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30 Strategies On Investment - The Art Of War(ren)Presentation Transcript
30 30 StrategiesOn Investment The Art Of War(ren)
1. Turn Snowballs Into Snow Forts Over everything else, Buffett believes in the power of patiently compounding over time. In investing, that means starting as early as possible (he started as a pre-teen), avoiding short-term risks even if it means lower possible returns, and letting investing returns build upon themselves.
2. Look for companies with moats Buffett looks for companies with moats, or sustainable competitive advantages. The strength of Coca-Cola's moat (its brand) is why he believes a ham sandwich could run it. The stronger a company's moat, the more likely it will be a leader for decades rather than years.
3. Margin of safety As with many of his most beloved tenets, Buffett got this one from his mentor, Benjamin Graham. A margin of safetysimply means buying in at a price well below your best estimate for a stock's intrinsic value. In other words, don't just buy popular names like McDonald's because they are great companies with seemingly strong moats. Go the extra step, and only buy them when they are great companies selling for good to great prices.
4. The concept of inner scorecard vs. outer scorecard "If the world couldn't see your results, would you rather be thought of as the world's greatest investor but in reality have the world's worst record? Or be thought of as the world's worst investor when you were actually the best?“ Those who answer the latter have an inner scorecard. They'll have the ability to be a true contrarian, ignoring the world's judgment and focusing on long-term results.
5. Think differently like the true contrarian "I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.” Remembering the Buffett concept of an inner scorecard, and the Rudyard Kipling admonition to "keep your head when all about you are losing theirs," can lead to outsize returns as Mr. Market sways back and forth.
6. A stock is the right to own a little piece of a business Another Graham idea. We frequently divorce a stock from its underlying company, especially when Mr. Market is delivering up a volatile stock price. Remember, though, that in the long run, a stock is only as good as the company backing it up. Kind of like how a promise is only as good as the person making it.
7. Don't fall into the false precision trap "We like things that you don't have to carry out to three decimal places. If you have to carry them out to three decimal places, they're not good ideas." It's important to keep the big picture in mind. A 20-tab Excel model that calculates a company's value on a discounted cash-flow basis is useless unless you understand the business enough to feed in good assumptions.
8. Hold on to your stock Warren Buffett personally holds his stocks forever if he found a gem. Buying and selling stocks frequently will cost you admin charges and the commissions you have to pay to the stock broker. Investing is just like a snowball. The important thing is finding wet snow (great investments) and a really long hill (long term).
9. Intensity is the price of excellence Buffett reached his current heights not only because of his brilliant mind, but also because of a focus that has had him analyzing stocks for hours on end, just about every day, for decades. The takeaway for armchair investors is to stick to buying and holding index funds and ETFs, unless you have the time to dedicate to individual stock picking. Even then, indexing should be the core of most portfolios.
10. Buy companies cheap Buffett doesn't pay much attention to earnings per share, a common measure of value. Instead, he likes to see companies with good return on equity, solid operating margins and reasonable or no debt. He also likes to see that companies generate a lot of cash and that they invest it well or return it to shareholders in the form of dividends or buybacks.Buffett wants to see a consistent operating history; he's not into startup companies. He also prefers to gauge how well a company does in different kinds of markets, not just the good times or the latest quarter.
11. Buy big, concentrated positions Most professional money managers protect against risk by diversifying. Buffett goes against the crowd here, too. When he finds a company he likes, he piles into it big time.This is crucial to his success. Buffett thinks his risk protection comes from understanding a business better than the market does and then being patient enough to buy it at the right price.
12. Calculate how much money you will make A smart investor needs to keep an eye on expected returns from particular stocks in the long term and calculate the entry and exit prices of invested companies. This requires thorough research and analysis of the company’s available data. Buffett recommends being one’s own analyst to profit from investing in stocks.
13. Care about your money as much as you do Throughout his investing years, Warren Buffett does not let anyone handle his money. He checks up individual stocks by himself and makes the decision whether to buy or not. If you allow other people (financial adviser, financial manager, stock broker) to handle your money, you will need to be aware of whether they are acting for your best benefit or theirs. Most of them have commissions for each investment that you made and sometimes they simply have too much customers on hand that they can’t pay attention to you.
14. Invest in quality businesses, not in stock symbols If a business does well, the stock eventually follows. Most investors don’t analyze the businesses they invest in. They simply follow the symbols or brands of successful corporate houses. As, Buffett states, ‘An investor needs to buy the stock as if he is buying the whole company down the road’. Investors are also expected to be acquainted with the following before buying the company stock: What are the company’s products? How consistent is its products’ sales? How receptive is the company to change in consumer trends? Who are its competitors? What distinguishes it from them? What is the company’s USP? What would be the most worrying thing (risk) about owning such a company’s stock?
15. Never suck your thumb Gather in advance any information you need to make a decision, and ask a friend or relative to make sure that you stick to a deadline. Warren Buffett prides himself on swiftly making up his mind and acting on it. He calls any unnecessary sitting and thinking "thumb sucking." When people offer him a business or an investment, he says, "I won't talk unless they bring me a price." He gives them an answer on the spot.
16. Scan thousands of stocks and look for screaming bargains It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price. Essentially, it means taking some time out to carefully understand and analyze the company and its business. Investors also need to keep updates of their selected companies and sector news on a regular basis. Information about a company is readily available through secondary sources such as journals, economic newspapers, television, etc. Many a time such secondary sources are sufficient for analyzing and arriving at a decision for investment.
17. Interpret how well money is being utilized by the company’s management Beware of geeks bearing formulas. The success of any business depends on how well its management uses its capital. Such an analysis can be made with the help of 2 ratios: Return on Equity (ROE) and Return on Capital Employed (ROCE). A smart investor must interpret the company’s financial statements and understand the quality of return on his investment. One needs to search and invest in companies with good returns on capital invested while employing little or no debt. This means that ROE and ROCE should essentially be the same.
18. Stay away from so-called ‘glitter’ stocks A smart investor should examine whether the stock-in-news has some real value or is just glittering at the moment. Although the episode is behind us now, it is wise to do your homework before investing in each and every company. You would also be wise to diversify your investments across sectors and asset classes, which will give you the needed cushion from loss from any one investment.
19. Wait for a fat pitch then decide what to do with it Value is what you get. After identifying great businesses to invest in at a fair price, buy a “meaningful amount of stocks in them”. Buffett elaborates about knowledge and confidence. According to him, one must require the knowledge of selecting the right stocks by careful research and also build confidence in one’s decisions. Market will test your patience to reach the expected returns. So, you need to stay firm with your investment decisions during volatile trading sessions. Do a good amount of homework and keep faith in your research and decisions.
20. Play baseball without strikes In 1999, Warren Buffett compared investing to baseball without strikes. You can wait for the right pitch all day and there is no penalty other than lost opportunity. So, “when the fielders are asleep, step up and hit the pitch.” It’s easy to swing at sub-par pitches, but when you’re in the business game, those sub-par pitches are what breaks your company. Just take a look at some banks in 2008 and 2009.
21. High Tide Shields the Naked I know you heard the Warren Buffett quote “It is only when the tide goes out that you know who was swimming naked,” but now I would like you to write it down. So, whether you’re in a good market or a bad market, you need to commit to success. You need to make sure you are always doing everything in your power to stay competitive.
22. Admit mistakes and move on There’s something about seeing the big boss fall on his sword that allows everyone to move on. This is quintessential Buffett, turning to self-deprecation as a mechanism to disarm. For startup ventures where course corrections are a way of life, nothing says “we’re all in this together” like a senior executive uttering the three words “I was wrong.”
23. Don’t become dependent on the kindness of strangers This means be a thoughtful spender. To invest if you can and make lots and lots of trusted relationships where you give. Strangers, distant relatives and surface-level friends may not be there for you when you need them but people that you were good to will often be there.
24. Always reinvest your profits Warren Buffett learned from an early age to always reinvest his profits and have his money make more money for him. Warrant Buffett saw money as a worker that he controlled. Warren Buffett built his enormous fortune by continually reinvesting his profits over and over again until he got to where he was today. Starting small at a young age, Warren kept on reinvesting the money he made from his businesses into the stock market. He started with nothing and kept on reinvesting his money to make more money until he became what he is today.
25. The numbers don’t lie Buffet said that he limits contact with the managers of businesses that he invests in, choosing rather to examine the company’s financial records. By relying on the numbers he is able to focus on neutral information and prevent outside noise from affecting his decisions.
26. Rule No.1: Never lose money. Rule No.2: Never forget rule No.1 This is a simple lesson that Warren always took seriously. The big investment risks that Warren took during his life were always strongly weighted in his favor thanks to his diligent and meticulous research. Trying to hit a home run with your money every time is a losing proposition with long term consequences. To chase investments that offer a high rate of return you must also assume that it also comes with a higher rate of risk.
27. Remove the weeds and water the flowers — not the other way around Someone’s sitting in the shade today because someone planted a tree a long time ago.One of the best practices according to Buffett is to sell loss-making stocks during a bull run and buy the winner stocks during a bear hug. The amount realized by discarding loss-making stocks can be utilized to invest in stocks with future growth potential and there by achieving better returns.
28. Become a conscious investor It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently. It’s necessary for a smart investor to think logically while investing and performing research. You need to keep on asking yourself why you want to invest in a particular company and eliminate decision-making based purely on intuition, emotion and herd mentality. So follow the sound advice provided by Warren Buffett — avoid the noise and glitter, do your own research, and constantly update your knowledge and stock-picking skills. In short, be a smart investor!
29. Generosity and Abundance Goes Hand In Hand “Even though Ben Graham [Buffett's mentor] had everything he needed in life, he still wanted to give something back by teaching, So just as we got it from somebody else, we don’t want it to stop with us. We want to pass it along too.” – Warren Buffett The greatest ally to building a strong friendship is to help others achieve what they want from life.
30. Know when to quit Once, when Warren Buffett was a teen, he went to the racetrack. He bet on a race and lost. To recoup his funds, he bet on another race. He lost again, leaving him with close to nothing. He felt sick -- he had squandered nearly a week's earnings. Warren Buffett never repeated that mistake. Know when to walk away from a loss, and don't let anxiety fool you into trying again.
“I know people who have a lot of money," he says, "and they get testimonial dinners and hospital wings named after them. But the truth is that nobody in the world loves them. When you get to my age, you'll measure your success in life by how many of the people you want to have love you actually do love you. That's the ultimate test of how you've lived your life.