The Warren Buffet Way

[pietpetoors]

My Favorite book on share investing is "The Warren Buffet Way" by Robert Hagstrom.

My opinion is that everybody who wants to take on investing should read this book first. Whether you want to be a technical or fundamental investor you should read this first. Mr Buffet is after all the richest share investor in the world, so he must have done something right

There are books on Warren Buffet at http://www.businessbooks.co.za/warren-buffet/

[Dave A]

Mr Buffet is after all the richest share investor in the world, so he must have done something right

You're a master of understatement, Piet

What I find fascinating about Warren Buffet is he did it trading in the manner of an investor, not as a speculator.

[pietpetoors]

Share Investment

an investor, not as a speculator

That is true Dave. That is one of the reasons why I think everybody must read this before they jump into the share investment hype.

The guys who sell the courses and share trading software all make their money with selling tools which people must use to speculate. That is why people believe that they must make their money speculating, it is so easy, buy low and sell high!

Even if you are a speculator, if you read above mentioned book you will know how to identify shares that makes business sense and which could be a lower risk than other shares. , or must I say "which have a higher probability to make you money"

[sterne.law@gmail.com]

That is true Dave. That is one of the reasons why I think everybody must read this before they jump into the share investment hype.

The guys who sell the courses and share trading software all make their money with selling tools which people must use to speculate. That is why people believe that they must make their money speculating, it is so easy, buy low and sell high!

Even if you are a speculator, if you read above mentioned book you will know how to identify shares that makes business sense and which could be a lower risk than other shares. , or must I say "which have a higher probability to make you money"

If investing in shares is so easy and so lucrative why would someone be in the business of selling the books or software? Oh, they want to share their wealth. Another good author, Robert Kywoski in Rich Dad poor Dad, probably summed it up when he said why would you want to buy policies that will supposedly make you rich, from someone who is not rich. Pretty smart and some more understatement.

[Marq]

trading in the manner of an investor, not as a speculator

These are those manners of trading:-

1. Never follow the day to day fluctuations of the stock market. The market only exists to make it easier to buy and sell, not to set values. Keep an eye on the market only for someone who is willing to sell a stock at a not-to-be-missed price.
2. Don’t try and analyze or worry about the general economy. If you can’t predict what the stock market will do from day to day, how can you reliably predict the fate of the economy?
3. Buy a business, not its stock. Treat a stock purchase as if you were buying the entire business, using the following tennets:

Business Tennets
1. Is the business simple and understandable from your perspective as an investor?
2. Does the business have a consistent operating history?
3. Does the business have favourable long-term prospects.
Management Tennets
1. Is management rational?
2. Is management candid with its shareholders?
Financial Tennets
1. Focus on return on equity, not earnings per share.
2. Calculate "Owner Earnings".
3. Search for companies with high profit margins.
4. For every dollar of retained earnings, has the company created at least one dollar’s extra market value?
Management Tennets
1. What is the value of the business?
2. Can the business currently be purchased at a significant discount to its value?

4. Manage a portfolio of businesses.
Intelligent investing means having the priorities of a business owner (focused on long-term value) rather than a stock trader (focused on short-term gains and losses).

I'm still not convinced there is a vast difference between these two terms - especially when it comes to the topic of the share market and one of the richest men in the world.

The main difference revolves around risk, the usual suspect when it comes to making money. The higher the risk the higher the profits. Secondary to this is the time or period that a share will be held before selling on.

Investing relates to long term less risky while speculation is short term higher risk. How long that period is to redefine your role from speculator to investor is an unknown factor. The risk factor is also fairly subjective. The difference implies that to invest you will buy stock based on a solid current market value and trend and then hold onto it no matter what, or at least until it looked to be a real problem, while the speculator would watch the daily scenario and sell at the moment a profit was realised or put in a stop loss scenario.

Now anybody who has set out to invest in the stock market and have a balanced portfolio of shares that are blue chip , sound and just great will probably have the intention of just maintaining the values, keeping the returns above inflation and ensuring that the portfolio keeps ticking along and does not go down the tubes given a recession.

The speculator sets out to make a buck - grow the portfolio the dividend rate and returns beyond anything else that the market may have to offer. He has to know stuff and be in and out and account for this on a daily weekly basis. He could be a gambler of note and the good guys at this become the rich guys.

The question I have is - at what stage does an investor become a speculator? Is the one a progression from the other or are they both the same given different values for time and risk?

[wynn]

I'm a real 'Plaas Japie' when it comes to shares on the stock market.
It seems to me you would need a bunch of cash invested in shares to make a living from the dividends.

Looked at this way, if I need R10,000.oo per month to live and if say R5.oo safe conservative shares pay a dividend of say 17c each that means I must have 706,000 shares @ R5 = R3,530,000.oo invested and that is before tax and no gain on my investment.

Would I get shares that pay better than that without risk?

It would be better to use the same money to build a small block of 6 apartments bringing in R4000.oo each per month, at least I get capital gains on the value of the building over say twenty years.

[Dave A]

I think the main difference is the investor rides the big trend - the speculator plays with the little bumps on the big trend.

I wish Graeme was still around - he'd have a field day with this.

[pietpetoors]

Risk?

Would I get shares that pay better than that without risk?

Why are people so concerned about risk.

To me the biggest risk is to keep your money in the bank. Banks pay you interest less than inflation which means that your money will always be worth less. SO having money in the bank is a huge risk.

I think the main difference is the investor rides the big trend - the speculator plays with the little bumps on the big trend.

Spot on

[tommys1]

The basis of Warren Buffett's investment strategy has alot to do with minimizing the risk factor.
Buffett does NOT invest in stocks, he invests in businesses. He only uses the stock price to determine whether the business is cheap to buy or not. In other words, he works backward from analysing the returns he can expect from a business towards the current stockprice.

We are trying to bring one of the foremost experts on Warren Buffett's strategy to South Africa for a few seminars, if the demand is high enough. Robert P. Miles has given seminars all over the world about Buffett and have had many lunched with the man himself

[Dave S]

I'm a bit of a Moron when it comes to understanding stocks, shares and market trades. Would this book be of interest to someone coming from a "layman's" background, or is it written in the sense of a financial expert?

[Blurock]

I think the main difference is the investor rides the big trend - the speculator plays with the little bumps on the big trend.

So speculator is short term and investor is long term? I believe that one of the main causes of the economic meltdown worldwide is the focus on short term gain. Wall street measures businesses on quarterly reports and any performance worse that the previous period is severely punished.

This focus on short term profits leads employee managers (Note: NOT owners) of the business to devise schemes to boost the bottom line and to keep their jobs. (Enron, sub prime bonds etc) The American business schools teach us that shareholder value is paramount and the main measure of performance.

That is why I am weary of dealing with any company who has a mission statement that reads .....to maximise shareholder value. What they are in effect saying is that they will screw any one in favour of shareholders, including staff, suppliers and customers.

I have not done empirical research, but my perception is that most family owned businesses in Europe have a conservative long term strategy and focus. They are not so much concerned with short term performance, but rather manage market trends and economic fluctuations.

Some of the Fortune 500 companies now only report half yearly, due to the negative impact of quarterly reports. They may realise the value of not paying out too much in dividends, but retaining profits for future growth

[Justloadit]

I think that the quarterly reports which were originally generated for management information, are now being used for the measurement of a companie success. Big Mistake.

I watch my figures closely on a monthly basis, which helps with the day to day decision of the company. If I was concerned with the losses over the last 8 months, I should have liquidated then, but, in the long term there are very good prospects which need work to turn into excellent future profits. The problem with share holders is that they have no idea how business actually works - whilst we wish it was the case, a business may not always be profitable, it requires investment and nurturing. Especially with our current markets which change approximately every 2 years, it requires massive amount of investment into R & D, and in some cases it may even cost profits for months on end before it becomes profitable.

[wynn]

Is it not a fact that most investors get paid dividends quarterly? If I had a lump sum invested I would want this.
Perhaps this is why results are published quarterly?
It is easy to do because it works out to every second VAT period, so you have a mini balance and a trend forecast anyway.

If you only pay out dividends bi-annually or annually you would only need to publish results accordingly!