The Dividend Pirate

I came across a great article today on http://valueinvestingresource.blogspot.com/2008/05/2008-berkshire-hathaway-shareholder.html. In the above link the author shares his experience on the Berkshire Hathaway annual meeting. I highly recommend you to read the entire article. It is a bit lengthy but very informative.

For the less informed, Berkshire Hathaway is a company owned by Warren Buffet. It is very unlikely that you haven’t heard about Mr. Buffet. Apart from being the world’s richest man, Mr. Buffet is known for his generosity. He has pledged to donate 95% of his wealth to charity. He is regarded as one of the world’s greatest stock market investors. He is popularly known as the Oracle from Omaha.

About the Berkshire Hathaway Annual meeting: The mass migration of investors to Omaha for Warren Buffet’s annual shareholder meeting is the biggest pilgrimage from this side of Mecca. More than 30,000 people from every state in the Union and dozens of foreign countries go to soak up the wisdom of Buffet and his business partner, Charlie Munger, who sit for hours and answer questions from all comers.

The article mostly is a question/ answer session with Mr. Buffet and Mr. Munger. I found this particular piece of advice on investing from the annual meeting very enlightening:

Phil Town is the author of one of my favorite books on Investing. I had the privilege of meeting him on one occasion and found him very knowledgeable. Having read his book I highly recommend it to anyone who is planning to start investing in stocks. He explains in very simple words some difficult concepts.

His approach to investing is simple and effective at the same time. In a nutshell his approach is as follows,

1. Find a company that you really like and have a good knowledge about. If you love eating at Chipotle, research its stock. If you are an ardent Apple fan, research Apple’s stock. Dont try to invest in a company that you dont have much idea about.

2. Ok so you really like this company. The next thing to find out is if the company is fundamentally strong. For this he recommends looking at key financial ratios which are mainly,

• Minimum average annual growth for EPS
• Free cash flow
• Sales
• Book value

For each of these ratios he explains in detail what kind of growth should you look for. I really enjoyed reading this part of the book since I always used to get confused on what financial ratios should I focus on from the hundreds that are available.

3. If the stock matches the above criteria, the next thing to find out is if the management of the company is good or not. Obviously you want to buy companies that are well managed. One of the easy ways is to look at the insider ownership. You want the company management to own a large stake.

Guest post from ksap16

Caught your eye!! That’s what happened when I was on rediff.com some days back. Yes that IS a nice caption, and so is this article. Some really wonderful ones on that site. This is just one of those..you can get it at http://www.rediff.com/money/2008/feb/21perfin.htm.Once you decide to put your money to work to build long-term wealth, you have to decide, not whether to take risk, but what kind of risk you wish to take. Here are 10 investing rules that can make you rich:

1. There’s no escaping risk

Yes, money in a savings account is dollar-safe, but those safe dollars are apt to be substantially eroded by inflation, a risk that almost guarantees you will fail to reach your wealth goals.

And yes, money in the stock market is very risky over the short-term, but, if well-diversified, should provide remarkable growth with a high degree of consistency over the long term.

DP(Dividend Pirate): I have 90% of my investments in stocks and 10% in savings. In short a very risky short term portfolio.

2. Buy right and hold tight

The most critical decision you face is arriving at the proper allocation of assets in your investment portfolio — stocks for growth of capital and growth of income, bonds for conservation of capital and current income.

Once you get your balance right, then just hold tight, no matter how high a greedy stock market flies, nor how low a frightened market plunges. Change the allocation only as your investment profile changes. Begin by considering a 50/50 stock/bond-cash balance, then raise the stock allocation if:

• You have many years remaining to accumulate wealth.
• The amount of capital you have at stake is modest.

Below are excerpts from an article written on rediff.com about Rakesh Jhunjhunwala(considered by some as the Warren Buffet of India),

“Jhunjhunwala takes the cue from Warren Buffett when he says: “Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.” He recommends the following,

• Don’t follow stock picks by big investors
• Remember: the market is always right
• You can never be taught about market, you have to learn it
• You must balance fear and greed”

For Jhunjhunwala, trading by the hunches is the best thing to do. “If in doubt, listen to your heart,” is what he tells young investors. Below are some investment gems from him:

• Be optimistic
• Be opportunistic
• Study the market thoroughly
• Maximise profits and minimise losses
• Invest in a business not a company
• Have an independent opinion, always
• Be happy with your gains but take losses in your stride
• Be prepared for risks
• Be paranoid of success — never take it for granted. Realise success can be temporary and transient”

I would like to highlight some of the points that he mentioned,
“You can never be taught about market, you have to learn it”. If you are an investor with no experience, the best way to learn is by researching a few stocks and investing a small amount in them. Once you do that, believe me you will be checking the stock regularly and in the process learn a lot. Another good way to learn about stock trading is by investing virtual cash in simulated games offered by websites such as Investopedia.com These sites give you 100,000 dollars in virtual cash and you can test your investing strategies. Another good way to learn is to form a group of people to compete in such investing simulation games, discuss and learn together.