Pearl Invest

Warren Buffet has become a legend in the investment community. His strategy, knowledge and intuition have made Berkshire Hathaway one of the most successful corportations worldwide. So what is the secret of his success? Five simple rules that every investor should take to heart…

Buffet’s first rule: Trust what you know – not your gut instinct. Decisions should always be based on cold hard facts. The bank that is issuing the fond or certficate will have comprehensive information. Investors will be able to find out what strategic plan a fond has, how a certificate is defined or whether the securities are compatible with their investment goals. If you’re investing in stocks, the “Investor Relations” section on the company website will usually have details about their opportunities and plans – giving you inisight into the stock’s potential.

Don’t buy popular stocks

Another mantra that Buffet likes to repeat endlessly: “Buy stocks that do not have the attention of the masses. His reasoning: “Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well” He argues that the popular opinion always loses on the market. If you look at the popularlity of the dot-com stocks amongst small investors this certainly seems to be the case. By the time the boom had reached its pinnicle and caught the attention of the masses, there was very little money left to be made.

Another aspect of this strategy that every investor should take note of, is the longevity of an investment. According to Buffet, you shouldn’t make investments that you aren’t willing to hold on to for at least ten years, you shouldn’t hold on to it for even ten minutes. His reasoning is that you shouldn’t even consider investments in companies in which you do not have confidence in their long-term prospects. Buffet explains: “Focus your investments – If you have a harem of 40 women, you never get to know any of them very well.”

Spread your investments

It’s a fact that only only investing in one or two titles is dangerous. No-one is infallible and if you make a mistake with these two investments, you’ll be risking a lot. Warren Buffet’s “Noah’s Ark” approach: Your depot should never be broadly mixed like a zoo, but should contain investments that supplement each other and are coordinated to minimize your overall risk.

The deciding principle that Buffet lays out is his insistence of “understanding”: It dictates that you should only invest in companies, fonds, and certificates if you actually understand the investment and its risk. If you’re buying shares, this means understanding what the company actually does, how do they make money? What are their future prospects? If you’re investing in fonds and certificates, find out whether you’re investing in a grab bag and have to hope that it ends up making money in the long run, or whether the investment makes sense and you know in detail what you’re getting yourself into. Only if you have know the answers to these questions will you be able weigh the the potential against the risks. And before you’ve done that, the investment wouldn’t make any sense.

The history of Berkshire Hathaway

Berkshire Hathaway is a conglomerate holding company which was founded in 1839. At the beginning Berkshire Hathaway was focussed on textile operations, but later in In 1962 the legendary investor Warren Buffett bought the whole company and turned it into an investment holding. Since then the companies produced an averaged annual growth in book value of 20.3%.

Highest priced stock ever traded at NYSE

Due to the fact that Warren Buffett never executed a share split the class A shares were traded at an all-time high of $150,000 on December 13, 2007. In Dezember 2009 the a class shares were traded at 99.200 $ which made them highest priced stocks at NYSE. In 2009 the net income amounted to 8.015 Billion US Dollars with total revenues of 112.493 Billion US Dollars. The assests of the Berkshire Hathaway amounted to 297.119 Billion US Dollars.  In 2005 the CEO of Berkshire Hathaway Warren Buffett owned 35 % of Berkshire Hathaway which made hin the second richest man in the world. Charlie Mugner the vice chairman of Berkshire Hathaway also owns enough hathaway stocks to make him a billionaire.

Berkshire Hathaway stock price Source: Google Finance

Warren Buffett is one of the greatest investors of all time. Speaking at the University of Florida in front of a class of MBA students he gives a short speech about morals and ethics before giving the floor to the students with a Question and Answer session.

We all have someone whom we admire and respect. For me one person on my shortlist is Warren Buffett who is sometimes referred to as the “Sage of Omaha“. I first heard about Buffett back in 2001 when I first started getting serious about investing and so I started reading all the titles with his name on it. Off course Buffett hasn’t actually written any of them but they were priceless none the less.

If you have never heard of Buffett, Forbes currently ranks him as the third richest man in the world and he is arguably the world’s greatest investor. He has amassed his fortune by making astute investment decisions and investing in businesses. Here is what I have learnt from Buffett:

1. Rich Is A State Of Mind
“I always knew I was going to be rich. I don’t think I ever doubted it for a minute.” – Warren Buffett

The difference between being poor and being rich is really just a state of mind. Poor people think thoughts of poverty and lack, rich people think thoughts of abundance and prosperity. Your beliefs are going to determine the way you perceive wealth, the decisions you make and the way you act towards it.

2. Success Is More Than About Your Bank Balance
When asked by CNBC what is the secret to success, Buffett replied “If people get to my age and they have the people love them that they want to have love them, they’re successful. It doesn’t make any difference if they’ve got a thousand dollars in the bank or a billion dollars in the bank… Success is really doing what you love and doing it well. It’s as simple as that. I’ve never met anyone doing that who doesn’t feel like a success. And I’ve met plenty of people who have not achieved that and whose lives are miserable.”

3. Spend Less Than You Earn
“Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.” -Warren Buffett

It seems like common sense advice and you’ve no doubt heard financial experts preaching about it for years. You can’t possibly get ahead financially if you’re spending more than your paycheck. Buffett is famous for living a simple and frugal lifestyle. He is the only billionaire I know that still lives in the same house he bought back in 1958 for $31,500. He drove a 2001 Lincoln Town Car for years which he bought second hand. Buffett has a net worth in excess of $52 billion and yet lives off an annual salary of $100,000. The relative percentage of his spending based on his overall net worth is minuscule.

4. Avoid Consumer Debt
The sooner we realize that consumerism is a social plague that has been propagated by billion dollar marketing machines to keep you shackled to your job, the sooner we can stop spending money on useless stuff. It is a fool’s game to spend today so that you can work tomorrow to pay it off. It is a losing proposition because one day your working days are going to be over but the debt is still going to be hanging over your head. Clever marketing has convinced our society that to be happy you have to have more, be more and do more. Buffett abhors consumer debt instead choosing to use debt wisely by leveraging it in investments. To help you deal with your debt consider reading “How To Get Yourself Out Of Debt“.

5. You Are Who You Associate With
“It’s better to hang out with people better than you. Pick out associates whose behavior is better than yours and you’ll drift in that direction.” -Warren Buffett

If you want to succeed financially you need to associate with people who are most conducive to encouraging and cheering on your financial journey. If the people you associate with see money as evil, object to capitalism and find wealth a foreign concept then your financial health and well being is going to be influenced by their views. Whether we like it or not we are all influenced to some extent by the people we spend our primary time with. If you aspire to achieve financial security then you need to find a mastermind of people in your life whom you can all encourage and help each other.

6. Gambling Is A Fools Game
“Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.” – Warren Buffett

While we are young and naive we choose to take risks with our money that are dumb and stupid. Trying to hit a home run with your money every time is a losing proposition with long term consequences. To chase investments that offer a high rate of return you must also assume that it also comes with a higher rate of risk. Bill Gates once quipped “Warren’s and my betting has always been confined to $1 bets” when talking about them paying poker together. If two billionaires take risk management this seriously, it’s time we average punters did the same thing.

7. Give Back To The Community
“Of the billionaires I have known, money just brings out the basic traits in them. If they were jerks before they had money, they are simply jerks with a billion dollars.” – Warren Buffett

They say that to have more you need to give more. A contradiction in terms, maybe, but it’s a simple truth that is as enduring as time. As the bible says “It is more blessed to give than to receive -Acts 20:35”. Buffett has announced in 2006 that he was giving away over $30 billion to the Bill and Melinda Gates Foundation making it at the time of writing the largest charitable donation in history. He also contributes large sums to his children’s charitable foundations.

8. Generosity and Abundance Goes Hand In Hand
“Even though Ben Graham [Buffett's mentor] had everything he needed in life, he still wanted to give something back by teaching, So just as we got it from somebody else, we don’t want it to stop with us. We want to pass it along too.” – Warren Buffett

A famous bible quote goes: “What benefit will it be to you if you gain the whole world but lose your own soul?” – Mark 8:36. The path to wealth isn’t a solo endeavor. How sad would life be if you come to the end of your life and there is no one to share it with. So as you journey on your path to financial abundance remember that there will be many people who generously helped you on your journey so it is only fitting to pay it forward when the opportunity arises. Generosity with your time, with your money, with your resources are great virtues to have. The greatest ally to building a strong friendship is to help others achieve what they want from life.

I leave you with this last quote “You only have to do a very few things right in your life so long as you don’t do too many things wrong.” – Warren Buffett

Written by Tezza  website: 4EvaYoung.com published under Creative Commons 3.0 License.

Get Benjamin Graham´s “The Intelligent Investor” now !

Get Benjamin Graham´s “Security Analysis” now !

The Intelligent Investor by Benjamin Graham is a classic. Considered by many to be the father of value investing and modern security analysis. Benjamin Graham started working on Wall Street in 1914, a time when portfolio management was based more on unsupportable impressions and inside information. Benjamin Graham brought a disciplined and intelligent approach to the profession.

After reading The Intelligent Investor in his senior year at the University of Nebraska, Warren Buffett was so impressed that he traveled to New York to study with Benjamin Graham at Columbia University.  Warren Buffett once said that he was “15 percent (Philip) Fisher and 85 percent Benjamin Graham.”  The training that Warren Buffett received from Benjamin Graham was critical to his success.  If you read this book, you’ll know why.

Clayton’s lending operations, though not damaged by the performance of its borrowers is nevertheless threatened by an element of the credit crisis. Funders that have access to any sort of government guarantee — banks with FDIC-insured deposits, large entities with commercial paper backed by the Federal Reserve, and others who are using imaginitive methods (or lobbying skills) to come under the government’s umbrella — have money costs that are minimal. Conversely, highly-rated companies, such as Berkshire, are experiencing borrowing costs that, in relation to treasury rates, are at record levels. Moreover, funds are abundant for the government-guaranteed borrower, but often scarce for others no matter how creditworthy they are.

This unprecedented “spread” in the cost of money makes it unprofitable for any lender who doesn’t enjoy government-guaranteed funds to go up against those with favored status. Government is determining the “haves” and the “have nots.” That is why companies are rushing to convert to bank holding companies, not a course feasible for Berkshire.

Though Berkshire’s credit rating is pristine — we are one of only seven AAA corporations in the country — our cost of borrowing is now far higher than competitors with shaky balance sheets but government backing. At the moment it is far better to be a financial cripple with a government guarantee than a Gibraltar without one.

“Many people believe that the stock exchange is some kind of a casino and the only way to make money is to buy a stock cheap and to sell it to a higher price. Worse still is that many of these people also believe that you can get rich at the stock exchange very quick, they buy a stock because they believe that it´s gonna triple within the next weeks. However unfortunately that doesn´t work in most instances and in the end the people often sell their stocks with a loss.

That´s really stupid because in being interested in participating in the earnings of a company these people prefer to play a game with many other idiots who all evaluate the worth of the company every single day. Warren Buffett once said that when he buys a stock he actually never wants to sell it again. But what does he mean with this statement ? How can you make money at the stock markets when you don´t sell your stocks again ? The answer is you buy stocks with a high dividend yield.

In September 2008 for example Warren Buffett bought Goldman Sachs Goldman Sachs stocks at 115 USD. Actually now he could sell these stocks again and make a profit of 55 %. But he won´t do that, because Goldman Sachs pays him a dividend of 10 % on his stocks year for year for year. So Warren participates in the earnings of Goldman Sachs instead of taking care what others would pay for his shares.

Another fact is that a constantly high dividend yield is always a good sign for a sound company, because if a company is able to pay it´s investors a high dividend it has made high profits. Also Warren Buffett once said: “If a business does well, the stock eventually follows.” So if a dividend is getting higher and higher every year it´s a sign that the profits of the company are also getting higher and higher every year, which leads to a higher stockprice.

Last but not least there are many studies which underlie that stocks with a high dividned yield perform better than the total market.

One of Warren Buffett´s ways to success is the enormous concentration on a special industry. Bill Gates a good friend of Warren always wanted him to buy Microsoft stocks in the 90´s. We all know that the investment in Microsoft stocks wasn´t a bad one in the year 1990 and although Bill Gates the CEO of this Microsoft was a good friend of Warren, he did´t want to have them.

The reason for that was because the stocks were not in Warren´s sphere of competence. In Warren Buffett´s view every good investor should have a personal sphere of competence. This sphere of competence includes the industries and types of securities the investor is quite good at. Warren Buffett for example is at home in the insurance sector the consumer industry and the food industry and he would never buy a stock of a industry he doesn´t know.

In Warren Buffett´s view it doesn´t depend on the size of the sphere of competence of an investor it depends on the knowing the borders of your sphere of competence. This proceeding has several advantages:

1. It´s much easier to predict the trend of the industry you invest in.

When you are at home in a special industries, you know the effects of external happening on it. For example when you are at home in the chemistry industry you know that a high oil price could affect that hole industry in this or that way. When you are at home in the auto industry you know that a high or weak dollar could have this or that effect on the industry.

2. It´s easier to compare companies witch each other and to say if a company is under or overvalued.

Nowadays it´s very hard to say what´s the worth of a company. Of course we could easily have a look into the balance sheet and calculate the net asset value of the company, but there are always stocks of industries which cost a multiple of what they really earn and what their real net asset value is. Stocks of the IT industry for example usually cost a multiple of what stocks of the food industry cost. The reason is because people belive that the growth opportunities are the best there. So, when you are at home in a special industry you can compare companies which each other and you can say weather the company is cheap or not.