Gone Fishing With Buffett

wealthymatters Warren Buffet follows his own investment method and has stuck to it through thick and thin to made a lot of money. The key principles of this investment method, as described by Sean Seah in his book Gone Fishing with Buffett are as follows:

1. Investment Rule Number 1: Never Lose Money
Investment Rule Number 2: Never Forget Rule Number 1.

2. Risk comes from ignorance.

3. Buy businesses with good and exceptional economics and buy them at a sensible price. Repeat until wealthy.

4. The stock market is the only place where people who drive BMWs take advice from people who take the train.

5. If you need complicated maths for investing, Buffett would probably be distributing newspapers today. Read more of this post

Buffett’s 7 Filters


Anybody who has read anything about Warren Buffett knows he is superbly wealthy and has made all his money through his investment in stocks,that he is a value investor,that his favourite holding period is forever and that he loves his companies to have ‘big moats’.Following are a list of parameters that Buffett uses to evaluate companies.They are from the book ‘The Guru Investor’ by John P. Reese.Why not use these parameters to check out a company before buying its shares?

 STABILITY OF EARNINGS:This can be checked by considering the earnings per share (EPS) for the past 10 years. EPS is derived from the residual profit left after payment of all expenses, taxes, depreciation, interest, preference dividends and belongs entirely to equity shareholders. A company should not have a negative EPS in the past 10 years. If the EPS is lower than that in the previous year, the dip should not be more than 45%.

DEBT TO EARNINGS RATIO: The second variable is the level of long-term debt to earnings ratio. Buffett likes conservatively financed companies. He prefers the long-term debt of a company to have been paid off from its net earnings in less than five years. This implies that the long-term debt to earnings ratio should be less than or equal to five.

RETURN ON EQUITY (ROE): The third variable measures how much money a company earns on its equity. The ratio is generally expressed as a percentage. For a company to figure on Buffett’s radar, its 10-year average ROE should be greater than or equal to 15%. Read more of this post

Confusing Uncertainity With Risk

wealthymatters.comHere is an extract  from the article ‘ Investors will miss out if they confuse uncertainity with risk ‘ by Whitney Tilson published in the Financial Times on 16 Feb 2008.I think confusing uncertainity with risk is precisely what happened pre-budget in India this year. And this confusion is something that happens to a greater or lesser extent every year before the budget.The same thing happens before the final decision is taken on any government policy. So if a  stock investor remembers that there is a difference between uncertainity and risk he/she can sometimes buy shares cheap.Risk means the chance of a loss of capital. Uncertainty is the range of different outcomes. So a stock may have high uncertainty but may not be risky, if no one knows what will happen but the worst case scenario would not results in a huge loss.

“Dealing with uncertainty is always a key challenge for investors. But dealing with uncertainty doesn’t mean avoiding it – on the contrary, it is often fuzziness about a company’s future that creates the type of opportunity bargain-hunting investors cherish.Wall Street in the main hates uncertainty, which manifests itself in depressed share prices of companies whose prospects lack “visibility.” But where the market can err is in confusing uncertainty with risk. Just because a company’s future is highly uncertain doesn’t mean an investment in it is risky. In fact, some of the best potential investments are highly uncertain, but have little risk of permanent capital loss. As hedge-fund manager Mohnish Pabrai describes it in his book, The Dhandho Investor: “Heads, I win; tails, I don’t lose much.” Read more of this post
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