Have been in India for the past three weeks. Visited the Gandhi Memorial in Pune yesterday. Was very moved by the experience. How did the country go from such selfless idealism to today's corrupt leaders and eroded values? Think India's potential as an "emerging" super-power seems overstated. Think India needs a dictator like Singapore's Lee to bring about the requsite accountability and punishment that are sadly lacking today.

The Cricket World Cup was a source of a lot of excitement upon my arrival here. Now of course, India and Pakistan are out after surprising defeats to two of the weakest teams in the draw. Ofcourse this is not so surprising if these matches are assumed to have been fixed. The Bob Woolmer murder has added another depressing and Kafkaesque angle to the whole affair. As Mark Waugh, an Australian cricketer said "The fixing problems in most of the cricketing world have been solved, except for the sub-continent. Their players still push the envelope".

May sound ironic, but have never been more in love with the country than now. Every visit reinforces my gratitude for having the luck to be born in a family and country where could be free to pursue whatever I wanted.

Portfolio doing fantastic right now. Is up 20% YTD. Too chicken to sell, since hasn't reached target price yet. Hoping for COP to 72+, APC : 45+, WFMI : 55+

From Berkshire Hathaway's 2007 annual report

Some enjoyable and thought provoking excerpts from the 2007 Berkshire annual report:

• There are many giant-company managers that I greatly admire, but I don't think I could do the management job they do. I wouldn't enjoy the duties that came with their positions, meetings, speeches, foreign travel, the charity circuit and governmental relations.
• In our early years we put most of our retained earnings and insurance float into investments in marketable securities, because of this our growth in the early years was high. (27.5%). Later years we focused more on the acquisition of operating businesses hence lower rate in later years (12.5%)
• ISCAR makes money because it enables its customers to make money. There is no better recipe for continued success.
• Paul (of TTI Technologies) rejected the idea of a "strategic" buyer, knowing that in the pursuit of "synergies", he would be apt to dismantle what he had so carefully built, a move that would uproot hundreds of his associates. He also ruled out private equity, which would very likely load the company with debt and then flip it as soon as possible.
• Jack was late. Finally arriving, he explained he had been driving around looking for a parking meter with unexpired time. That was a magic moment. I knew that Jack was my kind of manager.
• Naturally, I had no notion in 1967 that our float would be as large as it is today ($50.9+ billion) . There's much to be said for just putting one foot in front of the other every day.
• Appropriate prices do not guarantee profits, but inappropriate prices most certainly guarantee losses.
• We remain prepared to lose $6 billion in a single event, if we have been paid appropriately for assuming that risk. We
  are not willing, though, to take on even very small exposures at prices that don't reflect our evaluation of loss
  probabilities. Appropriate prices do not guarantee profits, but inappropriate prices most certainly guarantee eventual
  losses. Rates have recently fallen because a flood of capital has entered the super-cat field. We have therefore
  sharply reduced our wind exposures. Our behavior here parallels that which we employ in financial markets: Be fearful
  when others are greedy, and be greedy when others are fearful.
• Once you've flown NetJets, returning to commercial flights is like going back to holding hands.
• You will be happy to hear- and I'm even happier - that this will be my last discussion of the losses at Gen Re's
  derivative operation. When we started to wind this business down, we had 23,218 contracts outstanding, now we have
  197. A Shakespearean thought seems appropriate for the tombstone of this derivative business:
  "All's well that ends"
• As our US trade problems worsen, the probability that the dollar will weaken over time, continues to be high. I
  fervently believe in real trade - the more the better for both us and the word. We had about $1.44 trillion of this
  honest-to-god trade in 2006. But the US also had .76 trillion (6% of GDP) of pseudo-trade - imports for which we
  exchanged no goods or services. Making these purchases that weren't reciprocated by sales, the US necessarily
  transferred ownership of its assets or IOUs to the rest of the world. Like a very wealthy but self-indulgent family, we
  peeled off a bit of what we owned in order to consume more than we produced.
• The investment income account of our country - positive every year since 1915 - turned negative in 2006.
  Foreigners now earn more on their US investments than we do on our investments abroad.
• All of our direct currency profits we have realized have come from forward contracts, which are
  derivatives, and that we have entered other types of derivatives contracts too. This may seem odd, since you know of
  our expensive experience in unwinding the derivatives book at Gen Re and also have heard me talk of the systemic
  problems that could result from the enormous growth in the use of derivatives. Why, you may wonder, are we fooling around with such potentially toxic material? The answer is that derivatives, just like stocks and bonds, are sometimes
  wildly mispriced. We currently have 62 contracts outstanding. I manage them personally, and they are free of counter-party credit risk. So far, these contracts have worked out well for us, producing pre-tax profits in the hundreds
  of millions of dollars. Though we will experience losses from time-to-time, we are likely to earn - overall - significant profits from mispriced derivatives.
• Picking the right person will not be an easy task. Its not hard, of course, to find smart people, among them individuals who have impressive investment records. But there is more to successful long-term investing than brains
  and performance that has recently been good. Over time the markets will do extraordinary, even bizarre, things. A single, big mistake could wipe out a long string of
  successes. We therefore need someone genetically programmed to recognize and avoid serious risks, including those never before encountered. Certain perils that lurk in investment strategies cannot be spotted by use of the models commonly employed today by financial institutions. Temperament is also important. Independent thinking, emotional stability, and a keen understanding of both human and institutional behavior is vital to long-term investment success. I've seen a lot of very smart people who lacked these virtues.
• Board members must be owner-oriented, business-savvy, interested and truly independent and to faithfully represent owners.
• I have been the Typhoid Mary of compensation committees. "All other kids have one" may seem too juvenile
  for use in the boardroom, but consultants employ precisely this argument, phrased more elegantly of course.The consultant's present drill of deftly selecting "peer" companies to compare with will only perpetuate present
  excesses.
• Wall Street's Pied Piper's of Performance will have encouraged the futile hopes of the Gotrocks - above-average
  performance will be promised to them by only paying ever-higher fees.- In part the family persists in this folly because it harbors unrealistic expectations about obtainable returns.
• Let me end this section by telling you about one of the good guys of Wall Street : Walter Schloss. From 56-2002,
  Walter managed a successful investment partnership, from which he took not a dime unless his investors
  made money. Walter did not go to business school, or college. His office contained 1 file cabinet in
  1956, that number had mushroomed to 4 by 2002. He worked without a secretary, book-keeper or clerk, just with
  his son, Edwin. They used only simple statistical
  methods Walter learnt while working for Ben Graham. When asked about their record, they replied : "We try to buy stocks cheap". So much for MPT, TA and complex algorithms.
• Following a strategy that involved no real risk - defined as permanent loss of capital - Walter produced results that
  dramatically surpassed the S&P 500. Still, schools went merrily on their way presenting EMT
  as having the certainty of scripture. Walter meanwhile went on over-performing, his job made easier by the misguided
  instructions. Maybe it was a good thing for his investors that Walter did not
  go to college.
• Last year, one hapless soul asked Charlie what he should do if he didn't enjoy the book (Poor Charlie;s Almanack),
  back came a Mungerism " No problem, just give it to someone more intelligent". Other books are : "Seeking Wisdom
  : From Darwin to Munger" by Peter Bevelin and Fred Schwed's classic : "Where are the Customer's yachts?". The funniest book ever written about investing, it lightly
  delivers many truly important messages on the subject.
• Charlie and I are extraordinarily lucky. We were born in America, had terrific parents who saw that we got good
  educations; have enjoyed wonderful families and great health; and came equipped with a business gene that has
  allowed us to prosper in a manner hugely disproportionate to other people who contribute as much or more to our
  society's well-being. Moreover we have jobs we love, in which we are helped every day in countless ways by talented
  ad cheerful associates. No wonder we tap-dance to work.

Bill Miller interview excerpts

...as I'm fond of telling the analysts, if it's in the newspapers, it's in the price. So you really need to understand what isn't in the price, what isn't being discounted, what events can happen that will lead the market to think differently...

...If gasoline prices go up, you're going to drive less. So price and demand are inversely correlated: basic economics..But in financial markets, it isn't the case. Here, demand is positively correlated with price. More people buy things when they go up; if stocks start to go up, more people want them than if they're going down. The higher they go up, the greater the demand for them.... financial assets particularly - it's been very well established that demand follows price....

Entire interview here.

Planning to read Fortune’s Formula by Bill Poundstone soon.

• The task is not to see what lies dimly in the distance, but to do what lies clearly at hand - Thomas Carlyle
• Necessity never made a good bargain - Benjamin F
• Acquire worldly wisdom and do what you think is right. If that gives you temporary unpopularity with your peer group, then to hell with them - Charles M
• The ones who matter don't mind, and the ones that mind don't matter. - (unbelievably, Dr Seuss)
  
  Reading the Almanack again, as a bad day in the market. Rushing to work now to do what lies at hand, loath to leave the tulips though.

Good interview with WEB.

From James Stewart, Common Sense, some good rules to live by :

-When the market falls and stock values decline, focus on buying rather than the current value. When favorite stock falls in price, most paralyzed. Phenomenon not limited to neophytes. Ibankers seem comfortable spending billions only when high prices. e.g. M&A pick up during market peaks.
-Remember that stock represents fractional ownership in an ongoing enterprise.

Interesting Barron's section this week. Round-table II. After the scolding last week, they left us 2 copies of the paper this morning, guess am shrewish after all ;) Also signed up for brokeragelink at Fidelity. Might as well manage retirement funds as well. Have a couple of good ideas for those funds. Advising T to buy VGENX and fuggedaboutit for 1 year. Also thinking of going to Omaha this year for the annual meeting, may be fun.

Need to do some regular work today. Lagging pitifully behind on that. Atleast it provides the steady, if unspectacular steady-state and gives me something to do during the day.

Nice Quote :"The happiest conversation is one where there is no competition, no vanity, but a calm interchange of sentiments". - Samuel Johnson

"Be extremely skeptical, and stay with what you know. The great success stories in life are people who figure out what they know, stay with it, put their eggs in that basket and watch it very carefully. Don't listen to me or anybody else." - Jim Rogers


The stock market is the only place where customers will run away from a bargain. Someone once said that and it remains true. I did some buying this afternoon - nothing very big, but nevertheless, I'm putting money to work. I think that attention will blow over shortly. The market's concentration span is quite limited, so while it may be the key focus now, next week it won't be. In a few days we'll all be focused on something else.

Always Be An Early Seller
Don't worry about leaving some money on the table. As the saying goes on Wall Street - the only person who always buys at the bottom and sells at the top is a liar.

When To Sell Winners

When To Sell Winners
Professionals sell stocks only when the reasons they bought them are no longer valid. e.g a stock selected because it was undervalued is considered ripe for selling when it reaches "a reasonable valuation." Start with the stock's fundamentals, its P/E, P/S ratio, book value, and cash flow. Is it more expensive than its peers? If you're still the least bit bullish, it's probably too early to sell. The bottom line is that you have to always ask yourself why you bought a particular stock in the first place and if that reason is no longer valid, then it may be time to move on.

Another one : would you buy it again at this price? If answer is no, SELL!! and RUN!!

Some Munger pearls

Found these today.. ----- IT PAYS TO BUY QUALITY: Munger persuaded Buffett to embark on the new investment strategy with the 1972 acquisition of South San Francisco's See's Candies for $25 million -- a tiny fraction of what it's worth today. "See's candy company was the first high-quality business we ever bought," he observed. See's also demonstrated to the value of building a "seamless web of trust" between a company and its customers and suppliers, he said in making the point that doing the right thing can pay big dividends both personally and professionally. One has to have a lot of patience in waiting for the right investment opportunities to come along, and similar patience and selectivity can be useful in one's personal life as well, Munger said. "When you have doubts about a person, you can pass," he said. "There's enough nice people to interface with." Other observations Munger shared: • Strategic plans prompt people to do something when sometimes the best course of action is no action. "Strategic plans cause more dumb decisions than anything else in America." • Their mistakes tended to be "great losses of omission. "If we had invested in McDonald's in its infancy ..." he ruminated. Berkshire recently acquired a significant stake in the nation's largest restaurant chain. • Know your limits. "A money manager with an IQ of 160 and thinks it's 180 will kill you," he said. "Going with a money manager with an IQ of 130 who thinks its 125 could serve you well."

some investment quotes

Good Quotes on Investing


Core Investment Principles

"To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets. You may, in fact, be better off knowing nothing of these. That, of course, is not the prevailing view at most business schools, whose finance curriculum tends to be dominated by such subjects. In our view, though, investment students need only two well-taught courses - How to Value a Business, and How to Think About Market Prices. "Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Over time, you will find only a few companies that meet these standards - so when you see one that qualifies, you should buy a meaningful amount of stock. You must also resist the temptation to stray from your guidelines: If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio’s market value."
--Warren Buffett, 1996 Berkshire Hathaway Shareholder Letter


"Confronted with a challenge to distill the secret of sound investment into three words, we venture the motto, Margin of Safety."
--Ben Graham, The Intelligent Investor.


"The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors."
--Warren Buffett, Fortune magazine, 11/22/99


"Our investments continue to be few in number and simple in concept: The truly big investment idea can usually be explained in a short paragraph. We like a business with enduring competitive advantages that is run by able and owner-oriented people. When these attributes exist, and when we can make purchases at sensible prices, it is hard to go wrong (a challenge we periodically manage to overcome).
"Investors should remember that their scorecard is not computed using Olympic-diving methods: Degree-of-difficulty doesn’t count. If you are right about a business whole value is largely dependent on a single key factor that is both easy to understand and enduring, the payoff is the same as if you had correctly analyzed an investment alternative characterized by many constantly shifting and complex variables."
--Warren Buffett, 1994 Berkshire Hathaway Shareholder Letter


"We continually search for large businesses with understandable, enduring and mouth-watering economics that are run by able and shareholder-oriented managements. This focus doesn’t guarantee results: We both have to buy at a sensible price and get business performance from our companies that validates our assessment. But this investment approach -- searching for the superstars -- offers us our only chance for real success. Charlie and I are simply not smart enough to get great results by adroitly buying and selling portions of far-from-great businesses."
--Warren Buffett, 1991 Berkshire Hathaway Shareholder Letter


"An alert investor who has held a good stock for some time usually gets to know its less desirable as well as its more desirable characteristics. Therefore, before selling a rather satisfactory holding in order to get a still better one, there is need of the greatest care in trying to appraise accurately all elements of the situation."
--Philip Fisher, Common Stocks and Uncommon Profits, p.81.


"The investor cannot pinpoint just how much per share a particular company will earn two years from now. As a matter of fact, the company’s top management cannot. Under these circumstances, how can anyone say with even moderate precision just what is overpriced for an outstanding company with an unusually rapid growth rate? If the growth rate is so good that in another ten years the company might well have quadrupled, is it really of such great concern whether at the moment the stock might or might not be 35% overpriced? That which really matters is not to disturb a position that is going to be worth a great deal more later."
-- Philip Fisher, Common Stocks and Uncommon Profits, p.83.


"Even the most thoughtful and steadfast investor is susceptible to the influence of skeptics who yell ‘Sell’ before it’s time to sell…We’ve all been taught the same adages: ‘Take profits when you can,’ and ‘A sure gain is always better than a possible loss.’ But when you’ve found the right stock and bought it, all the evidence tells you it’s going higher, and everything is working in your direction, then it’s a shame if you sell. A fivefold gain turns $10,000 into $50,000, but the next five folds turn $10,000 into $250,000. Investing in a 25-bagger is not a regular occurrence even among fund managers, and for the individual, it may only happen once or twice in a lifetime. When you’ve got one, you might as well enjoy the full benefit."
-- Peter Lynch, One Up on Wall Street, p. 253.


"We try to price, rather than time, purchases. In our view, it is folly to forego buying shares in an outstanding business whose long-term future is predictable, because of short-term worries about an economy or a stock market that we know to be unpredictable. Why scrap an informed decision because of an uninformed guess?
"We purchased National Indemnity in 1967, See’s in 1972, Buffalo News in 1977, Nebraska Furniture Mart in 1983, and Scott Fetzer in 1986 because those are the years they became available and because we thought the prices they carried were acceptable. In each case, we pondered what the business was likely to do, not what the Dow, the Fed, or the economy might do. If we see this approach as making sense in the purchase of businesses in their entirety, why should we change tack when we are purchasing small pieces of wonderful businesses in the stock market?"
--Warren Buffett, 1994 Berkshire Hathaway Shareholder Letter


"The most common cause of low prices is pessimism - some times pervasive, some times specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It’s optimism that is the enemy of the rational buyer.
"None of this means, however, that a business or stock is an intelligent purchase simply because it is unpopular; a contrarian approach is just as foolish as a follow-the-crowd strategy. What’s required is thinking rather than polling. Unfortunately, Bertrand Russell's observation about life in general applies with unusual force in the financial world: ‘Most men would rather die than think. Many do.’"
--Warren Buffett, 1990 Berkshire Hathaway Shareholder Letter


"Price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to…the operating results of his companies."
--Ben Graham, The Intelligent Investor, p.109.


"The percentage of investors who own 25 or more different stocks is appalling. Investors have been so oversold on diversification that fear of having too many eggs in one basket has caused them to put far too little into companies they thoroughly know and far too much in others about which they know nothing at all. It never seems to occur to them that buying a company without having sufficient knowledge of it may be even more dangerous than having inadequate diversification.
-- Philip Fisher, Common Stocks and Uncommon Profits, pp. 108-9.

Came across these quotes today. I was awed to have such eminent and diverse soulmates, for lack of a better word ********************************************************************************** Great spirits have always encountered opposition from mediocre minds. The mediocre mind is incapable of understanding the man who refuses to bow blindly to conventional prejudices and chooses instead to express his opinions courageously and honestly. Albert Einstein (1879 - 1955), quoted in New York Times, March 13, 1940 

  Men fear thought as they fear nothing else on earth -- more than ruin -- more even than death.... Thought is subversive and revolutionary, destructive and terrible, thought is merciless to privilege, established institutions, and comfortable habit. Thought looks into the pit of hell and is not afraid. Thought is great and swift and free, the light of the world, and the chief glory of man. Bertrand Russell (1872 - 1970) 

 My definition of a free society is a society where it is safe to be unpopular. Adlai E. Stevenson Jr. (1900 - 1965) 

 Everything that is really great and inspiring is created by the individual who can labor in freedom. Albert Einstein (1879 - 1955) 

 To know what you prefer instead of humbly saying Amen to what the world tells you you ought to prefer, is to have kept your soul alive. Robert Louis Stevenson (1850 - 1894) 

 The ideals which have lighted my way, and time after time have given me new courage to face life cheerfully, have been Kindness, Beauty, and Truth. The trite subjects of human efforts, possessions, outward success, luxury have always seemed to me contemptible. Albert Einstein (1879 - 1955) 

 A room without books is like a body without a soul. Cicero (106 BC - 43 BC)

 That best portion of a good man's life, His little, nameless, unremembered acts of kindness and of love. William Wordsworth

interesting quotes on friendships

By Francis Bacon "Of Friendship" : "to whom you may impart griefs, joys, fears, hopes, suspicions and whatever lieth an oppression on the heart". "To rehearse and work through my own thoughts and views in the mirror of another's mind, and gail faithful counsel on the rightness of my judgement". 

 "For without friends", write Aristotle, in the Ethics, "no one would choose to live".

 "Sir, I look upon every day to be lost, in which I do not make a new acquaintance." Samuel Johnson

 "There can be no friendship without confidence, and no confidence without integrity." Samuel Johnson 

"This is the happiest conversation", said Samuel Johnson, "where there is no competition, no vanity, but a calm interchange of sentiments". 

Missing my funnier half. Is away for a business trip. Have been left to my own devices for three weekends now, expecting due recompense for travails.

So, yesterday was a giddy giddy day. I dared to hope to reach pre May 06 levels.

I have done something quite foolish and risky by buying MA yesterday. I know that its had a big run-up, but bought in nevertheless. Am hoping for a quick and dirty small loot to boost the steady state of portfolio, as with PFCB last month, however it seems a bit risky. May stay in till November 1. Wow, these momentum things really need some stomach.

Others going up nicely, am not extremely worried about any other because they I think are at reasonable valuations. HURC is beautiful. Waiting for 32-33 before bailing.

No other insights unfortunately since I wrote the last time. Just hoping the small raid like Ghengis Khan foraying into India and running off with quick loots works for me too..

Stay cool. And luck!

So after a couple of desultory postings on my personal text blog, found that Iam not as motivated to post as Iam posting here online for all to see. I don't think too many people read this but oh well, they can if they want to !


Portfolio is in decent-er shape now. Not negative for the YTD. Still trailing the market, but I have a lot of new ones that need time to bloom :)

CKCM got bought out aat a nice price, actually made some money. Was a good strategy to buy some more when it tanked.

Iam a bit hopeful of natural gas play NBR. I think the weather may play up at some point in the future and may recover some on there. PFCB going up nicely, and also hopeful of HURC.
Followed WB on ?USG and also saw why he may have bought it, P/E of essentially about 5.4!


When the next oil runup arrives, if it arrives, COP and STO are going to be history..

Just finished skimming through "John Neff on Investing". Enjoyed the book. Apparently was given a cold shoulder on Wall Street, before going on to manager the Windsor fund. Also no MBA just some courses on finance and investing.

Also espouses low p/e strategy like Dreman. Amazing to me in some ways, if so easy why not more millionaires around ? Anyway, maybe this will lean me more toward value investing in the future.

From the book:
Windsor was never fancy. These were its principal elements:
1) a low P/E ratio.
2) Fundamental growth in excess of 7%
3) Yield protection, enhancement in most cases
4)Superior relation of total return to P/E paid.
5)No cyclical exposure without compensating p/e multiple.
6) Solid companies in growing fields.
7) Strong fundamental case.

"total return" described our growth expectations.
total return = earnings growth + yield.

Without these growth expectations, rational investors do not buy equities.

As a way to measure the bang for our investment buck, total return divided by initial p/e could not have been more succinct.
total return ratio = (total return) / (p/e)

We preferred stocks whose total return ratio exceeded the market average by 2 to 1.

e.g
company earnings growth yield total return p/e total return ratio
--------- ----------------- ----- ----------- ---- -----------------
yellow freight 12% 3.5% 15.5% 6X 2.6
1999 market 8% 1.5% 9.5% 27X 0.35



Inflection points abound!!
However most of these take investors by surprise. The market place always becomes momentum-laden as inflection points draw near. In my experience, markets are continuously foolish thanks to investors who forget the past.

So long as fundamentals remain intact, we were not averse to holding stocks for 3-4 years, but that has not prevented us from taking profits right away. There have been times we have owned shares for a month or less.

When you feel like bragging about a stock, its probably time to sell.

In overpriced markets, we periodically went to as much as 20% cash. (A higher percentage wasn't prudent for an equity fund, in my judgement)

Our maximum progress usually occurred after an inflection point.

Conventional wisdom suggests that more information is a blessing and more competition a curse. I'd say the opposite is true. Coping with so much information runs the risk of distracting attention from the few variables that really matter.

If a stock is as terrific as you believe, catching it a quarter point higher is less hazardous than firing before you aim properly. Do homework! Time spent nosing around usually comes handy.

If one has made not a stellar stock pick, can one also use market's irrationality to some time lift the price of the stock to above its fair value and sell then? This is for stocks that have become too dear to sell, i.e. large loss.

From David Dreman's book

- First goal should be a strong defense : preserve capital ! Never lose money.

-Fundamental research has been no more successful than technical analysis. This is because forecasting is the most important factor in security analysis. However, research analysts forecast poorly. This will mean some earnings misses for some stocks in some quarter on another. Higher p/es are punished more and one miss can devstate the price.

- Just how much information a person can handle effectively has come under intense scrutiny in recent years, with striking results. One is that investor's comprehension of large amounts of data about companies, industries or teh economy may not always give him or her that extra "edge". In fact ingesting large amounts of investment information can lead to worse rather than better decisions. People, when swamped by information, may select ony a small portion of the total, and reach a dramatically different conclusion than what the entire data would suggest. Not unlike juggling, each factor is another ball in the air, increasing the difficulty.

- Rule 2 : Respect the difficulty of working with a mass of information. In-depth information does not translate into in-depth profits.

-Under conditions of anxiety, uncertainty and too much information, the market becomes a giant Rorschach test. The investor sees any pattern he wishes.

-In extensive studies, was found that analysts estimates were way off mark, even though they were made less than three months before the end of the quarter for which earnings were reported. The average error was 44%

- Earnings surprises of even a few percentage points can trigger major price reactions. (especially for high p/es)

-Rule 6 : Analsyts forecasts are usually optimistic. Make the appropriate downward adjustment to your earnings estimate.

-Rule 8 : It is impossible, in a dynamic economy to use the past to estimate the future.

-The more data you get, the less information you have.

-Surprise helps unpopular stocks (with low P/Es) and hurts popular ones (with high P/Es)

- Take advantage of the high rate of analyst forecast error by simply investing in out-of-favor stocks.

-Rule 13 : Favored stocks underperform the market, while out of favor companies outperform the market, but the reappraisal often happens slowly, even glacially.

-Avoid stocks that experts or crowds are recommending.

-Sonjoy Basu published a study that found that annual returns decline as one moves from low p/e to high p/e.

-Rule 18 : Invest equally in 20-30 stocks, diversified among 15 or more industries.

-Rule 19 : Buy medium or large sized stocks.

-After picking low P/E, P/B, P/CF or P/Div, don't abandon Security analysis entirely.
1) Check that strong financial position.
2) As many favorable operating and financial ratios as possible
3) A higher rate of earninsg growth than the S&P and the likelihood this will not plummet in the near future.
4) Earnings estimates should always lean to the conservative side.
5) An above average dividend yield which the company can sustain and increase.
Dreman dound indicator 5 above improved performance when used with low P/Es.

-Rule 20: Diversify across industries. Buy the least expensive stocks within an industry regardless of how high or low the general price of the industry group.

-P/E of S&P in 97 was 24.2, P/CF 18.1, P/B 5.4 and yield 1.6%. As a rule of thumb try to use a 20% discount for the first three measures and a yield of atleast 1%. P/CF, P/E and P/B should be available in Value Line.

-Rule 21 : Safest approach is to rely on mechanical guidelines, which filter out much of emotional content. Sell a stock when its P/E approaches that of the overall market, regardless how favorable the prospects may appear. If it reaches that point, grit your teeth and get rid of it. It will probably go higher but why be greedy? Youve made a good gain and that's the whole point.

-How long to wait for a stock to work out? I would say 2.5-3 years or 3.5 years for cyclicals. If after this time the stock still disappoints, sell it. Another important ruke is to sell a stock immediately of the long term fundamentals deteriorate. No matter how much research, things can go wrong. Iam not talking of a temporary surprise or a poor quarter from which a stock will snap back from, but major changes that weaken a companies prospects. Under these conditions, I have found that taking your lumps immediately and moving on results in the smallest loss.

-

Lynch from Investment Guru interview :

You could have bought Wal-mart 10 years after it went public. Let's say you're very cautious. You wait another 10 years. This was not a startup any more, even then you would have made 30 times your money. The reason is that after 10 years it had reached only 15% of te country.

You could say, this company has minimal costs, they're efficient, all competition says they're great, the balance sheet is great, products are terrific and they're self-funding. Why can't they go to 25%? Think of that and buy and hold. You have to ask: why can't this company go from 20 stores to 400 stores?

Q Some people say there is no point in trying to beat the market. Academics say that Lynch and Buffett are the outliers on the right tail of the distribution curve, the lucky orangutans that do things by luck. How do you answer this ?

Lynch : Well you could say that there are going to be a million tennis matches this weekend. And 500,000 people will lose and 500,000 people will win. Therefore should people not practice their backhand or serve? The question is : why not be a winner rather than a loser? You could be a better investor if you look at the balance sheet, if you knew what the company did, if you use the information you have. You would simply do a better job . Just like you would be a better tennis player if you worked on your weakness and improved strengths. The concept is maybe we should ban tennis, since half the people are going to lose so the other half can win.

Q What do you think of technical analysis?

Lynch : I like only one formation. The stock goes from 50 to 8. Then sideways for a few years between 8 and 11. Such stocks may make a nice research list. Now see what the situation is, if you're right it'll go up, if not it'll go sideways and you won't lose money.

PB Remember : The key is to increase your odds. Get more favorable odds. I'd like to believe that my odds are getting better with education. You can't be perfect but can increase odds only.
The fact that you're working with just a small part of the market and avoiding the whole (which includes bad ones) can translate in bettering the market if due diligence is done.

e.g. if I had read a bit about market P/Es etc, would maybe not have purchased tech stocks in 1998-99.

From Benjamin Franklin's autobiography:

-Be encouraged to due diligence in thy calling, and distrust not Providence (and yourself).

-I wish to acknowledge luck and God for setting me down the right path and giving me success. My belief in such guidance leads me to hope that this same goodness will continue to bless me.

The easiest way invariably is the best way. I don't think you can get to be a really good investor without doing a massive amount of reading. Each year at the annual meeting Munger recommends a wide range of reading material. These include Value Line charts, Cialdini's "Influence", Hagstrom's the WB portfolio: Mastering the Power of Focus Investing.

Frequently you look at a business having fabulous results. And the question is "How long can this continue? Think about why the results are occurring now and about what will make these results to stop occurring."

This helps spot a company that has a franchise on a certain product, a so called "moat" around its business.

Observing business over time gives an investor greater perspective on investing. Some simple changes in the way we live can alter the long term value of a business.

"Modern Portfolio Theory? Its demented!" proclaims Munger. "I also ignore Beta since we think it is nonsense. We just want favorable odds, as long as these are in our favor and we're not risking evrything on one throw of the dice, we don't mind volatility"


I have never taken a course in chemistry, economis, psychology or business. Early elemntary physics and math helped me assimilate the fundamental ethos of hard science, which I therafter pushed further and further into softer and softer subjects. Early exposure to hard skills is essential. Mastery of psychology and accounting should be required.