentum and James breezed by for an easy game-winning layup.

I thought about this afterward and how if this same situation was played out 20 more times, this result (a James layup) might occur one out of 20 (maybe not even that often).

So How Did James Pull This Off?

It wasn't planned.. He didn't have time to think consciously about it. It was just procedural memory. Over the course of James' life (on the playground courts, high school, the NBA, etc.) he's seen countless situations [size=11pt; line-height: 115%; font-family: Calibri, sans-serif]— [/size]case studies, if you will.). The more situations like this he's in, the more natural and fluid the decision-making process becomes.

James can instantly assess probability on the basketball court. Within milliseconds he can quickly evaluate a circumstance and decide to take action that will result in the highest probability of success. This ability is often referred to as "basketball IQ," but it's really just the procedural memory that comes from seeing thousands of similar situations and understanding the proper course of action to take.

Procedural memory is what athletes, concert pianists, ballet dancers, doctors and many other professionals rely on to successfully execute their respective activities, often without the time to consciously consider what they are doing.

Luckily, as investors, we don't have to act in seconds. We don't even have to act in hours, or in most cases days. We usually have a lot of time to evaluate a situation as it develops and begins to unfold. And like LeBron on the basketball court, these skills get developed through experience. Part of this is just making investments and learning over time, and part is by studying the results of our own and other investors' past investments. Case studies.

Buffett himself even referenced this type of benefit derived from studying past investment cases in a 1996 interview with Outstanding Investor Digest when he said:

"You do see repetition of certain business patterns and business behavior. And Wall Street tends to ignore those, incidentally."

Case studies help you identify potential profitable and/or harmful situations, and Wall Street doesn't care, thus allowing you to take advantage of those insights!

How to Do Case Studies?

So if you're all fired up after watching LeBron's incredible display of procedural memory and can't wait to begin improving your own skills, I'd recommend doing the same thing I do: Read, read and read some more. The best thing to do is just read investment letters.

I've already mentioned the Berkshire letters above. You could spend a year just studying Buffett. Eddie Lampert did that, and he ended up achieving one of the greatest track records of all time,close to 30% annual returns for a couple decades. A Bloomberg article from 2004 references the foundation Lampert built by studying Buffett's investments:

"Lampert has carefully studied Buffett for years. He started reading and rereading Buffett's writings while working at Goldman after college. He would analyze Buffett's investments, he says, by "reverse engineering" deals, such as his purchase of insurance company GEICO. Lampert went back and read GEICO's annual reports in the couple of years preceding Buffett's initial investment in the 1970s. "Putting myself in his shoes at that time, could I understand why he made the investments?" says Lampert. "That was part of my learning process." In 1989 he flew out to Omaha and met Buffett for 90 minutes, peppering him with questions about his investing philosophy."

In fact, in the shareholder letter I referenced above, the very next paragraphs lay out Buffett's basic thought process for taking a stake in US Air. This did not turn out to be a successful investment, but with Buffett's clearly laid out thought process, along with his mentioning of the key things that went wrong, it becomes a great learning lesson for the rest of us.

Books

In addition to reading old shareholder letters, there are some books with great case studies to read about. Alice Schroeder's "Snowball" has some of the best case studies complete with great detail into how Buffett thought, including some of his lesser known investments. Maybe the best book of all for case studies is Joel Greenblatt's "You Can Be a Stock Market Genius." This book has case studies of some of Greenblatt's greatest investments laid out in simple, concise form.

There are many other books ("Market Wizards," "Buffettology," etc.) that lay out case studies often at a cursory (but still valuable) level. These are great to read because they often take just a few minutes, but reinforce some valuable concepts.

Blogs

In addition to reading letters and books, I have a number of blogs that I read, and some of them are worth going through the archives to find examples of their own past investments, and sometimes their commentary on other investors' past investments. CSInvesting, Brooklyn Investor, Geoff Gannon, Above Average Odds and Greg Speicher among others are great places to read old case studies.

My System for Tracking Case Studies
There is a lot out there to read. Sometimes it's overwhelming. The key is to just read, and let "compound knowledge" work in your favor over time. Don't get too rigid about any of this. Just read. I think if you consistently go through Buffett's letters and Greenblatt's book, along with a few others, that you just happen across (which happens often when you read a lot), you'll develop a great foundation for understanding what some of the greatest investors of all time were thinking when they made some of their greatest (and worst) investments.

You may adopt something similar to what I do. I have a three step filter for when I come across case studies. First off, most of the time I just read them and let it sink in over time. This way, I can read, move on to the next thing, read it, move on to the next, etc., but over time, you'll come across some things that you may want to notate for future reference.

What I do here is this:

Keep a Binder: Print the article or letter that has the case study and file it in a binder I have. This is like a scrapbook of case studies in no particular order with scribbled notes and ideas for me to review later.
Keep a Word Doc: I then take some brief bullet point notes of the case study and record them on a word doc, that is getting massive at this point. I can also review these over time. I have a section on this doc for "key learnings," which are takeaways from the case studies.
Build a Checklist that contains certain aspects of things I've learned.

This last step is new for me. I heard Mohnish Pabrai talk about this a few years ago and recently decided I'd start building a more detailed checklist with numerous miscellaneous points to consider. I have to say that I think this is a huge benefit and will be a part of my process permanently going forward. The biggest benefit is compiling the list and altering it and letting evolve as I learn things. The checklist is not static, it's ever changing as I learn more. And it does help to write these things down.

To Sum It Up

So, hopefully this lays out a case for why I think it's important to do these case studies. Again, this is part of the process. Much of learning and improving as an investor has to do with reading, and often times this will come in the form of studying and reading about current ideas (current 10-Ks, reports, etc.). But reading about past investments and occasionally taking down some notes of important points will help you improve over time.

The more situations you can identify with, the more accurately you'll be at gauging risk and being able to estimate the probability of success on any given investment.

What I plan to do over time on this blog is put up some brief points on some of the case studies I've done. The key is to keep the big picture in mind. Usually the investment success/failure can be traced back to just a couple main points. That's what we want to find out. What are those points, and how can we use them to our advantage the next time we see that "play" develop.

We'll go over some of these over time, along with continuing to discuss certain ideas I find interesting.

Have a great weekend!

From gurufocus.com

Golden rules for losing money

2013-09-27T21:57:00.000-07:00

Investing successfully poses many challenges. In these pages we aim to show you some of the techniques that can help you to rise to these challenges but first, one of our favourite tools, from mathematician Carl Jacobi.

He was fond of saying, 'invert, always invert' and that's what we're going to do, here and in our next issue. Instead of looking at how to make money, we're going to look at great ways to lose it. That way you can aim to minimise your mistakes-a vital part of investing successfully.

So here they are, classic investment mistakes guaranteed to ensure woeful performance.

1. Trade fast and trade often

Charlie Munger, Warren Buffett's business partner, often refers to the huge mathematical advantages of 'doing nothing' to your portfolio. Let's blindly ignore the very large tax benefits of holding stocks for the long term and just consider the impact of brokerage.

Someone who 'turns over' (buys and sells) all the stocks in their portfolio several times a year is at least a few percent behind the eight ball, even with internet brokerage rates as low as 0.3%. Add up the brokerage from your last tax return to see what we mean.

There's also an important, but less measurable, benefit to taking a longer-term approach. It makes you think long and hard about which stocks to include in your portfolio. When you are considering buying a stock for 10 years or more, you tend to pick quality businesses. And that can only be a good thing.

So, if your intention is to lose money (and enrich your broker), trade fast and frequently.

2. Follow the mainstream media

Hopefully, your subscription to The Intelligent Investor inoculates you somewhat against this particular human folly, especially after reading our cover story last issue. Most people, though, aren't so resistant.

Munger refers to a human condition known as 'incentive-caused bias' and it explains the functioning of media quite nicely. There's a widely held belief, and it may be correct, although declining newspaper circulations suggest otherwise, that emotional, confrontational, dramatic coverage sells more papers than rational, factual reporting. Hence the tendency to induce panic in investors when calmness would better serve their interests.

But incentive-caused bias doesn't just affect the media. Just look at how honest managing directors can first convince themselves, then their board, then their shareholders, how an offshore acquisition or hostile takeover will be great for everyone, especially themselves. Generous options packages offer a fitting explanation for many examples of corporate foolishness.

To lose money, avert your eyes from a factual assessment of a situation and bury yourself in the opinions and arguments of those with a vested interest in convincing you of the veracity of their own opinion.

3. Follow fads or 'hot stocks'

In his highly recommended book Influence: The Psychology of Persuasion , Robert Cialdini talks about another human condition known as 'social proof'. The evolution of the human species, and sheep, was greatly assisted by a tendency to follow the crowd-safety in numbers and all that.

Anyone who thinks that social proof is solely the preserve of the historian should study the mania of the dot com boom. Millions, gulled with the fear of standing apart from the crowd, played a huge role in firing the mania. Conformity still dictates many areas of life but following the stockmarket crowd can be a costly mistake. As Buffett says, 'you pay a very high price in the stockmarket for a cheery consensus.'

That's why we are most often excited when others are depressed and fearful when others are optimistic (see our review of FKP on page 6). And it explains why we're worried about China, nickel stocks and other areas like the spate of listed investment company floats that are currently running hot.

If you're intent on seeing your net worth dwindle, follow hot stocks and sectors.

4. Beat yourself up over lost opportunities

Here, you might want to refer to our cover story from issue 135/Sep 03 , 'Right decision, wrong result'. In an imperfect activity like investing, mistakes are absolutely inevitable. But, odd as it may sound, sometimes even when you're right, you're wrong.

To call tech stocks overvalued in mid-1999 was undoubtedly correct. But for the next six months, as speculators pushed prices higher still, it sure didn't feel correct. It's a fact of life that someone will always be getting rich a little quicker than you are. But then again, they may become poor just as quickly by adopting the same approach.

If you take the conservative decision not to invest in a stock, and it goes up anyway, don't fret. Just be patient-other opportunities are often just around the corner. But if you are interested in blowing your capital, now's a good time to capitulate and buy at these higher prices.

In next fortnight's issue, we'll look at some more 'Golden rules for losing money'. Try and save your pennies 'till then.

As we said last issue, to make money, sometimes it's better to first concentrate on not losing it. With that in mind, here's the second part of our series, with five more golden rules for losing money.

5. Buy cyclical stocks at the top

In last issue's review of property group FKP, we discussed the natural human tendency to extrapolate recent events. So when a cyclical stock like a steel company or property developer has a few tough years, investors tend to make the assumption that the bad times will last indefinitely. This can sometimes offer good opportunities for the canny investor, as it did for subscribers who followed our first strong buy recommendation on FKP in issue 84/Jul 01 .

In the same way, when these stocks show a few years of good results, thanks, for example, to strong Chinese metal demand, a booming property market or some other factor, the market tends to extrapolate the good times. It's the same mistake made at different ends of the cycle. Just at the peak of a cycle, investors can confuse a cyclical stock with a growth stock and bid the shares up, perhaps to a very high PER. But when earnings are at a peak, that's exactly when cyclical stocks should be selling on a low PER. When earnings fall, as they inevitably do with a cyclical downturn, the shares come crashing down. Farmers-who are used to the feast/famine cycle of a life on the land-seem less susceptible to this folly than most.

6. Follow overly acquisitive management

In his comprehensive book, Two Centuries of Panic , Trevor Sykes says that 'more companies are ruined by bad management than by bad economies'. We'd most definitely agree. Overly acquisitive managements-those hell-bent on growth, seemingly at any cost, are especially prone to getting into trouble. How so?

Acquisitions often involve large amounts of debt which thereby increase risk. As interest rates rise, for example, a growing portion of cashflow has to be diverted to service debt rather than deployed in the business or paid out as dividends. Secondly, acquisitive managements, often suffering from delusions of grandeur, can overstretch themselves. And, finally, acquisitions tend to cloud the company's financial accounts. This can fool bankers and shareholders for a while but by the time the gravity of a tough situation comes to light, it's too late. The collapse of speedily built empires like Austrim, Quintex and Adelaide Steamship are stark reminders of what can go wrong. Backing such management is almost bound to help lighten your wallet.

7. Invest in rapidly expanding financial institutions

Depending on the riskiness of the borrower, a financial institution might make a 'spread' or 'margin' on loans of anything from 1% to 5% per year. But when a loan goes bad, it can lose 100%. It's a risk that must be managed very, very carefully. Warren Buffett once remarked that a bad bank manger can flush all your equity down the toilet in your lunch hour.

And watching the accounting ratios like a hawk won't always save you either. In banking, growth can actually be used to hide bad loans temporarily (as, perhaps, we are about to see). A bank that is experiencing a high rate of loan delinquencies can easily halve that rate temporarily by writing new loans and doubling the size of its loan book-after all, a new loan takes time before it can go bad. But hastily made new loans are likely to be of poorer quality than existing ones.

This is why we get worried when financial institutions aim for rapid growth. Bank of Queensland, on which we have a negative recommendation, has targeted a 5% share of the national home loan market in 3-5 years, compared to its current 2.5% share. To achieve that, we suspect it will have to offer lower rates, or take on riskier business, to wrestle market share from the other banks-especially as it tackles markets outside its home state. If you want to improve your chances of ending up in the financial poorhouse, put your money into fast-growing financial institutions.

8. Work to the 'greater fool' theory

Some investors seem happy to buy expensive stocks, knowing full well they're overvalued, because they feel confident that someone else will come along and pay an even higher price. That's what happened in the dot com boom and it's what seems to be happening in the current nickel boom. Many investors buying nickel stocks now believe them to be overvalued, but assume they'll get even more overpriced-as in the Poseidon boom of the early 1970s. It's financial musical chairs for suckers and is likely to end up costing many investors a bundle.

9. Buy 'gunna' companies rather than 'doer' companies

'Gunna' companies are those that are 'gunna' do this and 'gunna' do that. Such unproven companies, and their attendant management teams, are a great way to lose capital. But even well-established companies can be 'gunna' companies. Management will explain away the poor performance of the last few years and concentrate on what it will do in the future (see Brazin or IAG this issue). Chances are it will be putting on a similar show a few years down the track. While those sticking with proven companies and managements should do well, if you're aiming to lose money, buy 'gunna' companies.

From shares.intelligentinvestor.com.au

83 Reasons We Love Warren Buffett

2013-09-04T01:24:00.002-07:00

Today is Warren Buffett's 83rd birthday. Each year, I celebrate the Babe Ruth of Investing's birthday by adding another reason we love our hero.

1. Intricate, occasionally contradictory complexity hides beneath the "Aw, shucks" folksy charm. As a Forbes writer once put it, "Buffett is not a simple person, but he has simple tastes."

2. Many people talk about avoiding the madding crowd, but Buffett actually does it by living 1,250 miles away from Wall Street.

3. He has a fortress-like internal scorecard on all things investing, yet a vulnerable, endearing external scorecard on many aspects of his personal life. See his penchant for seeking mother figures.

4. His perspective: "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."

5. He is that guy in school who tells you he may have failed the test -- only to bust the top of the curve.

6. His time frame for the long run consistently exceeds his life span.

7. He says it better: "Someone's sitting in the shade today because someone planted a tree a long time ago."

8. He's human. He fears nuclear war and his own mortality. He's frequently more adept at business relationships than personal ones. He can hold a grudge. His hero is his daddy.

9. Classic line: "Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1."

10. Once branded a stingy miser (rightly or wrongly), Buffett has evolved (assuming it wasn't his intention from the start) into one of the most effective philanthropists I know. After growing his potential givings at a 20% compounded rate per year, he set a plan to give most of it away.

11. Perhaps as importantly, he put ego aside and outsourced his charitable decision-making to the Bill & Melinda Gates Foundation. Circle of competence at its finest.

12. "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 five years." Contrast that with computer algorithm-based trading, day trading, and some of the moves you've made in your own account.

13. Buffett's smarter than you and I, but he's kind enough to let us feel otherwise.

14. David Sokol was once an heir apparent and arguably Buffett's most trusted operations guy. But when Sokolgate emerged, Buffett stayed true to his word: "We can afford to lose money -- even a lot of money. But we can't afford to lose reputation -- even a shred of reputation."

15. "Derivatives are financial weapons of mass destruction." He said it early, and we are reminded of it often.

16. In a glimpse of the nuance that some commentators call hypocrisy, Buffett uses derivatives himself. But he does so in a way that doesn't threaten the entire financial system and explains exactly why in his annual shareholder letters.

17. He doomed himself from ever holding public office: "A public-opinion poll is no substitute for thought."

18. I like juxtaposing these two quotes: 1) "It's better to hang out with people better than you. Pick out associates whose behavior is better than yours and you'll drift in that direction." 2) "Wall Street is the only place that people ride to in a Rolls-Royce to get advice from those who take the subway."

19. "You only have to do a very few things right in your life so long as you don't do too many things wrong."

20. He has the ability to resist the allure of the quick fix or quick buck when longer-term dynamics are at play.

21. Not sure if this quote came before or after the Internet: "Let blockheads read what blockheads wrote."

22. For those hoping to become famous and respected, he's a testament that the challenges and doubts keep coming regardless of the length of the track record. He has publicly prevailed so far.

23. An investing truism: "Price is what you pay. Value is what you get."

24. The business side of that investing truism: "Your premium brand had better be delivering something special, or it's not going to get the business."

25. He uses colorful language and analogies when drab jargon could do the trick.

26. Boring example: moat vs. competitive advantage.

27. Not-so-boring example: sex.

28. "Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it."

29. Classic line: "Only when the tide goes out do you discover who's been swimming naked."

30. He backs up his saying, "Our favorite holding period is forever," by keeping past-their-prime subsidiaries that others would "spin off to unlock value."

31. His Robin (Charlie Munger) can kick your Batman's butt.

32. He makes loophole-free handshake deals.

33. "Risk comes from not knowing what you're doing."

34. Quote No. 1 on keeping it simple, stupid: "The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective."

35. Quote No. 2 on keeping it simple, stupid: "There seems to be some perverse human characteristic that likes to make easy things difficult."

36. The Berkshire Hathaway (NYSE: BRK-A ) (NYSE: BRK-B ) annual meeting is an unrivaled spectacle in investing, truly living up to its billing as the Woodstock for Capitalists.

37. One of the most concise summations of why America is great: "There are 309 million people out there that are trying to improve their lot in life. And we've got a system that allows them to do it."

38. Trash-bin-diving caution No. 1: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

39. Trash-bin-diving caution No. 2: "Time is the friend of the wonderful company, the enemy of the mediocre."

40. He's an eternal optimist in a sound-bite culture that often rewards pessimists.

41. His shareholder letters reveal an artisan-like craftsmanship only seen when the proprietor cares deeply about his creation.

42. The contrarian credo: "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."

43. He recognizes that genius fails: "When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact."

44. Like so many great thinkers, Buffett is able to ignore noise and whittle a decision down to its core variables. After he explains those variables, the decision sounds elementary.

45. Why banking can be dangerous: "When you combine ignorance and leverage, you get some pretty interesting results."

46. He allows me to see the name Buffett without thinking of Jimmy.

47. Buffett maintains a high thought-to-speech ratio.

48. Buffett's librarian fantasy: "If past history was all there was to the game, the richest people would be librarians."

49. He converts a deadly sin into a virtue: "You do things when the opportunities come along. I've had periods in my life when I've had a bundle of ideas come along, and I've had long dry spells. If I get an idea next week, I'll do something. If not, I won't do a damn thing."

50. Averaging 20% returns for almost half a century results in beating the S&P 500 78-to-1!

51. Even though he has fewer and fewer meaningful investing options because of the size of Berkshire Hathaway, he continues to wow us.

52. On a chili-dog-and-onion-ring-flavored note, Berkshire Hathaway owns Dairy Queen, my favorite fast-food chain.

53. Many of Buffett's managers were wildly successful entrepreneurs before selling out to Berkshire. Convincing successful, headstrong, boss-less superstars to subjugate themselves,and keeping those people motivated and happy, is quite a feat.

54. On a related note, Buffett doesn't micromanage -- good thing, with an empire this large.

55. He gets doubted again and again and again and proves the doubters wrong most of the time. Yet you never hear him say, "I told you so."

56. Well, maybe sometimes he gloats. Harvard Business School rejected him, which led him to study under his mentors Benjamin Graham and David Dodd at Columbia. His "How do you like me now?" statement: "Harvard did me a big favor by turning me down. But I haven't made any contributions to them in thanks for that."

57. He has become America's de facto investing teacher. And he has done so willingly.

58. Perhaps my favorite Buffett line: "We like things that you don't have to carry out to three decimal places. If you have to carry them out to three decimal places, they're not good ideas."

59. Not that he can't be ruthless, but Buffett tends to look for win-win situations where possible. Contrast that with the Wall Street art of "ripping the face off" of clients.

60. He's often described as a "learning machine," extending his natural abilities and allowing him to make behemoth investing decisions over the span of just hours.

61. He added to Ben Graham's teachings with the help of that learning ability and Munger's counsel.

62. Now is a good time to point out that companies' annual reports, which are available to all, are the primary fuel in his learning machine. He reads them voraciously to compare and contrast companies and build his business knowledge base. See the next point.

63. When asked what the most important key to his success was, Buffett answered, "focus." His biographer Alice Schroeder elaborates: He has "focus like you have never seen on anybody else." For good or ill, Buffett's entire life has been dedicated to investing. It's much harder than he lets on.

64. There are plenty of business fish in the sea: "There are all kinds of businesses that I don't understand, but that doesn't cause me to stay up at night. It just means I go on to the next one, and that's what the individual investor should do."

65. How many people can pull off being a contrarian by buying shares of Coca-Cola?

66. Even in an investing world full of Buffett students and imitators, he manages to surprise.

67. He takes every legal, ethical advantage available in the current system, but he lobbies for a better system. For example, he supports higher taxes for the rich, more severe estate taxes, and a level playing field. As he puts it, "I don't like anything where the bottom 20% keep getting a poorer and poorer deal."

68. He is grateful for the advantages he has had in life -- like many of us, he won the "ovarian lottery."

69. When he talks, E. F. Hutton listens.

70. Like many geniuses, he is frequently the confounding exception to the rule. For example, Berkshire Hathaway has never paid a dividend and only started share repurchases recently. It also doesn't split the chairman and CEO roles. And we shareholders thank him for it.

71. Buffett buys what he knows (and frequently loves), but he doesn't overpay out of affection. He has the discipline to wait decades for the right opportunity.

72. He gives credit to his direct reports.

73. Not only is Buffett a great investor and manager, but he's one hell of a writer. My jealousy grows.

74. He once picked up a date in a hearse he co-owned.

75. Before making his money work for him, he worked for his money early on with a series of jobs, schemes, and ventures. These included a paper route, selling chewing gum door to door, a pinball business, a sales job at J.C. Penney's, caddying, marking up refurbished golf balls, and founding a horse-racing tip sheet.

76. He's a permabull -- on women.

77. It's very possible that the house you live in is worth more than the house Buffett lives in -- the house in Omaha he bought in 1958.

78. Over the years, he has relied on a similar set of answers to oft-asked questions. That his philosophy has stayed stable throughout that time is remarkable.

79. His wealth has bought him the ultimate trophy: He does whatever he wants to do just about every single day.

80. He's the outsized calming influence a lot of us need. From his biography Snowball: "If a tornado were barreling straight toward Kiewit Plaza [where his office is], Buffett would say that things were 'never better' before mentioning the twister."

81. Anyone who can make the hyper-opinionated Charlie Munger regularly utter "I have nothing to add" must be saying something impressive.

82. When his time to step down finally comes, it will take a village (a CEO, a chairman, and multiple portfolio investors) to perform his current responsibilities.

83. That said, he fully expects this list to one day reach well into the triple digits. And I look forward to adding those lines. Happy birthday, Mr. Buffett!

From fool.com

Buffett Vs. Soros: Investment Strategies

2013-07-24T01:16:00.002-07:00

In the short run, investment success can be accomplished in a myriad of ways. Speculators and day traders often deliver extraordinary high rates of return, sometimes within a few hours. Generating a superior rate of return consistently over a further time horizon, however, requires a masterful understanding of the market mechanisms and a definitive investment strategy. Two such market players fit the bill: Warren Buffett and George Soros.

Warren Buffett
Known as "the Oracle of Omaha," Warren Buffett made his first investment at the tender age of 11. In his early 20s, the young prodigy would study at Columbia University, under the father of value investing and his personal mentor, Benjamin Graham. Graham argued that every security had an intrinsic value that was independent of its market price, instilling in Buffett the knowledge with which he would build his conglomerate empire. Shortly after graduating he formed "Buffett Partnership" and never looked back. Over time, the firm evolved into "Berkshire Hathaway," with a market capitalization over $200 billion. Each stock share is valued at near $130,000, as Buffett refuses to perform a stock split on his company's ownership shares.

Warren Buffett is a value investor. He is constantly on the lookout for investment opportunities where he can exploit price imbalances over an extended time horizon.

Buffett is an arbitrageur who is known to instruct his followers to "be fearful when others are greedy, and be greedy when others are fearful." Much of his success can be attributed to Graham's three cardinal rules: invest with a margin of safety, profit from volatility and know yourself. As such, Warren Buffett has the ability to suppress his emotion and execute these rules in the face of economic fluctuations.

George SorosAnother 21st century financial titan, George Soros was born in Budapest in 1930, fleeing the country after WWII to escape communism. Fittingly, Soros subscribes to the concept of "reflexivity" social theory, adopting a "a set of ideas that seeks to explain how a feedback mechanism can skew how participants in a market value assets on that market."

Graduating from the London School of Economics some years later, Soros would go on to create the Quantum Fund. Managing this fund from 1973 to 2011, Soros returned roughly 20% to investors annually. The Quantum Fund decided to shut down based on "new financial regulations requiring hedge funds to register with the Securities and Exchange Commission." Soros continues to take an active role in the administration of Soros Fund Management, another hedge fund he founded.

Where Buffett seeks out a firm's intrinsic value and waits for the market to adjust accordingly over time, Soros relies on short-term volatility and highly leveraged transactions. In short, Soros is a speculator. The fundamentals of a prospective investment, while important at times, play a minor role in his decision-making.

In fact, in the early 1990s, Soros made a multi-billion dollar bet that the British pound would significantly depreciate in value over the course of a single day of trading. In essence, he was directly battling the British central banking system in its attempt to keep the pound artificially competitive in foreign exchange markets. Soros, of course, made a tidy $1 billion off the deal. As a result, we know him today as the man "who broke the bank of England."

The Bottom LineWarren Buffett and George Soros are contemporary examples of the some of the most brilliant minds in the history of investing. While they employ markedly different investing strategies, both men have achieved great success. Investors can learn much from even a basic understanding of their investment strategies and techniques.

From investopedia.com

Warren Buffett's Bear Market Maneuvers

2013-06-19T22:06:00.001-07:00

In times of economic decline, many investors ask themselves, "What strategies does the Oracle of Omaha employ to keep Berkshire Hathaway on target?" The answer is that the esteemed Warren Buffett, the most successful known investor of all time, rarely changes his long-term value investment strategy and regards down markets as an opportunity to buy good companies at reasonable prices. In this article, we will cover the Buffett investment philosophy and stock-selection criteria with specific emphasis on their application in a down market and a slowing economy.

The Buffett Investment Philosophy

Buffett has a set of definitive assumptions about what constitutes a "good investment". These focus on the quality of the business rather than the short-term or near-future share price or market moves. He takes a long-term, large scale, business value-based investment approach that concentrates on good fundamentals and intrinsic business value, rather than the share price. (For further reading, seeWarren Buffett: The Road To Riches and What Is Warren Buffett's Investing Style?)

Buffett looks for businesses with "a durable competitive advantage." What he means by this is that the company has a market position, market share, branding or other long-lasting edge over its competitors that either prevents easy access by competitors or controls a scarce raw-material source. (For more insight, see Competitive Advantage Counts, 3 Secrets Of Successful Companiesand Economic Moats Keep Competitors At Bay.)

Buffett employs a selective contrarian investment strategy: using his investment criteria to identify and select good companies, he can then make large investments (millions of shares) when the market and the share price are depressed and when other investors may be selling.

In addition, he assumes the following points to be true:

The global economy is complex and unpredictable.
The economy and the stock market do not move in sync.
The market discount mechanism moves instantly to incorporate news into the share price.
The returns of long-term equities cannot be matched anywhere else.

Buffett Investment Activity

Berkshire Hathaway investment industries over the years have included:

Insurance
Soft drinks
Private jet aircraft
Chocolates
Shoes
Jewelry
Publishing
Furniture
Steel
Energy
Home building

The industries listed above vary widely, so what are the common criteria used to separate the good investments from the bad?

Buffett Investment Criteria

Berkshire Hathaway relies on an extensive research-and-analysis team that goes through reams of data to guide their investment decisions. While all the details of the specific techniques used are not made public, the following 10 requirements are all common among Berkshire Hathaway investments:

The candidate company has to be in a good and growing economy or industry.
It must enjoy a consumer monopoly or have a loyalty-commanding brand.
It cannot be vulnerable to competition from anyone with abundant resources.
Its earnings have to be on an upward trend with good and consistent profit margins.
The company must enjoy a low debt/equity ratio or a high earnings/debt ratio.
It must have high and consistent returns on invested capital.
The company must have a history of retaining earnings for growth.
It cannot have high maintenance costs of operations, high capital expenditure or investment cash flow.
The company must demonstrate a history of reinvesting earnings in good business opportunities, and its management needs a good track record of profiting from these investments.
The company must be free to adjust prices for inflation.

The Buffett Investment Strategy

Buffett makes concentrated purchases. In a downturn, he buys millions of shares of solid businesses at reasonable prices. Buffett does not buy tech shares because he doesn't understand their business or industry; during the dotcom boom, he avoided investing in tech companies because he felt they hadn't been around long enough to provide sufficient performance history for his purposes.

And even in a bear market, although Buffett had billions of dollars in cash to make investments, in his 2009 letter to Berkshire Hathaway shareholders, he declared that cash held beyond the bottom would be eroded by inflation in the recovery.

Buffett deals only with large companies because he needs to make massive investments to garner the returns required to post excellent results for the huge size to which his company, Berkshire Hathaway, has grown. (To learn about the disadvantage of being confined to blue chip stocks, readWhy Warren Buffett Envies You.)

Buffett's selective contrarian style in a bear market includes making some large investments in blue chip stocks when their stock price is very low. And Buffett might get an even better deal than the average investor: His ability to supply billions of dollars in cash infusion investments earns him special conditions and opportunities not available to others. His investments often are in a class of secured stock with its dividends assured and future stock warrants available at below-market prices.

Conclusion

Buffett's strategy for coping with a down market is to approach it as an opportunity to buy good companies at reasonable prices. Buffett has developed an investment model that has worked for him and the Berkshire Hathaway shareholders over a long period of time. His investment strategy is long term and selective, incorporating a stringent set of requirements prior to an investment decision being made. Buffett also benefits from a huge cash "war chest" that can be used to buy millions of shares at a time, providing an ever-ready opportunity to earn huge returns.

From investopedia.com

How Warren Buffett Made His Fortune

2013-05-30T00:47:00.000-07:00

A genius for spotting opportunity and growth potential spark wealth

Most investors are familiar with Warren Buffet, who is the man in command at Berkshire Hathaway (BRK.A,BRK.B). Buffett is one of the most successful investors of all time, with a net worth placing him somewhere in the top three richest people in the world. His partner in crime was Charlie Munger, who has worked with him for the past 50 years. While most investors are familiar with the story of Berkshire Hathaway, few seem to know how exactly Buffett made his first millions, that catapulted him to Berkshire Hathaway and the companies and stocks he owns through it.

Buffett started several investment partnerships in 1956 with approximately $105,000 in investor money, after his former employe, Graham-Newmann investment partnership, was liquidated. Buffett had put an initial $700 of his own money, which ballooned to a stake worth $20 million by the time he liquidated his investment partnership in 1969. The assets under management had grown to $100 million by that time. The Berkshire Hathaway annual letters to investors have been inspired by Buffett’s annual and semi-annual letters to his limited partners.

Per the Buffett Partners agreement, Buffett as the General Partner received a cut of the profits. For every percentage point gain above 6% in a given year, Buffett collected 25% of the gains. The Buffett Partnership Limited (BPL) was essentially a hedge fund, which pooled investor’s money and invested them at the discretion of the fund manager. Buffett never had a losing year during the thirteen years he ran the partnership, and he also managed to add new investors along the way. In addition, he reinvested any gains he made as a general partner back into the partnership.

Buffett invested in the following types of companies at the partnership: generally undervalued securities, work-outs and control situations. Work-outs included stocks whose financial results depend on corporate actions rather than supply and demand factors created by buyers and sellers. Control situations include occasions where BPL either controlled the company or took a sufficiently large position that allowed it to influence policies of the company.

After the BPL was liquidated, Buffett received shares in Berkshire Hathaway, as well as shares in companies which ultimately merged in Berkshire. And the rest is history.

The lesson to be learned from this exercise is that in order to become rich, Warren Buffett had a scalable business model, with a substantial amount of leverage. Unfortunately, BPL was mostly a one-man operation, although the turnaround expert he employed with Dempster Mill Manufacturing company is a rare situation where he employed others. He did exchange ideas with several of his value investing friends however.

Buffett’s investment model worked well when he had $100,000 in the partnership, as well as during the time that he had $100 million. The overvalued market in the late 1960’s however presented a change to his investment strategy. Buffett had leverage to make a lot of money, simply by being the general partner and earning a good cut on any earnings that the partnership generated, without much downside for himself. On the other hand, Charlie Munger made his initial million by using debt leverage to invest and build real estate.

The true genius of Buffett is his complete transformation in the 1970’s, when he started purchasing stock in companies with strong competitive advantages. He essentially held those stocks as long-term investments, and in the event where Berkshire acquired entire businesses, he delegated the whole oversight of day to day operations to skilled management.

The companies he invested in the 1950’s and 1960’s represented mostly investments that were one-time producers of substantial gains for BPL. It took Buffett a lot of time to uncover those opportunities, but once they reached full valuation and he sold them, they were no longer producing any benefit for his partnership. He then had to spend more time to find more investments to allocate the now higher cash hoard.

However, the companies and securities that Buffett purchased since the 1970’s for Berkshire Hathaway generate recurring cash flow streams to the company. As a result, the effort required to uncover these hidden gems resulted in cash distributions paid to the main holding company for decades. He then used these cash streams to purchase even more cash flow generating assets, which is why I believe that he is a closet dividend investor.

The genius of Buffett is that he has been able to uncover undervalued assets, over many different asset classes. Examples include his purchase of silver (SLV) in 1998, real estate investment trusts in 1999, foreign currencies such as the Euro in the early 2000′s as well as selling long-dated puts on major market indexes.

While he has a strategy of always looking for undervalued assets, he has been able to make a fortune for Berkshire by being flexible, and avoiding following a “rigid” strategy. By training himself to spot opportunities when they arose, he has been able to constantly reinvent himself and make money in different environments.

From investorplace.com

Warren Buffett Shared Some Great Career Advice For Millennials

2013-05-09T22:07:00.005-07:00

Warren Buffett served as a mentor to young professionals yesterday during an "Office Hours" session with Levo League, a networking and career advice site.

During the live stream video chat, the Berkshire Hathaway CEO told women to "stop holding yourself back" and shared personal stories — including how he overcame his fear of public speaking — to highlight universal career lessons.

We've included a few key takeaways from Buffett's interview below:

1. Find your passion.

"Never give up searching for the job that you’re passionate about," he says. "Try to find the job you’d have if you were independently rich. ... Forget about the pay. When you’re associating with the people that you love, doing what you love, it doesn’t get any better than that.”

2. Be careful who you look up to.

"If you tell me who your heroes are, I'll tell you how you're gonna turn out. It's really important in life to have the right heroes. I've been very lucky in that I've probably had a dozen or so major heroes. And none of them have ever let me down. You want to hang around with people that are better than you are. You will move in the direction of the crowd that you associate with."

3. Learn how to communicate effectively.

While he was getting his MBA from Columbia University, Buffett said that he was "terrified of public speaking," and signed up for a Dale Carnegie class, but changed his mind at the last minute. After graduating, Buffett saw the ad for the course again and decided to give it a second chance.

"I became associated with the 30 other people in the class. We couldn't stand up in front of a group and say our own name. I mean it was — we were — it was pathetic. But that class changed my life in a big way."

4. Develop healthy habits by studying people.

"Pick the person that has the right habits, that is cheerful, generous, gives other people credit for what they do. Look at all of the qualities that you admire in other people ... and say to yourself, 'Which of those qualities can't I have myself?' Because you determine whether you have them. And the truth is you can have all of them."

5. Learn how to say "no."

"You won't keep control of your time, unless you can say 'no.' You can't let other people set your agenda in life."

6. Don't work for someone who won't pay you fairly.

"I do very little negotiation with people. And they do little with me, in terms of it ... if I was a woman and I thought I was getting paid considerably less than somebody else that was equal coming in, that would bother me a lot. I probably wouldn't even want to work there. I mean, [if] somebody's gonna be unfair with you, in salary, they're probably being unfair with you in a hundred other ways."

7. Become involved with growing businesses.

"I mean, you want to get on a train that's going to go 90 miles an hour and not one that's gonna go 30 miles an hour and you're gonna try to figure out how to, you know, push it along a little faster. So it really does make a huge difference. And there are some businesses that inherently [have] far more opportunities than others."

8. Learn everything you can about your industry.

Buffett says he reads six hours every day because he believes that growing your intellectual prospective will also help you critically solve future problems that may arise.

"I knew a lot about what I did when I was 20. I had read a lot, and I aspired to learn everything I could about the subject. "

9. Young women should seek male mentors.

Buffett says it's important for women to have male mentors, because the majority of today's leaders in the workplace are still men.

“These [mentoring] relationships all just evolve. I never set out to become a mentor ... It’s amazing ... how the person that really wants to do a terrific job just jumps out. There aren’t that many. You will be perceived as exceptional and as a worthy person for a superior to spend some extra time with if you just do something extra all the time. It seems elementary, but it’s true.”

At the end of his office hour, Buffett told everyone that even if they fail along the way, "the world isn't over," because "you are healthy, and bright and have decades ahead of you."

Read more: businessinsider.com

Buffett To Hedge Fund Manager: 'You Didn't Convince Me To Sell The Stock'

2013-05-06T00:51:00.002-07:00

Weeks ago Warren Buffett called on investors far and wide to be the "credentialed bear" at his Berkshire Hathaway's massive annual shareholder blowout in Omaha.

Ultimately, Palm Beach hedge fund manager Doug Kass was selected, and as "credentialed" bear he got to ask the first question in front of thousands of onlookers today. That's probably tough.

After Berkshire announced earnings yesterday and blew past analyst earnings by $307 a share, it was probably even more tough.

All that said, Kass opened with a valid question, and not one that isn't unheard of when people whisper criticism of Buffett's legendary firm — they ask if in recent years his acquisitions have become too large.

From The Street, where Kass is a contributor:

Kass said, you were "hunting gazelles before, but now you are hunting elephants." He points out that Burlington Northern and Lubrizol have been made at high historical valuations. Richer prices paid will lead to lower returns on acquisitions than in the past, driving slower growth for the company. Does this mean Berkshire is becoming more like a sleepy index than a stock?

Buffett recognized the argument and said basically that he's willing to pay for true value.

"We have paid up for good business. There are companies we should have bought 30 years ago that looked expensive then but have done very well. We have now realized that paying up for an extraordinary business is not a mistake." They are trying to avoid missing good opportunities like the ones they passed on previously.

Warren also got the final word of the exchange as the conversation ended.

"You haven't convinced me to sell the stock yet, Doug."

Warren Buffett Says He’s Not a Buyer of Gold After Price Slump

2013-05-05T22:11:00.000-07:00

Billionaire investor Warren Buffett, the chairman and chief executive officer of Berkshire Hathaway Inc., comments on the investment appeal of gold. He spoke to reporters in Omaha,Nebraska, on May 2.

Gold rallied 4.9 percent in the past two weeks after entering a bear market April 12. Futures in New York are still down 13 percent this year to $1,464.20 an ounce.

On whether he would buy gold after recent declines:

“No. Gold’s not reproduced or anything since I wrote about it a year or two ago. It just sits there, and you hope somebody pays you more for it.

‘‘If gold went to $1,000 I wouldn’t be a buyer. If it went to $800, I wouldn’t be a buyer. It’s never interested me. If you go back to 1965, Berkshire was at $15 and gold was at $35, so you could’ve bought two shares of Berkshire for an ounce of gold, a little more than two shares. And so far, two shares of Berkshire’s been better.”

From bloomberg.com

Buffetted: Why the world’s greatest investor changed his strategy

2013-03-21T22:49:00.001-07:00

Warren Buffett’s latest annual letter to shareholders demonstrates once again that the world’s greatest investor marches to his own drummer.

The letter, published Friday, shows that Mr. Buffett’s flagship company,Berkshire Hathaway Inc., continues to hold a highly concentrated portfolio. About 64 per cent of its holdings are in only five stocks.

Mr. Buffett has held a concentrated portfolio throughout his illustrious career, making a mockery of the modern portfolio theory taught in universities around the world, which holds that wide diversification among hundreds of stocks is desirable.

But while Mr. Buffett has always believed in the benefits of holding highly concentrated portfolios, his opinion about what kind of stocks to invest in has evolved over the years. Investors who want to emulate the Oracle of Omaha should ponder the lessons of his career.

Mr. Buffett’s current policy is to buy great companies at reasonable prices. His portfolio is focused on market leaders, such as Coca-Cola, American Express and Wells Fargo, that he has held for years. Once he invests in a great company, he says he wouldn’t care whether the markets were to close for the next three years. He buys and holds as if he were the owner; he never buys and sells as a trader.

Mr. Buffett’s recent deal to buy H.J. Heinz Co. is a perfect fit for his philosophy. In many ways, the ketchup maker is like Coca-Cola. Both have intergenerational customer captivity – an extremely rare thing – forged out of habits built up while consumers are children. For these stocks the best strategy is to buy and hold – you never sell, as their intrinsic value is always one step ahead of the stock price.

But Mr. Buffett has been having difficulty finding deals of this quality nowadays. He says he is searching for the mega-sized deals he calls “elephants,” but fewer and fewer such opportunities are coming his way. As a result, his recent performance has been lagging his historical record.

At times like this, it’s important for people to remember that Mr. Buffett was not always the type of investor we now see.

During his early years, he was a far more opportunistic buyer. Back then, he adhered closely to the teachings of Ben Graham, his teacher at Columbia, and managed to achieve outstanding results with a style that is far different than his current fashion.

The young Mr. Buffett invested in unloved and obscure companies – ones that had prices that were cheap in comparison to their earnings and book values. He liked small, less liquid companies and, in many cases, ones that were in outright distress.

Buying companies like this can generate enormous riches – it certainly did for Mr. Buffett in his early years.

So why has he changed? One big reason is that he has been so successful that he now has too much money to invest.

Unable to nip in and out of tiny stocks the way he once did, he has had to focus on large, liquid and well-known companies. These are generally more expensive than the ones he bought in his youth and are unlikely to double or triple the way some of his early picks did. Giant companies tend to be well covered by analysts; the chances of them being terribly undervalued are lower than for the stocks Mr. Buffett used to invest in.

What should investors learn from Mr. Buffett’s career? One key point is that value investors do not always buy and hold. They buy and hold only the kind of companies that Mr. Buffett is investing in now.

For the rest, they look for opportunities to buy low and sell high – an investing style that, implemented properly, can also result in tremendous profits, even if it seems to be at odds with what Mr. Buffett is doing now.

From theglobeandmail.com

Buffett Still Buying Stocks, Sees 'Good Value'

2013-03-04T23:07:00.000-08:00

Warren Buffett still sees "good value" in stocks, even as the Dow Jones Industrial Average approaches an all-time high.

On CNBC's Squawk Box, Buffett said Berkshire Hathaway is still buying stocks, even though prices have increased.

"Anything I bought at $80 I don't like as well at $100. But if you're asking me if stocks are cheaper than other forms of investment, in my view the answer is yes. We're buying stocks now. But not because we expect them to go up. We're buying them because we think we're getting good value for them."

He said stocks are not "as cheap as they were four years ago" but "you get more for your money" compared to other investments. He added, "The dumbest investment, in my view, is a long-term government bond."

Buffett revealed that a potential acquisition had been "mentioned" to him and he will be exploring the idea, no deal is imminent. "That's always a low probability. Whether it's a five percent or ten percent, who knows? But I get excited when I hear about possibilities." Asked what sector the company is in, he replied with a laugh that it is "in business."

Buffett praised Berkshire's new portfolio managers, Todd Combs and Ted Weschler, and announced publicly for the first time that they'll soon be getting an additional $1 billion to work with. He joked they are making his decisions "look bad" by comparison. The new money will increase the size of their portfolios to $6 billion from $5 billion.

Buffett said it's "quite unlikely" he'll hire another portfolio manager, in part because he's so happy with Combs and Weschler. "We hit the jackpot with these two."

Buffett isn't too worried that the automatic government spending cuts known as the sequester will slow down the U.S. economy too much.

"We're continuing to see a slow recovery," he said. "It hasn't taken off, but it hasn't stopped either."

Buffett said that while the sequester will reduce the government's stimulus of the economy by cutting back on the deficit the remaining spending is still providing the economy a lot of "juice."

"It's not galloping at all, but we are making progress bit by bit. Everybody would love to see it faster. But it's not going into reverse and I do not think the sequester will cause it to go into reverse."

Buffett said the sequester could go on "for quite a while." He thinks, however, that once the American people see the results of its "meat ax" approach, there will be an opportunity to make more considered spending cuts.

Buffett remains confident, however, that Washington's red ink will be reduced. "We're going to bring down spending. We're going to bring up revenues. We may get there in fits and starts. And everybody may scream each time we do it. But the deficit is going to come down. It needs to come down."

Buffett has "enormous respect" for Federal Reserve Chairman Ben Bernanke, but thinks it will be interesting to see what happens when the Fed begins to unwind its efforts to keep interest rates very low. He said that rates near zero have pushed stocks higher than they would have gone otherwise and the global markets are on a "hair trigger," looking for any sign the central bank may start raising rates.

"I think the Fed will try to give little signals here and all of that. But in the end, there are an awful lot of people who want to get out of a lot of assets if they think the Fed is going to tighten a lot."

The results of higher rates, he said, "will be very noticeable" in the markets. While stocks will be hurt by higher rates, Buffett said other investments will also be affected and he still thinks equities are the best thing to buy now.

From cnbc.com

Warren Buffett's Advice: How to Get 'Fair Shake' on Wall Street

2013-03-04T22:24:00.004-08:00

During his live appearance on CNBC's "Squawk Box" today, Berkshire Hathaway Chairman Warren Buffett had some valuable advice for individual investors on how to make sure they are getting a "fair shake" on Wall Street.

BECKY QUICK: Do you think, and I ask this because there have been so many scandals that people think about, Libor, and they think about a lot of the deals behind the scenes that have been dragged out. A lot of Main Street investors think they can't get a fair shake on Wall Street. Can they?

WARREN BUFFETT: Well, they pay a lot of expenses in many cases. They don't need to. They should buy a low-cost index fund and they can participate in the growth of America over the next 20 or 30 or 40 years and they'll do fine. But if they're paying high fees to achieve that same result, they're going to get hurt. They should look very carefully at costs. But they should hold a diversified group of really high-class companies, which you can do by buying an index fund. And then they should forget it. They should just pretend the stock market closes for five years and they shouldn't look at prices every day...

The people selling you securities are often selling you things they make a lot of money in. The first question you should ask of anybody selling you securities is, 'How are you getting paid and how much are you getting paid?' The truth is you can own index funds with a very, very low cost and you will end up getting the same performance that you get from people who charge you a lot more.

So, you always want to look at costs. When somebody comes around to you and says, 'I'm going to sell you this wonderful security but there's this big chunk in it for me," you get suspicious.

As they say, when a person with experience meets a person with money, the person with the money gets the experience and the person with the experience gets the money.

(Read More: You Tweet, Buffett Answers)

From cnbc.com

The Extreme Plan One Mother Used To Erase $89,000 Of Debt In Six Months

2013-02-18T22:18:00.000-08:00

Six kids means more than multiplying diapers, food, clothing and toys … the dollar signs multiply as well.

Angela Coffman, of Kansas City, Missouri, one of the four subjects on the recent TLC special Extreme Cheapskates, was a stay-at-home mom of six, and in debt to the tune of $89,000.

Through extraordinary dedication, effort and big-time penny-pinching, she managed to pull her family up by its bootstraps and erase all that debt … in just six months!

Today, Coffman works from home, teaching others how to live frugally on her website, Grocery Shrink. We caught up with this reality TV star to talk about how she paid off that debt, and how she budgets to keep it off.

What were you doing to acquire so much debt?
My husband and I were living the American dream. We had several credit cards, but we mostly used one that gave us cash back on our purchases. We would put everything on it—food, clothing, all of our necessities—and then try to pay it back at the end of the month. We borrowed $20,000 to buy a car, we had put $75,000 down on a house that we were using as a rental property and borrowed $1,000 to buy a leather couch. Then my husband Darren, who’s an accountant, lost his job, and we couldn’t pay off the credit card any more.

How did you become motivated to do something about it?
I knew there was a better way to handle our money. My parents paid off our home when I was in the fourth grade, and they never borrowed money again. They really had taught me better. One day, I heard finance expert Dave Ramsey on the radio announcing a contest to win a trip to the Bahamas. You had to be one of the top ten families in the nation who paid off the most debt or saved the most money in a six-month period. About that time Darren got a new job, and I figured, even if we lose the contest but we give it our all, we’ll end up winners. We won—and got to go on the trip.

What did you do during those six months to save money?
We went all out. We spent nothing that we did not have to in order to survive. We ate food that we picked from our yard, we turned off our heat and burned wood in the fireplace instead, we used cloth diapers, cloth napkins, cloth toilet paper—anything that you would usually use paper for. We hand-made gifts, I made clothes for the kids out of leftovers from garage sales that neighbors would give me. So my sons wore denim skirts … but they looked like shorts after I sewed them.

We decided to sell our house and wait for a time when we were financially able to support an investment like that. We sold some cattle that my husband owned, and we sold whatever else we could. We only kept $1,000 for ourselves. That was our only cushion between us and bankruptcy. The rest went to paying off debt.

By the end of the six months, we were completely out of debt. Three months later, we had actually saved $40,000 to put down on a new house.

Tell me about the reusable toilet paper.
It started when we were doing the contest, when every dime made a difference. But then we realized we liked it a lot better. I cut up squares of cloth. It’s softer, lint free and doesn’t tear up—it’s fantastic. We were using cloth diapers at the time time, so we would just pour it all in the wash together. There were people who said, “Cloth toilet paper, that’s disgusting!” I’ve seen disgusting, though, and this isn’t it. But, I realize there is a cultural line that we had crossed. I do buy a pack of toilet paper every year to keep in the guest bathroom or for backup. But the kids get really upset when there are no cloth wipes.

How much do you think you save with the cloth wipes?
Since we have eight people in the family, I would guess we’re saving between $15 and $20 a month. And we’ve been doing it since 2005.

What other strategies do you still use today?
We live in the country, and the nearest grocery store is 30 miles away, so I started going to the grocery store once a month to conserve gas. That was our transition to a whole new way of shopping. I started working on a pantry system. Instead of buying food for a week’s worth of meals, I would buy a month’s worth of food in one trip. At the time of the contest, I had three kids and my monthly food budget for the five of us was $185.

And what is your budget today?
We have six kids now—ages 12, 10, 8, 6, 4 and 10 months—so our monthly food budget for the eight of us is $400 total, $50 per person. We save $400 per month by shopping all at one time.

Could you explain the pantry system?
Over time, I built a pantry with a three- to six-month supply of food like tomato sauce, whole wheat flour and brown rice pasta. Now, when I go out for my monthly shopping trip, it’s just for fresh items and the really good deals. When I see great deals, I stock up. I got to the point where I would never pay full price. If I see that tomato sauce is really cheap, I buy 30 cans. We won’t use it that month, but I can store it for a year.

Also, I plan menus for the whole month. It gives me something to shoot for when I’m at the store and I see deals.

(Want to save on food by planning ahead yourself? Check out our Food for a Month series.)

What other thrifty tactics do you use?
We only use cash. Every month, my husband and I work out a budget, and whatever that is, we pull it out in cash. I have a plastic coupon organizer with tabs for categories like groceries, clothing, gifts, etc. that I use to divvy up the cash. That way when I’m at the store, I can see at a glance if I’m over budget. When we were putting everything on credit cards, we technically had a budget, but I couldn’t tell how close to it we were when we were at the store.

What about for your children’s clothes?
Twice a year, in the fall and spring, we plan a clothing menu for every person in the family. For example, for my oldest daughter Heidi, I will write down that she needs three pairs of jeans, two church dresses, this many socks, etc. First we look through what we already have and we write that down on the menu, so we know exactly how much we’ll need to buy for her. We start looking at garage sales, then thrift stores, then the clearance racks at high-end department stores like Dillards. Also, Old Navy has amazing clearance racks. Then, if I still haven’t found what I’m looking for, I’ll look on Craigslist and Ebay—especially if I’m looking for something special like soccer cleats. My last resort would be to buy it new.

On the TLC special, you used a babysitting club. Do you still do that?
Yes, we do. We trade every other Tuesday night with another family. One week their family comes over, and I provide food for their kids. The parents have four hours to do whatever they want. And the next week it’s our turn. It’s fantastic. Darren and I weren’t able to eat out because it was too expensive with the children, but now when it’s just the two of us, we can afford it.

Do you ever splurge?
Last year, we took our three older children on a cruise to Mexico. We found a deal at Vacations To Go. The tickets were $250 each for Darren and me, and the children’s tickets were $150 each. That included a week on the cruise ship and all of our food and entertainment. It was a splurge for us, but we can only go if we find a deal like that.

From businessinsider.com

Read more: http://www.learnvest.com/2012/02/how-one-mom-ditched-her-familys-89000-debt#ixzz2LK4wzphO

Buying Necker Island For $180,000 Was The Best Deal Richard Branson Ever Made

2013-02-15T22:30:00.002-08:00

Richard Branson, the head of Virgin Group, is one of the most famous and successful entrepreneurs in the world.

His portfolio of assets now include everything from media companies and airlines to telecommunications companies and real estate.

But one of Branson's smartest early purchases was Necker Island, a 74-acre island in the Caribbean that he visited in the late 1970s and quickly fell in love with.

Entrepreneur Luke Murray recently recounted how the deal went down on Virgin's blog.

When Branson visited Necker at age 28, it was owned by Lord Cobham, who was asking $5 million for the uninhabited property. Branson boldly decided to offer $100,000 and was quickly evicted by the insulted landowner.

Over the next few months, Branson slowly increased his offer while looking for the necessary funds, according to Murray. It just so happened that Lord Cobham was in need of short term cash, and he finally accepted an offer of $180,000, more than a 96 percent discount off the asking price.

The purchase did come with some stipulations. The government required any foreigner who purchased the island to build a resort, or the state would reclaim ownership.

It took Branson five years and $10 million to construct his island haven, but it was a worthwhile investment — despite the fact that part of the resort was destroyed in a fire last year.

In addition to the enjoyment that guests have had over the years, Branson estimated in 2006 that the island's value had grown to approximately $60 million, a 33233 percent increase over what he paid for it.

Unsurprisingly, he called it his "best financial move" in an interview with UK website This is Money.

From businessinsider.com

Stock Market Crash: Is Your Asset Allocation Right?

2013-02-12T21:29:00.001-08:00

If we have a stock market crash, is your asset allocation right to protect your portfolio from large losses? Many investors mistakenly believe that because they are “long term investors” they shouldn’t concern themselves with “short term” returns. They are wrong!

Stock Market Crashes

Stock market crashes and secular bear markets are a reality of investing in stocks. The result of either will be determined by your asset allocation. If you are not prepared by having the right asset allocation for the current circumstances and valuation; your portfolio can be destroyed for years to come.

If you have a 50% loss and a 50% gain you are not at break even. You have lost 25% of your portfolio! Volatility is one of the most underestimated killers of portfolio performance. If you don’t have a clear understanding of this concept read my post “Portfolio Volatility and the Impact on Performance”.

Get Your Asset Allocation Right!

Once you understand the importance of capital preservation; how do you get your asset allocation right? This is the secret only value investors seem to know: Price Matters!

The public has been taught by the financial media to choose a fixed strategic asset allocation. But does this make sense? Should you buy the same amount of an asset when its price is expensive as when the price is a bargain?

Purchasing investment assets at prices below their fundamental or intrinsic value greatly improves the probability of above average returns. When you require a margin of safety you have created a margin for errors in your analysis, or unforeseen events that could affect your investment.

This means you can lower your investment risk by implementing a tactical asset allocation strategy. You should never have an asset allocation that can wreck your portfolio for years to come. That may mean being less aggressive than you have been in the past. It also may mean putting more emphasis on cash in your portfolio.

Watch For Warning Signs

Watch for warning signs long before a stock market crash. Fundamental analysis of company financial statements and current market valuations should provide warnings of over valued securities. If you can’t find many stocks that meet your margin of safety requirement, that is a warning sign.

Also pay attention to sentiment indicators. Keep in mind the public usually hates stocks when they are bargains and loves them when they are over valued. Be a contrarian thinker when it comes to getting your asset allocation right.

You now have several investment concepts to help you avoid the next stock market crash. There are always warning signs; remember, price matters.

It’s critical to limit losses in a stock market crash because you can grow your capital from a higher base. Then, when most are panic selling you will be buying at prices you know favor above average returns.

From arborinvestmentplanner.com

Why Warren Buffett Keeps Buying IBM

2013-01-08T22:25:00.000-08:00

After reading about the company for 50 years without making a move and shunning the entire tech sector for the majority of his career, Warren Buffettsuddenly picked up over $10 billion in shares of IBM (IBM) recently for his company, Berkshire Hathaway (BRK.A)(BRK.B). Buffett said in Nov. 2011 on NBC when he announced owning a stake in the company that “he would not be announcing it if he were not pretty much done” buying shares. But over the next three quarters he has found the stock attractive enough to continue buying, making it the second most-bought stock in his portfolio, and causing investors to ask why.

Purchasing History

Buffett began to buy IBM shares in the first quarter of 2011, with 4,517,774 shares for a price of $159 on average. Purchasing became more aggressive in the second and third quarter when he cumulatively bought more than 82.2 million shares for $167 and $173 on average. From the fourth quarter of 2011, to the third quarter of 2012, he made smaller purchases at average prices ranging from $185 to $197.

By the end of the third quarter, he owned a total of 67,517,896 shares, which equals 5.98% of IBM’s shares outstanding. It also made the company an 18.6% weighting in Buffett’s portfolio.

Why He Likes It

On CNBC in Nov. 2011, when he revealed the stake, Buffett discussed several of the reasons he chose the company:

1. Management – Five-year business objectives met

2. Moat

3. Requirements for good business met

4. Share repurchases

Management – Business Execution

Buffett praised IBM CEOs Lou Gerstner and Sam Palmisano in his 2011 annual letter for rescuing IBM from the brink of bankruptcy 20 years ago and making it into a successful business today. In addition to their “extraordinary” operational accomplishments, “their financial management was equally brilliant,” Buffett said, “particularly in recent years as the company’s financial flexibility improved. Indeed, I can think of no major company that has had better financial management, a skill that has materially increased the gains enjoyed by IBM shareholders.”

IBM consistently uses “Road Maps” to create targets for the future and measure progress in the present. Buffett was impressed that the company had met its benchmarks for a plan introduced in 2007 called the 2010 Road Map, and in 2011 proved it is on its way toward the goals set forth in the 2015 Road Map that replaced it. In 2010, the company surpassed its 2007 goal of $10 to $11 in earnings per share by reaching EPS of $11.52 in 2010.

The company’s 2015 map focuses on the major drivers of its earnings per share performance: operating leverage, share repurchases and growth strategies. Specifically, according to the company’s 10-K, highlights of the metrics it is aiming for include:

· $50 billion in share repurchases

· $20 billion in dividends

· $20 in EPS (non-GAAP)

· $100 billion in free cash flow

· $20 billion spending on acquisitions

· Software becoming about half of segment profit

· Growth priorities:

1. Growth markets unit accounting for 30 percent of segment revenue by 2015 (it was 21 percent in 2010)

2. Analytics growth to $16 billion in revenue

3. $7 billion in revenue from cloud computing

4. Smarter Planet solutions to grow to $10 billion in revenue

In 2011, the company had achieved the following progress toward its 2015 goals:

· $3.473 billion paid in dividends (9.32% increase year over year)

· $15.05 billion in share repurchases

· $13.44 in diluted operating (non-GAAP) earnings per share (a record)

· $16.6 billion in free cash flow (a record)

· $1.8 billion for five acquisitions in software

· Software and services was 44% of segment profit

· Growth Priorities:

1. Growth markets accounted for 22% of geographic revenue (an 11 increase from 2000)

2. 16% revenue growth year over year

3. 200% revenue growth year over year

4. 50% revenue growth year over year

IBM said 2011’s positive financial performance resulted from the transformation it began year ago to shift the business “to higher value areas of the market, improving productivity and investing in opportunities to drive future growth. These changes have contributed to nine consecutive years of double-digit earnings per share growth.”

Some of the changes involved in the transformation include exiting its PC and hard disk drive businesses in time for the dramatic slow-down that would take place in those industries. It also introduced new businesses like products, services, skills and technologies into the mix.

The focus on growth and investment in innovation allowed the company to enter new markets and delve into new waves in the technology sphere such as business analytics and cloud computing.

Moat

This transition has transformed the company into a service company instead of a hardware/software company. Buffett in his CNBC interview noted that companies are reluctant to change their IT suppliers and as companies around the world look for companies to develop their IT departments, they are likely to turn to a trusted and iconic name like IBM.

Business Metrics

Buffett said on CNBC that American businesses were a great place to put money currently, specifically businesses that “are earning very good money, that have high returns on equity, have high returns on incremental capital, are buying in their stock at a rapid rate so that your ownership in the business increases significantly.”

In IBM’s case, it has:

· Return on equity – In 2009, 2010 and 2011, IBM generated return on equity of 59%, 64% and 78.4%, far higher than in the earlier part of the decade.

· Stock repurchases – IBM has a strong history of repurchasing shares. Buffett said he would be happy to see IBM reduce its share count to 64 million shares. Since 2003, the company has decreased its share count annually, from 1.72 billion in 2003 to 1.179 billion in 2011.

Though future earnings primarily will determine Buffett’s success in IBM, Buffett said in his 2011 letter, he hopes the stock prices languishes because the amount of he is able to purchase with the amount of money they dedicate toward repurchases was “an important secondary factor.” The more shares it is able the buy, the greater the percentage of the company he will own.

Buffett bought IBM at near historical-high prices. In the past year its stock price has increased almost 6%. It has a P/E of 13.5, P/B of 10.2 and P/S of 2.

From gurufocus.com

Stock Portfolio Jan 2013

2013-01-08T22:21:00.001-08:00

So far Stock Portfolio Jan 2013, I have received dividend gain from

- TM RM196

- KMLOONG RM200

- MPHB RM37

- KMLOONG RM100

- TAGB RM180

Here’s Why Warren Buffett Keeps Buying Wells Fargo

2013-01-07T00:23:00.000-08:00

To start this off right, I’d like to point out that Warren Buffett is extremely optimistic about the future of America. “Tomorrow’s always uncertain,” he mentions while on CNBC this morning. “But the future, the longer future, is always very certain. And that’s what you have to keep your eye on.”

It’s this very attitude that allows Mister Buffett to continue building astronomical stakes in businesses that he feels are worthy through the best of times and the worst of times. But how does Warren Buffett choose these particular companies to begin with? Let’s look at Wells Fargo, and find the evidence in this stock which he continues purchasing the most.

Wells Fargo
Wells Fargo has entered into Warren Buffett’s portfolio way back in the 1990s, and it is a great representation of his philosophy of long term investing. Plus, you can see a steady trend of continual buying of this stock since the first quarter of 2009. From that point until the present day, Berkshire Hathaway has bought 1 million 119,940,333 shares of Wells Fargo. This has brought the total position up to more than 422 million shares in all.

Warren Buffett made three very important moves in his portfolio during 2011, and Wells Fargo was one of them, along with Bank of America and IBM purchases. He provides shell holders several different reasons why this was important during his annual letter: “the banking industry is back on its feet, and Wells Fargo is prospering. Its earnings are strong, its assets solid and its capital at record levels.”

Wells Fargo is also extremely large – since it currently serves about one out of every three households in the United States of America from its 12,000 ATMs, it’s 9000 branches and their website. They are also prominent in 35 different countries. This company is also the first in market value of its common stock out of all of the United States banks, and the fourth in assets.

Even though Warren Buffett requires a high ROI from a bank, he also insists that the return on investment be gained in a conservative manner. This is great, because Wells Fargo has a very well maintained and controlled operating environment. It has excellent ground rules in place to manage credit risk, and they monitor their loan portfolio performance very closely. It also has set ranges for its interest rates and market risks in its liabilities and assets, while it is able to fuel growth with ample capital levels and liquidity.

In addition, Wells Fargo will continue to remove nonperforming loans from its assets. During the third quarter of 2012, loans that were 90 days past due or more totaled in the amount of $1.5 billion. This is down a half $1 billion from the $2 billion at the end of 2011.

As well, Wells Fargo also solidified its position with capital. The equity earned in the third quarter was increased by $6.6 million from the second quarter numbers, and rose to $156.1 billion. Its tier 1 common equity reached the amount of $105.8 billion, which is equal to 9.9% of the risk-weighted assets. Wells Fargo also has a nice tier 1 capital ratio of 11.5% in their total capital ratio of 14.51%, as well as the tier 1 leverage ratio that they possess of 9.4% which rounds out the third quarter.

The other results that they gained during the third quarter are testament to showing that they are a strong company that can easily withstand economic uncertainty. The bank overall reported a total of $4.9 billion and earnings, which is up 8/10 of 1 billion from last year’s $4.1 billion at the same time.

The improvements that Wells Fargo gained this year were basically brought on by fee income and balanced net interest. They also have a strong credit performance, a diversified loan portfolio and further diversified sources of their fee income. They also grew across many of their businesses.

Wells Fargo’s third-quarter revenue grew to $21.2 billion, which is up from the $19.6 billion that it saw at the same time last year. The revenue was strictly sparked from noninterest income growth in the mortgage banking industry, and you can combine that with a mild increase in their income from that interest. They also originated 56% more loans this year than they did at the same time last year.

Also during the same quarter, Wells Fargo decided the buyback 17 million shares and they also paid a $.22 dividend. The previous year’s dividend was only $.12. During Warren Buffett’s 2010 letter, he predicted that Wells Fargo would have a dividend increase. He also expected that his largest gain in dividend would come from Wells Fargo. They were forced to lower it at one point, though it was “consistently prospering throughout the worst of the recession.”

Buffett seem to have a crystal ball so to speak, but he really knew that the fundamentals and Wells Fargo’s strategy of execution would easily survive the economic turmoil. He made his biggest stock purchases throughout the five years by buying shares during the biggest stock dips. Those took place during the first quarter of 2009, the third quarter of 2009 and the third quarter of 2010. But he’s actually made his biggest purchases over the last year, all while the stock has been rising by almost 23%.

From warrenbuffett.com

Some Sales Tips From Warren Buffett

2013-01-07T00:19:00.003-08:00

When the Oracle of Omaha puts together a deal, it usually happens fast, just like the deal he made for purchasing Nebraska Furniture Mart. The 89-year-old Rose Blumkin who owns and founded the company told Warren Buffett that she no longer wanted a fight with her children in regards to running the company, and she also wanted to slow down. “Rose, I’ve always told you that when you are ready to sell, I would buy. What’s your price?” Replied Buffett.

Within an hour’s time, he and Rose shook hands on the deal and he also gave her a check that he wrote for $55 million, as she requested. There were no lawyers, no fuss and no muss – and both parties got what they wanted in an excellent deal.

Since Warren Buffett is so successful at making deals, to authors by the name of Henry DeVries and Tom Searcy thought it would be a good idea to share Warren’s Buffett’s approach would salespeople. “If you want to know about making big deals, Warren is still the guy to watch,” they shared with us in their book How to Close a Deal like Warren Buffett.

The main thing is you need to know the other person’s money. Warren Buffett understands how a company makes money, and he also knows how a company will spend it. Salespeople are often too busy trying to sell their products and services, but they forget to focus on helping improve the numbers of any company they are pursuing.

Tom Searcy and Henry DeVries recommended process that they named “the triples” which should help improve the salesmanship of your service or product.

Triple #1 – The Three Problems of Your Prospect
The first thing you need to do is find out and write down the three biggest issues that your prospect will face. Then you need to determine how your service or product is going to help them. This puts you in alignment with the interests of your buyer.

Triple #2 – The Three-Part Solution
Now you have to carefully think about how you are going to be able to solve their three problems. As you write out a plan to present your client, try and avoid any type of generic language like using the words “better,” “improved,” and “big difference” because this language really isn’t all that compelling. You need to provide them with specific numbers and mentioned specific points of pressure in which you focus so that you can prove you’ll be able to help them achieve a new outcome that’s desirable.

Triple #3 – Provide Three References
with this third step, you are going to provide your potential client with three references who have achieved the results that your client is trying to achieve by using your service or product. This might be difficult because of client confidentiality and potential competitiveness. But you need to figure it out because “the most effective way to get the attention of prospects is to drop the names of others just like them.”

In the book, the authors implore you to become a student of psychology. They believe you should develop profiles of the members of the people on your prospects team. Try and figure out their fears, because this will help you create a compelling pitch. You also need to figure out each person’s point of view in regards to your solution, and come up with any other trait that might be important to your overall success. You also need to study the dynamics of the team, and figure out where people stand and who were the higher-ups on the chain of command.

You’re also going to have to contend with a dangerous person known as “the eel.” Both of the authors insist that “in every deal, and at every prospects table, there is always an eel – a person who is against the deal. Always. Eels have a tendency to hang out in the shadows. They are hard to get to, and they usually talk you down when you’re not around.”

Eels are usually driven by fear, and it is a fear which they do not want to acknowledge, so they insist that they are not with this deal based on principles. They are very dangerous to you, and you need to figure out who they are quickly. You can then try and co-opt them, so that you can take the ideas of the eel and add them into your proposal.

If that doesn’t work, then the other possibility you have is to contain the eel. Concede all of this person’s small issues, and focus the main conversation onto the bigger issues, where the influence that they have might not be that significant. You could also attempt to divert the eel’s attention to another issue that has nothing to do with your deal.

When you prepare your final proposal and presentation, it’s important that you include something for all parties involved in this deal. The finance people as an example are going to want to know all of the numbers.

“Everybody who reads your solution is looking for something aimed at her. Not only does she want to see that it’s in your solution, but she also wants to see it the way she wants to see it… It’s not enough that this particular material is in your solution. You are responsible for making it pop off the page for the person who is looking for it,” write the authors.

This is an excellent book on some levels, and it’s a woeful book on other levels. The connection between salespeople and Warren Buffett is actually quite tenuous at times. A reader is at risk to intellectual whiplash as they go from the opening portion and read aspects of Mister Buffett’s dealmaking, and then jump over to the selling portion which often has tangential advice.

What saves this particular book is that the authors provide useful and unique tips about the sales process. This could very well help you in your next deal, whether or not it is a non-Buffett like deal.

From warrenbuffett.com

Can You Really Invest Like Warren Buffett?

2013-01-07T00:13:00.000-08:00

(Reuters) - For as long as I can remember, the investment maxim that most evokes a mix of adulation and performance anxiety is "Invest like Warren Buffett."

How can mere mortals emulate an investing deity? In truth, most of us will never come close to "the Sage of Omaha." He's done all the things a stellar investor should do: He buys when there's blood in the street, finds solid companies at great prices and keeps them "forever." Lacking Buffett's phenomenal verve and mettle, though, most of us won't do this. But that doesn't mean we're doomed to failure.

Fortunately, the multibillionaire chairman and chief executive of Berkshire Hathaway Inc. has been generous with his wisdom and two recent books published in November compile and analyze it elegantly: "Tap Dancing to Work" by Carol Loomis, a long-time Fortune writer and Buffett friend and "Think, Act and Invest Like Warren Buffet" by Larry Swedroe, principal and director of research for Buckingham Asset Management, LLC.

What key advice resonates most?

1. Stick with index funds
Although you probably won't get the returns of Berkshire Hathaway with index funds, you can still get pretty close to market returns without having to be an oracle yourself.

If individuals "aren't going to be an active investor - and very few should try to do that - then they should just stay with index funds. Any low-cost index fund," Loomis quotes Buffett as advising. "And they should buy it over time. They're not going to pick the right place and time."

2. Don't play Buffett's game
Although Buffett is often able to time his purchases brilliantly, chances are, you won't. In fact, research shows that most individual investors' records on timing the market successfully are dismal.

One of the most important Buffett shibboleths is acknowledging that you won't be able to predict the market. If you take his advice on index funds and stay the course, "the only way an investor can get killed is by high fees or by trying to outsmart the market", he said in 2008.

No big secret here. When you find good stocks, buy them at low prices and hold them. For those buying individual stocks, this means dollar-cost averaging - fixed investments every month - and reinvesting the dividends. Most large companies offer dividend reinvestment plans for this purpose.

Swedroe reinforces Buffett's advice by citing academic studies that actively managed mutual funds show "no evidence of the ability to persistently generate outperformance beyond what would be randomly expected". So a passive strategy can work for most investors.

Most individuals also get scorched on transactions and trading costs.

3. Think long term
Buy durable enterprises that will produce profits for decades, not quarters. Buffett has bought in to enterprises like BNSF Railway and Coca-Cola that have been around for a long time and are not going away. They have good prospects not because of recent "rear-view" quarterly earnings reports. When Buffett says he's buying "businesses," he's committed to managements that generate cash, profits and dividends decades into the future.

4. Keep your cool and be a contrarian
Booms and busts don't seem to phase Buffett, who will hold onto his cash when most are buying and open his wallet when the market crashes. He's not distracted by television blowhards or prevailing sentiment -emotions that can derail even the smartest and investors. He knows how to seize opportunities when most investors are seized by fear.

When Goldman Sachs called him to take a stake in the company at the height of the 2008 meltdown, Buffett got some incredible terms on his US$5 billion ($5.9 billion) investment: A 10 per cent annual dividend and repayment that eventually netted him US$1.7b when Goldman paid him off early last year.

Who do you know can demand and receive a legitimate 10 per cent dividend these days?

From reuters.com

How I Got Out of Debt: My Personal Success Story

2012-12-06T00:11:00.001-08:00

When you’re in debt or unable to make regular payments on your bills, it feels like you’re carrying a redwood tree on your shoulders. You write checks with your fingers crossed behind your back for good luck, and with each swipe of the credit card you hold your breath hoping not to see that dreaded embarrassment: “declined.”

I used to be that young woman, unable to handle the responsibility that comes with having a credit card; it was a time when I felt as if my expenses, and my inability to have more coming in than going out, would swallow me whole.

While it seems like a common story for people of any age, being in debt has a stigma: it’s not something we talk about. In fact, according to the results of a recent survey from LinkedIn and Citi, which examined professional women’s biggest financial and career concerns, talking about money is such a personal subject matter that 75% of women surveyed aren’t comfortable talking about money through social media—and 36% of Generation Y women polled don’t think that it’s polite to talk about money anywhere.

That’s no way to get out of debt.

I want to be part of the 25% that will talk about it, so I’ll start with my story.

These days, a bit older and wiser (and debt-free), I definitely breathe more easily. I’m more aware than ever of how little it takes to get there in the first place.

My Descent into Debt…

I moved to Washington, DC for college in 2001, and my mother handed me $300 to get me through the first two weeks. My parents would provide an allowance every two weeks, and I was expected to eventually get a job. Within the first week I had blown most of the money on drinks (thanks to a fake ID), shopping trips, eating out, and a tattoo. Oh, yes. I got a tattoo. After discussions on how I spend my money and that a tattoo is not a necessity (who was rebelling? Yes, THIS GIRL) my mother handed me a credit card. “For emergencies only, Heather Lynn.” I was an irresponsible 17-year-old with a penchant for shoe shopping. What could go wrong?

A lot went wrong. It was easy to spend the money in my checking account on the boring necessities, and later make a quick swipe with my credit card for a cute top. Having a credit card allowed me to be irresponsible while feigning responsibility. By the end of college I’d racked up about $2,500 in credit card debt spread over three cards. What forced me to pay it off was when I moved to upstate New York and wondered how I’d ever be able to buy my own home. It was then that I realized I would own nothing in the future if I didn’t pay off what I faced in my present.

…And How I Got Out of It
1. Step-by-step: Slowly and painfully, month by month, I took a steady approach. I looked at which card had the highest interest rate, and I made it a goal to pay that one off first, so for payment to that card, I paid the minimum plus $50.

When you are making $35,000 a year, it feels like you’re perpetually sinking, but after four years of focused discipline, I was free of credit card debt. The thing about being saddled with debt is that you always feel like you’re hunched over, hiding from the world. On the outside, I might have seemed like I had it together, but on the inside I felt like a fraud who didn’t have a handle on her own expenses. To be released from that self-inflicted burden was like coming up for air.

Read More citibank.com

What To Do When Good Stocks Aren’t Cheap

2012-12-06T00:00:00.000-08:00

You have to look for a margin of safety in every stock you buy. If you can’t find a margin of safety – you have to hold cash.

Two people who read my articles sent me these emails:

Hi Geoff,

My question is what strategy should an investor adopt when the market is rising (generally good stocks are not available at reasonable prices in such circumstances)? Should an investor just wait on the sidelines when the market continues to rise?

And the second email:

In general, how do you approach the macro investor problem: When markets are down, value investors pile in, but when markets are up, what should value investors do? Underperform?

That’s what I’m doing now. I have 75% of my portfolio in cash. And I am underperforming. I am up 5% in 2012. The S&P 500 is up 11%. It is no fun making 5% a year. And it is no fun being beat by the S&P 500.

But when you keep 75% of your assets in cash – you know that has to happen. I would love to be 100% invested. I would always love to be 100% invested. But when I can’t find stocks I like with a margin of safety – I stay in cash.

It’s odd for me to have 75% in cash. I can’t think of any time in recent years where I kept more than 50% of my portfolio in cash for more than a month or so. It just never happens. But it’s happening now. It’s been happening for most of 2012.

Why?

We all have rules. We all have habits. We all have ways we like to invest. Most investors diversify more than I do. I have low standards when it comes to diversification. I have high standards when it comes to stock selection.

Like I said in a recent article – my required rate of return is 10%. If I don’t think I can make 10% a year in a stock – I don’t buy that stock.

So I have a rate of return hurdle. I also have a value hurdle. I need to know the stock I am buying is – conservatively calculated – worth more than what I am paying. I need clear and convincing evidence of that.

I also have a safety hurdle. We’ll call it a comfort hurdle. I need to be comfortable with the industry, the organization, the management, the balance sheet, etc. There needs to be a low risk of catastrophic loss.

I don’t like looking at stocks where I think there is a real chance of losing 50% of my investment.

I don’t own banks. Over the last few years – there were many cheap banks. There still are some. Many of them have a real risk of catastrophic loss. You could lose 50% of your money if the world goes against you.

That is not true in Kimberly Clark (KMB). That is not true in Waste Management (WM). That is not true in Carnival (CCL). Or in Omnicom (OMC).

Those are companies in industries with solid demand. They are businesses with solid competitive positions. If you know they are cheap – and you know they can make you 10% a year – those are stocks you can feel safe buying.

So when I say I’m not finding stocks to buy – I am saying I’m not finding stocks that check all 3 boxes at once. They need to be worth more than they are trading for. They need to be safe. And they need to offer a return of 10% a year.

There are some stocks I know are safe. A good example is Copart (CPRT). That is a safe stock. Demand for the service is stable. It will be around as long as car insurance. Copart’s competitive position is solid. I like the management. The balance sheet – which is chock full of land – is fine. It’s clearly a safe stock.

But is it cheap? Copart trades at 21 times earnings. It trades at over 4 times sales. And the price to book is so high it has no meaning.

So I like Copart. I follow Copart. But I don’t own Copart. It only checks one of the boxes I need checked. It is a good, safe business. But it isn’t cheap. And it doesn’t promise 10% annual returns. So I can’t buy the stock.

Then there are stocks that are cheap. No one doubts they are cheap. But are they safe? Are they the kind of business I feel comfortable owning?

Think about Bank of America (BAC). Or Hewlett-Packard (HPQ). Or even Microsoft (MSFT).

Whether you can buy these stocks depends on where you draw your circle of competence. HP is definitely outside my circle. There is not even a kernel of understanding in that business for me to latch onto. I don’t know their products. I don’t know their customers. I don’t see how they differ from others.

And I’m writing this on an HP desktop. But I only own that desktop because another – non-HP computer – broke. They could ship an HP that day. So I bought an HP. I don’t like or dislike the desktop. And I wouldn’t buy another HP.

A lot of companies – mostly big companies – fall into the HP category for me. They are big. They compete with other big companies. And I’m not sure I understand what they do. Why they make the products they do. Why they provide the services they do. And why any customer would stick with them.

These stocks may make good bets. It might be a great idea to buy Hewlett-Packard LEAPs. I don’t know. It isn’t the kind of stock I am looking for. Because I’m looking for a business I understand. Where I understand the company’s behavior. And I understand their customer’s behavior. That – more than anything – is what gives me comfort.

So no HP for me. No matter how cheap it is. What about Bank of America? Warren Buffett has a preferred investment in Bank of America. He obviously thought the common stock was cheap. He got 10-year options as part of the deal.

I’m a Bank of America customer. And I have no doubt that – in five years – they will have more of my dollars at their bank than they do now. That’s a good sign.

There are very few businesses that can count on getting more of my business in the next five years. I’m sure Amazon (AMZN) will make more money off me in 2017 than they do now. I’m sureSouthwest (LUV) will make more money off me. And I’m sure Bank of America will too. That’s about it.

These businesses all have some things in common. They scale well. They have big competitors. And parts of the experience they offer are unpleasant.

Amazon benefits from how little I liked shopping at Wal-Mart (WMT). It was never a fun place. Some people like being in actual stores. I’m not one of them. So Amazon doesn’t need to match stores on price to keep my business. I’m always willing to pay up a little for the convenience of online shopping, home delivery, etc.

Southwest is a more direct winner. They offer more frequent flights on the routes I want. They have good prices. And I like the actual experience a bit more. Again, very big, unimpressive competition is part of why I can be sure I’ll fly Southwest even more in the future. The alternative is worse.

So why am I sure I’ll bank more with Bank of America? It’s a sticky business. It’s a big hassle to move. They own a broker – Merrill Lynch. Online banking is important to me. Their brokerage and online services can match anyone’s. And I don’t like going in a branch. So superior customer service by a local competitor won’t get my deposit.

Finally, the real reason Bank of America has my business is location. My old bank was Wells Fargo. I liked Wells Fargo better than Bank of America. I still do. But Wells Fargo doesn’t have a branch I can walk to. Bank of America has one a couple blocks from my apartment.

Does that mean Wells Fargo can open a branch next door and get back my business? No. Banking is a sticky business. I moved banks when I moved. Moving my account for any other reason is a pain I don’t need. Bank of America will have to drive me away with mistakes. A competitor can’t win me over if I’m even remotely content. Banks are not something people shop for. They are something they switch only when they need to. Like when their current bank screws up. Or when they move.

So Bank of America won my deposit with location. They’ve won a lot of deposits that way. And even a competitor like Wells Fargo can’t do much to them. In the U.S., every bank has a small share of national deposits. The competition between big banks – for deposits – is not as rough as the kind of competition Amazon and Southwest have to deal with. It’s more local. And more fragmented.

That makes it sound like I could buy shares of Bank of America. And I could – if all that mattered to a bank is deposits. I have no doubt Bank of America will get cheap money far into the future.

The problem is the past. And what they do with deposits. I need to worry about everything Bank of America did in the past. And all the loans they will make in the future.

I like to put 25% of my portfolio into one stock. I don’t feel comfortable putting 25% of my portfolio into Bank of America. It is cheap. And it can return 10% a year. But it’s not in my comfort zone.

Finally, there’s Microsoft (MSFT). This stock is also clearly cheap. And it’s also a business where I have experience as a customer. I’m running Windows 8 right now. I love it. I have no idea what the long-term future of Windows will look like.

I also have an Xbox 360. And – of course – I use Microsoft Office. I’m very likely to use all three – Xbox, Windows, and Office – in their next generations. So Microsoft has their hooks in me. And in a way HP doesn’t. My next desktop will not be an HP. My next operating system will be Windows.

Microsoft seems like an easy business to understand. And in some ways it is. But it depends a lot on what computers look like. It worries me a lot that the line between my desktop and my Kindle Fire is not a wide one. Windows only has a moat in one of those devices.

I just don’t know what the future of computers will be. And whether there will be a place for Windows. And how big it will be. So I know Microsoft is cheap. But I’m not comfortable buying it.

Why did I turn a question about macro investing into a question about micro investing?

Because that is always what it comes down to. I have 75% of my portfolio in cash – because I said no to stocks like Microsoft and Bank of America and HP. Not because I have a view of the market. Not because I have a view of the economy.

If the stock market was overpriced and the economy was in the toilet and Carnival was trading for $15 a share – I would buy it. Why? Because in 20 years, I believe the cruise industry will be bigger than it is today, Carnival will be the leader in the cruise industry, and the leader in the cruise industry will earn its cost of capital. If those things are true – and Carnival is trading for a fraction of book value – then I should buy Carnival. Nothing else matters.

The macro picture – by which I mean the level of the stock market, the strength of the economy, and the level of interest rates – will change a lot in 20 years. It changed a lot during the 23 years in which Warren Buffett owned Coke. But if he was right about Coke in 1989 – he didn’t need to be clairvoyant about the future of everything else.

Thinking about the big picture is often dangerous. Because it’s often used as a way to justify dumb decisions. Not clearly dumb decisions. But borderline decisions. Carnival at $35 a share is a borderline decision. If you are right about fuel prices – that they will be lower in the future than they are today – you may make buckets of money buying Carnival at $35 a share. If you are wrong, you may not. It’s a borderline decision at $35 a share. It is clearly a good decision at $15 a share.

Waiting is the hardest part of investing. You have to wait long enough to buy a good idea. And once you own the idea, you have to wait long enough to see it play out.

Right now, I am waiting for a good idea. And that means I made 5% this year. And the market made 11%. That’s the price of a good idea.

The value of cash is as an option. Cash is an option on future, lower stock prices. For a market timer – it’s an option on future, lower general stock prices. For a stock picker – like me – cash is an option on future, lower specific stock prices.

I don’t have 75% of my portfolio in cash because I think the stock market will be lower in the future. I have 75% of my portfolio in cash because the price of Carnival and Copart and DreamWorks (DWA) are not low enough yet.

Those stocks may get cheaper in the future. If they do, I may buy them. Or they won’t get cheaper. And I’ll never get to buy them.

The only other option is lowering your standards. Which Warren Buffett refused to do in 1965. Stock prices were too high. He couldn’t find good ideas to buy. It wasn’t the game he was used to playing. So he wound down his partnership.

Why didn’t he just stay in cash? Because he was investing for others. Many of the people reading this article are not professional money managers. You can live with earning 5% a year when the market earns 11% a year. That’s the advantage you have over money managers. Use it.

From gurufocus.com

Warren Buffett on Hedge Fund Managers and Going Long Versus Short

2012-12-05T23:47:00.000-08:00

Berkshire Hathaway's Warren Buffett recently was interviewed by Andrew Ross Sorkin for Dealbook and he made some interesting comments about hedge funds, respected investors, and short selling that we wanted to flag:

Buffett on Hedge Fund Managers: "They're not as good as the old ones generally. The field has gotten swamped, so there's so much money playing and people have been able to raise money by just saying 'hedge fund. That was not the case earlier on; you really had to have some performance for some time before people would put money with you. It's a marketing thing."

Julian Robertson echoed this sentiment when he also recently commented that hedge funds aren't doing as well as they used to because the competition is more hedge funds.

Buffett mentioned a few hedge fund managers who were successful like Julian Robertson (Tiger Management), and he mentioned that he liked Seth Klarman (Baupost Group). As we highlighted today, Klarman was named one of the 'next Warren Buffetts' way back in 1989 by Fortune.

On Short Selling: "Charlie and I have both talked about it. We probably had a hundred ideas of things that would be good short sales. Probably 95 percent of them at least turned out to be, and I don't think we would have made a dime out of it if we had been engaged in the activity. It's too difficult."

On Going Long: "The whole thing about 'longs' is, if you know you're right, you can just keep buying, and the lower it goes, the better you like it, and you can't do that with shorts."

On Running 'Too Much' Money: "... money starts getting self-defeating at a point, too."

From marketfolly.com