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#1 Focus on Annual Reports How to Spend Your Time A few years ago, Warren Buffett was on the Fox Business Network discussing the sale of Berkshires (BRK.A)(BRK.B) shares of PetroChina (PTR). Fox anchor Liz Claman asked Buffett how he was able to come up with the idea to invest in PetroChina in the first place. Buffett replied, Other guys read Playboy, I read annual reports. A biography of value investor Peter Cundill was recently published entitled Theres Always Something to Do. Truer words have never been spoken. There always is something to do. The question is are you doing the right things. Buffett spends his time reading annual reports. Moreover, he isnt reading willy-nilly. Hes reading with purpose. Buffett focuses on trying to figure out how much a business is worth. In the case of PetroChina, in 2002 Buffett figured the whole company was worth about $100 billion. The entire business was selling in the market for about $37 billion. Buffett bought $488 million worth of shares which he sold in 2007 for $4 billion. Buffett earned a 700%+ return on a half a billion dollar investment in five years by sitting in his office and reading annual reports. How do you spend your time? How many annual reports have you read in the past week? Being a great investor requires brutal honesty. Theres always something to distract you and get you off your game. Being brutally honest about how you spend your time is the first step to spending it on what really matters. Focus on reading annual reports. Youll be richer for it. #2 Learn from the Super Rich What You Can Learn from Tiger 21, an Investment Club for the Super-Rich
By: Greg Speicher #4 Go Back to Buffett In his classic book Mastery (which I highly recommend), George Leonard provides a road map to longterm success and mastery of your craft. Its relevant to our subject because, if you want to consistently beat the market, you must pursue investment mastery. The first of Leonards five keys to mastery is instruction. Leonard states, For mastering most skills, theres nothing better than being in the hands of a master teacher. There is none better than Buffett: not only is he the best investor of our era but also he has shared an enormous amount of his thinking. My advice is to carefully go back and read or re-read all Buffetts output. Study it like a chemistry textbook. Study it like Eddie Lampert did. Take careful notes. Let it deeply inform your investment process. Start with the partnership letters and then work through all the Berkshire shareholder letters. Get a hold of the meeting notes from Outstanding Investor Digest going back to the 80s. (They may be available through some good libraries. Order back copies if you have to.) They are pure gold. Move on to the speeches and videos. The 1991 speech at Notre Dame is a gem. Then move on and go through the best of the secondary literature. Dont miss Seeking Wisdomand Of Permanent Value. Of course, no study of Buffett would be complete without also going back through Mungers body of work, starting with the excellent Poor Charlies Almanac. This will take some time. Enjoy the process. Consider it your own post-graduate program in successful investing . Turn down the noise and turn up the wisdom. Finally, Ive heard people say that you dont want to slavishly follow Buffett. They say to seek your own voice. Thats true to a point. Those who master a subject must first master the fundamentals and trace the path forged by the great ones. This takes time and dedication. Only then are you really ready to cut your own path. #5: Remember the Single Most Important Thing Howard Marks has written a book called The Most Important Thing: Uncommon Sense for the Thoughtful Investor. The book has been well received. Marks is well known for his client memos which are considered must reading by investors. They receive high praise from the likes ofWarren Buffett and Seth Klarman.
By: Greg Speicher #7: Avoid Hot Industries with No Barriers to Entry A Lex column in yesterdays Financial Times, Solar: the sun also sets, is yet another stark reminder that a growing industry does not necessarily make a good investment.
By: Greg Speicher #7: Avoid Hot Industries with No Barriers to Entry
Greg Speichers 100 Ways To Beat The Market: #13, #14 And #15
December 7, 2011 By Greg Speicher
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Greg Speichers 100 Ways To Beat The Market: #17, #18, #19
December 8, 2011 By Greg Speicher
#17: Select securities with a higher expected return than the market If you want to beat the market, you need to have a clear understanding of what drives market returns. Generally speaking, you can expect the returns of the the S&P 500 to be closely correlated with the growth of corporate earnings. Corporate earnings in turn are closely tied to GDP growth. After all, per Buffett, you cant expect a component part corporate earnings to indefinitely grow at a faster rate than the aggregate to which they belong the overall economy. You can provide your own estimates, but assuming that real GDP growth averages 3% and that inflation is at 3%, your would get a 6% return. Add in 1.5% for dividends and you are 7.5%. If you are expecting more than this, then you need to provide and defend your assumptions. Is the markets return on equity closer to the high end or the low end of its historic average? Are multiples of earnings high of low? What are your expectations for interest rates going forward? These all play a roll in setting expectations. What is the point of this exercise if you are trying to best the market? In sports, top athletes carefully study their opponents so they can get an edge. If you clearly understand what drives overall stock market performance, you can make a rule for yourself that you will only buy securities that offer superior expected returns both as a function of the businesses underlying economics and also the price you are paying for their securities. If you buy better businesses at better prices, you will beat the market. #18: Handle the basics well In his 1994 shareholder letter, Warren Buffett extols the phenomenal performance of Scott Fetzer: it earned an extraordinary return on equity without the benefit of a monopolistic position, leverage or strong cyclical tail winds. Scott Fetzers return on equity had it been included in the 1993 Fortune 500 would have earned it a number 4 ranking. Buffett attributes the companys success to the managerial performance of Ralph Schey, Scott Fetzers CEO. But heres the somewhat surprising point. Its not because of any managerial gymnastics on Scheys point. Its because as Buffett points out Schey handles the basics extraordinarily well and doesnt allow himself to get diverted. Schey, Establishes the right goals and doesnt allow himself to get diverted. Buffett explicitly points out that this approach applies not only to the management of a business, but also to investing. Extraordinary things are not necessary to get extraordinary results. Yet, the temptation
By Greg Speicher 100 Ways to Beat the Market #19: Avoid businesses subject to disruption The value of a business is the present value of all future cash flows that it will produce. Determining these future cash flows is the serious work of a securities analyst. Ratios that look at past and present performance often reveal little about a businesss future prospects. Thinking is required, and that cant be automated or delegated. Frequently, these future cash flows simply cannot be determined with precision. One risk that you must be on guard against is whether a business is subject to disruption. You need to consider what could kill the business? This is a foundational question, perhaps the most important. If the business is generating a good return on capital and these are the types of businesses you should be looking at you can be certain that there are those who would love to storm the castle and steal the gold. One of the biggest disruptors is the Internet. We all know that its a game changer for many businesses. Before making any investment, you need to think long and hard about whether your prospective investment is subject to Internet disruption and, if so, to what degree. Its the difference between investing in businesses like Borders or Circuit City that were massively affected by the Internet and BNSF that is largely impervious to Internet disruption. So how do you think about Internet disruption? A checklist is a good tool here. Make a list of the issues and factors you need to think about and then run it down when contemplating a purchase. I just came across a good one in Bill Ackmans analysis of Lowes (LOW). Ackman is considering the impact of online shopping on home centers such as Lowes and Home Depot (HD). Heres Ackmans checklist of conditions that render on-line shopping most appealing: 1. 2. 3. 4. 5. 6. 7. Product is relatively high-priced (i.e., sales tax savings are more material) Product is not needed immediately Shipping cost is low Shipping is unlikely to damage the product Professional installation is not needed Item is not purchased as part of a larger project End-user of the product is making the purchasing decision