Charlie Munger’s Quotes = Mungerisms

February 12, 2011 7 Comments


wealthymatters.com

Here is my list of “Mungerisms”.Over time I have used many of them to my advantage and the rest are in my list as reminders of ways I could improve my condition or as cautions against folly.I hope you too find them just as helpful as I do.

 

  1. (1)”Most people are too fretful, they worry to much.  Success means being very patient, but aggressive when it’s time.”

(2)”Using [a stock’s] volatility as a measure of risk is nuts. Risk to us is 1) the risk of permanent loss of capital, or 2) the risk of inadequate return. Some great businesses have very volatile returns – for example, See’s [a candy company owned by Berkshire] usually loses money in two quarters of each year – and some terrible businesses can have steady results.”

(3)”I think that, every time you saw the word EBITDA [earnings], you should substitute the word “bullshit” earnings.”

(4)“Warren talks about these discounted cash flows. I’ve never seen him do one.” “It’s true,” replied Buffett. “If the value of a company doesn’t just scream out at you, it’s too close.”

(5)”If you buy something because it’s undervalued, then you have to think about selling it when it approaches your calculation of its intrinsic value. That’s hard. But if you buy a few great companies, then you can sit on your ass. That’s a good thing.”

(6)”We bought a doomed textile mill [Berkshire Hathaway] and a California S&L [Wesco] just before a calamity. Both were bought at a discount to liquidation value.”

(7)”For society, the Internet is wonderful, but for capitalists, it will be a net negative. It will increase efficiency, but lots of things increase efficiency without increasing profits. It is way more likely to make American businesses less profitable than more profitable.  This is perfectly obvious, but very little understood.”

(8)”Virtually every investment expert’s public assessment is that he is above average, no matter what is the evidence to the contrary.” Read more of this post

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The Difference Between Stock Market Investors and Speculators

February 9, 2011 30 Comments


wealthymatters.com

The following is an excerpt from Seth Klarman’s ‘Margin of Safety.’I got around to reading this book based on the recommendations of one of the readers of this blog.Thank you Andy!I think the following is a nice way of making a distinction between stock market investment and speculation.BTW the book is pretty nice and I will blog more about it as and when I come across more interesting stuff.

 

 

 

To investors stocks represent fractional ownership of underlying businesses and bonds are loans to those businesses.Investors make buy and sell decisions on the basis of the current prices of securities compared with the perceived values of those securities. They transact when they think they know something that others don’t know, don’t care about, or prefer to ignore. They buy securities that appear to offer attractive return for the risk incurred and sell when the return no longer justifies the risk.Investors believe that over the long run security prices tend to reflect fundamental developments involving the underlying businesses. Investors in a stock thus expect to profit in at least one of three possible ways: from free cash flow generated by the underlying business, which eventually will be reflected in a higher share price or distributed as dividends; from an increase in the multiple that investors are willing to pay for the underlying business as reflected in a higher share price; or by a narrowing of the gap between share price and underlying business value.Speculators, by contrast, buy and sell securities based on whether they believe those securities will next rise or fall inprice. Their judgment regarding future price movements is based, not on fundamentals, but on a prediction of the behavior of others. They regard securities as pieces of paper to be swapped back and forth and are generally ignorant of or indifferentto investment fundamentals. They buy securities because they “act” well and sell when they don’t. Indeed, even if it were certain that the world would end tomorrow, it is likely that some speculators would continue to trade securities based on what they thought the market would do today.Speculators are obsessed with predicting-guessing-the direction of stock prices. Every morning on cable television,every afternoon on the stock market report, every weekend in Barron’s,every week in dozens of market newsletters, andwhenever businesspeople get together, there is rampant conjecture on where the market is heading. Many speculators attempt to predict the market direction by using technical analysis-past stock price fluctuations-as a guide. Technical analysis is based on the presumption that past share price meanderings,rather than underlying business value, hold the key to future stock prices. In reality, no one knows what the market will do;trying to predict it is a waste of time, and investing based upon that prediction is a speculative undertaking.

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Discounted Cash Flow Calculator For Share Valuation

February 2, 2011 6 Comments


wealthymatters.comWhen we buy shares we all want to buy cheap and sell dear.However the really difficult thing is figuring out whether something is actually cheap.To an extent we can try to rely on our memories and those of older people to compare current prices with historic prices adjusted for inflation.If we have preserved old papers we can do slightly better than rely on memories and impressions.This method however does not really work when the economy and the company itself has changed beyond recognition.So if our parents or grandparents bought SBI shares at IPO for 100 rupees a share we would have a long wait to see those prices ,or even those prices adjusted for inflation, again.

To buy at dips or corrections in the share price,or to buy only in bear markets is a good idea.But no one has been able to predict  market bottoms consistently.So we are all faced with the decision of whether to buy a given company’s shares at a given price or not at any given time.And it helps to know whether we getting  a good enough price if not the lowest price.To determine if we are getting a good enough price we can compare it with the fair value of the share we get by using this calculator http://www.moneychimp.com/articles/valuation/dcf.htm

The calculator takes values in US Dollars,but if we mentally replace the sign with any other currency sign we will be OK.We just need to focus on the absolute numbers.We can get The EPS numbers from the Annual Financial Reports(either buy one share and have this document delivered home every year or download it from the company website), financial websites, ads in the  financial newspapers like Economic Times etc.Finding the growth in earnings figure to plug into the calculator is a bit more tricky.I just go over the last 3 years EPS(often found in the year’s AFR or you need to find the back reports often found on company websites) and work out the average year on year growth in earnings.I then look to the management discussion section and check overall forecast for the industry.I then check for any debt funded expansion plans that are likely to affect the EPS.I then use these three pieces of information to guesstimate a growth in EPS.I keep the growth estimate for 5 years only and the annual growth rate therafter at 0%.The discount rates I use is the average 10 year Sensex returns I get from here: http://www.hdfcfund.com/Calculators/SensexRollingReturnsCalculator.aspx?ReportID=C208C983-C4A5-41B4-B245-CB77C8D2EDC3

Then I accept my falliability and try to look for shares of good companies available at prices well below those I get from using this calculator and my inputs.I then try to forget about the stock market and the daily fluctuations of share prices till the next time I wish to buy shares.

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Buffett Quotes

January 30, 2011 34 Comments


wealthymatters.comI have always enjoyed Warren Buffett’s quotes.I enjoy the folksy humour.I appreciate the insights.And I find they help me remember important things just when I need to.I have benefitted from sticking to his fundamentals.I thought I’d share my collection of Buffetisms with you.I will add to the list as I come across them.If you have any favourites please share them with me.I’d love to hear them.

  • “Beware of geeks bearing formulas.”
  • We’ve put a lot of money to work during the chaos of  the last two years. When it’s raining gold, reach for a bucket, not a thimble.”
  • “Derivatives are financial weapons of mass destruction.”
  • “I always knew I was going to be rich. I don’t think I ever doubted it for a minute.”
  • “I am a huge bull on this country. We will not have a double-dip recession at all. I see our businesses coming back almost across the board. “
  • “I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.”
  • “The basic ideas of investing are to look at stocks as businesses, use market fluctuations to your advantage, and seek a margin of safety. That’s what Ben Graham taught us. A hundred years from now they will still be the cornerstone of investing.”
  • “Stocks are simple. All you do is buy shares in a great business for less than the business is intrinsically worth, with management of the highest integrity and ability. Then you own the shares forever.”
  • “The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.”
  • “I won’t talk unless they bring me a price.”
  • “I can’t be involved in 50 or 75 things. That’s a Noah’s Ark way of investing – you end up with a zoo that way. I like to put meaningful amounts of money in a few things.”
  • “If you have more than 120 or 130 I.Q. points, you can afford to give the rest away. You don’t need extraordinary intelligence to succeed as an investor.” Read more of this post

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