Investing secrets -Part1

Most Admire Warren Buffett, But Few Try To Copy His Results.

Warren Buffett has been talking about his methods for decades — but few even make the attempt to understand what he is doing. “I have seen no trend toward value investing in the 35 years I’ve practised it,” Buffett declared some years back in the Chicago Tribune. “There seems to be some perverse human characteristic that likes to make easy things difficult.”

Most investors and fund managers are still caught in the impossible trap of trying to make quick money in the stock market. Preferably overnight.

Secret #1: Invest in quality businesses, not stock symbols

FOR MOST PEOPLE, investing in a stock is little more than watching the trail left by the stock symbol as its price wanders along some drunken path.

They know that the symbol is associated with a company while not being too sure what is expected of this company to ensure that its share price will rise. It is a case of let’s sit back and hope for the best.

Then there are others who deliberately do not want to know anything about the activities of the company. They want to study the “pure” movement of the stock price with the belief that they can use this information to make forecasts about the future movements of the price. Warren Buffett refers to this as trying to play bridge without looking at the cards.

It just makes no sense to ignore the fact that the stock symbol is attached to a company. And it makes no sense not to apply sound business principles to analyze these companies. The more we know about the company, then the more confident we can be about the price of the stock. Not on a day to day basis, but over time.

“When I buy a stock,” Warren Buffett said, “I think of it in terms of buying a whole company, just as if I were buying a store down the street.” If you were buying a store you would want to know all about it. What were its products? How consistent are the sales? Do they keep trying new products or do their products stay fairly constant? What competitors does the store have and what distinguishes it from them? What would be the most worrying thing about owning such a store?

This leads to the idea of looking for companies that have a strong and durable economic moat. Just as castles have moats to protect them from invaders, so companies can have economic moats to protect them from challenges of competitors and changes in consumer preferences. The moat can be made up of attributes such as brand name, geographical position or patents and licenses.

All these principles about purchasing businesses are equally applicable to purchasing shares. It becomes one of the most enjoyable parts of investing to look into the “business” aspects of any company that you are considering adding to your portfolio.

Secret #2: Don’t invest for ten minutes if you’re not prepared to invest for ten years

WHEN WE LOOK at the share price of a company we usually see a wildly fluctuating graph with mighty hills and plunging chasms.

For example, on the right is the graph of the daily closing prices of a company over ten years. It would be a brave person who could look at this graph and say what was going to happen in the next 24 hours, let alone the next 5 to 10 years. Yet this is a typical graph of the prices of a listed company.

But what about this graph? Because it is growing so consistently we would have a lot more confidence in making forecasts of what was going to take place in the future.

This graph is of the earnings per share of a company. If you were buying a company, this is just what you would want — a company whose earnings and sales go up like clockwork by 15 or 20 percent or more each year. It is no different when you invest in companies via the stock market.

Clearly it is an advantage to be able to find companies with such steady and strong growth in earnings.

When we locate such companies, we are well on the way to finding quality investments. Warren Buffett said a few years back, “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.”

We must put together a portfolio of companies whose aggregate earnings march upwards over the years, and so will the portfolio’s market value.

In other words, as investors, we focus on the medium to long term business characteristics of companies. It is these that drive the share price.

Focusing on the short-term aspects of a company including both business and price fluctuations is foolish as Buffett has said. “Most of our large stock positions are going to be held for many years, and the scorecard on our investment decisions will be provided by business results over that period, not by prices on any given day.”

The exciting thing about value long-term investing is that time and time again,you 

outperform the market in the short term as well as in the long-term. If you own shares in a portfolio of great companies with sales and earnings moving upwards that you bought at sensible prices, then it often doesn’t take long to show up in the share price.