Archives for September 2012

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Last week, I reviewed lessons from Warren Buffett’s 1958 letter to partners of Buffett Partnerships.

Lest you forget, here is a summary of the key lessons we discussed in that review:

1. In rising markets, there’s a rise in the ratio of mercurially tempered people – those with rapid and unpredictable changeableness of mood. The overall mood is of exuberance. People invest in stocks for any and every reason. These combine together to further stimulate rising stock prices. Whenever you find such a deadly combination next time, simply run for cover…because such exuberance will always leads to eventual trouble – stock market crashes.
2. Be very careful while buying illiquid stocks – The impact cost of a large sell order can be huge in case the stock surges and a large investor wants to cash out.
3. Illiquidity of a great stock can work to your advantage as a small investor. You can buy it over a period of time without impacting the price materially. Then, when big investors come to know the story and take a bite of it, you would’ve already made your money.
4. Avoid extrapolating short term performance into long term performance. A 30-40% return from your stocks in one year doesn’t mean you will retire a rich investor in 10 years. It never happens!
5. Use intrinsic value as a reference point to sell stocks – Sell when a stock reaches close to intrinsic value, and also when intrinsic value reaches close to stock price.
6. Sell a stock (but only when you don’t have any investible cash left) if you can find a better opportunity – one with a greater margin of safety.
7. Beware of permanent loss of capital…and then when you identify businesses that won’t impair your capital permanently, buy them and be willing to wait for even 10-15 years to create tremendous wealth from them.

Today, I review the letter for 1959.

[Read more…] about Wit, Wisdom, Warren (Issue #3): The Valuation Junkyard

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Last week, we studied lessons from Warren Buffett’s 1957 letter to partners of Buffett Partnerships.

Lest you forget, here is a summary of the key lessons we discussed in the previous review:

1. Give due importance to intrinsic value while making your investment decisions.
2. Over time, stock prices generally revert to intrinsic value.
3. Ignore the Sensex (what it is doing, where it is going) except to check the pulse of the “general investing environment”.
4. Ignore short term movements in stock prices, even if they are sharp. You must only be concerned with comparing stock prices with intrinsic values, and that’s it.
5. Give luck its due credit (but luck, like love, is a verb…so practice hard to get lucky, like Buffett did).
6. Humility is one of the most important attributes of a value investor.
7. Over the long term, if you can do your work properly, expect to outperform the broader market at just a reasonable rate. Never expect a big outperformance, for such an expectation might lead you to commit grave errors of commission.
8. Being a value investor, expect to perform better in a bear market than in a bull market.
9. Patience is a virtue, and especially if you are a stock market investor.
10. It’s important to set a proper asset allocation strategy before you start to invest…and then it’s equally important to follow that strategy in stock market ups and downs.

Today, I review the letter for 1958.

[Read more…] about Wit, Wisdom, Warren (Issue #2): Avoiding Permanent Loss of Capital

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We start this series of review of Warren Buffett’s letters with his second letter to partners of Buffett Partnerships that he wrote in 1957 (the first letter isn’t available).

Buffett was just 27 years of age when he wrote this letter to his partners. So you can imagine his level of understanding at an age when most people are clueless about the future and are instead lost in the world of revelry and merriment.

But Buffett had his priorities well set. By this time, he had already:

• Started and closed several small businesses (like selling chewing gum, Coca-Cola, weekly magazines, golf balls and stamps) that could earn him enough money to save and invest.
• Bought a farm using his investments.
• Accumulated more than US$ 90,000 in savings (measured in 2009 dollars).
• Filed his first income tax return…at the age of 14!
• Graduated with a Bachelor of Science in Business Administration (1949).
• Earned a Master of Science in Economics from Columbia (1951).
• Studied “Security Analysis” under Benjamin Graham and David Dodd (and earned the only A-Grade that Graham ever gave to any of his students).
• Read Graham’s The Intelligent Investor several times
• Worked as a securities analyst under Graham at Graham-Newman Corp. (1954-56).

He started Buffett Partnership Ltd. in 1956 after Graham retired and closed his partnership.

[Read more…] about Wit, Wisdom, Warren (Issue #1): Key Investing Principles

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I have nothing but utmost respect for Warren Buffett, the only man who became the world’s wealthiest by picking stocks.

My fondness for Buffett has its roots in a chance email forwarded by a friend in 2006, which contained link to one of his letters to shareholders. Till then, I had known Buffett as a successful investor, but never bothered to read the philosophy that made him an investing great.

Anyways, as soon as I finished reading this letter my friend sent me, I was hooked! The hook was so strong that I printed every single one of Buffett’s annual letters to shareholders of Berkshire Hathaway (and also his Partnership letters) and read them page by page.

[Read more…] about Wit, Wisdom, Warren: Lessons from the World’s Best Investor