It's easier to identify buying opportunities at times of extreme pessimism than it is to spot market peaks, which are more likely to be accompanied by complacency than by obvious euphoria. The Common Sense system sidesteps these issues by imposing purely mathematical criteria: When the market falls 10 percent from a previous high, it's an occasion to buy, as is every subsequent 10 percent decline. When the market rises 25 percent, it's an occasion to raise cash by selling.

What percentage of a portfolio to buy or sell at a trading opportunity is a decisions best left to individual investors. But one simple approach is to rebalance a portfolio divided between stocks and fixed income and cash on the other. At buying opportunities, when stocks are cheaper, you buy stocks to restore to a target ratio, such as 70 30 or 60 40, of stocks to fixed income. When there's a selling opportunity, you do the opposite.

The Common Sense system yielded a return of 20.8 percent over the decade we studied. That was five percentage points better than strict buy-and-hold

I think there are really 4 questions you answer before buying any stock:

1. Is it safe?
2. Is it a great business?
3. Am I getting a great price?
4. Can I hold this stock for as long as it takes?

The ideal stock would get 4 “yes” answers.

http://finance.fortune.cnn.com/2012/02/09/warren-buffett-berkshire-shareholder-letter/?section=money_topstories&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+rss%2Fmoney_topstories+%28Top+Stories%29&utm_content=Google+Feedfetcher

Hilarious comparison of gold and alternate productive assets!

Today the world's gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce -- gold's price as I write this -- its value would be about $9.6 trillion. Call this cube pile A.

Let's now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world's most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?

Beyond the staggering valuation given the existing stock of gold, current prices make today's annual production of gold command about $160 billion. Buyers -- whether jewelry and industrial users, frightened individuals, or speculators -- must continually absorb this additional supply to merely maintain an equilibrium at present prices.

A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops -- and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil (XOM) will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.

Admittedly, when people a century from now are fearful, it's likely many will still rush to gold. I'm confident, however, that the $9.6 trillion current valuation of pile A will compound over the century at a rate far inferior to that achieved by pile B.