On Business Success
"The great personal fortunes in this country weren't built on a portfolio of fifty companies. They were built by someone who identified one wonderful business."
-- The Tao of Warren Buffet, Simon & Schuster, 2006
On the Value of Firsthand Experience in Business
"Can you really explain to a fish what it's like to walk on land? One day on land is worth a thousand years of talking about it, and one day running a business has exactly the same kind of value."
On Challenges
"I don't look to jump over 7-foot bars; I look around for 1-foot bars that I can step over."
On the Skills Needed to Become an Investor
"If calculus or algebra were required to be a great investor, I'd have to go back to delivering newspapers."
-- The Tao of Warren Buffet, Simon & Schuster, 2006
On the Difference Between "Price" and "Value"
"Long ago, Ben Graham taught me that 'Price is what you pay; value is what you get.' Whether were talking about socks or stocks, I like buying quality merchandise when it is marked down."
-- Letter to shareholders, 2008
On the Traits Needed to Be a Great Investor
"You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ."
-- Warren Buffet Speaks: Wit and Wisdom from the World's Greatest Investor, Wiley Publishers, 2007
On Surrounding Yourself with the Right People
"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."
On Learning How to Invest
"Investing is like baseball. If you want to score runs, don't study the scoreboard, study the playing field."
On Protecting Your Business Reputation
"It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently."
Source - Taken from various articles available on the Internet. I wish to acknowledge the respective authors.
--------------**********************///////////////////////////********************************
Publishing some pearls of wisdom on Value Investing from varied sources.
1. Choose Simplicity over Complexity
When investing, keep it simple. Do what's easy and obvious. If you don't understand a business, don't buy it's stock.
2. Make Your Own Investment Decisions
Don't
listen to the brokers, the analysts, or the pundits. Figure it out for
yourself. Become a value investor. It's proven to be a very rewarding
technique over the long term.
3. Maintain Proper Temperament
Let
other people overreact to the market. To succeed in the market, you
need only ordinary intelligence. But in addition, you need the kind of
temperament to help you ride out the storms and stick to your long-term
plans. If you can stay cool while those around you are panicking, you
can surely prevail.
4. Be Patient
Think
10 years, rather than 10 minutes. Don't dwell on the price of stocks.
Instead, study the underlying business, its earnings capacity and its
future. If the question is, "How long will you wait?" – "If we're in the
right place, we'll wait indefinitely" .
5. Buy Business, Not Stocks
Once you get into the right business, you can let everyone else worry about the stock market.
Business
performance is the key to picking stocks. Study the long-term track
record of any company that is on your buy list. Look for following five
main things before investing in a company.
(i) Business you can understand
(ii) Companies with favorable long-term prospects
(iii) Business operated by honest and competent people
(iv) Businesses priced very attractively
(v) Business with free cash flow
Don't think about "stock in the short term." Think about "business in the long term".
6. Look for a Company that is a Franchise
Some businesses are "franchises". Franchise generates free cash flows.
7. Buy Low-Tech, Not High-Tech
Successful
investing is rarely a gee-whiz activity. It's less often about rockets
and lasers and more often about bricks, carpets, paint, shaving blades
and insulation.
Do
not be tempted by get-rich-quick deals involving relatively complex
companies (e.g., high-tech companies). They are the most unpredictable
in the long run. Look for the absence of change. Look for the business
whose only change in the future will be doing more business, e.g
Gillette Blades.
8. Concentrate Your Stock Investments
A
the "Noah's Ark" style of investing – that is, a little of this, a
little of that. Better to have a smaller number of investments with more
of your money in each.
Portfolio
concentration – the opposite of diversification – also has the power to
focus the mind. If you're putting your eggs in only a few baskets,
you're far less likely to make investments on impulse or emotion.
9. Practice Inactivity, Not Hyperactivity
There are times when doing nothing is a sign of investing brilliance. Be a decade's trader, not a day trader.
10. Don't Look at the Ticker
Tickers
are all about prices. Investing is about a lot more than prices. It is
about value. It is about wealth. Abstain from looking at share prices
every day. Study the playing field and not the scoreboard. Know the
value of something rather than the price of everything.
11. View Market Downturns as Buying Opportunities
Market
downturns aren't body blows; they are buying opportunities. Change your
investing mind-set. Reprogram your thinking. Learn to like a sinking
market because it presents great buying opportunity. Pounce when the
three variables come together. When a strong business with an enduring
competitive advantage, strong management, and a low stock price come
onto your investment screen.
12. Don't Swing at Every Pitch
What if you had to predict how every stock in the Standard & Poor's (S&P) 500 would do over the next few years?
In
this scenario you have very poor chance of being correct. But if your
job was to find only one stock among those 500 that would do well? In
this revised scenario you have a good chance. A few good investments are
all that is needed.
13. Ignore the Macro; Focus on the Micro
The
big things – the large trends that are external to the business – don't
matter. It's the little things, the things that are business-specific,
that count. It's possible to imagine a cataclysm so terrible that the
markets would collapse and not bounce back. Externalities don't matter –
and you can't predict them, anyway. And what can you do about them?
Focus on what you can know: the workings of a good business.
14. Take a Close Look at Management
The analysis begins – and sometimes ends – with one key question: Who's in charge here?
Assess
the management team before you invest. A investing in any company that
has a record of financial or accounting shenanigans, (creative
accounting, accounting jugglery). Weak accounting usually means weak
business performance. Strong companies do not have to resort to tricks.
15. Remember, The Emperor Wears No Clothes on
Wall
Street is the only place where people go to in Rolls Royce to get
advice from people who take the subway. Ignore the charts. A value
investor is not concerned with charts. Search for discrepancies between
the value of a business and the price of small pieces of that business
in the market. This is the key to value investing, and it's far more
productive than getting dizzy studying hundreds of stock charts. Offer
documents of most mutual funds say – in small print – that past
performance is no guarantee of future success.
16. Practice Independent Thinking
When
investing, you need to think independently. Make independent thinking
one of your portfolio's greatest assets. Being smart isn't good enough.
Lots of high-IQ people fall victim to the herd mentality. Make it one of
your own.
17. Stay within Your Circle of Competence
Develop
a zone of expertise, operative within that zone. Write down the
industries and businesses with which you feel most comfortable. Confine
your investments to them.
18. Ignore Stock Market Forecasts
Short-term
forecasts of stock or bond prices are useless. They tell you more about
the forecaster than they tell you about the future. Take the time you
would spend listening to forecasts and instead use it to analyze a
business's track record. Develop an investing strategy that does not
depend on the overall movement of the market.
19. Understand "Mr. Market" and the "Margin of Safety"
What
makes for a good investor? A good investor is one who combines good
business judgment with an ability to ignore the wild swings of the
marketplace. When the emotions start to swirl, remember Ben Graham's
"Mr.Market" concept, and look for a "margin of safety".
Make
sure that you also understand the concepts of Mr. Market and the margin
of safety. Like the Lord, the market helps those who help themselves.
But, unlike God, the market doesn't forgive those who "know not what
they do". Bide your time, and wait for Mr. Market to get depressed and
lower stock prices enough to provide a margin-of safety buying
opportunity.
20. Be Fearful when Others Are Greedy and Greedy When Others Are Fearful
You
can safely predict that people will be greedy, fearful, or foolish.
Trouble is you just can't predict when or in what order.Buy when people
are selling and sell when people are buying.
21. Read, Read Some More, and Then Think
Mr.
Warren Buffet spends something like six hours a day reading and an hour
or two on the phone. The rest of the time, he thinks. He therefore
advises get in the habit of reading. The best thing to start is to read
Buffet's annual reports and letters. Finally, restrict your time only to
things worth reading.
22. Use All Your Horsepower
How
big is your engine, and how efficiently do you put it to work? Warren
Buffet suggests that lots of people have "400 – horsepower engines" but
only 100 horsepower of output. Smart people, in other words, often allow
themselves to get distracted from the task at hand and act in
irrational ways. The person who gets full output from a 200-horse-power
engine, says Buffet, is a lot better off.
Make
sure that you have the right role models. Strive for rational behavior,
good habits, and proper temperament. Write down the habits, practices
and philosophies that you want to make your own. Then be sure to keep
track of them and eventually own them. Financial success is a "matter of
having the right habits".
23. Learn from the Costly Mistakes of Others
This is self explanatory and need no comments!
24. Become a Sound Investor
Buffet
says that Ben Graham was about "sound investing". He wasn't about
brilliant investing or fads and fashions , and the good thing about
sound investing is that it can make you wealthy if you are in not too
much of a hurry, and it never makes you poor.
To
become a sound investor, you need to develop sound investing habits.
Always fight the noise to get the real story. Always practice continuous
improvement.It's less about solving difficult business problems, says
Warren Buffet, and more about a finding them. It's about finding and
stepping over "one-foot hurdles" rather than developing the
extraordinary skills needed to clear seven foot hurdles.
************************************************************
The commandments of Value Investing
Benjamin
Graham is regarded as the father of value investing and his books are
investment classics. Securities Analysis (first published in 1934) and
The Intelligent Investor (first published in 1949) continue to sell
steadily. In addition to this legacy, he has permanently influenced many
successful investors, including Warren Buffet, the wealthiest man in
America; William Ruane, founder of the super-successful Sequoia Fund;
and well-known investor Walter Schloss.
Ben
was a prophet in a very specialized but important realm of life. He
preached commandments that any investor can use as stars when navigating
the vast and mysterious seas of the investment world. An individual
investor, who is not under pressure to shoot comets across the heavens
but would like to earn a smart and substantial return, especially can
benefit from Ben’s guidance. In greatly simplified terms, here are the
14 points Graham most consistently delivered in his writing and
speaking. Some of the counsel is technical, but much of it is aimed at
adopting the right attitude:
1. Be an investor, not a speculator
“Let
us define the speculator as one who seeks to profit from market
movements, without primary regard to intrinsic values; the prudent stock
investor is one who (a) buys only at prices amply supported by
underlying value and (b) determinedly reduces his stock holdings when
the market enters the speculative phase of a sustained advance.”
Speculation,
Ben insisted, had its place in the securities markets, but a speculator
must do more research and tracking of investments and be prepared for
losses if they come.
2. Know the asking price
Multiply
the company’s share price by the number of company total shares
(undiluted) outstanding. Ask yourself, if I bought the whole company
would it be worth this much money?
3. Rake the market for bargains
Graham is best known for using his “net current asset value” (NCAV) rule to decide if the company was worth its market price.
To
get the NCAV of a company, subtract all liabilities, including
short-term debt and preferred stock, from current assets. By purchasing
stocks below the NCAV, the investor buys a bargain because nothing at
all is paid for the fixed assets of the company. The 1988 research of
Professor Joseph D. Vu shows that buying stocks immediately after their
price drop below the NCAV per share and selling two years afterward
provides an excess return of more than 24 percent.
Yet
even Ben recognized that NCAV stocks are increasingly difficult to
find, and when one is located, this measure is only a starting point in
the evaluation. “If the investor has occasion to be fearful of the
future of such a company,” he explained, “it is perfectly logical for
him to obey his fears and pass on from that enterprise to some other
security about which he is not so fearful.”
Modern
disciples of Graham look for hidden value in additional ways, but still
probe the question, “what is this company actually worth?” Buffet
modifies the Graham formula by looking at the quality of the business
itself. Other apostles use the amount of cash flow generated by the
company, the reliability and quality of dividends and other factors.
4. Buy the formula
Ben
devised another simple formula to tell if a stock is under-priced. The
concept has been tested in many different markets and still works.
It
takes into account the company’s earnings per share (E), its expected
earnings growth rate (R) and the current yield on AAA rated corporate
bonds (Y).
The intrinsic value of a stock equals:
E(2R + 8.5) x Y/4
The
number 8.5, Ben believed, was the appropriate price/to/earnings
multiple for a company with static growth. P/E ratios have risen, but a
conservative investor still will use a low multiplier. At the time this
formula was printed, 4.4 percent was the average bond yield, or the Y
factor.
5. Regard corporate figures with suspicion
It
is a company’s future earnings that will drive its share price higher,
but estimates are based on current numbers, of which an investor must be
wary. Even with more stringent rules, current earnings can be
manipulated by creative accountancy. An investor is urged to pay special
attention to reserves, accounting changes and footnotes when reading
company documents. As for estimates of future earnings, anything from
false expectations to unexpected world events can repaint the picture.
Nevertheless, an investor has to do the best evaluation possible and
then go with the results.
6. Don’t stress out
Realize
that you are unlikely to hit the precise “intrinsic value” of a stock
or a stock market right on the mark. A margin of safety provides peace
of mind. “Use an old Graham and Dodd guideline that you can’t be that
precise about a simple value,” suggested Professor Roger Murray. "Give
yourself a band of 20 percent above or below, and say, “that is the
range of fair value.”
7. Don’t sweat the math
Ben,
who loved mathematics, said so himself: “In 44 years of Wall Street
experience and study, I have never seen dependable calculations made
about common stock values, or related investment policies, that went
beyond simple arithmetic or the most elementary algebra. Whenever
calculus is brought in, or higher algebra, you could take it as a
warning signal that the operator was trying to substitute theory for
experience, and usually also to give speculation the deceptive guise of
investment.”
8. Diversify, rule #1
“My
basic rule,” Graham said, “is that the investor should always have a
minimum of 25 percent in bonds or bond equivalents, and another minimum
of 25 percent in common stocks. He can divide the other 50 percent
between the two, according to the varying stock and bond prices.” This
is ho-hum advice to anyone in a hurry to get rich, but it helps preserve
capital. Remember, earnings cannot compound on money that has
evaporated.
Using
this rule, an investor would sell stocks when stock prices are high and
buy bonds. When the stock market declines, the investor would sell
bonds and buy bargain stocks. At all times, however, he or she would
hold the minimum 25 percent of the assets either in stocks or bonds —
retaining particularly those that offer some contrarian advantage.
As
a rule of thumb, an investor should back away from the stock market
when the earnings per share on leading indices (such as the Dow Jones
Industrial Average or the Standard & Poor’s composite index) is less
than the yield on high-quality bonds. When the reverse is true, lean
toward bonds.
9. Diversify, rule #2
An
investor should have a large number of securities in his or her
portfolio, if necessary, with a relatively small number of shares of
each stock. While investors such as Buffet may have fewer than a dozen
or so carefully chosen companies, Graham usually held 75 or more stocks
at any given time. Ben suggested that individual investors try to have
at least 30 different holdings, even if it is necessary to buy odd lots.
The least expensive way for an individual investor to buy odd lots is
through a company’s dividend reinvestment program (DRP).
10. When in doubt, stick to quality
Companies
with good earnings, solid dividend histories, low debts and reasonable
price/to/earnings ratios serve best. “Investors do not make mistakes, or
bad mistakes, in buying good stocks at fair prices,” Ben said. “They
make their serious mistakes by buying poor stocks, particularly the ones
that are pushed for various reasons. And sometimes — in fact, very
frequently — they make mistakes by buying good stocks in the upper
reaches of bull markets.”
11. Dividends as a clue
A
long record of paying dividends, as long as 20 years, shows that a
company has substance and is a limited risk. Chancy growth stocks seldom
pay dividends. Furthermore, Ben contended that no dividends or a
niggardly dividend policy harms investors in two ways. Not only are
shareholders deprived of income from their investment, but when
comparable companies are studied, the one with the lower dividend
consistently sells for a lower share price. “I believe that Wall Street
experience shows clearly that the best treatment for stockholders,” Ben
said, “is the payment to them of fair and reasonable dividends in
relation to the company’s earnings and in relation to the true value of
the security, as measured by any ordinary tests based on earning power
or assets.”
12. Defend your shareholder rights
“I
want to say a word about disgruntled shareholders,” Ben said. “In my
humble opinion, not enough of them are disgruntled. And one of the great
troubles with Wall Street is that it cannot distinguish between a mere
troublemaker or “strike suitor” in corporate affairs and a stockholder
with a legitimate complaint that deserves attention from his management
and from his fellow stockholders.” If you object to a dividend policy,
executive compensation package or golden parachutes, organize a
shareholder’s offensive.
13. Be Patient
“...
every investor should be prepared financially and psychologically for
the possibility of poor short-term results. For example, in the
1973-1974 decline the investor would have lost money on paper, but if
he’d held on and stuck with the approach, he would have recouped in
1975-1976 and gotten his 15 percent average return for the five-year
period.”
14. Think for yourself
Don’t
follow the crowd. “There are two requirements for success in Wall
Street,” Ben once said. “One, you have to think correctly; and secondly,
you have to think independently.”
Finally, continue to search for better ways to ensure safety and maximize growth. Do not ever stop thinking.
***************************************************
1. Risk: measure it, avoid it if possible, have a margin of safety, and limit downside.
2. Independence: don't follow the herd, the herd will only do average.
3. Preparation: learning, building mental models, and continual improvement.
4.
Humility: acknowledge what you don't know, don't be overconfident, stay
within your circle of competence, and watch for errors.
5. Analytic rigor: calculate value before looking at price, and be a business analyst and not a securities analyst.
6. Allocation: consider opportunity costs.
7. Patience: Wait for the right opportunities.
8. Decisiveness: great ideas are rare, so bet big when they come along and when you have confidence in them.
9. Focus on Companies that pay full Income Tax along with consistent ROE of 20% over a period of 15 years.
I wish to acknowledge the authors of the original articles. Excerpts are taken from various websites and blogs.
/////////***********************-------------------****************
Diversification - View and Counterview
There is a very old
saying "Failing to plan is planning to fail". This may sound simplistic
but people who wish to be successful should always plan before doing any
activity.
The world that you live in is very dynamic. Things change in a split
second, so you should have a plan to prepare yourself face those
uncertain changes and not let your daily routine be affected by that.
People today, have understood the importance of planning right from the
beginning, so in future, they are ready to face any unfortunate event.
Investments should also be done with proper planning and homework. The
key for successful investment planning is proper asset allocation. Asset
allocation is investing your savings in appropriate sectors and fields,
so that you get decent returns in the future, that you anticipate, will
help you achieve your financial goals. As an investor, you need to make
sure that you carefully study the various processes involved in
investments, how they work and have you properly allocated your hard
earned money in different asset classes in order to fulfill your
investment objective.
There are two very important factors that can have a great impact on asset allocation:
1. The ability to bear risks
2. The time horizon for the goal of the investor
Time
horizon refers to the duration for which the person desires to invest
the money in any particular field. Every person has a specific financial
goal in mind and the time horizon can play a significant role in
helping the person achieve that financial goal. Therefore the asset
allocation of a 25 year old planning for retirement and a 40 year old
planning for retirement will be quite different, even though their end
goal is the same.
Risk tolerance is another key factor in asset allocation. The
willingness and ability to lose part or whole of the money invested in
return for larger potential returns is termed as risk tolerance.
Larger risk in investment is directly proportional to larger chances of
revenue generated. Investors who are highly aggressive often accept
investments with high risk in the hope of getting better results.
Investors with lower risk tolerance are tagged as conservative
investors. They invest money in avenues which offer lesser risk, but do
not earn as much return.
A
portfolio designed to cut down the risk by combining investments of
different asset classes, i.e. equity, debt and gold, which
generally doesn't moves in similar direction in terms of market
movements is termed as diversification. The prime aim of diversification
is risk mitigation. Diversification paves the way for more reliable and
steady performances of the various asset classes under changing
economic conditions.
Another adage springs to mind when one thinks of diversification -
"Never put all your eggs in one basket." Diversification is nothing but
splitting those eggs appropriately, so even if one basket breaks, you do
not face too many losses.
However, the Buffet school of thoughts says that you should keep all
your eggs in the same basket and should guard that Basket well. This
view is recommended for people who are matured and wise enough to
understand the meaning of risk, the various risks associated with the
investment and how to measure and monitor them.
Lastly, what matters is that you carefully understand your own
intuitions and carve out your own niche Investment Philosophy based on
your preferences.
References and acknowledgement - Some part of the article and the basic
premise has been taken from Quantum Mutual Fund Newsletter
///////////********************----------*************///////////////
