Wednesday, August 6, 2008

Warren Buffet Wealth by Robert P.Miles

Warren Buffett Wealth
Having a disastrous record of 50% paper losses from my portfolio with another 3k of realized losses, I been pondering if I am a cut into trading/investing and kept asking what wrong with myself as some peers that I met online achieving a good track record in their investment and one friend of mine who has influence me into stock investing reaping a good profit by both trading and investing...

My friend had mentioned that I have started off using trading techniques without cutting losses, ignoring crucial valuations, suggests that I read some books about investing and recommended me Warren Buffett Wealth – Principles and Practical Methods Used by the world’s Greatest Investor.

This book gave a brief introduction about Warren Buffet, the investment talent he processes and his investment journey showcasing some of this brilliant investment he made since he was young such as reselling the coke from house to house with a decent return on investment of 20%(which later in life he acquired the shares), the joint business venture of pinball machine that boost his wealth substantially, the key investments in GEICO Auto Insurance, Coca-cola and Washington Post.

It also introduces general principles like “Learning from the Best to be the Best”, "one needs to devote his efforts in order to be successful" and shares with us that wealth is created through owning a business. It also teach an important concept of the Down Market Test where the true measure of a successful investor is not a comparison of performance against the NASDAQ, DJI, S&P but rather how well a portfolio performs during down markets.

It then relates the key processes to become wealthy:
- Begin investing and building wealth early
- Have confidence
- Understand accounting and how business work
- Set Goals
- Save, invest, and live below your income
- Read, study businesses over many decades before you invest
- Be a business analyst, not a market analyst
- Concern yourself with what is going on inside a business, and free yourself of any concern with what is going on in the outside markets
- Learn to value business and purchase pieces of them for below what you think they are worth
- Make a list of traits that you admire and before you know it you will become the person you want to be
- Create another set of character traits that you don’t admire which will also remind you of the person you don’t want to be
- Write down the habits you want to develop
- Select your mentors carefully
- Identify what passion you have that could create wealth

It also shows why wealth is created by owning business by giving an excellent example of how the ownership of a business created wealth and how the Barnes Foundation of Philadelphia strict rules against business ownership bankrupt its own funds as inflation drain the funds which only focuses on fixed income securities (bonds).

Then it prompted you to evaluate what kind of investor are you and show define what is an active investor and a passive investor, and the difference between an investor and a trader (speculator). It stated that this is important as it will determine ability to create wealth. Below are the definition of investors and the differences of an investor and a trader (speculator).

Definition of 2 types of investor
Passive investor - not wanting or enjoying the day to day activity of evaluating investments
Active investor - hands on, fascinated, energetic participant who enjoys intensive reading and learning about all things related to finance, business, the economy and the investment world

Stock Speculators VS Business Owners
Business owner is concerned with what’s going on inside the business – with its employees, customers, strategic plan, growth and sales, expense and cost reduction, as well as increasing profits and earnings.

Speculator is more concerned about what is going on outside the business or the stock’s market price: the speculator buys something today in order to sell it later at a higher price. “The sooner the better” is the motto of every trader and speculator. Speculator focus on the price, and owners focus on the business. Speculators are market analysts; owners are business analyst
Question to ask yourself if you are an owner or a trader.
1) Are you concern with the present and future earnings of a business, or are your evaluating the only its price?
2) Are you influenced by reading and research? Or do others influence you? (Following the madness of crowds)

Value investing
Warren buffet and most value investors are by nature independent thinkers and get little satisfaction by being with the crowd. They do their own research and read nonstop. They observe others but do not follow, taking great delight in choosing their own path. Important step is to do some self discovery to determine your investment expectations, your time frame, and your risk tolerance.

Next, it guided us to develop our philosophy (plan) to achieve our results and speaks about the principles and methods Buffet use.

Warren Buffet Philosophy
Rule number 1: Don’t lose capital
Rule number 2: Don’t forget rule number 1

Buffet Investment Principles
1.Know what you own
2.Research before you buy
3.Own a business, not a stock
4.Make a total of only lifetime investments
5.Make one decision to own a stock and be a long term owner

Buffet method (cigar butt method)
Old economy stocks that have one or two puffs of earnings left (businesses that have low P/E with a lifespan of twenty years or less)
Attempt to buy a dollar worth of assets for 50 cents ( buy things for less that they worth)
Work out how much a business will pay you between now until judgment day. Discount that back to today and attempt to buy them cheaper.
Buy business you understand, with favorable long term prospects, operated by competent and honest people and available at attractive prices.

Calculation Method Used
Value Investing – it is about the careful review and calculation of a company’s book value and intrinsic value and its relationship to market value.

Book value is the simple subtraction of assets from liabilities.

Intrinsic value concept—what will you pay for a machine that generates $1 a year for ten years? You wouldn’t pay $10 because you would be just getting your money back over 10 years. You wouldn’t pay $9 today to get $1 a year for 10 Years, which would be a return of 11/1%, or 1% a year. What you would pay is determined by how much you seek in return on your investments. You seek an 11% annual return, which happens to be the long term rate of return o equalities over the last several decades, you will offer $3.52 for this machine.
Other methods: Present Value Calculation or Discounted Cash flow

Ways to evaluate Business
1) First, he looks at the business. Is it simple? Is it in an industry that he understands? Is it a high profit margin business? Any Debt? What is its return on equity?
2) Then he looks at its managers. Are they candid? What are their expansion plans? Are they well financed? How much Business do they own?
3) Then he looks at the market place. What is the business value? Can it be purchased at a discount to its market value?

Finally, wealth building requires that you know the valuation, price or management influence whether you’re buying, you know the management, the competition, and you understand what would be an attractive stock price.

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