This book presents 24 ideas Buffet has followed from day one.
Your reviewer enumerates below these twenty-four ideas with his comments for your ready reference:
1. Choose Simplicity over Complexity
When investing, keep it simple. Do what’s easy and obvious.
If you don’t understand a business, don’t buy it.
2. Make Your Own Investment Decisions
Don’t listen to the brokers, the analysts, or the pundits. Figure it out for yourself.
Become a value investor. It’s proven to be a very rewarding technique over the long term.
3. Maintain Proper Temperament
Let other people overreact to the market.
To succeed in the market, you need only ordinary intelligence. But in addition, you need the kind of temperament to help you ride out the storms and stick to your long-term plans. If you can stay cool while those around you are panicking, you can surely prevail.
4. Be Patient
Think 10 years, rather than 10 minutes
Don’t dwell on the price of stocks. Instead, study the underlying business, its earnings capacity and its future.
If the question is, “How long will you wait?” – “If we’re in the right place, we’ll wait indefinitely” says Buffet.
5. Buy Business, Not Stocks
Once you get into the right business, you can let everyone else worry about the stock market.
Business performance is the key to picking stocks. Study the long-term track record of any company that is on
your buy list. Buffet looks for following five main things before investing in a company.
(i) Business he can understand
(ii) Companies with favorable long-term prospects
(iii) Business operated by honest and competent people
(iv) Businesses priced very attractively
(v) Business with free cash flow
Don’t think about “stock in the short term.” Think about “business in the long term”.
6. Look for a Company that is a Franchise
Some businesses are “franchises”. Franchise generates free cash flows.
7. Buy Low-Tech, Not High-Tech
Successful investing is rarely a gee-whiz activity. It’s less often about rockets and lasers and more often about bricks, carpets, paint, shaving blades and insulation.
Do not be tempted by get-rich-quick deals involving relatively complex companies (e.g., high-tech companies).
They are the most unpredictable in the long run. Look for the absence of change. Look for the business whose only change in the future will be doing more business, e.g Gillette Blades.
8. Concentrate Your Stock Investments
A the “Noah’s Ark” style of investing – that is, a little of this, a little of that. Better to have a smaller number of investments with more of your money in each.
Portfolio concentration – the opposite of diversification – also has the power to focus the mind.
If you’re putting your eggs in only a few baskets, you’re far less likely to make investments on impulse or emotion.
9. Practice Inactivity, Not Hyperactivity
There are times when doing nothing is a sign of investing brilliance.
Be a decade’s trader, not a day trader.
10. Don’t Look at the Ticker
Tickers are all about prices. Investing is about a lot more than prices. It is about value. It is about wealth.
Abstain from looking at share prices every day. Study the playing field and not the scoreboard. Know the value of something rather than the price of everything.
11. View Market Downturns as Buying Opportunities
Market downturns aren’t body blows; they are buying opportunities.
Change your investing mind-set. Reprogram your thinking. Learn to like a sinking market because it presents
great buying opportunity. Pounce when the three variables come together. When a strong business with an
enduring competitive advantage, strong management, and a low stock price come onto your investment screen.
12. Don’t Swing at Every Pitch
What if you had to predict how every stock in the Standard & Poor’s (S&P) 500 would do over the next few years?
In this scenario you have very poor chance of being correct. But if your job was to find only one stock among those 500 that would do well?
In this revised scenario you have a good chance. A few good investments are all that is needed.
13. Ignore the Macro; Focus on the Micro
The big things – the large trends that are external to the business – don’t matter.
It’s the little things, the things that are business-specific, that count.
It’s possible to imagine a cataclysm so terrible that the markets would collapse and not bounce back.
Externalities don’t matter – and you can’t predict them, anyway. And what can you do about them?
Focus on what you can know: the workings of a good business.
14. Take a Close Look at Management
The analysis begins – and sometimes ends – with one key question: Who’s in charge here?
Assess the management team before you invest. A investing in any company that has a record of financial or accounting shenanigans, (creative accounting, accounting jugglery). Weak accounting usually means weak business performance.
Strong companies do not have to resort to tricks.
15. Remember, The Emperor Wears No Clothes on Wall Street
Wall Street is the only place where people go to in Rolls Royce to get advice from people who take the subway.
Ignore the charts.
A value investor is not concerned with charts. Invest like Benjamin Graham.
Graham told investors to “search for discrepancies between the value of a business and the price of small pieces of that business in the market.”
This is the key to value investing, and it’s far more productive than getting dizzy studying hundreds of stock charts.
Offer documents of most mutual funds say – in small print – that past performance is no guarantee of future success.
Buffet says the same thing about the market: If history revealed the path to riches, librarians would be rich.
16. Practice Independent Thinking
When investing, you need to think independently.
Make independent thinking one of your portfolio’s greatest assets. Being smart isn’t good enough, says Buffet.
Lots of high-IQ people fall victim to the herd mentality. Independent thinking is one of Buffet’s greatest strengths.
Make it one of your own.
17. Stay within Your Circle of Competence
Develop a zone of expertise, operative within that zone.
Write down the industries and businesses with which you feel most comfortable.
Confine your investments to them.
18. Ignore Stock Market Forecasts
Short-term forecasts of stock or bond prices are useless.
They tell you more about the forecaster than they tell you about the future.
Take the time you would spend listening to forecasts and instead use it to analyze a business’s track record.
Develop an investing strategy that does not depend on the overall movement of the market.
19. Understand “Mr. Market” and the “Margin of Safety”
What makes for a good investor?
A good investor is one who combines good business judgment
with an ability to ignore the wild swings of the marketplace.
When the emotions start to swirl, remember Ben Graham’s “Mr.Market” concept, and look for a “margin of safety”.
Make sure that you also understand Buffet’s concepts of Mr. Market and the margin of safety.
Like the Lord, the market helps those who help themselves. But, unlike God, the market doesn’t forgive those who “know not what they do”.
Bide your time, and wait for Mr. Market to get depressed and lower stock prices enough to provide a margin-ofsafety buying opportunity.
20. Be Fearful when Others Are Greedy and Greedy When Others Are Fearful
You can safely predict that people will be greedy, fearful, or foolish.
Trouble is you just can’t predict when or in what order.
Buy when people are selling and sell when people are buying.
21. Read, Read Some More, and Then Think
Mr. Warren Buffet spends something like six hours a day reading and an hour or two on the phone. The rest of the time, he thinks.
He therefore advises to get in the habit of reading. The best thing to start is to read Buffett’s annual reports and letters.
Finally, restrict your time only to things worth reading.
22. Use All Your Horsepower
How big is your engine, and how efficiently do you put it to work?
Warren Buffett suggests that lots of people have “400 – horsepower engines” but only 100 horsepower of output.
Smart people, in other words, often allow themselves to get distracted from the task at hand and act in irrational ways.
The person who gets full output from a 200-horse-power engine, says Buffett, is a lot better off.
Make sure that you have the right role models. Strive for rational behaviour, good habits, and proper temperament.
Write down the habits, practices and philosophies that you want to make your own.
Then be sure to keep track of them and eventually own them.
Financial success is a “matter of having the right habits”.
23. Learn from the Costly Mistakes of Others
This is self explanatory and need no comments!
24. Become a Sound Investor
Buffet says that Ben Graham was about “sound investing”. He wasn’t about brilliant investing or fads and fashions, and the good thing about sound investing is that it can make you wealthy if you are in not too much of a hurry, and it never makes you poor.
To become a sound investor, you need to develop sound investing habits.
Always fight the noise to get the real story.
Always practice continuous improvement.
It’s about finding and stepping over “one-foot hurdles” rather than developing the extraordinary skills needed to clear sevenfoot hurdles.
>Commandments of Value Investing
Benjamin Graham is regarded as the father of value investing and his books are investment classics. Securities Analysis (first published in 1934) and The Intelligent Investor (first published in 1949) continue to sell steadily. In addition to this legacy, he has permanently influenced many successful investors, including Warren Buffett, the wealthiest man in America; William Ruane, founder of the super-successful Sequoia Fund; and well-known investor Walter Schloss.
Ben was a prophet in a very specialized but important realm of life. He preached commandments that any investor can use as stars when navigating the vast and mysterious seas of the investment world. An individual investor, who is not under pressure to shoot comets across the heavens but would like to earn a smart and substantial return, especially can benefit from Ben’s guidance. In greatly simplified terms, here are the 14 points Graham most consistently delivered in his writing and speaking. Some of the counsel is technical, but much of it is aimed at adopting the right attitude:
1. Be an investor, not a speculator
Speculator =>Is one who seeks to profit from market movements, without primary regard to intrinsic values.
Prudent stock Investor => is one who buys
(a) only at prices amply supported by underlying value and
(b) determinedly reduces his stock holdings when the market enters the speculative phase of a sustained advance.
Speculation, Ben insisted, had its place in the securities markets, but a speculator must do more research and tracking of investments and be prepared for losses if they come.
2. Know the asking price
Multiply the company’s share price by the number of company total shares (undiluted) outstanding. Ask yourself, if I bought the whole company would it be worth this much money?
3. Rake the market for bargains
Graham is best known for using his “net current asset value” (NCAV) rule to decide if the company was worth its market price.
To get the NCAV of a company, subtract all liabilities, including short-term debt and preferred stock, from current assets. By purchasing stocks below the NCAV, the investor buys a bargain because nothing at all is paid for the fixed assets of the company. The 1988 research of Professor Joseph D. Vu shows that buying stocks immediately after their price drop below the NCAV per share and selling two years afterward provides an excess return of more than 24 percent.
Yet even Ben recognized that NCAV stocks are increasingly difficult to find, and when one is located, this measure is only a starting point in the evaluation. “If the investor has occasion to be fearful of the future of such a company,” he explained, “it is perfectly logical for him to obey his fears and pass on from that enterprise to some other security about which he is not so fearful.”
Modern disciples of Graham look for hidden value in additional ways, but still probe the question, “what is this company actually worth?” Buffett modifies the Graham formula by looking at the quality of the business itself. Other apostles use the amount of cash flow generated by the company, the reliability and quality of dividends and other factors.
4. Buy the formula
Ben devised another simple formula to tell if a stock is underpriced. The concept has been tested in many different markets and still works.
It takes into account the company’s earnings per share (E), its expected earnings growth rate (R) and the current yield on AAA rated corporate bonds (Y).
The intrinsic value of a stock equals => E(2R + 8.5) x Y/4
The number 8.5, Ben believed, was the appropriate price/to/earnings multiple for a company with static growth. P/E ratios have risen, but a conservative investor still will use a low multiplier. At the time this formula was printed, 4.4 percent was the average bond yield, or the Y factor.
5. Regard corporate figures with suspicion
It is a company’s future earnings that will drive its share price higher, but estimates are based on current numbers, of which an investor must be wary. Even with more stringent rules, current earnings can be manipulated by creative accountancy. An investor is urged to pay special attention to reserves, accounting changes and footnotes when reading company documents. As for estimates of future earnings, anything from false expectations to unexpected world events can repaint the picture. Nevertheless, an investor has to do the best evaluation possible and then go with the results.
6. Don’t stress out
Realize that you are unlikely to hit the precise “intrinsic value” of a stock or a stock market right on the mark. A margin of safety provides peace of mind. “Use an old Graham and Dodd guideline that you can’t be that precise about a simple value,” suggested Professor Roger Murray. "Give yourself a band of 20 percent above or below, and say, “that is the range of fair value.”
7. Don’t sweat the math
Ben, who loved mathematics, said so himself: “In 44 years of Wall Street experience and study, I have never seen dependable calculations made about common stock values, or related investment policies, that went beyond simple arithmetic or the most elementary algebra. (remember class Vth maths?) Whenever calculus is brought in, or higher algebra, you could take it as a warning signal that the operator was trying to substitute theory for experience, and usually also to give speculation the deceptive guise of investment.”
8. Diversify, rule #1
“My basic rule,” Graham said, “is that the investor should always have a minimum of 25 percent in bonds or bond equivalents, and another minimum of 25 percent in common stocks. He can divide the other 50 percent between the two, according to the varying stock and bond prices.” This is ho-hum advice to anyone in a hurry to get rich, but it helps preserve capital.
Remember, earnings cannot compound on money that has evaporated.
Using this rule, an investor would sell stocks when stock prices are high and buy bonds. When the stock market declines, the investor would sell bonds and buy bargain stocks. At all times, however, he or she would hold the minimum 25 percent of the assets either in stocks or bonds — retaining particularly those that offer some contrarian advantage.
As a rule of thumb, an investor should back away from the stock market when the earnings per share on leading indices (such as the Dow Jones Industrial Average or the Standard & Poor’s composite index) is less than the yield on high-quality bonds. When the reverse is true, lean toward bonds.
9. Diversify, rule #2
An investor should have a large number of securities in his or her portfolio, if necessary, with a relatively small number of shares of each stock. While investors such as Buffett may have fewer than a dozen or so carefully chosen companies, Graham usually held 75 or more stocks at any given time. Ben suggested that individual investors try to have at least 30 different holdings, even if it is necessary to buy odd lots. The least expensive way for an individual investor to buy odd lots is through a company’s dividend reinvestment program (DRP).
10. When in doubt, stick to quality
Companies with good earnings, solid dividend histories, low debts and reasonable price/to/earnings ratios serve best. “Investors do not make mistakes, or bad mistakes, in buying good stocks at fair prices,” Ben said. “They make their serious mistakes by buying poor stocks, particularly the ones that are pushed for various reasons. And sometimes — in fact, very frequently — they make mistakes by buying good stocks in the upper reaches of bull markets.”
11. Dividends as a clue
A long record of paying dividends, as long as 20 years, shows that a company has substance and is a limited risk. Chancy growth stocks seldom pay dividends. Furthermore, Ben contended that no dividends or a niggardly dividend policy harms investors in two ways. Not only are shareholders deprived of income from their investment, but when comparable companies are studied, the one with the lower dividend consistently sells for a lower share price. “I believe that Wall Street experience shows clearly that the best treatment for stockholders,” Ben said, “is the payment to them of fair and reasonable dividends in relation to the company’s earnings and in relation to the true value of the security, as measured by any ordinary tests based on earning power or assets.”
12. Defend your shareholder rights
“I want to say a word about disgruntled shareholders,” Ben said. “In my humble opinion, not enough of them are disgruntled. And one of the great troubles with Wall Street is that it cannot distinguish between a mere troublemaker or “strike suitor” in corporate affairs and a stockholder with a legitimate complaint that deserves attention from his management and from his fellow stockholders.” If you object to a dividend policy, executive compensation package or golden parachutes, organize a sharcholder’s offensive.
13. Be Patient
“... every investor should be prepared financially and psychologically for the possibility of poor short-term results. For example, in the 1973-1974 decline the investor would have lost money on paper, but if he’d held on and stuck with the approach, he would have recouped in 1975-1976 and gotten his 15 percent average return for the five-year period.”
14. Think for yourself
Don’t follow the crowd. “There are two requirements for success in Wall Street,” Ben once said.
“One, you have to think correctly; and
secondly, you have to think independently.”
Finally, continue to search for better ways to ensure safety and maximize growth. Do not ever stop thinking.
Theoretically, even technically I'm told, corrections adjust equity prices to their actual value or “support levels”.
In reality, it’s much easier than that. Prices go down because of speculator reactions to expectations of news, speculator reactions to actual news, and investor profit taking.
The two former "becauses" are more potent than ever before because there is more "self directed" money out there than ever before. And therein lies the core of correctional beauty! Mutual Fund unit holders rarely take profits but often take losses. Opportunities abound!
Here’s a list of ten things to do and/or to think about doing during corrections of any magnitude:
1. Your present Asset Allocation should have been tuned in to your goals and objectives. Resist the urge to decrease your Equity allocation because you expect a further fall in stock prices. That would be an attempt to time the market, which is (rather obviously) impossible. Proper Asset Allocation has nothing to do with market expectations.
2. Take a look at the past. There has never been a correction that has not proven to be a buying opportunity, so start collecting a diverse group of high quality, dividend paying, NYSE companies as they move lower in price. I start shopping at 20% below the 52-week high water mark, and the shelves are full.
3. Don’t hoard that “smart cash” you accumulated during the last rally, and don’t look back and get yourself agitated because you might buy some issues too soon. There are no crystal balls, and no place for hindsight in an investment strategy.
4. Take a look at the future. Nope, you can’t tell when the rally will come or how long it will last. If you are buying quality equities now (as you certainly could be) you will be able to love the rally even more than you did the last time… as you take yet another round of profits. Smiles broaden with each new realized gain, especially when most folk are still head scratchin’.
5. As (or if) the correction continues, buy more slowly as opposed to more quickly, and establish new positions incompletely. Hope for a short and steep decline, but prepare for a long one. There’s more to Shop at The Gap than meets the eye.
6. Your understanding and use of the Smart Cash concept has proven the wisdom of The Investor’s Creed. You should be out of cash while the market is still correcting. [It gets less and less scary each time.] As long your cash flow continues unabated, the change in market value is merely a perceptual issue.
7. Note that your Working Capital is still growing, in spite of falling prices, and examine your holdings for opportunities to average down on cost per share or to increase yield (on fixed income securities). Examine both fundamentals and price, lean hard on your experience, and don’t force the issue.
8. Identify new buying opportunities using a consistent set of rules, rally or correction. That way you will always know which of the two you are dealing with in spite of what the Wall Street propaganda mill spits out. Focus on value stocks; it’s just easier, as well as being less risky, and better for your peace of mind. Just think where you would be today had you heeded this advice years ago…
9. Examine your portfolio’s performance: with your asset allocation and investment objectives clearly in focus; in terms of market and interest rate cycles as opposed to calendar Quarters (never do that) and Years; and only with the use of the Working Capital Model, because it allows for your personal asset allocation. Remember, there is really no single index number to use for comparison purposes with a properly designed value portfolio.
10. Finally, ask your broker/advisor why your portfolio has not yet surpassed the levels it boasted five years ago. If it has, say thank you and continue with what you’ve been doing. This one is like golf, if you claim a better score than the reality, you’ll eventually lose money.
11. One more thought to consider. So long as everything is down, there is nothing to worry about.
Corrections (of all types) will vary in depth and duration, and both characteristics are clearly visible only in institutional grade rear view mirrors. The short and deep ones are most lovable (kind of like men, I'm told); the long and slow ones are more difficult to deal with. Most corrections are "45s" (August and September, '05), and difficult to take advantage of with Mutual Funds. But amid all of this uncertainty, there is one indisputable fact: there has never been a correction that has not succumbed to the next rally... its more popular flip side. So smile through the hum drum Everydays of the correction, you just might meet Peggy Sue tomorrow.
(taken from TI group)
==== figures in rs crores.. ====
the result only seems to reinforce the belief that
but even then whenever a huge jump in monthly money pouring into MF (compared to previous months) is seen
a top is formed which lasts for a few months.