An Investing Principles Checklist

February 12, 2011 1 Comment


wealthymatters.com

This is an investing principles checklist from ‘Poor Charlie’s Almanack’.I think it bears reading at frequent intervals just to ensure we aren’t doing something incredibly stupid or failing to do something basic that could better our investment records.

Risk – All investment evaluations should begin by measuring risk, especially reputational
  • Incorporate an appropriate margin of safety
  • Avoid dealing with people of questionable character
  • Insist upon proper compensation for risk assumed
  • Always beware of inflation and interest rate exposures
  • Avoid big mistakes; shun permanent capital loss

Independence – “Only in fairy tales are emperors told they are naked”

  • Objectivity and rationality require independence of thought
  • Remember that just because other people agree or disagree with you doesn’t make you right or wrong – the only thing that matters is the correctness of your analysis and judgment
  • Mimicking the herd invites regression to the mean (merely average performance)

Preparation – “The only way to win is to work, work, work, work, and hope to have a few insights”

  • Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day
  • More important than the will to win is the will to prepare
  • Develop fluency in mental models from the major academic disciplines
  • If you want to get smart, the question you have to keep asking is “why, why, why?” Read more of this post

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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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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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Self-Defeating Beliefs About Wealth

February 1, 2011 4 Comments


wealthymatters.comIf a person says he/she would like to be wealthy but you find them struggling,you will find them having one or more of the following self-defeating beliefs about wealth.These beliefs sap energy and kill initiative.

Belief No. 1: How much you earn depends on how hard/long you work or how highly skilled you are

Such a person becomes a workaholic and often believes in driving other people to work.A person like this might have a professional degree and quite often believes in chasing professional qualifications.He/she believes that a professional qualification often entitles them to more money.With these people the focus is on the work and its length, hardness, unpleasantness and/or skill.They believe in their own merit and get upset when they feel the world does not reward them justly.These people focus on the process and not the results.Their focus is not on wealth generation, which should be their goal if they want to be wealthy, but on part of the process, i.e. the nature  of the work they engage in to make money, which they believe will make them wealthy.

Belief No. 2: Work is not meant to be enjoyable.

Such people often unconsciously believe that the more they suffer at work,the more meritorious they are and the more deserving they are of wealth.As they believe in the virtues of suffering,these people often maximize their own suffering and those of others around them.They are resistant to the thought that pain might be an indicator that they are going about things the wrong way or the hard way that there might be better,easier and less painful ways of going about things.

As a contrast consider these words of Warren Buffet “I get to do what I like to do every single day of the year.I tap dance to work, and when I get there, I think I’m supposed to lie on my back and paint the ceiling. It’s tremendous fun.”

Obviously the more fun you find work the less you have to force yourself to do it.Your body and mind instead of rebelling and sabotaging your efforts are actually engaged in harmony to produce your best work. Read more of this post

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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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