Here's How Warren Buffett Decides To Invest In Something

Warren Buffett is a self-made billionaire. His successful investment business makes him one of the most respected men in the world. 

Buffett attributes all of that to always being prepared. When he was a teenager, he was inspired by a book called "The Intelligent Investor" by Ben Graham. The book tells the importance of being prepared instead of making emotional decisions in business. 

The book The Art of Selling Yourself: The Simple Step-by-Step Process for Success in Business and Life (Tarcher Master Mind Editions) says the book explains Buffett's success because it made him value being prepared. 

Here are a few ways that you can be as prepared as Buffett when you make investment decisions: 

• Make sure you're getting the investment at a good price. This makes the investment safer in the long-run. 
• Ask yourself if the investment is long-term. The best investments give back over time instead of offering immediate gratification. 
• Research if the business is well-managed. Buffett scrutinizes decisions that management are making to ensure that even if the company falls on hard times, the best decisions will be made. 
• See if the business avoids debt. Buffett doesn't invest in companies that have too many debts to pay off. 
• Also check out the company's returns. Buffett seeks out company's with a return on investment higher than average--or 11 percent. 
• See if the business has a competitive edge in its industry. Buffett accomplishes this by seeking out brand-names like Coca-Cola. The brand recognition gives it value. 

From businessinsider.com

There's A Personal Finance Message In ‘Gangnam Style’

The video for “Gangnam Style,” a pop song by Korean rap star Psy (short for Psycho), has been raging across the world. 

It has racked up 221 million YouTube views as of this writing and is the number one song downloaded on iTunes. Psy himself has been on a media tear in the United States and has appeared on the MTV Video Music Awards, Ellen (twice), The Today Show and Saturday Night Live.

And if you haven’t yet seen him, his addictive video or any of the many parodies it has spawned (by the Oregon Duck mascot, Naval Academy cadets, a wedding party, lifeguards and more), get ready to see more of him, because he has signed with Scooter Braun, the man who made stars of Justin Bieber and Carly Rae Jepsen.

But there’s no reason for a personal finance site to be writing about a silly song known for its horse-riding dance, right? Well, actually, it turns out this addictively catchy song and its accompanying video relay a lesson that could help you with your own spending habits.

What Gangnam Style Is All About

The words “gang” and “nam” literally mean “south of the river,” but Gangnam with a capital G is an upscale neighborhood of Seoul (you guessed it) on the south side of the river. As the Beverly Hills of South Korea’s biggest city, it also occupies a psychic place in the minds of Korea’s 99% and represents the luxurious life for which they strive.

The neighborhood is just seven square miles but holds 7% of Korea’s GDP. For comparison, New York state, which is 3,000 times the size of Gangnam holds 7% of U.S. GDP. Forty-one percent of students at the nation’s most prestigious college, Seoul University, come from Gangnam, which in the U.S., would be like having 41% of Harvard students come from Manhattan.

The neighborhood is full of high-rise apartment buildings, high-end department stores, the city’s trendiest boutiques and hottest clubs, and a lot of plastic surgery clinics. As U.S.-based Korean blogger Jae Kim says in her analysis of the song, “In short, it’s like the U.S. Upper East Side plus Beverly Hills minus tradition; or I’d rather say it’s more like ‘Dubai’”–and here, she refers to the area’s recent development–”built on Korean cabbage and Korean pear fields.”

What ‘Gangnam Style’ The Song Is About

But Psy’s rendering of “Gangnam Style” highlights the superficiality of this dream. In the opening scene, Psy is lounging on a beach, dreaming he is being fanned by a beautiful girl. As the camera pans out, you realize he is actually lying on a chair in a sandy children’s playground.

Then you see him in a tux with a girl on each arm, strutting as though down a red carpet, except they appear to be in an underground parking lot, and instead of confetti fluttering down upon them, trash is flying at them with blizzard-like force.

In another scene, he parties like a rock star in a bus outfitted with disco balls, but his fellow partygoers are retirees wearing sun visors.

Meanwhile, in all these scenes, he’s dancing as though he’s riding an invisible horse, almost as though he’s the knight of his own imaginary Camelot.

Peter Lynch's Principles & Golden Rules of Investing

Peter Lynch ran Fidelity's Magellan Fund for 13 years and was regarded as one of the most successful investors during his tenure.  Lynch outlines the broad gist of his investment philosophy with various pearls of basic wisdom in his book, Beating the Street.  

Last week we detailed Lynch on using your edge in investing.  This time we wanted to focus on some more of his advice, taken both from "Peter's Principles" and his "Golden Rules of Investing":


Peter's Principles

- "Never invest in any idea you can't illustrate with a crayon"

-"You can't see the future through a rearview mirror"

- "When yields on long-term government bonds exceed the dividend yield of the S&P 500 by 6 percent or more, sell your stocks and buy bonds."

- "The best stock to buy may be the one you already own."


Peter Lynch's Golden Rules of Investing

- "You have to know what you own, and why you own it."

- "Never invest in a company without understanding its finances.  The biggest losses in stocks come from companies with poor balance sheets.  Always look at the balance sheet to see if a company is solvent before you risk your money on it."

- "Everyone has the brainpower to make money in stocks. Not everyone has the stomach. If you are susceptible to selling everything in a panic, you ought to avoid stocks and stock mutual funds altogether."

- "Time is on your side when you own shares of superior companies. You can afford to be patient –even if you are missed Wal- Mart in the first 5 years, it was a gr8 stock to own in the next 5 years. Time is against you when you own options." 


From marketfolly.com

Related Books

One Up On Wall Street : How To Use What You Already Know To Make Money In The Market

Beating the Street

Learn to Earn: A Beginner's Guide to the Basics of Investing (The Classic Guide)

3 Big, Safe Dividend Stocks for the Beginning Investor

Whether you're new to investing or have been at it for a lifetime, you need to understand the business models of the companies you invest in, because understanding how a company makes money will significantly reduce your overall investing risk.

In that spirit, today we'll look at three companies with straightforward business models, strong dividends, and a knack for longevity. Because what good is a great dividend if the company's not going to be around long enough to pay it out?

Without further ado, then, here are three big, safe dividend stocks for the beginning investor, along with the reasons for my personal favorite at the end:

1. Boeing (NYSE: BA  )
727. 737. 747. 787. At first glance, they're just numbers, but upon reflection they're so much more. You've heard them uttered or read about them your whole life. They represent what Boeing is all about: airliners. Boeing is the most successful company in the history of aviation, and indeed is the very essence of American aviation. This is a company that has endured its share of economic ups and downs, just like any other big company that's been around for nearly 100 years, but is still at the top of its game.

From a dividend investor's perspective:

• I normally look for dividend yields of around 3% -- an arbitrary threshold, but one I feel separates the wheat from the chaff. Boeing pays 2.5% -- under our threshold, but close enough to enjoy consideration as one of our dividend stocks, especially given what a rock-solid industrial giant it is.
• I like to see dividend-payout ratios of 50% or less: As a rule of thumb, the lower the percentage, the more sustainable it is. At 30%, Boeing's falls well below our 50% mark, which argues well for its longevity.

Boeing's five-year average dividend yield is 2.7%, which bodes well for the longevity of the current 2.5%. But most critically, the orders for aircraft just keep coming, with airlines around the world placing orders in record numbers. On Sept. 6, the company reached a milestone: order No. 500 for its next-generation 737 aircraft, the workhorse of the fleet in airlines everywhere.

2. Johnson & Johnson (NYSE: JNJ  )
Johnson's Baby Shampoo. Tylenol. Band-Aid. Listerine. Brands that are burned into your memory from childhood, and likely still have a significant presence in your life. J&J has been around since 1886, and just like Boeing, has seen its share of ups and downs, including an embarrassing string of product recalls lately. But the company has a new CEO, Alex Gorsky, who is tasked with turning the company around with a strategy focusing on the rehabilitation of the consumer-products division. Given J&J's stable of iconic brands, it's a good one.

From a dividend investor's perspective:

• I said I look for a 3% yield on our dividend stocks. At 3.6%, J&J easily makes the grade, as does, to its credit, rival Pfizer (NYSE: PFE  ) , which pays out an identical 3.6%.
• At 74%, J&J's payout ratio is steeper than I like, but not frighteningly so. Pfizer comes in at a better, but not game-changing, 62% on this metric.

J&J has a five-year average dividend yield of 3.1%, which argues fairly well for the sustainability of the current 3.6%. While having a rough go of it right now, this company will be rehabilitated. In the end, J&J has too much brand strength and too much money in the bank -- $16.9 billion -- to go away anytime soon. And its wide-ranging consumer and medical-professional product lines make it a safer bet in the long run than strictly pharmaceutical-focused Pfizer.

3 Simple Investing Lessons From Peter Lynch

In the lead-up to Sept. 25's Worldwide Invest Better Day, The Motley Fool is reacquainting investors with the basic building blocks of investing. In light of that, who better to consider than one of the most Foolish investors of all?

Peter Lynch put together one of the greatest investing track records of all time, while serving as the portfolio manager of Fidelity's Magellan Fund. An ordinary investor who put $1,000 in the fund on the day Lynch took over would have had roughly $28,000 by the time Lynch stepped down 13 years later.

Despite those truly remarkable returns, Lynch was a passionate believer in the notion that the normal investor can pick stocks better than the average Wall Street professional. In fact, he argued that the retail investor had numerous advantages that might allow him or her to outperform both the experts and the market in general.

You need to do certain things

Lynch did not say, however, that it would be easy for retail investors to outperform. He believed they could do the job very well, but that they had to do certain things. Below are three simple lessons from Lynch that will assist ordinary investors in their quest to beat the market:

1. Do the work. 

Peter Lynch is very well known, of course, for recommending that investors "buy what they know." According to this principle, investors may want to invest in that busy restaurant on the corner that always seems crowded on Friday night.

Perhaps less well-known about Lynch is that he expected investors to understand their businesses before putting their money in them. In his classic book One Up On Wall Street, he recommended that you should "never invest in any company before you've done the homework on the company's earnings prospects, financial condition, competitive position, plans for expansion, and so forth."

Amazon.com (Nasdaq: AMZN ) provides a great example here, I think. Many of us are dedicated users of the online retailer, so why wouldn't we want to invest our money in the company as well? Before doing so, however, investors might want to know why the company's profit margins are so low, and how the company intends to increase those margins over time. Finally, investors should feel comfortable with Amazon's valuation too before buying shares in it.

Lynch was an indefatigable worker himself, who felt that -- borrowing from Edison – "investing is ninety-nine percent perspiration." In general, he believed that you need to "know what you own" and just thinking it will go up "doesn't count." As a result of this belief, Lynch figured that a part-time stock picker probably only has time to follow eight to 12 companies. And he warned that "if you don't study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards."

2. Use your edge. 

Lynch strongly believed that everyone has an edge that can allow them to outperform the experts. The key is to utilize your edge by investing in companies or industries that you understand well.

He recommended that individuals identify three to five companies that they could know very well. You could study them; lecture on them; and understand their stories intimately. Ultimately, Lynch felt that ordinary folks need to discover their personal edge, whether it's a profession or hobby or even something else, like being a parent.

When I started out as an investor, Procter & Gamble (NYSE: PG ) was a stock I felt I had a considerable edge with. My grandfather had worked for the company for over 30 years, and my grandmother held quite a few shares of the company. As a kid, I always talked with her about new products and challenges facing the business. When I first began buying stocks, I always felt extremely comfortable having P&G in my portfolio. Each of us probably knows a company or two like that, and we must use that edge to our advantage.

3. Be patient. 

Being patient and investing for the long term should be the simplest investing lesson of all. Sadly, it's one of those things that is easier said than done. In 1960, the average holding period for a stock was eight years; nowadays, it's just four months.

Lynch often said that he had no idea what the market would do in one or two years. But he was confident about what stocks would do 10, 20, or 30 years from now. He truly believed that time was on the side of the retail investor, and that's why he was an enthusiastic proponent of long-term investing.

And yes, he was aware of some long time frames where the market didn't do well. In an interview with Frontline, he referred to the period from 1966 to 1982 when the market was flat for the most part. But Lynch noted that you'd have still received dividends from your stocks. He also felt that corporate profits tend to trend upward, and that investors would eventually be rewarded for that.

McDonald's (NYSE: MCD ) is perhaps a good illustration of a stock that will outperform today's market. Over the past decade, the S&P 500 has been more or less flat. Going forward, however, McDonald's -- with its growing dividend and overseas expansion -- is likely to perform very well for long-term investors. Similarly, I'd be very surprised if Exxon Mobil(NYSE: XOM ) -- with its growing dividend and rock-solid balance sheet -- didn't do well over the next decade regardless of the performance of the overall market.

Lynch believed that it "pays to be patient, and to own successful companies." He understood that there are times when there doesn't appear to be a correlation between a company's operations and its stock price. Lynch also knew, however, that "in the long term, there is a 100 percent correlation between the success of the company and the success of its stock. This … is the key to making money."

Simple is as simple does

Peter Lynch once said, "The simpler it is, the better I like it." In a world of faster trading and ever-increasing flows of information, keeping it simple might be the ultimate edge for the ordinary investor. Always remember, though, that simple doesn't necessarily mean easy. I know I have to work a lot harder on all three of those "simple" lessons mentioned above.

From fool.com

The World's Most Powerful Hedge Fund Manager Tells Investors How They Should Set Up Their Portfolios

Hedge fund god Ray Dalio, who runs Bridgewater Associates, is widely considered to be the most successful hedge fund manager in the world.

He recently sat down with CNBC's Maria Bartiromo to discuss a variety of topics at the Council on Foreign Relations and he had some advice for the average investor. 

During the hour-long discussion, Bartiromo asked Dalio about portfolio allocation in terms of gold versus equity versus real estate and other asset classes.

Here's his advice that we've transcribed: (emphasis ours) 

First, Dalio explains what you need to think about when setting up a portfolio.  The key here is asset allocation. 

"So I think I'm going to answer it in the following way that I think that is the right way for people to look at it. It's the way I look at it. I think that the first thing is you should have a strategic asset allocation mix that assumes that you don't know what the future is going to hold.  And I think most people should..." 

In other words, if you're thinking of "beating" the market, as though it's a game, you're probably going to lose.

"In other words, let's say, I play the game of betting against others. So it's like I'm going on the poker table and if I'm smarter, and I know how difficult that game is, so very few winners.  And like if I'm not engrossed in it and if we're not engrossed in it, I'd be worrying about it and I do worry about it when I am engrossed in it.  So the average investor and most people should not be playing that game.  They're going to lose at the poker table."

This is why Dalio emphasizes the importance of a balanced portfolio, especially in terms of risk.  

"So what that means, they should have a properly balanced portfolio.  Now the most important thing is that is that they balance... They make a mistake in terms of dollars invested and with a bias with what's done well in the past and they don't realize that risk.  They should balance it in terms of risk.  

"Let's say stocks have twice the volatility, more than twice the volatility, of bonds and when they own a portfolio and structure a portfolio that way they tend to have concentrated risks. And I think what they need to do.  I would recommend reading, read, on the subject of risk parity, read on our website, we have an explanation on how to balance risk, but they key thing is that there are basically four economic environments.  There are two main drivers of asset class returns-- inflation and growth." 

Here simplifies how inflation and growth affect the prices of asset classes based. 

"Assets all price based on, you could look at the pricing of asset classes and calculate what the discounted growth rate is and what the discounted inflation rate is. And what causes assets to move is surprises to that.  So when growth is faster-than-expected, stocks go up.  When growth is slower-than-expected, stocks go down.  When inflation is higher-than-expected, bonds go down.  When inflation is lower-than-expected, bonds go up.  OK. 

Dalio says it's important for the average investor to understand inflation and growth and their effects.  That's why he suggests having four different portfolios to achieve balance.  

"What I'm trying to say is that for the average investor, what I would encourage them to do is to understand that there's inflation and growth. It can go higher and lower and to have four different portfolios essentially that make up your entire portfolio that gets you balanced.  Because in every generation, there is some period of time, there's a ruinous asset class, that will destroy wealth and you don't know which one that will be in your life time. So the best thing you can do is have a portfolio that is immune, that is well diversified.  That is what we call an all-weather portfolio.  That means you don't have a concentration in that asset class that's going to annihilate you and you don't know which one it is...

Again, the reason you should have a balanced portfolio is you don't know what the future holds, says Dalio.  

"Well, I'm saying based on the notion that you don't know which one it is. And therefore,..when you say 'which should it be today?' It should be balanced today like it is in the future and it should have that mix of assets.  And now you get into a whole conversation...But you need to achieve balance..."

From businessinsider.com

Younger retirees need some risk in their portfolios

Just as the baby boomers brought us free love and rock ’n’ roll, they’re also leading the way into pension-less retirement. Those who are near or just into retirement are in a tough spot. They have a long time horizon and need investment returns that are well in excess of inflation. And yet, low-risk investments provide minimal return (negative after inflation), and owning higher risk securities has been harrowing and less-than-rewarding over the last five years.

While most people entering retirement feel some level of anxiety, it is those who don’t have a defined benefit pension plan and don’t know if they’ll have enough to fund their retirement who experience the most stress. What they want more than anything is certainty, but that’s hard to come by in today’s low interest rate environment.

There are no easy answers to the no-DB dilemma, although any solution should start with a financial plan. Rather than wondering and worrying, some work up front with an adviser or fee-for-service planner will bring clarity to the issues, if not peace of mind. And as devoted followers of the column below this one know, a proper plan will likely recommend a combination of strategies.

Work longer

It’s not what people want to hear, but the best way to set up the next 30 years may be to work the first two or three. Every year adding to the nest egg, as opposed to drawing on it, improves the retirement calculations significantly.

Spend less

There are three variables in the calculation – life span, investment return and spending. Everyone wants to maximize the first, so the conversation is most often focused on the second. “How can I get a better return?” As Andrew Rice of the financial planning firm, Stewart and Kett, reminded me, however, the least considered variable – spending – has the most impact on what the numbers look like.

Increasingly, I’m seeing our clients build flexibility into their spending patterns. They make adjustments based on how their portfolio is doing. When their capital base is temporarily depleted due to weak markets, they dial down their spending and postpone the new car, kitchen renovation or world cruise.

Take more risk

The most common response to the no-DB dilemma is to reach for a higher yield by owning riskier securities. Instead of getting regular income from guaranteed investment certificates and government bonds as investors did 10 years ago, corporate bonds, income-oriented stocks and structured products are now playing a bigger role.

Most of the time, the income flow from these higher octane securities feels the same as the GICs and government bonds of the past, but there will most assuredly be market-related jolts from time to time. The corporate bond market is known to shut down at inconvenient times (2002 and 2008 being prime examples), which means corporate bond prices will experience significant price declines. And even the most conservative stocks will be taken down in a bear market.

Taking more risk should be a core strategy, but young retirees need to be careful not to focus too much on acquiring current income such that they put future income at risk. Higher-yielding investments don’t necessarily produce a better return (Yellow Media being an extreme example), especially when the yield entices investors to pay more than what a company is worth.

Warren Buffett Earning 39% Dividend Yield From Coca-Cola?

Warren Buffett is currently earning a 39% dividend yield on his shares of Coca-Cola (NYSE: KO).

It seems impossible. If you or I were to buy the shares today, we'd earn a yield of just 1.3%.

But Buffett first added the shares to Berkshire Hathaway's (NYSE: BRK-B) portfolio back in 1988. Despite being a mature business even back then, the stock has earned roughly 1,800% on Berkshire's original investment. Meanwhile, Berkshire's yield on cost (the amount of dividends earned as a percentage of the original investment) is 39% per year thanks to Coke's steady dividend growth.

What's behind this? After all, Coke had been around for more than a century before Buffett invested. How is it that some companies can continue to grow -- and raise dividends -- seemingly forever?

It's an advantage that I call a "legal monopoly."

The few businesses that have this advantage are among the richest companies in the world. And they only seem to get richer with every passing year -- much to the enjoyment of their investors.

Many companies have operated with this advantage for decades, without a peep from the government.

That's because this isn't a monopoly in the traditional sense. Most monopolies attract attention (and regulation) because they keep other businesses from competing. They tilt the odds so far in favor of one company that no one else can even do business.

But the legal monopoly I'm talking about doesn't keep other businesses from competing -- it simply helps a company to continue growing and generating billions in profits for its investors... almost no matter what.

Take a look at what Coke has done during the past decade. And remember, the company was founded in the 1880s. The results below come after more than a century in business.

Should You Invest in the Stock Market?

The stock market is as fascinating as it is frightening for many small-time, would-be investors.

You’ve heard tales of the guy who bought eBay stock and made a killing, but you’re also worried about the multiple stories of inexperienced investors completely losing their shirts.

While there are a ton of articles telling you what to invest in, comparatively few tell you how to evaluate whether or not you should invest anything in the first place.

Here are some things to consider before you invest in the stock market.

Timing is King
“Buy low, sell high” is the mantra of stock market investment. So while tomorrow might not be the right time for you to invest, next week might be.

Timing has a lot to do with answering the question of whether or not you should invest in the stock market, but unless you’re a professional financial analyst, it can be a question that is nearly impossible to answer.

Still, if the market takes a downward turn, that might be your time to buy in at low, low prices.

Do You Have the Stomach for It?
The stock market can fluctuate greatly. The investors with the best returns are the ones who can weather the storm. When your stocks take a hit, are you the type of person who can hold onto them until they turn around? Or are you going to want to dump everything and get out while the getting’s good?

Being able to answer this question honestly is important. If you can’t hold on to declining stocks in a bearish market, then you probably don’t have what it takes to invest in stocks directly.