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.

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.

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

Book Review: 'The Warren Buffett Portfolio'

Books on Warren Buffett dominate the bookshelves at the investment section of bookstores. Among the sea of Warren Buffett books, Robert G. Hagstrom's name stands out. He has written three books: "The Warren Buffett Way," "The Warren Buffett Portfolio" and "The Essential Buffett."

According to Hagstrom, his second book, "The Warren Buffett Portfolio," is meant to be a companion, not a sequel, to "The Warren Buffett Way." He claimed he unwittingly passed lightly over two important areas: portfolio management and intellectual fortitude in The Warren Buffett Way. TheWarren Buffett Way gives the reader tools to pick common stocks wisely, and The Warren Buffett Portfolio shows you how to organize them into a focus portfolio and provides the intellectual framework for managing it.

I introduce readers to Hagstrom's second book The Warren Buffett Portfolio.

Takeaways from The Warren Buffett Portfolio

- Focus Investing: Choose a few stocks that are likely to produce above-average returns over the long haul, concentrate the bulk of your investments in those stocks and have the fortitude to hold steady during any short-term market gyrations.

- Phil Fisher was known for his focus portfolios; he always said he preferred owning a small number of outstanding companies that he understood well to owning a large number of average ones, many of which he understood poorly.

- Using the tenets of the Warren Buffett Way, choose a few (10 to 15) outstanding companies that have achieved above-average returns in the past and that you believe have a high probability of continuing their past strong performance into the future. Allocate your investment funds proportionately, placing the biggest bets on the highest-probability events. As long as things don't deteriorate, leave the portfolio largely intact for at least five years (longer is better), and teach yourself to ride through the bumps of price volatility with equanimity.

- Buffett has a different definition of risk: the possibility of harm or injury. And that is a factor of the "intrinsic value risk" of the business, not the price behavior of the stock. The real risk, Buffett says, is whether after-tax returns from an investment "will give him [an investor] at least as much purchasing power as he had to begin with, plus a modest rate of interest on that initial stake."

- The optimal portfolio is a focus portfolio that stresses big bets on high-probability events, as opposed to equally weighted bets on a mixed bag of probabilities.

- Measure management this way: 1) Review annual reports from a few years back, paying special attention to what management said then about strategies for the future. 2) Compare those plans to today's results: How fully were they realized? 3) Compare the strategies of a few years ago to this year's strategies and ideas: How has the thinking changed? 4) Compare the annual reports of the company you are interested in with reports from similar companies in the same industry. It is not always easy to find exact duplicates, but even relative performance comparison can yield insights.

- Stock prices disengage from the intrinsic value of a business for various reasons, including psychological overreaction as well as economic misjudgment. Focus investors are perfectly positioned to take advantage of this mispricing. But, to the degree they incorporate macroeconomic or stock market predictions inside their model, focus investors will diminish their competitive advantage.

- For Buffett, investing is a series of "business" pitches and, to achieve above-average performance, he must wait until a business comes across the strike zone in the "best" cell. Buffett believes investors too often swing at bad pitches, and their performance suffers. Perhaps it is not that investors are unable to recognize a good pitch — a good business — when they see one; maybe the difficulty lies in the fact that investors can't resist swinging the bat.

From gurufocus.com

Related Books

The Warren Buffett Portfolio: Mastering the Power of the Focus Investment Strategy

The Warren Buffett Stock Portfolio: Warren Buffett Stock Picks: Why and When He Is Investing in Them

Book Review: 'The Warren Buffett Way'

Books on Warren Buffett dominate the bookshelves at the investment section of bookstores. Among the sea of Warren Buffett books, Robert G. Hagstrom's name stands out. He has written three books: The "Warren Buffett Way," "The Warren Buffett Portfolio," and "The Essential Buffett."

According to Robert Hagstrom, his second book, "The Warren BuffettPortfolio," is meant to be a companion, not a sequel, to "The Warren Buffett Way." He claimed he unwittingly passed lightly over two important areas: portfolio management and intellectual fortitude in The Warren Buffett Way. It gives the reader tools to pick common stocks wisely, and The Warren Buffett Portfolio shows you how to organize them into a focus portfolio and provides the intellectual framework for managing it.

I introduce readers to Hagstrom's first book, The Warren Buffett Way.

Takeaways from The Warren Buffett Way

Business Tenets = basic characteristics of the business itself

1. Is the business simple and understandable?

- Understand the revenues, expenses, cash flow, labor relations, pricing flexibility, and capital allocation needs of every single one of your holdings.

- Investment success is not a matter of how much you know but how realistically you define what you don’t know.

2. Does the business have a consistent operating history?

- A steady track record is a relatively reliable indicator. When a company has demonstrated consistent results with the same type of products year after year, it is not unreasonable to assume that those results will continue.

- Avoid purchasing companies that are fundamentally changing direction because their previous plans were unsuccessful. Undergoing major business changes increases the likelihood of committing major business errors.

- Avoid businesses that are solving difficult problems. Turnarounds seldom turn.

3. Does the business have favorable long-term prospects?

- A franchise as a company whose product or service 1) is needed or desired, 2) has no close substitute and 3) is not regulated.

- A franchise that is the only source of a product people want can regularly increase prices without fear of losing market share or unit volume.

- A franchise has the ability to survive economic mishaps and still endure. A great company is one that will be great for 25 to 30 years

Management Tenets = important qualities that senior managers must display

4. Is management rational?

- The most important management act is allocation of the company’s capital.

- Deciding what to do with the company’s earnings — reinvest in the business, or return money to shareholders — is an exercise in logic and rationality.

- If the extra cash, reinvested internally, can produce an above-average return on equity — a return that is higher than the cost of capital — then the company should retain all its earnings and reinvest them.

- A company that provides average or below-average investment returns but generates cash in excess of its needs should return the money to shareholders.

- Dividends put reinvestment risk in the hands of shareholders.

- Repurchases are preferred as shareholders are rewarded twice, first from the initial open market purchase and then from the positive effect of investor interest on price.

5. Is management candid with its shareholders?

- Likes managers who report their companies’ financial performance fully and genuinely, who admit mistakes as well as share successes, and who are in all ways candid with shareholders.

- Data should be disclosed in a manner that helps the financially literate readers answer three key questions: 1) Approximately how much is this company worth? 2) what is the likelihood that it can meet its future obligations? and 3) how good a job are its managers doing, given the hand they have been dealt?

- Managers who confess mistakes publicly are more likely to correct them.

- The CEO who misleads others in public may eventually mislead himself in private.

6. Does management resist the institutional imperative?

- The institutional imperative is the lemming-like tendency of corporate management to imitate the behavior of other managers, no matter how silly or irrational that behavior may be.

Warren Buffett's Timeless Advice: 'Don't Make This Mistake'

Warren Buffett has some timeless advice for investors that he can't repeat too many times.

At the end of his live, two-hour appearance with Becky Quick on CNBC's "Squawk Box" this morning, she gave him a chance to do a free association reaction to a single word: "buy."

Here's his response:

"I say, basically, 'hold.' The idea that the European news or slowdown in this or that or anything like that, that would not cause you to, if you owned a good farm and had it run by a good tenant, you wouldn't sell it because somebody says, 'Here's a news item,' you know, 'This is happening in Greece' or something of the sort.

"If you owned an apartment house and you got to raise the rents a little and it was well located and you had a good manager, you wouldn't dream of selling it.

"If you had a good business personally, a local McDonald's franchise, you wouldn't think of buying or selling it every day.

"Now, when you own stocks, you own pieces of businesses, and they're wonderful businesses. You can pick the best businesses in the world.

"And to buy or sell on current news is just crazy. You're in a wonderful business. You've got people running it for you. You know you're going to do well over five to ten years. And to think news events should cause you to dance in or out of something that's a wonderful game is a terrible mistake.

"So, get into a bunch of wonderful businesses and stay with them...

"I've been buying all my life. I bought my first stock when I was 11-years old and it was about three months after Pearl Harbor, and Corregidor was falling, and they had the Death March at Bataan and all the news was terrible. It was a great time to buy stocks. And I should have held that stock forever, and I've been buying stocks ever since."

From cnbc.com

Invest Like Warren Buffett: 3 Ways to Profit Like the Sage of Omaha

In the days leading up to Facebook’s historic (and now infamous) IPO, CEO Mark Zuckerburg pursued Warren Buffet’s sage advice. The young CEO, who’s gone from creating Facebook in his Harvard dorm-room to billionaire in only 8 years, spoke “for hours” with Buffett about how to take the social network public.

And it’s no surprise. As one of the wealthiest people in the world, Buffett is also known for his incredible business acumen and strong philosophies around business, economics, and investing.

What makes him different however, is that most of these philosophies go “against the grain” and collective wisdom of the financial markets.

Here are three of his investing lessons that will help you learn from the master.

1. Invest in Productive, Cash-Generating Businesses

Contrary to most financial managers, Buffett doesn’t recommend investing in currency-backed assets or gold. Especially as a way to hedge inflation.

Instead, he favors productive assets like businesses, farms and real estate. His rationale is that these supposed “safe” investments are actually the riskiest.

The main reason is that these assets actually lose purchasing power over time, while sound productive assets should grow – despite market cycles.

And Buffett has said that the goal for his companies isn’t to simply “make money”.

The goal is to generate more money then you will have to pay in taxes and inflation, so that you can buy more things later than you can with the same money right now.

10 Rules For Multiplying Personal Wealth

I have the privilege of teaching financial planning courses at local colleges and adult learning centers.

One of the things we do in class is recite and write down a set of rules I hope each student can learn to live by.

Here are a few key rules to remember:

Rule 1: Be systematic, unemotional and diversified

This is the very first rule we touch on right from the beginning. There's a popular bumper sticker that says, "I'm spending my grandkids' inheritance."

That whole idea just frustrates me. In some ways, our society's personality is such that if we can spend our money before we die, we've lived a great life. But you can't do that.

Rule 2: Never spend principal

That's the second rule. Inflation has gone above 10 per cent in the US economy five times, and I'd bet you it will happen again.

Rule 3: Never borrow money to buy a depreciating asset

Almost everybody does this at some point. But as soon as possible, and definitely by retirement, you have to get back to a cash basis.

How many people know what a $30,000 car bought on credit costs them at age 25? In retirement dollars, at age 65 and assuming a hypothetical 10 per cent return, that financed car could cost as much as $11,314 a month in potential income. Forever!

So, do you or your children understand what an "investment" in a car really costs you? Yes, I know we all buy cars. But try to imagine what would happen if I got every 25-year-old to forgo just one car purchase and invest that same amount of money in their long-term retirement goals. What a huge difference that could make to their choices at retirement!

Rule 4: Never save money in a spending account

Keep separate bank accounts for saving and spending. You have to save in savings accounts. If you truly want those savings to grow, use an account that helps you leave the money at work, rather than a "slush fund" that's easy to dip into.

People tell me they are saving $545 a month in an account. Yet when I ask them how much they have accumulated after seven years of doing this, their answer is often $1,123 because they spend out of that same account.

It is not a save-to-save account -- it's a save-to-spend account! If you know you're not naturally a disciplined saver, make it harder to get at the money. You'll be doing yourself a favor in the long run.

Rule 5: Use half, save half

Every time you pay off a debt, get a pay raise, get a bonus, or have any excess cash, have fun with half the money, and put the other half toward your long-term goals.

This is one of the best rules, especially for younger people. By following this rule consistently, in ten years, most people are amazed at how much they can save.

Whether you save or not has nothing to do with how much money you make. Either you save or you don't. It's a habit. Make a habit of investing half of any windfall, big or small, right off the top.

Sir John Templeton 16 Rules For Investment Success

Interesting set of rules from legendary investor John Templeton:

No. 1 INVEST FOR MAXIMUM TOTAL REAL RETURN

This means the return on invested dollars after taxes and after inflation. This is the only rational objective for most long-term investors. Any investment strategy that fails to recognize the insidious effect of taxes and inflation fails to recognize the true nature of the investment environment and thus is severely handicapped.

It is vital that you protect purchasing power. One of the biggest mistakes people make is putting too much money into fixed-income securities.

Today’s dollar buys only what 35 cents bought in the mid 1970s, what 21 cents bought in 1960, and what 15 cents bought after World War II. U.S. consumer prices have risen every one of the last 38 years.

If inflation averages 4%, it will reduce the buying power of a $100,000 portfolio to $68,000 in just 10 years. In other words, to maintain the same buying power, that portfolio would have to grow to $147,000— a 47% gain simply to remain even over a decade. And this doesn’t even count taxes.

No. 2 INVEST—DON’T TRADE OR SPECULATE

The stock market is not a casino, but if you move in and out of stocks every time they move a point or two, or if you continually sell short… or deal only in options…or trade in futures…the market will be your casino. And, like most gamblers, you may lose eventually—or frequently.

You may find your profits consumed by commissions. You may find a market you expected to turn down turning up—and up, and up—in defiance of all your careful calculations and short sales. Every time a Wall Street news announcer says, “This just in,” your heart will stop.

Keep in mind the wise words of Lucien Hooper, a Wall Street legend: “What always impresses me,” he wrote,“is how much better the relaxed, long-term owners of stock do with their portfolios than the traders do with their switching of inventory. The relaxed investor is usually better informed and more understanding of essential values; he is more patient and less emotional; he pays smaller capital gains taxes; he does not incur unnecessary brokerage commissions; and he avoids behaving like Cassius by ‘thinking too much.’”

No.3 REMAIN FLEXIBLE AND OPEN-MINDED ABOUT TYPES OF INVESTMENT

There are times to buy blue chip stocks, cyclical stocks, corporate bonds, U.S. Treasury instruments, and so on. And there are times to sit on cash, because sometimes cash enables you to take advantage of investment opportunities.

The fact is there is no one kind of investment that is always best. If a particular industry or type of security becomes popular with investors, that popularity will always prove temporary and—when lost—may not return for many years.

Having said that, I should note that, for most of the time, most of our clients’ money has been in common stocks. A look at history will show why. From January of 1946 through June of 1991, the Dow Jones Industrial Average rose by 11.4% average annually—including reinvestment of dividends but not counting taxes—compared with an average annual inflation rate of 4.4%. Had the Dow merely kept pace with inflation, it would be around 1,400 right now instead of over 3,000, a figure that seemed extreme to some 10 years ago, when I calculated that it was a very realistic possibility on the horizon.

Look also at the Standard and Poor’s (S&P) Index of 500 stocks. From the start of the 1950s through the end of the 1980s—four decades altogether—the S&P 500 rose at an average rate of 12.5%, compared with 4.3% for inflation, 4.8% for U.S. Treasury bonds, 5.2% for Treasury bills, and 5.4% for high-grade corporate bonds.

In fact, the S&P 500 outperformed inflation, Treasury bills, and corporate bonds in every decade except the ’70s, and it outperformed Treasury bonds—supposedly the safest of all investments—in all four decades. I repeat: There is no real safety without preserving purchasing power.

No. 4 BUY LOW

Of course, you say, that’s obvious. Well, it may be, but that isn’t the way the market works. When prices are high, a lot of investors are buying a lot of stocks. Prices are low when demand is low. Investors have pulled back, people are discouraged and pessimistic.

When almost everyone is pessimistic at the same time, the entire market collapses. More often, just stocks in particular fields fall. Industries such as automaking and casualty insurance go through regular cycles. Sometimes stocks of companies like the thrift institutions or money-center banks fall out of favor all at once.

Whatever the reason, investors are on the sidelines, sitting on their wallets. Yes, they tell you: “Buy low, sell high.” But all too many of them bought high and sold low. Then you ask: “When will you buy the stock?” The usual answer: “Why, after analysts agree on a favorable outlook.”

This is foolish, but it is human nature. It is extremely difficult to go against the crowd—to buy when everyone else is selling or has sold, to buy when things look darkest, to buy when so many experts are telling you that stocks in general, or in this particular industry, or even in this particular company, are risky right now.

But, if you buy the same securities everyone else is buying, you will have the same results as everyone else. By definition, you can’t outperform the market if you buy the market. And chances are if you buy what everyone is buying you will do so only after it is already overpriced.

Heed the words of the great pioneer of stock analysis Benjamin Graham: “Buy when most people…including experts…are pessimistic, and sell when they are actively optimistic.”

Bernard Baruch, advisor to presidents, was even more succinct:

“Never follow the crowd.”

So simple in concept. So difficult in execution.

No. 5 WHEN BUYING STOCKS, SEARCH FOR BARGAINS AMONG QUALITY STOCKS

Quality is a company strongly entrenched as the sales leader in a growing market. Quality is a company that’s the technological leader in a field that depends on technical innovation. Quality is a strong management team with a proven track record. Quality is a well-capitalized company that is among the first into a new market. Quality is a wellknown trusted brand for a high-profit-margin consumer product.

Naturally, you cannot consider these attributes of quality in isolation. A company may be the low-cost producer, for example, but it is not a quality stock if its product line is falling out of favor with customers. Likewise, being the technological leader in a technological field means little without adequate capitalization for expansion and marketing.

Determining quality in a stock is like reviewing a restaurant. You don’t expect it to be 100% perfect, but before it gets three or four stars you want it to be superior.

No. 6 BUY VALUE, NOT MARKET TRENDS OR THE ECONOMIC OUTLOOK

A wise investor knows that the stock market is really a market of stocks. While individual stocks may be pulled along momentarily by a strong bull market, ultimately it is the individual stocks that determine the market, not vice versa. All too many investors focus on the market trend or economic outlook. But individual stocks can rise in a bear market and fall in a bull market.

The stock market and the economy do not always march in lock step. Bear markets do not always coincide with recessions, and an overall decline in corporate earnings does not always cause a simultaneous decline in stock prices. So buy individual stocks, not the market trend or economic outlook.

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

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