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Legendary value investors' secrets

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April 24, 2018

Philosophical basis for valuation

“A postulate of sound investing is that an investor does not pay more for an asset than it is worth,” says Aswath Damodaran, the well-known author of “Damodaran on Valuation”, a book on security analysis for investment and corporate finance. “The statement may seem logical and obvious, but it is forgotten and rediscovered at some

Benjamin Graham's thoughts

The Intelligent Investor

“To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What is needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.” These words came from legendary investor Warren Buffett, the best known disciple of Benjamin Graham, the

Investment philosophy

Choose simplicity over complexity

Is investing in the stock market something that is complex, mysterious and risky and therefore best left to the professional? “Warren Buffett has shown this to be a myth,” says James Pardoe in his book “How Buffett Does It”. James Pardoe says in the book, which shares 24 simple investment strategies from the world’s greatest

Benjamin Graham's thoughts

What is speculation?

“An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.” Source: Benjamin Graham, “The Intelligent Investor”

Quotes

A climate of fear is your friend

“A climate of fear is your friend when investing; a euphoric world is your enemy.” – Warren Buffett (2013 letter to Berkshire Hathaway shareholders)

Benjamin Graham's thoughts

Margin of safety

“You don’t try and buy businesses worth $83 million for $80 million. You leave yourself an enormous margin (of safety). When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000-pound trucks across it. And that same principle works in investing. ” – Warren Buffett on what Benjamin Graham,

Investment philosophy

A bull market is like sex

“A bull market is like sex. It feels best just before it ends.” – Barton Biggs. (Note: Warren Buffett, in his 2013 letter to Berkshire Hathaway shareholders, was quoting the late Barton Biggs.) P/S Barton Biggs (November 26, 1932 – July 14, 2012) was a money manager said to be best known for accurately predicting

Investment philosophy

Warren Buffett on investment success

“In my opinion, investment success will not be produced by arcane formulae, computer programs or signals flashed by the price behavior of stocks and markets. Rather an investor will succeed by coupling good business judgment with an ability to insulate his thoughts and behavior from the super-contagious emotions that swirl about the marketplace.” – Warren

Berkshire Hathaway owner-related business principles

Berkshire Hathaway’s 15 owner-related business principles

Source: Berkshire Hathaway Annual Report 2016 1.  Although our form is corporate, our attitude is partnership. Charlie Munger and I think of our shareholders as ownerpartners, and of ourselves as managing partners. (Because of the size of our shareholdings we are also, for better or worse, controlling partners.) We do not view the company itself

Benjamin Graham's thoughts

Investment versus Speculation

“An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.” – Benjamin Graham, “The Intelligent Investor” Benjamin Graham, widely known as the  father of value investing, said that “outright speculation  is neither illegal, immoral, nor (for most people) fattening to the pocketbook”.

Berkshire Hathaway

Berkshire Hathaway ‘A’ and ‘B’ shares

A new release by Berkshire Hathaway dated 10 July 2017 said that chairman Warren Buffett  that day converted 12,500 of his Class A shares into 18,750,000 Class B shares. “Of these Class B shares, 18,628,189 have been donated to five foundations: Bill & Melinda Gates Foundation, Susan Thompson Buffett Foundation, Sherwood Foundation, Howard G. Buffett Foundation and

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Books

What stocks to buy: 15 points to look for

“What are the matters about which the investor should learn if he is to obtain the type of investment which in a few years might show a gain of several hundred per cent, or over a longer period of time might show a correspondingly greater increase? ” In other words, what attributes should a company have to give

Who's Who

Who is Ray DeVoe?

The name Ray DeVoe was mentioned by Warren Buffett in his FY2010 letter to Berkshire Hathaway shareholders. Warren Buffett said: “We keep our cash largely in U.S. Treasury bills and avoid other short-term securities yielding a few more basis points, a policy we adhered to long before the frailties of commercial paper and money market funds

Investment philosophy

Warren Buffett is set to win this US$500,000 wager

Background on Warren Buffett’s US$500,000 wager: Warren Buffett said in  Berkshire’s 2005 annual report that  active investment management by professionals – in aggregate – would over a period of years underperform the returns achieved by rank amateurs who simply sat still. Recalling his argument, he said in his FY2016 letter to Berkshire Hathaway shareholders: “I explained

Warren Buffett's thoughts

Warren Buffett graces Cherry Coke cans

“It should come as no surprise that iconic investor Warren Buffett is one of the world’s best-known fans of Cherry Coca-Cola. At almost every public appearance for a generation, Buffett has been seen taking a swig of his favorite drink,” says a March 31, 2017 article (Chinese Consumers Do a Double-Take as Warren Buffett Graces

Benjamin Graham's thoughts

Benjamin Graham on dollar-cost averaging

In Chapter 5 (The Defensive Investor and Common Stocks) of The Intelligent Investor, Benjamin Graham, the father of value investing, touched on various aspects of defensive investment, among which was dollar-cost averaging, an application of a “formula investment”. Elaborating, he said: “The New York Stock Exchange has put considerable effort into popularizing its ‘monthly purchase

Warren Buffett lessons

How Berkshire Hathaway selects a new director

Berkshire Hathaway’s four long-standing criteria in selecting a new board director: owner-oriented, business-savvy, interested and truly independent. Chairman Warren Buffett said: “I say “truly” because many directors who are now deemed independent by various authorities and observers are far from that, relying heavily as they do on directors’ fees to maintain their standard of living.

Books

Seven stock investing mistakes to avoid: Pat Dorsey

It takes many great stock picks to make up for just a few big errors, says Pat Dorsey, author of The Five Rules for Successful Stock Investing. So even before one goes into any analysis process, care should be taken to avoid seven easily avoidable mistakes. Here is Pat Dorsey’s list of seven mistakes to

Marketable securities

Warren Buffett loves Apple

Warren Buffett’s FY2016’s letter dated February 25, 2017, to Berkshire Hathaway shareholders showed the group had 61,242,652 Apple Inc shares, a stake of 1.1 per cent costing US$6.747 billion and worth a market value of US$7.093 billion. This has since doubled. According to a CNBC report on Feb 27, 2017, the stake had doubled in

Warren Buffett lessons

How Warren Buffett picks stocks

“Excellent business results by corporations will translate over the long term into correspondingly excellent market value and dividend results for owners, minority as well as majority,” Warren Buffett once said. How true this is even today although Mr Buffett said this as far back as 1978 in a letter to Berkshire Hathaway shareholders for FY1977.

Warren Buffett lessons

Misleading ‘record’ earnings

When companies say they achieve record earnings, be wary how they define “record” earnings. Warren Buffett said in a March 14, 1978, shareholder letter: “Most companies define ‘record’ earnings as a new high in earnings per share. Since businesses customarily add from year to year to their equity base, we find nothing particularly noteworthy in

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Benjamin Graham's thoughts

Benjamin Graham Theory Of Diversification

In investment, having a margin of safety itself is not sufficient.  Why is this so? Benjamin Graham, the founder of value investing, uses the simple basis of the insurance-underwriting business to explain the need for diversification. He said that  diversification is the companion of margin of safety. In other words, margin of safety and diversification

Benjamin Graham's thoughts

Margin of Safety: Secret of Sound Investment

Benjamin Graham (May 8, 1894 – September 21, 1976), the father of value investing, in his book, The Intelligent Investor, summed up the secret of sound investment in three words: margin of safety. Warren Buffett, Benjamin Graham’s most famous disciple, explained his mentor’s margin of safety concept this way (Source: The Superinvestors of Graham-and-Doddsville by

Benjamin Graham's thoughts

Investment versus speculation

In Chapter 1 of The Intelligent Investor, author Benjamin Graham (May 8, 1894 – September 21, 1976), the father of value investing, made a clear distinction between the term “investor” and “speculator“. Benjamin Graham, as far back as 1934, said in Security Analysis (a book he co-authored): “An investment operation is one which, upon thorough

Videos

Wall Street Crash of 1929 and the Great Depression

The Wall Street Crash of 1929, also known as Black Tuesday,   the Great Crash, or the Stock Market Crash of 1929, began on October 24, 1929, and was the most devastating stock market crash in the history of the United States,  when taking into consideration the full extent and duration of its fallout.  The crash signaled

Books

The Little Book of Common Sense Investing by John C. Bogle

In his letter dated February 27, 2015 (for FY2014) to Berkshire Hathaway shareholders, Warren Buffett says: “Rather than listen to their (advisors’) siren songs, investors – large and small – should instead read Jack Bogle’s The Little Book of Common Sense Investing. “Stock prices will always be far more volatile than cash-equivalent holdings. Over the long

Quotes

Warren Buffett on Benjamin Graham’s margin of safety

“You don’t try and buy businesses worth $83 million for $80 million. You leave yourself an enormous margin (of safety). When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000-pound trucks across it. And that same principle works in investing. ” – Warren Buffett on what Benjamin Graham,

Berkshire Hathaway

Berkshire Hathaway’s performance vs S&P 500

  Berkshire’s Performance vs. the S&P 500 Per share book value of Berkshire Per share market value of Berkshire S&P 500 with dividends included Compounded Annual Gain – 1965-2014 19.40% 21.60% 9.90% Overall Gain – 1964-2014 751,113% 1,826,163% 11,196% Data source: Berkshire Hathaway 2014 Annual Report Excerpt from Warren Buffett’s letter dated February 27, 2015,

Videos

Irving Kahn – passing of a great value investor

(https://www.youtube.com/watch?v=P4CPj6aiD7g) The value investing world  has lost a great member  –  American businessman and investor  Irving Kahn (December 19, 1905 – February 24, 2015),  who was the oldest living active investment professional.  Wikipedia says he was an early disciple of Benjamin Graham, the creator of the value investing methodology. Kahn began his career in 1928 and continued to work

Investment philosophy

How the Superinvestors did it

Time: May 17, 1984. Legendary investor Warren Buffett was making a speech at a seminar at Columbia Business School to celebrate the 50th Anniversary of the publication of Benjamin Graham and David Dodd’s Security Analysis. A blurb in the article, The Superinvestors of Graham-and-Doddsville (By Warren E. Buffett), based on the speech by  Warren Buffett,

Books

Charlie Munger’s “lollapalooza effect” concept

In stock markets, we hear of this term called “lollapalooza effect”. In mid-2014, for example, when the stock of Apple plummeted at one stage by  40 per cent from a high of $700 to just below  $400, the cause was attributed in some quarters to the “lollapalooza effect”. In a June 2014  article , “Apple Stock Still

Books

Mr Market a Drunken Psycho: Warren Buffett

Legendary investor Warren Buffett,  the Sage of Omaha, recently referred to Mr Market as the “Drunken Psycho”. Aspiring value investors need to know who Mr Market is to understand why Warren Bufftett calls him a Drunken Psycho. Warren Buffett has in a letter to Berkshire Hathaway also called Mr Market the poor fellow with incurable emotional

Investment criteria

Walter Schloss stock market secrets

In a note dated March 10, 1994, Walter Schloss, a famous value investor named by Warren Buffett in 1984 as one of the superinvestors, listed 16 “Factors Needed To Make Money In The Stock Market”. Walter Schloss (August 28, 1916 – February 19, 2012)  was a notable American value investor who was one of the famous

Warren Buffett's thoughts

Who’s Walter Schloss?

American investor Walter Schloss (August 28, 1916 – February 19, 2012) was another famous disciple of the Benjamin Graham school of investing. The noted value investor died in 2012 of leukemia. Walter Schloss  was another great example that disproved the notion that the market was efficient. Talking of market efficiency, here’s a notable quote from legendary investor Warren

Books

Economic moats checklist

“A moat is a deep, broad ditch, either dry or filled with water, that surrounds a castle, fortification, building or town, historically to provide it with a preliminary line of defence.” – Wikipedia. Legendary investor Warren Buffett coined the  term “moat” in finance.  A company needs a moat to protect its profitability and to fence itself

Books

Market Value vs Intrinsic Value of a stock

To better understand what “intrinsic value” is for a stock, let’s first look at the stock’s price-earnings ratio , sometimes referred to as  the PER, the P/E ratio or just the P/E. The price (P) in the numerator refers to the price of the stock. The earnings (E) in the denominator refers to the earnings

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