Warren Buffett: How He Does It

Buffett follows the Benjamin Graham school of value investing. Value investors look for securities with prices that are unjustifiably low based on their intrinsic worth.

There isn't a universally accepted way to determine intrinsic worth, but it's most often estimated by analyzing a company's fundamentals. 

Like bargain hunters, the value investor searches for stocks that they believe are undervalued by the market, or stocks that are valuable but not recognized by the majority of other buyers.

Read more at:
https://www.investopedia.com/articles/01/071801.asp

Avoid These 9 Traps to Become a Millionaire

For most people, becoming a millionaire (or a 'crorepati') is a pipe dream. It is never going to happen. Costs are increasing. Earnings aren't growing enough. Taxes are too high. So on, and so forth.

The real reason may be that most people never really want to become a millionaire. Warren Buffett said: "I always knew I was going to be rich. I don't think I ever doubted it for a minute."

To become rich, wishing and dreaming are never enough. You need to have a plan, and then work diligently to make a success of that plan. You also need to have a positive attitude - about life and about money.

In a recent article in investopedia.com, David Rae explained the nine most common reasons which prevent someone from becoming rich. Read the article here. 

When is the Right Time to Sell a Stock?

The following comments appeared in a post titled "When should you 'hold' and When should you 'fold' a stock?":

"Buying a stock doesn't make any one any money. Holding it for a reasonable length of time, and then selling it at a profit completes the cycle." 

It may seem like a no-brainer, but in reality many small investors find it difficult to decide when is a good time to sell a stock.

If you are a long-term investor with a 'core' portfolio of good large-cap stocks, then there should be only three reasons (explained in the post referred above) for selling a stock.

However, if you also have a 'satellite' portfolio of mid-cap and small-cap stocks then Warren Buffett's strategy of 'holding forever' may not be a good idea.

Setting a price target and a stop-loss - and selling when the target or stop-loss is reached is often a better idea.

In a recent article in investopedia.com, Steve Economopoulos explains how you can fine-tune your selling strategies and provides a technical analysis example of setting a price target after buying, and selling when the target is reached.

Read the article here.

Do you have the personality to be a good investor?

Anyone who is reasonably fit and has good hand-eye coordination should be able to pick up a tennis racket and start hitting balls over the net with very little effort. 

Does that mean s/he will become the next Serena Williams or Roger Federer? 
Obviously not! It has taken both those living legends many thousands of hours of coaching, practice and perseverance to be counted among the all-time greats.

Like tennis (or painting or playing the violin), investing is a skill that requires some talent but a lot more practice and experience to become really good. 

You won't become the next Warren Buffett just by opening a demat account and buying a few shares.

Buffett had a well-known 'guru' in Benjamin Graham - from whom he learned the ins and outs of the investment business. Then he put that learning into years of practice.

Can you still become a successful investor without aspiring to be a Warren Buffett? Sure you can!

But first you will need to learn some of the common behavioural traits that lead to sensible decision making which result in investment gains.

It always helps to have a 'guru' who can guide you in the initial stages. Even without one it is possible to learn and hone the skills that will enable you to make steady and consistent returns from your investments.

So, what are the personality traits that will make you a good investor?

In a recent article in investopedia.com, Lisa Smith discusses five 'money personalities'. Find out which one is the closest to yours, and then make the suggested changes.

The Ultimate List of Painful Financial Mistakes

Warren Buffett is arguably the greatest stock investor that ever lived. He didn't become so by chance but by learning the ropes from his guru, Benjamin Graham, and by following a few basic investment rules.

Two of his most famous rules are:-

Rule No. 1: Never lose money
Rule No. 2: Never forget Rule No. 1

Does Buffett practice what he preaches? Of course he does. That is why he is the greatest. But the two rules should not be interpreted literally. If you invest in stocks, you are going to make a few wrong selections that will lead to loss of money.

In fact, 'losing money' can be a great learning experience - as long as you don't turn it into a habit. What Buffett really means by the two rules is that you need to follow a well-planned strategy that reduces the possibility of losses and increases the chances of making money in the long-term in spite of occasional losses.

Even if you make a lot of money from stocks, it can be difficult to manage and grow your portfolio unless you know how to avoid the following financial mistakes listed by Patrick Bourbon in a recent article in investopedia.com:

1. Not diversifying your wealth.

2. Not understanding the risk in your portfolio.
3. Investing in tax-inefficient portfolios.
4. Doing nothing/failing to build a customised financial plan.
5. Not saving enough or saving too late.
6. Overlooking your advisor/broker fees.
7. Failing to rebalance your portfolio.
8. Not having a sufficient emergency cash reserve.
9. Being overconfident in your own abilities.
10. Chasing past performance.
11. Investing based on news or reacting to short-term returns.
12. Emotionally buying and/or selling.
13. Trying to time the market.
14. Selecting the wrong stock/mutual fund.
15. Not taking into account the effect of inflation.
16. Buying what you don’t understand. 

Read more.

About Quality and Price in Stock Investing

Proponents of Efficient Market Theory (EMT) believe that it is impossible to 'beat the market' because prices of stocks (and other securities) discount all available information at any time due to the efficient dissemination of information in the stock market.

Most small investors would benefit by believing in EMT. Instead of losing their shirt trying to 'beat the market' by buying 'cheap' stocks in large quantities, they should just buy index funds or index ETFs from their monthly savings. The stock index will provide them long-term returns.

Hasn't Buffett become an investing legend by doing just the opposite? Isn't he the one who thinks that EMT is meant for academicians? Doesn't the stock market periodically mis-price stocks, allowing savvy investors to 'buy low and sell high'? Yes, to all three questions. 

You can get market-beating returns if you buy stocks of quality companies at fair prices, and sell them at a profit a few years later. But do you know which are 'quality companies' and what are 'fair prices' for their stocks?

Wikipedia provides the following definition of Quality Investing: "..an investment strategy based on a set of clearly defined fundamental criteria that seeks to identify companies with outstanding quality characteristics. The quality assessment is made based on soft (e.g. management credibility) and hard criteria (e.g. balance sheet stability)." 

In a recent article, Ben Johnson of Morningstar.com discussed 'The What, Why and How of Quality', where he makes the following remarks: "The importance of assessing the price paid for high-quality stocks cannot be understated. While quality matters, price arguably matters more."

Related Post

The Moneyball of Quality Investing

Stocks in the news this week (Apr 17, ‘14)

As human beings and investors, we are prone to biases in our decision making. ‘Recency bias’ clouds our minds if a recent event had caused a lot of pain – like losing money by buying or selling near a market top.

Three days of profit booking by FIIs (they can’t go on buying all the time) sent shivers down the spines of many investors. Was this the beginning of the big crash? Should they be exiting the market?

Fear impedes rational decision making. Remember the famous Gabbar Singh quote from ‘Sholay’: If you are afraid, you are as good as dead. And the one from Warren Buffett: Be greedy when others are fearful.

This post is not about being greedy or fearful about the stocks in the charts below. Please do your own analysis if you wish to buy or sell.

Hathway Cable

The stock has been trading sideways for most of the past year. It slipped into a bear market in Feb ‘14. The sharp spike in price today was caused by a ‘buy’ call from a foreign brokerage. Technical indicators remain in bearish zones.

Hind. Construction

The stock had dropped deep in a bear market to ‘penny’ status in Jul ‘13. It has recovered since then and returned to a bull market in Mar ‘14. Some recent big orders have boosted the rally. Technical indicators have corrected overbought conditions and remain bullish.

Sadbhav Engg.

The stock had a long struggle with the bears, but has more than doubled from its Sep ‘13 low. Today’s sharp rise in price was on clarification about a frivolous allegation before the Company Law Board. Technical indicators are looking overbought and three of them are showing negative divergences by touching lower tops. Some correction or consolidation may follow.

Shasun Pharma.

Bears had a stranglehold on this stock. Though it has moved above its three EMAs on good volume support, the ‘golden cross’ of the 50 day EMA above the 200 day EMA is still awaited. A PE investor has bought a minority stake in a JV. Technical indicators are looking overbought. Expect some profit booking.

How small investors can widen their Circle of Competence

Warren Buffett is a strong believer of the Circle of Competence concept. If a company or business doesn’t fall within his Circle of Competence, he won’t touch it. He famously avoided buying into any high-tech company in the 1990s – when every one and his brother-in-law were investing in dot.com companies. He didn’t understand how high-tech companies were making money, and whether they had sustainable businesses. He missed the boom – and the inevitable bust that followed.

Warren Buffett is one of a kind. You and I will never be able to match his skill and wisdom in investing. That doesn’t mean we shouldn’t follow some of his money-making principles. What if our Circle of Competence is too limited? Is there a way to widen the Circle?

Let me give you the bad news first. You can’t widen your Circle of Competence in a hurry. It is a process that will take a lot of time and effort. The good news is that the process is not difficult or complicated. It takes patience, perseverance, and a plan.

First make a short-list of all the knowledgeable people you know. The list isn’t likely to be a long one if you are looking for people with real knowledge. Not some one who knows how many hundreds Tendulkar scored before the age of 25, or the exact locations of the seven wonders of the world. But some one who knows about the economy, business and industry.

Next, figure out how you can meet such people without imposing too much on their time and patience. May be he is a friend’s father or your wife’s uncle. If you inform them in advance that you want to meet them, and the reasons for the meeting, knowledgeable people will be more than happy to share some of their experiences.

Don’t know anyone knowledgeable enough? Join discussion forums and investment groups. There are many in cyberspace. Each group or forum will have a few knowledgeable members. Try and pick their brains.

Going to a family wedding or a party? Don’t just waste your time eating and drinking and being merry. Introduce yourself to people you don’t know, and find out about what they do. If you show genuine interest in their activities, they will give you a lot of information that you won’t find in TV channels or pink papers.

Carry on this process for some time, and you will be amazed at how much wider your Circle of Competence can become. Then, have the discipline to stick to your Circle of Competence when choosing stocks to buy. That will prevent you from getting badly stuck in the shares of a company that you really know nothing about. Like Suzlon, or Punj Lloyd, or Bartronics.

Related Post

What is your Circle of Competence?

Do you like short-term Trading or long-term Investing?

One of the questions I face most often from readers is: How do I become a trader? I usually answer back with a question: Why don’t you want to become an investor? The answers vary from “I don’t have time to do stock research”, to “I don’t have enough capital”, to “I can’t ever become a Warren Buffett or Rakesh Jhunjhunwala – so why bother”!

New entrants to the stock market usually show up in droves when the Sensex is near an all-time high, thinking that: ‘trading is easy work, and investing is hard work’. The result of such thinking (or is it non-thinking?) is a quick depletion of savings that scares away most would-be traders from the stock markets altogether; or, a transformation of a would-be trader into an investor-by-default, whose quest becomes to somehow recover the trading losses by ‘averaging’ and holding on to the loss-making stocks.

This cycle gets repeated again and again at every market peak that adds to the misery of many newbies and the wealth of a handful of smart investors. I have no illusions that I will be able to change such behaviour akin to financial suicide. But my efforts at repeating this theme periodically is with the hope that a few readers of this blog may see the light.

Let me counter the three most common excuses given by readers to justify their trading ambitions.

I don’t have time to do stock research

Time is at a premium for those engaged in a full-time job or business. When there is insufficient time to complete the tasks at hand, where is the time to perform sector analysis, assess management competence, determine growth prospects, go through annual reports?

There is a simple answer. Delegate the job to a professional fund manager. They are paid (quite handsomely) to manage large funds on behalf of small investors. They have research teams that do all the hard work, and in turn, they charge a fee that is deducted from the fund’s earnings.

I’m not talking about a Private Equity fund or a Portfolio Management System – but an ordinary actively-managed equity mutual fund. Better still, choose an index fund (or index ETF) that is passively managed and charges lower fees. By investing small amounts, one can effectively buy a basket of good stocks or all the stocks that comprise an index.

I don’t have enough capital

Investing in the stock market doesn’t mean that you have to start off with Rs 5 lakhs or 10 lakhs. While such amounts may be necessary to build a strong core portfolio of stocks, you can always build up your capital through regular and systematic investing.

Whatever small amount that you can spare after meeting your regular monthly expenses can be invested in an index fund or diversified equity fund through the ups and downs of the stock market. After a few years of regular and disciplined investing, you may be surprised at the nice bundle you will accumulate.

You can then think of building a core portfolio of individual stocks – provided of course, that you have the time and inclination for doing the hard work involved in individual stock selection and monitoring. Otherwise, continue with your regular investment process.

I can’t ever become a Warren Buffett or Rakesh Jhunjhunwala

This is the lamest excuse of all. Every cricketer can’t be a Bradman or Tendulkar. Does that mean one shouldn’t aspire to be a Laxman or Dravid or Dhoni?

You can be what you want to be – but not without hard work and talent. No one ever became good at anything by taking short-cuts. If you want to become a trader because it involves less work and can give fast returns, you are being naive. You will end up being poor quickly. The majority of traders make their broker’s rich.

Another, often unstated, excuse is: Investing is boring; trading is thrilling. My response to that is – for thrills, visit a race course or a casino. At least the ambience will be enjoyable while you lose money!

Why stock market technical analysis chart patterns act like airport windsocks

One of the interesting aspects of writing a blog is that I get almost instant feedback from readers. It is a real joy when my posts on technical analysis of stock index chart patterns motivate some of you to get interested in the subject.

Carl Swenlin, a self-taught technical analyst, has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports.

Below his weekly technical analysis posts is the following comment:

'Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.'

(If you have never seen a windsock or don't know its purpose, here is a link that will enlighten you.)

One of the reasons that technical analysis of stock market chart patterns doesn't find favour among many well-known stock market gurus (like Warren Buffett, Peter Lynch and others) is probably because they don't need to use it.

They are like the 'jumbo jets' of the investment world that can take off and land in fair weather and foul, regardless of wind conditions. They have ready access to the upper echelons of the corporate world.

But what about us - the single-engine turboprops trying to fly with limited resources? Wind and weather conditions play an important role in our longevity. We have to use as many tools as are available to make our path to investment success a little less thorny.

Fundamental analysis alone may not help us to reach our goal of financial independence. Why? The Satyam scam has shown how managements out to commit fraud can hoodwink the best known auditors. Even if we are convinced about the management, we rarely have information about the actual operations inside any company.

The collective wisdom (or lack of it) of the market players tend to get reflected in the price charts. If we learn to identify similarities in price patterns from stock charts, it gives us an idea about which way the wind is blowing.

What these chart patterns can not reveal with a high degree of accuracy is which way the wind will be blowing three months or a year later. But, like a windsock, they can be very useful when we decide to land ('sell') or take off ('buy').