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

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

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.

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

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?"

1. 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.
2. Why did the investor decide to buy the stock?
3. 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.

Golden rules for losing money

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.

83 Reasons We Love Warren Buffett

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."