Value Investing Strategies PART 2

Value Investing Strategies.

By ADAM HAYES.
The key to buying an undervalued stock is to thoroughly research the company and make common-sense decisions. Value investor Christopher H. Browne recommends asking if a company is likely to increase its revenue via the following methods:

Raising prices on products.
Increasing sales figures.
Decreasing expenses.
Selling off or closing down unprofitable divisions.

Browne also suggests studying a company's competitors to evaluate its future growth prospects. But the answers to all of these questions tend to be speculative, without any real supportive numerical data. Simply put: There are no quantitative software programs yet available to help achieve these answers, which makes value stock investing somewhat of a grand guessing game. For this reason, Warren Buffett recommends investing only in industries you have personally worked in, or whose consumer goods you are familiar with, like cars, clothes, appliances, and food.

One thing investors can do is choose the stocks of companies that sell high-demand products and services. While it's difficult to predict when innovative new products will capture market share, it's easy to gauge how long a company has been in business and study how it has adapted to challenges over time.

Insider Buying and Selling.
For our purposes, insiders are the company’s senior managers and directors, plus any shareholders who own at least 10% of the company’s stock. A company’s managers and directors have unique knowledge about the companies they run, so if they are purchasing its stock, it’s reasonable to assume that the company’s prospects look favorable.

Likewise, investors who own at least 10% of a company’s stock wouldn’t have bought so much if they didn’t see profit potential. Conversely, a sale of stock by an insider doesn’t necessarily point to bad news about the company’s anticipated performance — the insider might simply need cash for any number of personal reasons. Nonetheless, if mass sell-offs are occurring by insiders, such a situation may warrant further in-depth analysis of the reason behind the sale.

Analyze Earnings Reports.
At some point, value investors have to look at a company's financials to see how its performing and compare it to industry peers.

Financial reports present a company’s annual and quarterly performance results. The annual report is SEC form 10-K, and the quarterly report is SEC form 10-Q. Companies are required to file these reports with the Securities and Exchange Commission (SEC). You can find them at the SEC website or the company’s investor relations page on their website.

You can learn a lot from a company’s annual report. It will explain the products and services offered as well as where the company is heading.

Analyze Financial Statements.
A company’s balance sheet provides a big picture of the company’s financial condition. The balance sheet consists of two sections, one listing the company’s assets and another listing its liabilities and equity. The assets section is broken down into a company’s cash and cash equivalents; investments; accounts receivable or money owed from customers, inventories, and fixed assets such as plant and equipment.

The liabilities section lists the company’s accounts payable or money owed, accrued liabilities, short-term debt, and long-term debt. The shareholders’ equity section reflects how much money is invested in the company, how many shares outstanding, and how much the company has as retained earnings. Retained earnings is a type of savings account that holds the cumulative profits from the company. Retained earnings are used to pay dividends, for example, and is considered a sign of a healthy, profitable company.

The income statement tells you how much revenue is being generated, the company's expenses, and profits. Looking at the annual income statement rather than a quarterly statement will give you a better idea of the company’s overall position since many companies experience fluctuations in sales volume during the year.

 Studies have consistently found that value stocks outperform growth stocks and the market as a whole, over the long-term.
Couch Potato Value Investing
It is possible to become a value investor without ever reading a 10-K. Couch potato investing is a passive strategy of buying and holding a few investing vehicles for which someone else has already done the investment analysis—i.e., mutual funds or exchange-traded funds. In the case of value investing, those funds would be those that follow the value strategy and buy value stocks—or track the moves of high-profile value investors, like Warren Buffet. Investors can buy shares of his holding company, Berkshire Hathaway, which owns or has an interest in dozens of companies the Oracle of Omaha has researched and evaluated.

Risks with Value Investing.
As with any investment strategy, there's the risk of loss with value investing despite it being a low-to-medium-risk strategy. Below we highlight a few of those risks and why losses can occur.

The Figures are Important.
Many investors use financial statements when they make value investing decisions. So if you rely on your own analysis, make sure you have the most updated information and that your calculations are accurate. If not, you may end up making a poor investment or miss out on a great one. If you aren’t yet confident in your ability to read and analyze financial statements and reports, keep studying these subjects and don’t place any trades until you’re truly ready. (For more on this subject, learn more about financial statements.)

One strategy is to read the footnotes. These are the notes in a Form 10-K or Form 10-Q that explain a company’s financial statements in greater detail. The notes follow the statements and explain the company’s accounting methods and elaborate on reported results. If the footnotes are unintelligible or the information they present seems unreasonable, you’ll have a better idea of whether to pass on the stock.

Extraordinary Gains or Losses.
There are some incidents that may show up on a company's income statement that should be considered exceptions or extraordinary. These are generally beyond the company's control and are called extraordinary item—gain or extraordinary item—loss. Some examples include lawsuits, restructuring, or even a natural disaster. If you exclude these from your analysis, you can probably get a sense of the company's future performance.

However, think critically about these items, and use your judgment. If a company has a pattern of reporting the same extraordinary item year after year, it might not be too extraordinary. Also, if there are unexpected losses year after year, this can be a sign that the company is having financial problems. Extraordinary items are supposed to be unusual and nonrecurring. Also, beware of a pattern of write-offs.

Ignoring Ratio Analysis Flaws.
Earlier sections of this tutorial have discussed the calculation of various financial ratios that help investors diagnose a company’s financial health. There isn't just one way to determine financial ratios, which can be fairly problematic. The following can affect how the ratios can be interpreted:

Ratios can be determined using before-tax or after-tax numbers.
Some ratios don't give accurate results but lead to estimations.
Depending on how the term earnings are defined, a company's earnings per share (EPS) may differ.
Comparing different companies by their ratios—even if the ratios are the same—may be difficult since companies have different accounting practices. (Learn more about when a company recognizes profits in Understanding The Income Statement.)

Buying Overvalued Stock.
Overpaying for a stock is one of the main risks for value investors. You can risk losing part or all of your money if you overpay. The same goes if you buy a stock close to its fair market value. Buying a stock that's undervalued means your risk of losing money is reduced, even when the company doesn't do well.

Recall that one of the fundamental principles of value investing is to build a margin of safety into all your investments. This means purchasing stocks at a price of around two-thirds or less of their intrinsic value. Value investors want to risk as little capital as possible in potentially overvalued assets, so they try not to overpay for investments.

Not Diversifying.
Conventional investment wisdom says that investing in individual stocks can be a high-risk strategy. Instead, we are taught to invest in multiple stocks or stock indexes so that we have exposure to a wide variety of companies and economic sectors. However, some value investors believe that you can have a diversified portfolio even if you only own a small number of stocks, as long as you choose stocks that represent different industries and different sectors of the economy. Value investor and investment manager Christopher H. Browne recommends owning a minimum of 10 stocks in his “Little Book of Value Investing.” According to Benjamin Graham, a famous value investor, you should look at choosing 10 to 30 stocks if you want to diversify your holdings.

Another set of experts, though, say differently. If you want to get big returns, try choosing just a few stocks, according to the authors of the second edition of “Value Investing for Dummies.” They say having more stocks in your portfolio will probably lead to an average return. Of course, this advice assumes that you are great at choosing winners, which may not be the case, particularly if you are a value-investing novice.

Listening to Your Emotions.
It is difficult to ignore your emotions when making investment decisions. Even if you can take a detached, critical standpoint when evaluating numbers, fear and excitement may creep in when it comes time to actually use part of your hard-earned savings to purchase a stock. More importantly, once you have purchased the stock, you may be tempted to sell it if the price falls. Keep in mind that the point of value investing is to resist the temptation to panic and go with the herd. So don't fall into the trap of buying when share prices rise and selling when they drop. Such behavior will obliterate your returns. (Playing follow-the-leader in investing can quickly become a dangerous game.

Example of a Value Investment.
Value investors seek to profit from market overreactions that usually come from the release of a quarterly earnings report. As a historical real example, on May 4, 2016, Fitbit released its Q1 2016 earnings report and saw a sharp decline in after-hours trading. After the flurry was over, the company lost nearly 19% of its value. However, while large decreases in a company's share price are not uncommon after the release of an earnings report, Fitbit not only met analyst expectations for the quarter but even increased guidance for 2016.

The company earned $505.4 million in revenue for the first quarter of 2016, up more than 50% when compared to the same time period from one year ago. Further, Fitbit expects to generate between $565 million and $585 million in the second quarter of 2016, which is above the $531 million forecasted by analysts. The company looks to be strong and growing. However, since Fitbit invested heavily in research and development costs in the first quarter of the year, earnings per share (EPS) declined when compared to a year ago. This is all average investors needed to jump on Fitbit, selling off enough shares to cause the price to decline. However, a value investor looks at the fundamentals of Fitbit and understands it is an undervalued security, poised to potentially increase in the future.

The Bottom Line.
Value investing is a long-term strategy. Warren Buffett, for example, buys stocks with the intention of holding them almost indefinitely. He once said, “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.” You will probably want to sell your stocks when it comes time to make a major purchase or retire, but by holding a variety of stocks and maintaining a long-term outlook, you can sell your stocks only when their price exceeds their fair market value (and the price you paid for them).

July 25, 2020

how to organize your personal year end finances

How to Organize Your Personal Year End Finances.

You should never organize your year-end finances all at once. Rather, you should be engaged in a steady process of organizing and reorganizing your financial documents and information throughout the year. The process you use when organizing at the end of the year will be basically the same process you use monthly or quarterly to evaluate your investments, insurance, and budget. Use the year-end financial organizational process to get the opinion of a financial planner to help you streamline your finances, identify areas of waste, and take corrective actions to save money.

Method 1 Getting Organized.

1. Select your organizational categories. Knowing how to organize your financial documents can be tough. Thinking broadly about the sorts of documents you ought to organize for your year-end finances will help the process move along smoothly. Some documents might need to be copied and placed in multiple locations. For instance, education loan payments might need to be in a “loans” folder and also a “taxes” folder. Depending on what sort of financial documents you have, you may or may not need folders devoted to each of the main financial categories, which include.

Financial management (bank statements and loan records).

Insurance and annuity documents (policies and statements).

Estate documents (wills, trusts, and powers of attorney).

Investments (stocks and bond).

Income tax information (tax returns and documents attesting to charitable giving).

Employment and military records (discharge papers and employee benefits).

Home records (appraisals, renovation receipts).

Medical documents (summaries of recent appointments and any medical bills or payments made).

Legal documents (passports, personal records, and real estate settlements).

2. Use the same organizational system for all your documents. You probably receive and pay some bills through regular mail, and some through digital outlets or automatic account debiting. In this case, it's important to impose a parallel structure on your analog and digital documents alike.

For instance, if you organize your vertical files containing utility bills, credit card bills, and other significant financial documents in order that they were received, you should not organize your digital files into folders containing payments, bills, and receipts according to the company or institution that you made the payments to.

3. Know what to keep. Retain anything tax-related for at least three years. Keep anything that demonstrates a financial loss for seven years. For instance, you ought to keep a bill of sale on a property that sold for less than what you paid for it. You should also retain receipts for transactions paid by credit card until you get the credit card bill that reflects them. Finally, keep all monthly account statements until you get the year-end reconciliation statement.

Conversely, you should know what to get rid of.When new insurance policies arrive, get rid of the old ones.

Err on the side of caution when disposing of financial documents. If you're unsure if you need to keep something, retain it.

For more in-depth guidelines on what you should pitch and keep, consult IRS Publication 17.

4. Use an app or website to help you organize. There are a variety of handy apps to help get your year-end finances organized. For instance, you might check out feedthepig.com, manilla.com, or mint.com.Apps that might help include Mint, Personal Capital, and Spending Tracker.

Method 2 Looking Ahead.

1. Set a budget. Find ways to save next year. Use your year-end financial organization time to identify sources that are draining your money. For instance, if you're paying for cable TV but never watch it, think about cancelling it altogether.

Overall, you should be spending about 35% of your income on home expenses (rent, utilities, and groceries), 15% on transportation expenses (car insurance, train fare, and auto repairs), 25% on entertainment and other miscellaneous expenses, 15% on paying off debt, and putting the final 10% of your income toward savings.

If you live in an expensive area or have a low income, you might need to contribute more money to home expenses and less toward debt or miscellaneous expenditures.

2. Simplify payments and financial data for next year. When you're done organizing your current year's financial data and documentation, look for ways to streamline the process next year. For instance, you can cut back on time spent searching for wayward documents by using automatic bill payments. You might also use debiting by tying regular payments like utilities and credit card charges directly to your bank account.

Cut back on the number of credit cards you use regularly. This will reduce the number of credit card bills you need to juggle. Use the credit card with the lowest interest rate as your day-to-day credit card, and use the other cards once a month in order to prevent their disuse from hurting your credit score.

For the same reason, limit your bank accounts. You should have one checking account and one savings account. If you have multiple checking and savings accounts, close the one with the most fees and least generous terms of service.

Consolidate your retirement accounts and investments, too. If you have several IRAs, transfer all the money into a single IRA. Use one brokerage firm to simplify investments.

3. Keep your finances organized throughout the year. Instead of putting all your receipts, account statements, and other financial documents in a stack and watching them slowly pile up over the course of a year, put them in the appropriate file or folder as you receive them. This will prevent confusion when trying to organize everything at year's end.

Use a three-ring binder with pockets to organize your financial materials in an orderly way. Move non-current financial records to your filing cabinet.

If you feel more comfortable printing out digital documents, print them out and put them in your vertical file or binder.

If you don't print out digital receipts and other documents, ensure that you put them in the appropriate folder according to your predesignated system as you receive them. For instance, when you get your digital W-2, immediately download it and put it with your other tax documents.

If you need to copy certain digital documents to make them accessible in multiple locations, don't be afraid to do so.

Method 3 Evaluating Your Financial Health.

1. Consult a financial planner or accountant. With the help of a certified financial planner or accountant, you'll be able to get your year-end finances under control. They can help you find ways to save when you file taxes in the coming months, and can explain some of the nuances of the tax code. For instance, you might want to ask.

Should I accelerate or defer income?

What losses or gains should I take this year?

Should I convert my traditional IRA to a Roth IRA so that my earnings will grow tax-free?

Are there any charitable donations I should make?

2. Total your year-to-date spending. You should have a column with all the payments, investments, and savings you have at the end of the year. Compare these numbers to their counterparts at the beginning of the year to get an overall sense of your financial health.

Your investment value should be greater at the end of the year than it was at the beginning of the year.

Your savings should be higher at the end of the year than it was at the beginning of the year.

Your spending should be less than the value of your savings.

3. Review your credit reports. Each year, you are entitled to three free credit reports, one each from the three major credit agencies (Experian, Equifax, and TransUnion). These reports will let you know if your credit score is good or if it needs a boost.

The best way to check your credit reports is not to check all three at once, but rather to space them out regularly over time. Ideally, you'd check one every four months.

4. Check your portfolio. Read the latest reports from your stock broker or financial planner to determine the relative health of your investments. If your portfolio is not doing well, think about investing elsewhere. Talk to a certified financial planner or stockbroker for advice about how to develop a robust portfolio.

Method  4 Finding Ways to Save.

1. Analyze your insurance coverage. If you have home, life, auto, or other insurance, contact some agents representing insurers in your area to find out if you have the best coverage you can afford. If you've made improvements to your home over the past year, you may have increased the value of your home, and that value should be reflected in your insurance policy.

Likewise, if you've welcomed a new family member into your family over the past year, you must check with your insurance provider to guarantee that they're covered under your insurance.

2. Review your tax data. Working with a tax professional, find ways to reduce your tax burden before the year is out. Charitable giving is the easiest way to do this. Look for reputable charities whose work you believe in through GuideStar (http://www.guidestar.org), CharityWatch (https://www.charitywatch.org/home) and Charity Navigator (http://www.charitynavigator.org).

You can also make in-kind (material) donations to thrift stores like the Salvation Army in exchange for a tax discount.

You can also qualify for tax deductions based on work-related expenses like travel or items of clothing you bought specifically for work.

3. Update your information where necessary. If you've had a change in your marital status you may need to revise your tax withholding and/or employee health coverage. If you're unsure if you need to update this information, contact a financial planner for assistance.

4. Empty your flexible spending account. A flexible spending account for healthcare should be used to cover outstanding claims from your doctor, dentist, or other health provider. If you have a flexible spending account oriented toward other types of spending like dependent care, employ the account to cover the appropriate expenses before the year is out.

Only $500 of a flexible spending account can carry over into the following year, so it's important to take full advantage of the account before the year ends.

January 22, 2020

How to Organize Your Personal Year End Finances

How to Organize Your Personal Year End Finances.

You should never organize your year-end finances all at once. Rather, you should be engaged in a steady process of organizing and reorganizing your financial documents and information throughout the year. The process you use when organizing at the end of the year will be basically the same process you use monthly or quarterly to evaluate your investments, insurance, and budget. Use the year-end financial organizational process to get the opinion of a financial planner to help you streamline your finances, identify areas of waste, and take corrective actions to save money.

Method 1 Getting Organized.

1. Select your organizational categories. Knowing how to organize your financial documents can be tough. Thinking broadly about the sorts of documents you ought to organize for your year-end finances will help the process move along smoothly. Some documents might need to be copied and placed in multiple locations. For instance, education loan payments might need to be in a “loans” folder and also a “taxes” folder. Depending on what sort of financial documents you have, you may or may not need folders devoted to each of the main financial categories, which include.

Financial management (bank statements and loan records).

Insurance and annuity documents (policies and statements).

Estate documents (wills, trusts, and powers of attorney).

Investments (stocks and bond).

Income tax information (tax returns and documents attesting to charitable giving).

Employment and military records (discharge papers and employee benefits).

Home records (appraisals, renovation receipts).

Medical documents (summaries of recent appointments and any medical bills or payments made).

Legal documents (passports, personal records, and real estate settlements).

2. Use the same organizational system for all your documents. You probably receive and pay some bills through regular mail, and some through digital outlets or automatic account debiting. In this case, it's important to impose a parallel structure on your analog and digital documents alike.

For instance, if you organize your vertical files containing utility bills, credit card bills, and other significant financial documents in order that they were received, you should not organize your digital files into folders containing payments, bills, and receipts according to the company or institution that you made the payments to.

3. Know what to keep. Retain anything tax-related for at least three years. Keep anything that demonstrates a financial loss for seven years. For instance, you ought to keep a bill of sale on a property that sold for less than what you paid for it. You should also retain receipts for transactions paid by credit card until you get the credit card bill that reflects them. Finally, keep all monthly account statements until you get the year-end reconciliation statement.

Conversely, you should know what to get rid of.When new insurance policies arrive, get rid of the old ones.

Err on the side of caution when disposing of financial documents. If you're unsure if you need to keep something, retain it.

For more in-depth guidelines on what you should pitch and keep, consult IRS Publication 17.

4. Use an app or website to help you organize. There are a variety of handy apps to help get your year-end finances organized. For instance, you might check out feedthepig.com, manilla.com, or mint.com.Apps that might help include Mint, Personal Capital, and Spending Tracker.

Method 2 Looking Ahead.

1. Set a budget. Find ways to save next year. Use your year-end financial organization time to identify sources that are draining your money. For instance, if you're paying for cable TV but never watch it, think about cancelling it altogether.

Overall, you should be spending about 35% of your income on home expenses (rent, utilities, and groceries), 15% on transportation expenses (car insurance, train fare, and auto repairs), 25% on entertainment and other miscellaneous expenses, 15% on paying off debt, and putting the final 10% of your income toward savings.

If you live in an expensive area or have a low income, you might need to contribute more money to home expenses and less toward debt or miscellaneous expenditures.

2. Simplify payments and financial data for next year. When you're done organizing your current year's financial data and documentation, look for ways to streamline the process next year. For instance, you can cut back on time spent searching for wayward documents by using automatic bill payments. You might also use debiting by tying regular payments like utilities and credit card charges directly to your bank account.

Cut back on the number of credit cards you use regularly. This will reduce the number of credit card bills you need to juggle. Use the credit card with the lowest interest rate as your day-to-day credit card, and use the other cards once a month in order to prevent their disuse from hurting your credit score.

For the same reason, limit your bank accounts. You should have one checking account and one savings account. If you have multiple checking and savings accounts, close the one with the most fees and least generous terms of service.

Consolidate your retirement accounts and investments, too. If you have several IRAs, transfer all the money into a single IRA. Use one brokerage firm to simplify investments.

3. Keep your finances organized throughout the year. Instead of putting all your receipts, account statements, and other financial documents in a stack and watching them slowly pile up over the course of a year, put them in the appropriate file or folder as you receive them. This will prevent confusion when trying to organize everything at year's end.

Use a three-ring binder with pockets to organize your financial materials in an orderly way. Move non-current financial records to your filing cabinet.

If you feel more comfortable printing out digital documents, print them out and put them in your vertical file or binder.

If you don't print out digital receipts and other documents, ensure that you put them in the appropriate folder according to your predesignated system as you receive them. For instance, when you get your digital W-2, immediately download it and put it with your other tax documents.

If you need to copy certain digital documents to make them accessible in multiple locations, don't be afraid to do so.

Method 3 Evaluating Your Financial Health.

1. Consult a financial planner or accountant. With the help of a certified financial planner or accountant, you'll be able to get your year-end finances under control. They can help you find ways to save when you file taxes in the coming months, and can explain some of the nuances of the tax code. For instance, you might want to ask.

Should I accelerate or defer income?

What losses or gains should I take this year?

Should I convert my traditional IRA to a Roth IRA so that my earnings will grow tax-free?

Are there any charitable donations I should make?

2. Total your year-to-date spending. You should have a column with all the payments, investments, and savings you have at the end of the year. Compare these numbers to their counterparts at the beginning of the year to get an overall sense of your financial health.

Your investment value should be greater at the end of the year than it was at the beginning of the year.

Your savings should be higher at the end of the year than it was at the beginning of the year.

Your spending should be less than the value of your savings.

3. Review your credit reports. Each year, you are entitled to three free credit reports, one each from the three major credit agencies (Experian, Equifax, and TransUnion). These reports will let you know if your credit score is good or if it needs a boost.

The best way to check your credit reports is not to check all three at once, but rather to space them out regularly over time. Ideally, you'd check one every four months.

4. Check your portfolio. Read the latest reports from your stock broker or financial planner to determine the relative health of your investments. If your portfolio is not doing well, think about investing elsewhere. Talk to a certified financial planner or stockbroker for advice about how to develop a robust portfolio.

Method  4 Finding Ways to Save.

1. Analyze your insurance coverage. If you have home, life, auto, or other insurance, contact some agents representing insurers in your area to find out if you have the best coverage you can afford. If you've made improvements to your home over the past year, you may have increased the value of your home, and that value should be reflected in your insurance policy.

Likewise, if you've welcomed a new family member into your family over the past year, you must check with your insurance provider to guarantee that they're covered under your insurance.

2. Review your tax data. Working with a tax professional, find ways to reduce your tax burden before the year is out. Charitable giving is the easiest way to do this. Look for reputable charities whose work you believe in through GuideStar (http://www.guidestar.org), CharityWatch (https://www.charitywatch.org/home) and Charity Navigator (http://www.charitynavigator.org).

You can also make in-kind (material) donations to thrift stores like the Salvation Army in exchange for a tax discount.

You can also qualify for tax deductions based on work-related expenses like travel or items of clothing you bought specifically for work.

3. Update your information where necessary. If you've had a change in your marital status you may need to revise your tax withholding and/or employee health coverage. If you're unsure if you need to update this information, contact a financial planner for assistance.

4. Empty your flexible spending account. A flexible spending account for healthcare should be used to cover outstanding claims from your doctor, dentist, or other health provider. If you have a flexible spending account oriented toward other types of spending like dependent care, employ the account to cover the appropriate expenses before the year is out.

Only $500 of a flexible spending account can carry over into the following year, so it's important to take full advantage of the account before the year ends.

January 22, 2020

How to Build a Stock Portfolio

How to Build a Stock Portfolio.

The stock market and its potential for risk intimidates many people. Nonetheless, a well-built stock portfolio is likely to outperform other investments over time. It is possible to build a stock portfolio alone, but a qualified financial planner can help. Knowing your goals and your willingness to take risks in advance, as well as understanding the nature of the market, can help you build a successful portfolio.

Part 1 Designing Your Portfolio.
1. Know what you're willing to invest. As you invest, you'll need to balance your potential risks against your potential rewards. A portfolio's assets are typically determined by the investor's goals, willingness to take risks, and the length of time the investor intends to hold his portfolio. Some of the most important factors to consider in making these decisions are:
The investor's age.
How much time the investor is willing to spend allowing his investments to grow.
Amount of capital the investor is willing to invest.
Projected capital needs for the future.
Other resources investor may have.
2. Decide what kind of investor you'll be. Portfolios usually fall somewhere in the spectrum between aggressive, or high-risk portfolios, and conservative, or low-risk portfolios. Conservative investors simply try to protect and maintain the value of a portfolio, while aggressive investors tend to take risks with the expectation that some of those risks will pay off. There are various online risk assessment tools you can utilize to help assess your risk tolerance.
Understand that your financial goals may change over time, and adjust your portfolio accordingly. Generally, the younger you are, the more risk you can afford or are willing to take. You may be better served with a growth-oriented portfolio. The older you become, the more you'll think about retirement income, and may be better served with an income-oriented portfolio.
Even during retirement, many still need some portion of their portfolio for growth, as many people are living 20, 30 or more years beyond their retirement date.
3. Divide your capital. Once you've decided what kind of investor you'd like to be and what type of portfolio you want to build, you'll need to determine how you intend to allocate (spread around) your capital. Most investors who are new to the market don't know how to pick stocks. Some important factors include:
Determining which sector(s) to invest in. A sector is the category a given industry is placed in.[8] Examples include telecommunications, financial, information technology, transportation and utilities.
Knowing the market capitalization (aka market cap), which is determined by multiplying a given company's outstanding shares by the current price of one share on the market (large-cap, mid-cap, small-cap, etc.).
It is important to diversify holdings across a variety of sectors and market capitalization to lower a portfolio's overall risk.

Part 2 Making Investments.
1. Understand the different kinds of stocks. Stocks represent an ownership stake in the company that issues them. The money generated from the sale of stock is used by the company for its capital projects, and the profits generated by the company's operation may be returned to investors in the form of dividends. Stocks come in two varieties: common and preferred. Preferred stocks are so called because holders of these stocks are paid dividends before owners of common stocks. Most stocks, however, are common stocks, which can be subdivided into the categories below:
Growth stocks are those projected to increase in value faster than the rest of the market, based on their prior performance record. They may entail more risk over time but offer greater potential rewards in the end.
Income stocks are those that do not fluctuate much but have a history of paying out better dividends than other stocks. This category can include both common and preferred stocks.
Value stocks are those that are "undervalued" by the market and can be purchased at a price lower than the underlying worth of the company would suggest. The theory is that when the market "comes to its senses," the owner of such a stock would stand to make a lot of money.
Blue-chip stocks are those that have performed well for a long enough period of time that they are considered fairly stable investments. They may not grow as rapidly as growth stocks or pay as well as income stocks, but they can be depended upon for steady growth or steady income. They are not, however, immune from the fortunes of the market.
Defensive stocks are shares in companies whose products and services people buy, no matter what the economy is doing. They include the stocks of food and beverage companies, pharmaceutical companies and utilities (among others).
Cyclical stocks, in contrast, rise and fall with the economy. They include stocks in such industries as airlines, chemicals, home building and steel manufacturers.
Speculative stocks include the offerings of young companies with new technologies and older companies with new executive talent. They draw investors looking for something new or a way to beat the market. The performance of these stocks is especially unpredictable, and they are sometimes considered to be a high-risk investment.
2. Analyze stock fundamentals. Fundamentals is the term given to the pool of qualitative and quantitative data that are used to determine whether or not a stock is a worthwhile investment in a long-term analysis of the market. Analyzing a company's fundamentals is usually the first step in determining whether or not an investor will buy shares in that company. It is imperative to analyze fundamentals in order to arrive at a company's intrinsic value - that is, the company's actual value as based on perception of all the tangible and intangible aspects of the business, beyond the current market value.
In analyzing the fundamentals of a company, the investor is trying to determine the future value of a company, with all of its projected profits and losses factored in.
3. Analyze qualitative factors. Qualitative factors, such as the expertise and experience of a company's management, various courses of industry cycles, the strength of a company's research and development incentives, and a company's relationship with its workers, are important to take into account when deciding whether or not to invest in a company's stock. It's also important to understand how the company generates its profits and what that company's business model look like in order to have a broad spectrum of qualitative information about that company's stock options.
Try researching companies online before you invest. You should be able to find information about the company's managers, CEO, and board of directors.
4. Look at the price-to-earnings ratio. The P/E ratio can be figured as either the stock's current price against its earnings per share for the last 12 months ("trailing P/E") or its projected earnings for the next 12 months ("anticipated P/E"). A stock selling for $10 per share that earns 10 cents per share has a P/E ratio of 10 divided by 0.1 or 100; a stock selling for $50 per share that earns $2 per share has a P/E ratio of 50 divided by 2 or 25. You want to buy stock with a relatively low P/E ratio.
When looking at P/E ratio, figure the ratio for the stock for several years and compare it to the P/E ratio for other companies in the same industry as well as for indexes representing the entire market, such as the Dow Jones Industrial Average or the Standard and Poor's (S&P) 500.
Comparing the P/E of a stock in one sector to that of a stock in another sector is however, not informative since P/E's vary widely from industry to industry.
5. Look at the return on equity. Also called return on book value, this figure is the company's income after taxes as a percentage of its total book value. It represents how well shareholders are profiting from the company's success. As with P/E ratio, you need to look at several years' worth of returns on equity to get an accurate picture.
6. Look at total return. Total return includes earnings from dividends as well as changes in the value of the stock. This provides a means of comparing the stock with other types of investments.
7. Try investing in companies trading below their current worth. While a broad spectrum of stock investments is important, analysts often recommend buying stock in companies that are trading for lower than they are worth. This sort of value investing does not, however, mean buying "junk" stocks, or stocks that are steadily declining. Value investments are determined by comparing intrinsic market value against the company's current stock share price, without looking at the short-term market fluctuations.
8. Try investing in growth stocks. Growth stocks are investments in companies that exhibit or are predicted to grow significantly faster than other stocks in the market. This involves analyzing a given company's present performance against its past performance amid the industry's ever-fluctuating climate.

Part 3 Maintaining Your Portfolio.
1. Avoid dipping into investments. Once you've invested capital in a stock, it's important to let the stock grow for at least a year without selling your shares. Consider for all intents and purposes that this money cannot be withdrawn and spent elsewhere.
As part of investing for the long term, determine the amount of money you can afford to commit to the stock market for five years or longer, and set that aside for investing. Money you'll need in a shorter period of time should be invested in shorter-term investments such as money-market accounts, CDs or U.S. Treasury bonds, bills or notes.
2. Diversify your portfolio. No matter how well a stock might be doing at the moment, the price and value of stocks are bound to fluctuate. Diversifying your investment portfolio can help you avoid this pitfall by spreading around your money to a number of stocks.
A well-diversified portfolio is important because in the event that one or more sectors of the economy start to decline, it will remain strong over time and reduce the likelihood of taking a significant hit as the market fluctuates.
Don't just diversify across the spectrum of asset classes. Some experts recommend you should also diversify your stock picks within each asset class represented in your portfolio.
3. Review your portfolio (but not too often). Anticipate that the market will fluctuate. If you check your stocks every day, you might end up feeling anxious over the value of your investments as things go up or down. But by the same token, you should check on your investments periodically.
Checking your portfolio at least once or twice a year is a good idea but research has shown that making rebalancing changes (selling the gains from those holdings which have been profitable and buying shares of those which have lost value) more than twice per year does not offer any benefit.
Some experts recommend checking on the quarterly earnings reports of a given company to see if your predictions for that company are holding true. Make changes as necessary, but don't jump ship every time a share reports a minor decrease in value.
Also important to keep in mind is tax implications of selling: if this is an account into which you've invested after-tax dollars (non-IRA or similar type of brokerage account), then try not to sell anything at a gain for at least one year in order to receive long-term capital gains rather than ordinary income tax treatment on your profits. For most people, the capital gains rate is more favorable than their income tax rate.

FAQ

Question : How do I create an imaginary portfolio ?
Answer : Follow these same steps without investing any money. Follow the progress of the stocks you chose.
Question : Where do I go to invest in marijuana stocks?
Answer : Ask a stockbroker who does business in an area where marijuana is legal.
Question : What does a gain or loss mean in a portfolio chart?
Answer : It refers to an increase or a decrease in the value of an investment.
Question : Which sector does better for next 3 years? In this sector, what are the names of the top 2 companies?
Answer : Anyone who tells you s/he knows what a given economic sector is going to do in the next three years is delusional. Your best bet is to invest in most or all sectors and in various companies with strong reputations.
Question : How do I calculate my returns in my diversified portfolio? And will my returns be lesser if I diversify my investments versus investing a lump sum in a single investment?
Answer : The easiest way to calculate total return on a diversified portfolio is to compare the total current value with the total value at the beginning of whatever period of time you're examining. If the value has risen, you would subtract the original value from the current value, then divide the difference by the original value. You would then multiply the quotient by 100 to get a percentage of return. Divide that percentage by the number of years you're considering to arrive at an annual percentage (which is the most commonly used percentage for the sake of comparison). Diversified portfolios often deliver better results than do single investments over a long period of time.
Question : How do I purchase stocks in South Africa?
Answer : Make online contact with any South African stockbroker registered to trade on the Johannesburg Stock Exchange. Ask if they do business with foreign investors.
Question : How do I open an account so that I can buy stocks?
Answer : Go to any local or online broker, fill out an application, and deposit some money.
Question : Will the initial money I deposit to open an account to buy or sell stocks be used toward buying or selling, or is it just the fee for opening the account?
Answer : Typically it is for buying stock. Brokers' terms may vary: some may remove part of your deposit to cover fees if you fail to pay them separately.

Tips.
Be aware of wash sale rules: if you decide to sell a stock or stock fund at a loss and buy into a stock or stock fund which is considered substantially similar within a 30-day period, you will not be able to claim that loss on your taxes.
Consult with a qualified financial planner if you're unsure of how to invest or what stocks are safe to invest in.
Be aware of tax consequences (see comments about long-term vs. short-term capital gains under "Maintaining your portfolio" above), and be aware that you will owe taxes on the dividends you earn on those stocks which pay them to you in the year they are earned, whether they were paid out to you or not.
Warnings.
Be aware that not all common stocks pay dividends. Whether a stock pays dividends should be only one factor in choosing it, not necessarily the only factor.

March 30, 2020

How to Find Great Companies to Invest In

How to Find Great Companies to Invest In.

Smart investors put their money in reputable companies and investigate new companies thoroughly before committing their money. By carefully considering the qualities of the companies you invest in and incorporating your own knowledge of the market, you can make informed decisions in the hopes of choosing stocks of good quality and value. Be aware, however, this is no small task. Mutual fund companies and the like dedicate entire teams of experts whose full-time jobs are to research and understand how to invest in companies. Be sure you have the time and inclination to do this yourself, as well as the willingness to take the risks of doing so.

Method 1 Buying What You Know.
1. Stay within your circle of competence. If you have a field of expertise, you may be best able to identify quality within that area. Experience can provide you with the insights you need to make more informed choices. For example, if you work in retail, you may be better positioned to determine if you should invest in companies like Walmart, Target, or Best Buy, than you are in evaluating the latest bio-tech company.
Having competence in a certain area doesn't have to come from workplace experience. If you're a techie who spends his time buying and reading about the latest gadgets, you can draw on the information you obtain to help you make decisions on how to invest in the technology sector.
2. Focus on a few industries or markets. These can be either your direct area of competence or other areas that you are interested in investing in. The important thing is to realize that you can't keep track of everything going on in the global economy. Large financial institutions have whole departments for doing this so don't think you can do it on your own. Instead, narrow your focus to include only a few key industries or markets.
This doesn't mean you should avoid focusing on individual companies. You should always investigate every company you plan to invest in individually.
3. Stay up to date on news within that industry. Examples of quality sources for this are online finance websites like Bloomberg and the Wall Street Journal. They'll give you up-to-date information on many of the goings-on in various sectors of the economy and the World. Again, focus your energy on a few key areas and become knowledgeable on the happenings in them. Look for things like trends, mergers, acquisitions, relevant legislation changes, and any global events that may affect your chosen market.
4. Plan ahead. Identify a company that you think stands to benefit from some change or trend in the market. Look ahead for when this change will take place and move around your money to prepare to invest in the company. For example, if you think that a new product being released by your favorite tech company is going to be a huge success, you may choose to invest in the company before the rest of the world realizes this and drives up the stock price.

Method 2 Investing in Companies with Competitive Advantages.
1. Understand competitive advantages. There are some companies that manage to be consistently profitable and successful in their industry over many years. These companies have succeeded in building a "moat" around them to keep their competitors away. This distance from their competitors is also known as a competitive advantage. Competitive advantages allow these companies to make money and retain customers more easily than others. In turn, these companies are able to provide greater value and return to their shareholders.
An investment in one of these companies allows you to participate in their competitive advantage. While they may not grow as quickly as smaller companies, they often can be less likely to fail in economic downturns and can provide consistent growth throughout the years to come.
Blue-chip stocks are examples of large, successful companies with competitive advantages. These companies have provided consistent growth or dividends over many years and are listed on large stock indexes.
2. Invest in trusted brands. Think Harley Davidson, Coke, BMW. These are brand names etched in the public mind as the best in their class. These companies can raise their prices on the strength of their brands, resulting in deeper profits.These companies are so well-known and essential that they are unlikely to lose a significant amount of customers to competitors.
3. Find companies with high switching costs. When was the last time you switched banks? Or cell phone providers? These services retain customers because switching between them is more time-consuming than it's worth. Companies that have high switching costs can be expected to hold on to their customers longer than companies that don't.
4. Search for economies of scale. Companies that are able to make products and sell them at much lower prices than their competition automatically attract customers -- lots of them -- as long as quality is not compromised. In a crowded market, this is generally the result of economies of scale, a phenomenon where a large company is able to experience lower production costs solely due to its size. Walmart and and Dell have perfected this concept to a science.
5. Invest in legal monopolies. Some companies are granted legal (if temporary) monopolies by the government. Large pharmaceutical companies and manufacturing companies with patents are able to bring a truly unique product to market. Companies that own copyrights, drilling rights, mining rights, and other forms of protected property are often the sole producer or service provider in their area. Thus, these companies can raise prices without fear of losing customers, resulting in higher profits.
Be sure to check how long the company's patent or usage rights are in effect. Some of these are temporary and when they go, there's a chance the company's profit will go with them.
6. Look for opportunities for easy growth. Some companies are easily scalable. That is, their products or services with the potential to network or add more users over time. Adobe has become the de facto standard in publishing; Microsoft's Excel has done the same in spreadsheets. eBay is a great example of a user network. Each additional user to the network costs the company virtually nothing. The additional revenues that come in as the network expands go straight to the bottom line.
For a more current example, consider Netflix. As a streaming service, they make more money for each subscriber, even as their costs remain virtually the same. That way, as they gain more users they will continue to grow in profitability, assuming they don't choose to increase costs significantly.

Method 3 Evaluating Company Performance and Valuation.
1. Check the quality of management. How competent is the management running the company? More importantly, how focused are they toward the company, customers, investors, and employees? In this age of rampant corporate greed, it's always a great idea to research the management of any company you're thinking of investing in. Newspaper and magazine articles are good places to get this information.
This doesn't just mean that management has provided good financial results recently. Rather, look for indications of other important qualities like responsiveness, adaptability, capacity for innovation, and organizational ability.
2. Watch for management changes. A good leader can successfully turn around a company that many consider to be a lost cause. Watch the news and financial reports for changes in management positions, especially CEOs. If you believe in the new CEO of a company, based on your research, you may choose to invest in that company. Here, you're essentially putting your faith in the person, not the company.
3. Avoid overvalued stocks. Even a great company can be overvalued. Learn to interpret financial statements and pick stocks with fundamental analysis to find companies the market has overvalued. Know that these companies may be some of the most buzzed-about and invested in companies around, but they are still overvalued and may experience drastic declines in price once their day in the spotlight is over.
One way to determine if a stock is overpriced is to examine its price-earnings-ratio. The price to earnings ratio can usually be found in the company's stock summary on financial websites. Generally, PE ratios are between 20-25, but this varies by industry.
To evaluate a company's PE ratio, search online for the average PE ratio in the company's industry. If the P/E ratio is over the industry average, the company could be overpriced in view of its earnings.
4. Buy undervalued stocks. Undervalued stocks are those that are trading at a lower value than their financial information would indicate. These may be companies that have only started to do well recently. In these cases, the market has not yet caught up with their newfound success. To identify stocks with room to grow in value, you can also use the price-earnings ratio mentioned above and look for companies with low PE ratios compared to the industry average.
You can also look for companies with a price-to-book-value of less than 2. The price-to-book ratio is the price of the company divided by the total value of its assets minus its liabilities and intangible assets. A low ratio may indicate that the company is relatively cheap.

FAQ.

Question : How can I know a company's management?
Answer : A company's stock prospectus will list its management personnel. For suggestions on researching company management, go here: Investopedia.com/articles/02/062602.asp.

Tips.
Start thinking about everyday companies in terms of this new framework.
Learn the basics of reading financial statements. Check the profitability of companies you're interested in. Check their debt position. See if they have been growing steadily.
Visit the company’s website and other financial websites that will give you insight into the stock.
While it may be advantageous to invest in companies you know, do not limit yourself to just one or two sectors of the economy. Try to research companies in a variety of sectors. Doing so further diversifies your portfolio to better insulate it from a downturn in a single sector or company.

Warnings.
Be aware of stock tips: Whether they come from someone you see on TV or someone you meet in person, these are more often not well-researched or are even based on someone's grandiose theory about getting rich quick. They may also be provided by salesmen paid to inflate a stock's price to allow a company to raise as much capital as possible.
Jumping into buying stocks in a company without doing thorough research can be a quick way to lose your money.
Investing always carries risk. Even if you do everything right, there's no guarantee that you'll make money.

April 07, 2020

What I Learned from Warren Buffett | How Warren Buffett decides if something is a good investment.

What I Learned from Warren Buffett | How Warren Buffett decides if something is a good investment.

by Bill Gates.

arren Buffett: The Making of an American Capitalist, Roger Lowenstein (New York: Random House, 1995).

Roger Lowenstein begins his new biography of Warren Buffett with a disclaimer. He reveals that he is a longtime investor in Berkshire Hathaway, the company that under Buffett’s guidance has seen its share price rise in 33 years from $7.60 to approximately $30,000.

In reviewing Lowenstein’s book, I must begin with a disclaimer, too. I can’t be neutral or dispassionate about Warren Buffett, because we’re close friends. We recently vacationed together in China with our wives. I think his jokes are all funny. I think his dietary practices—lots of burgers and Cokes—are excellent. In short, I’m a fan.

It’s easy to be a fan of Warren’s, and doubtless many readers of Buffett: The Making of an American Capitalist will join the growing ranks. Lowenstein’s book is a straightforward account of Buffett’s remarkable life. It doesn’t fully convey what a fun, humble, charming guy Warren is, but his uniqueness comes across. No one is likely to come away from it saying, “Oh, I’m like that guy.”

The broad outlines of Warren’s career are well known, and the book offers enjoyable detail. Lowenstein traces Warren’s life from his birth in Omaha, Nebraska in 1930 to his first stock purchase at age 11, and from his study of the securities profession under Columbia University’s legendary Benjamin Graham to his founding of the Buffett Partnership at age 25. The author describes Buffett’s secretiveness about the stocks he picked for the partnership, and his contrasting openness about his guiding principle, which is to buy stocks at bargain-basement prices and hold them patiently. As Warren once explained in a letter to his partners, “This is the cornerstone of our investment philosophy: Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results.”

Lowenstein describes how Warren took control of Berkshire Hathaway and cash-cowed its dying textile business in order to purchase stock in other companies. The book traces how Berkshire evolved into a holding company and how its investment philosophy evolved as Warren learned to look beyond financial data and recognize the economic potential of unique franchises like dominant newspapers. Today Berkshire owns companies such as See’s Candy Shops, the Buffalo News, and World Book International, as well as major positions in companies such as American Express, Capital Cities/ABC (now Disney), Coca-Cola, Gannett, Gillette, and the Washington Post Company. It also is a major insurer that includes GEICO Corporation in its holdings.

Readers are likely to come away from the book’s description of Buffett’s life and investment objectives feeling better educated about investing and business, but whether those lessons will translate into great investment results is less than certain. Warren’s gift is being able to think ahead of the crowd, and it requires more than taking Warren’s aphorisms to heart to accomplish that—although Warren is full of aphorisms well worth taking to heart.

For example, Warren likes to say that there are no called strikes in investing. Strikes occur only when you swing and miss. When you’re at bat, you shouldn’t concern yourself with every pitch, nor should you regret good pitches that you don’t swing at. In other words, you don’t have to have an opinion about every stock or other investment opportunity, nor should you feel bad if a stock you didn’t pick goes up dramatically. Warren says that in your lifetime you should swing at only a couple dozen pitches, and he advises doing careful homework so that the few swings you do take are hits.
For example, Warren likes to say that there are no called strikes in investing. Strikes occur only when you swing and miss.

Warren follows his own advice: When he invests in a company, he likes to read all of its annual reports going back as far as he can. He looks at how the company has progressed and what its strategy is. He investigates thoroughly and acts deliberately—and infrequently. Once he has purchased a company or shares in a company, he is loath to sell.

His penchant for long-term investments is reflected in another of his aphorisms: “You should invest in a business that even a fool can run, because someday a fool will.”

He doesn’t believe in businesses that rely for their success on every employee being excellent. Nor does he believe that great people help all that much when the fundamentals of a business are bad. He says that when good management is brought into a fundamentally bad business, it’s the reputation of the business that remains intact.

Warren likes to say that a good business is like a castle and you’ve got to think every day, Is the management growing the size of the moat? Or is the moat shrinking? Great businesses are not all that common, and finding them is hard. Unusual factors combine to create the moats that shelter certain companies from some of the rigors of competition. Warren is superb at recognizing these franchises.

Warren installs strong managers in the companies Berkshire owns and tends to leave them pretty much alone. His basic proposition to managers is that to the degree that a company spins off cash, which good businesses do, the managers can trust Warren to invest it wisely. He doesn’t encourage managers to diversify. Managers are expected to concentrate on the businesses they know well so that Warren is free to concentrate on what he does well: investing.

My own reaction upon meeting Warren took me by surprise. Whenever somebody says to me, “Meet so-and-so; he’s the smartest guy ever” or “You’ve got to meet my friend so-and-so; he’s the best at such and such,” my defenses go up. Most people are quick to conclude that someone or something they encounter personally is exceptional. This is just human nature. Everybody wants to know someone or something superlative. As a result, people overestimate the merit of that to which they’ve been exposed. So the fact that people called Warren Buffett unique didn’t impress me much.

In fact, I was extremely skeptical when my mother suggested I take a day away from work to meet him on July 5, 1991. What were he and I supposed to talk about, P/E ratios? I mean, spend all day with a guy who just picks stocks? Especially when there’s lots of work to do? Are you kidding?

I said to my mom, “I’m working on July fifth. We’re really busy. I am sorry.”
She said, “Kay Graham will be there.”

Now, that caught my attention. I had never met Graham, but I was impressed with how well she had run the Washington Post Company and by her newspaper’s role in political history. As it happened, Kay and Warren had been great friends for years, and one of Warren’s shrewdest investments was in Post stock. Kay, Warren, and a couple of prominent journalists happened to be in the Seattle area together, and owing to an unusual circumstance they all squeezed into a little car that morning for a long drive to my family’s weekend home, which is a couple of hours outside the city. Some of the people in the car were as skeptical as I was. “We’re going to spend the whole day at these people’s house?” someone in the cramped car asked. “What are we going to do all day?”

My mom was really hard core that I come. “I’ll stay a couple of hours, and then I’m going back,” I told her.

When I arrived, Warren and I began talking about how the newspaper business was being changed by the arrival of retailers who did less advertising. Then he started asking me about IBM: “If you were building IBM from scratch, how would it look different? What are the growth businesses for IBM? What has changed for them?”

He asked good questions and told educational stories. There’s nothing I like so much as learning, and I had never met anyone who thought about business in such a clear way. On that first day, he introduced me to an intriguing analytic exercise that he does. He’ll choose a year—say, 1970—and examine the ten highest market-capitalization companies from around then. Then he’ll go forward to 1990 and look at how those companies fared. His enthusiasm for the exercise was contagious. I stayed the whole day, and before he drove off with his friends, I even agreed to fly out to Nebraska to watch a football game with him.

When you are with Warren, you can tell how much he loves his work. It comes across in many ways. When he explains stuff, it’s never “Hey, I’m smart about this and I’m going to impress you.” It’s more like “This is so interesting and it’s actually very simple. I’ll just explain it to you and you’ll realize how dumb it was that it took me a long time to figure it out.” And when he shares it with you, using his keen sense of humor to help make the point, it does seem simple.

Warren and I have the most fun when we’re taking the same data that everybody else has and coming up with new ways of looking at them that are both novel and, in a sense, obvious. Each of us tries to do this all the time for our respective companies, but it’s particularly enjoyable and stimulating to discuss these insights with each other.

We are quite candid and not at all adversarial. Our business interests don’t overlap much, although his printed World Book Encyclopedia competes with my electronic Microsoft Encarta. Warren stays away from technology companies because he likes investments in which he can predict winners a decade in advance—an almost impossible feat when it comes to technology. Unfortunately for Warren, the world of technology knows no boundaries. Over time, most business assets will be affected by technology’s broad reach—although Gillette, Coca-Cola, and See’s should be safe.
One area in which we do joust now and then is mathematics. Once Warren presented me with four unusual dice, each with a unique combination of numbers (from 0 to 12) on its sides. He proposed that we each choose one of the dice, discard the third and fourth, and wager on who would roll the highest number most often. He graciously offered to let me choose my die first.

“Okay,” Warren said, “because you get to pick first, what kind of odds will you give me?”

I knew something was up. “Let me look at those dice,” I said.

After studying the numbers on their faces for a moment, I said, “This is a losing proposition. You choose first.”

Once he chose a die, it took me a couple of minutes to figure out which of the three remaining dice to choose in response. Because of the careful selection of the numbers on each die, they were nontransitive. Each of the four dice could be beaten by one of the others: die A would tend to beat die B, die B would tend to beat die C, die C would tend to beat die D, and die D would tend to beat die A. This meant that there was no winning first choice of a die, only a winning second choice. It was counterintuitive, like a lot of things in the business world.

Warren is great with numbers, and I love math, too. But being good with numbers doesn’t necessarily correlate with being a good investor. Warren doesn’t outperform other investors because he computes odds better. That’s not it at all. Warren never makes an investment where the difference between doing it and not doing it relies on the second digit of computation. He doesn’t invest—take a swing of the bat—unless the opportunity appears unbelievably good.

One habit of Warren’s that I admire is that he keeps his schedule free of meetings. He’s good at saying no to things. He knows what he likes to do—and what he does, he does unbelievably well. He likes to sit in his office and read and think. There are a few things he’ll do beyond that, but not many. One point that Lowenstein makes that is absolutely true is that Warren is a creature of habit. He grew up in Omaha, and he wants to stay in Omaha. He has gotten to know a certain set of people, and he’d like to spend time with those people. He’s not a person who seeks out exotic new things. Warren, who just turned 65, still lives in the Omaha house he bought for himself at age 27.

His affinity for routine extends to his investment practices, too. Warren sticks to companies that he is comfortable with. He doesn’t do much investing outside the United States. There are a few companies that he has decided are great long-term investments. And despite the self-evident mathematics that there must be a price that fully anticipates all the good work that those companies will do in the future, he just won’t sell their stock no matter what the price is. I think his reluctance to sell is more philosophical than optimization driven, but who am I to second-guess the world’s most successful investor? Warren’s reluctance to sell fits in with his other tendencies.
Warren and I share certain values. He and I both feel lucky that we were born into an era in which our skills have turned out to be so remunerative. Had we been born at a different time, our skills might not have had much value. Since we don’t plan on spending much of what we have accumulated, we can make sure our wealth benefits society. In a sense, we’re both working for charity. In any case, our heirs will get only a small portion of what we accumulate, because we both believe that passing on huge wealth to children isn’t in their or society’s interest. Warren likes to say that he wants to give his children enough money for them to do anything but not enough for them to do nothing. I thought about this before I met Warren, and hearing him articulate it crystallized my feelings.

Lowenstein is a good collector of facts, and Buffett is competently written. Warren has told me that the book is in most respects accurate. He says he is going to write his own book someday, but given how much he loves to work and how hard it is to write a book (based on my personal experience), I think it will be a number of years before he does it. When it comes out, I am sure it will be one of the most valuable business books ever.

Already, Warren’s letters to shareholders are among the best of business literature.

Already, Warren’s letters to shareholders in the Berkshire Hathaway annual reports are among the best of business literature. Much of Lowenstein’s analysis comes from those letters, as it should. If, after reading Buffett, you’re intrigued by the man and his methods, I strongly commend the annual reports to you—even ones from 10 or 15 years ago. They are available in many libraries.

Other books have been written about Warren Buffett and his investment strategy, but until Warren writes his own book, this is the one to read.

source : https://hbr.org/1996/01/what-i-learned-from-warren-buffett.

August 14, 2020