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."

Buffett Vs. Soros: Investment Strategies

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.

Warren Buffett's Bear Market Maneuvers

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?

How Warren Buffett Made His Fortune

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.

Warren Buffett Shared Some Great Career Advice For Millennials

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."

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

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."

Read more: businessinsider.com

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

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

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.

Buffett Still Buying Stocks, Sees 'Good Value'

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."

(Read More: Buffett: How to Get 'Fair Shake' on Wall Street)

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."

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

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.

(Read More: Buffett Still Buying Stocks, Sees 'Good Value')

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

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.

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

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?

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

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. 

Stock Portfolio Jan 2013

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

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.

Some Sales Tips From Warren Buffett

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.

Can You Really Invest Like Warren Buffett?

(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.